Constructive Trust Definition

Introduction

A constructive trust is imposed by the court to stop someone keeping property they ought not to keep. It arises by operation of law, not by agreement. Unlike an express trust, there is no need for declared intention. The focus is on conduct and circumstances: would it be against equity for the legal owner to retain the benefit?

This remedy appears in many settings. Common examples include a fiduciary taking a secret profit, a mistaken payment received and kept, a third party receiving trust assets in breach of trust, or a domestic partner who contributed to a home but is not on the title. English law typically treats constructive trusts as “institutional” (arising at the time of the wrongful event), though knowledge and conscience remain important. Some other jurisdictions adopt a more openly “remedial” approach, where the court shapes the trust at judgment. Either way, the court applies established equitable principles rather than a free-ranging appeal to fairness.

What You’ll Learn

• What a constructive trust is and how it differs from express and resulting trusts
• When courts in England and Wales are likely to impose one
• The role of knowledge and conscience, including limits from Westdeutsche
• Typical triggers: fiduciary profits, mistaken payments, knowing receipt, and family home cases
• How constructive trusts interact with sales of land and options (e.g., vendor–purchaser trusts)
• Leading cases and what each adds to the doctrine
• Practical steps to assess, plead, and protect claims

Core Concepts

Constructive vs express and resulting trusts

• Express trusts

  • Created deliberately with the “three certainties”: intention, subject matter, and objects.
  • Usually require a deed for land interests.

• Resulting trusts

  • Arise from presumed intention or a failure of an express trust (e.g., surplus not disposed of).
  • Often used where one party contributes purchase money but is not on title.

• Constructive trusts

  • Imposed by equity irrespective of intention.
  • Respond to events making it wrong for the holder to retain the benefit.
  • Can yield proprietary relief: tracing, priority over unsecured creditors, and potential protection on insolvency.

Institutional and remedial approaches

• Institutional (prevailing view in England and Wales)

  • The equitable interest arises when the facts occur (e.g., receipt of a bribe by a fiduciary).
  • FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 confirms that secret commissions are held on constructive trust from receipt.

• Remedial (illustrated in Australia)

  • The court declares a trust to achieve equitable justice on the facts.
  • Muschinski v Dodds [1985] HCA 78: a constructive trust is ordered only where warranted by established principles; not a free-form discretion.

• Knowledge and conscience

  • Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 stresses that equity operates on conscience; knowledge can be critical before a person is treated as a trustee for some categories.

Typical triggers

• Fiduciary wrongdoing

  • Secret profits, bribes, and benefits obtained by agents, company directors, or trustees.
  • The benefit is held for the principal or beneficiary.

• Mistaken payments

  • A recipient who becomes aware of the mistake (or similar facts engaging conscience) may hold the funds on constructive trust if they continue to retain them.

• Knowing receipt

  • A third party who receives trust property in breach of trust with the requisite knowledge may be required to hold it on constructive trust (Barnes v Addy; Nelson v Larholt).

• Family home and shared ownership

  • Courts may recognise a beneficial share for a non-legal owner who contributed to purchase price or made other significant contributions, often framed as a common intention constructive trust.

• Sales of land and options

  • A specifically enforceable contract for the sale of land can give rise to a vendor–purchaser constructive trust (e.g., once the contract is specifically enforceable, the vendor holds as trustee for the purchaser to completion).

Unconscionability and knowledge (use with care)

• Unconscionability is a useful theme but can be vague. Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 cautions against vague labels; standards such as dishonesty (for assistance) and knowledge (for receipt) are more precise.
• For mistaken payments, mere mistake is rarely enough by itself after Westdeutsche; the recipient’s knowledge or retention in the face of the known mistake can engage equity.
• Commercial certainty matters: courts avoid open-ended appeals to fairness and look for established categories and clear facts.

Key Examples or Case Studies

Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669

• Context: Bank paid money under a void interest rate swap and sought proprietary relief.
• Held: No resulting trust simply from the mistake. Equity’s intervention depends on conscience; knowledge of the relevant facts can be decisive.
• Application: For mistaken payments, show when the recipient’s conscience was engaged (e.g., knowledge of the mistake), especially if seeking a proprietary claim.

FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45

• Context: An agent received a secret commission on a hotel acquisition.
• Held: The commission was held on constructive trust for the principal from the moment of receipt.
• Application: Proprietary claims to bribes or secret commissions can trump unsecured creditors and support tracing.

Barnes v Addy (1874) LR 9 Ch App 244 and Nelson v Larholt [1948] 1 KB 339

• Context: Third-party liability where trust property is misapplied.
• Held: A recipient with the requisite knowledge can be liable for knowing receipt; Nelson v Larholt suggests that constructive notice can suffice in some circumstances.
• Application: Assess what the recipient knew or ought to have known; red flags can be enough to put a recipient on inquiry.

Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378

• Context: Accessory liability for breach of trust.
• Held: The standard is dishonesty for assistance, not a loose test of unconscionability. This is personal liability, not a constructive trust, but it shapes the language the courts prefer.
• Application: Use clear standards (dishonesty, knowledge) rather than broad labels.

Muschinski v Dodds [1985] HCA 78 (comparative)

• Context: Joint venture breakdown in Australia.
• Held: A constructive trust may be ordered to achieve equitable justice, but only within established principles; not every unfairness is cured by a trust.
• Application: Shows the remedial model used elsewhere; English courts are more restrained but still stress principled limits.

Example: Angela, Barbara, and Catherine (shared home)

• Facts: Two sisters own a cottage; their cousin lives there, pays household costs, and funds roof repairs over time.
• Likely outcome: Depending on contributions and shared dealings, the court could recognise a beneficial share for Catherine under a constructive trust.
• Practical point: Evidence of contributions (financial and non-financial), reliance, and discussions about ownership will be key.

Example: Amarjit, Sabeer, Caleb, and Daksha (farm and option)

• Facts: Sabeer has an option to buy part of the farm; Caleb purchases knowing about it; there is also a loan conditional on sale proceeds.
• Likely outcome: An exercised, specifically enforceable option can support a constructive trust in favour of the option holder; knowledge of the option strengthens the position. Conditional arrangements over sale proceeds may also engage equitable remedies.
• Practical point: Record options, protect with entries at the Land Registry where possible, and gather proof of notice.

Practical Applications

• Map the facts to an established category

  • Fiduciary profit, mistaken payment, knowing receipt, family home contributions, or a specifically enforceable land contract.

• Prove conscience/knowledge where relevant

  • For mistaken payments and knowing receipt, show when the recipient knew (or should have known) enough to make retention inequitable.

• Choose the remedy with care

  • Proprietary claim (constructive trust) can deliver priority and tracing.
  • Personal claims (e.g., unjust enrichment, dishonest assistance) may be simpler to prove but lack proprietary advantages.

• Evidence checklist

  • Money flows, bank statements, invoices for works, emails/letters, board minutes, agency agreements, marketing materials disclosing commissions.
  • For domestic cases: mortgage payments, lump-sum contributions, renovations, childcare arrangements that enabled earnings.

• Registration and protection

  • Registered land: enter restrictions or notices to flag the equitable interest where appropriate.
  • Actual occupation may protect unregistered equitable rights against a purchaser (check LRA 2002 schedules on overriding interests).

• Commercial safeguards

  • Firms and agents: declare commissions; have clear conflict policies; segregate client monies.
  • Recipients of large payments: run source-of-funds checks and document enquiries to avoid being fixed with knowledge.

• Litigation strategy

  • Consider interim remedies: freezing orders, proprietary injunctions.
  • Insolvency context: a proprietary claim may outrank unsecured creditors.
  • Limitation: equitable claims can be subject to laches; act promptly.

Summary Checklist

• Can you fit the facts within an established constructive trust category?
• Is this truly a constructive trust claim, or would a resulting trust or proprietary estoppel suit the facts better?
• For mistaken payments and knowing receipt, pinpoint when the recipient’s conscience was engaged.
• For fiduciary profits, consider FHR: secret commissions and bribes are held on trust from receipt.
• In family home disputes, gather evidence of contributions and shared dealings.
• For land sales/options, check if the contract is specifically enforceable (vendor–purchaser trust).
• Decide between proprietary and personal remedies early; this shapes tracing and priority.
• Protect interests by registration and by investigating occupation.
• Prepare robust evidence: payments, documents, and witness accounts.
• Move quickly to avoid prejudice from delay.

Quick Reference