What is a constructive trust?

A constructive trust may be imposed by the court where there is unconscionable or inequitable conduct which does not depend on any terms of a contract. Constructive trusts are a relief provided by a body of law known as equity which seeks to mitigate the sometimes inflexible and harsh results of strictly applying the law. Where a constructive trust is found, a person or entity will be found to hold an asset, or assets, for the benefit of another. The Court may impose constructive trusts irrespective of what the parties say where it would be unfair for a party to retain a benefit.

The key requirement for the ordering of constructive trust is unconscionability. Unconscionability requires more than unfairness; the act must done be against the norms of society and be contrary to good conscience. Equity does not allow someone to rely on strict legal rights where to do so would amount to unconscionable conduct.

A constructive trust can be created for specific purposes such as a declaration that a property is subject to a trust in favour of a specific person. For example, a court may find that Person A is liable as a third-party constructive trustee for a breach of Person B’s obligation and Person A now holds the property as constructive trustee for Person B. Once imposed, constructive trusts share all the features of a regular trust, but the duties are less precisely defined by the Court.

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 that person to escape accountability. Accountability is used in a broad sense, applying to both accountabilities for profits gained or losses incurred, and for interests in property.

The liability imposed by constructive trusts

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

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 to the effect that Person A is personally liable for losses and gains as if he or she were a trustee without necessarily requiring Person A to hold specific property on trust for Person B.

When will equity impose a constructive trust?

Constructive trusts are generally imposed by the Courts in the following situations:

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

Nature of constructive trusts

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

Constructive trusts may start operating from the:

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

Example of a constructive trust

One of the leading cases on constructive trusts, Muschinski v Dodds, illustrates circumstances in which a court may impose a constructive trust on the parties.

Mrs. Muschinski and Mr. Dodds were in a personal and commercial relationship. Together they bought land as tenants in common. On this land, they planned to build a house to live in and to restore a cottage to use as an arts and crafts center. Mrs. Muschinski paid the purchase price for the land. The parties were registered as tenants in common in equal shares. Mr. Dodds was to put in the time, effort, and funds necessary to develop the property. Ultimately, town planning approval failed and the project was abandoned. At that time, Mrs. Muschinski had contributed approximately ten-elevenths ($25,259.45) while Mr. Dodds had contributed the remaining one-eleventh ($2,549.77). Mr. Dodd’s sought to rely on his legal entitlement to his half-share. It was held that it would be unconscionable for Mr Dodds to retain a half share of the property without first accounting for the purchase price paid by Mrs Muschinski.

What is a common intention constructive trust?

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

1. There must have been a common intention between the legal owner of the property and the beneficiary, 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.

Resulting trust vs. constructive trust

There are many different kinds of 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.

An example of resulting trust is where Person A agrees to sell their house to person B for $1,000,000. After their agreement, the property transfers ownership from person A to person B.  Person B however fails to pay Person A the agreed-upon $1,000,000. In these circumstances, a resulting trust would be imposed and the property would revert back to Person A.

What now?

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