A court may impose a constructive trust where inequitable or unconscionable conduct occurs which is not dependent on any terms of a contract. A body of law known as equity provides the relief of constructive trusts, seeking to mitigate inflexible and harsh results of a strict application of the law. Where a constructive trust is found, a person or entity will be found to hold an asset(s) for the benefit of another. The court may impose a constructive trust where it considers that it would be unfair for a party to retain a benefit, irrespective of what the parties say.

The key requirement for the ordering a constructive trust is unconscionability. Unconscionability involves more than unfairness; it requires that the act done is contrary to good conscience and against the norms of society. Equity prevents a person from relying upon strict legal rights where to do so would amount to unconscionable conduct.

A constructive trust can be created for a specific purpose, such as a declaration that a property is subject to a trust in favour of some specific person. A court may find that Person A is liable as a third-party constructive trustee for a breach of Person B’s obligation. Person A now holds the property as constructive trustee for Person B. Constructive trusts share all the features of a regular trust, but the court less precisely defines the duties.

Why are constructive trusts important?

A constructive trust is adopted by courts of equity to make a person accountable in circumstances where it would be inequitable for them to escape accountability. Accountability is used in a broad sense, including accountability for losses incurred, for profits gained, and for interests in property.

The liability imposed by constructive trusts

It is generally considered that the term “constructive trust” incorporates two forms of liability:

1. A declaration that property is subject to a trust in favour of a person to secure a proprietary remedy (a remedy attached to the specific property) for the disadvantaged party; and
2. A declaration of personal liability:- person A is personally liable for losses and gains as if he or she were a trustee without necessarily requiring that Person A holds specific property on trust for Person B.

When will a constructive trust be imposed?

The court usually impose constructive trusts in the following situations:

1. Where joint relationships end without attributable blame;
2. where parties are working together for a joint purpose;
3. where parties have pooled their resources together;
4. where there was an assumption or common intention that the property is held according to joint contributions or for a specific purpose;
5. mutual Wills; or
6. where one party unconscionably denies the other party’s contributions.

Nature of constructive trusts

Constructive trusts operate to stop the retention or assertion of beneficial ownership to the extent that such would be contrary to equitable principle. They may be moulded to give effect to the application of equitable principles in the circumstances of the particular case.

Constructive trusts may operate from the:

1. breakdown of the relationship; or
2. date of a judicial decision; or
3. some other time.

What is a common intention constructive trust?

A common intention constructive trust is created to enforce a gift and/or a promise. The following elements need to be demonstrated to establish the existence of constructive trust:

1. There must have been a common intention between the beneficiary and the legal owner of the property, regarding the beneficiary’s beneficial ownership of the property;
2. This common intention is to be inferred as a fact from the words or conduct of the parties,
3. The beneficiary must be able to show that they have acted to their detriment on the basis of the common intention as to the beneficial ownership of the property, and
4. It must be fraud on the beneficiary for the legal owner to assert that the beneficiary did not have a beneficial interest in the property.

What’s the difference between a resulting trust and a constructive trust?

There are many different kinds of trusts. Constructive trusts are often confused with resulting trusts.

A constructive trust differs from a resulting trust in that it is created by the operation of law without reference to the parties’ intentions.

A resulting trust is created when a person holds a legal title of the property, but the equitable title remains with the settlor of the trust.

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