CONSTRUCTIVE TRUSTS

CONTENTS

1.0    Introduction

2.0    Objectives

• Main Content
• Features of Constructive Trusts
• Practical Situations of Imposition of Constructive Trusts

4.0    Conclusion

5.0    Summary

6.0    Tutor-Marked Assignment (TMA)

7.0    References/Further Readings

INTRODUCTION

Unlike the position with private or charitable trusts, there are certain situations where the law imposes a trust irrespective of the parties’ intention to create one. In situations where justice and law requires it, constructive trust is imposed  to  prevent a party who has committed an unconscionable conduct go scot-free. Situations such as this are varied and not static. Constructive trust is thus imposed in as the court may deem fit especially on rights relating to properties. Because  they are imposed, constructive trusts are exempted from compliance with the requirements of a trust.

OBJECTIVES

In this Unit, you will be taken through the features of constructive trusts and the reasons for imposing such a trust on a party, why constructive trusts are exempted from compliance with the requirements of a trust and an examination of some of  the varying situations where constructive trusts have been imposed by law. You will learn about the fact that constructive trust is essentially a proprietary and that there must be fiduciary relationship between the parties before constructive trust can be imposed. You will equally learn about distinguishing factor between resulting and constructive trusts. At the end of this Unit, you should be able to:

• Describe constructive trust
• Know the features of constructive trust
• Explain the circumstances that can give rise to constructive trust
• Know practical situation that can justify the imposition of constructive v
• Understand why constructive trusts are exempted from formalities of creating a trust.

MAIN CONTENT

Features of Constructive Trusts

Constructive trusts are a class of trusts imposed by law (equity) irrespective of the intention to create a trust. See Beatty v. Cupperhein Exploration Co. [1919] 225

N.Y. 330 per Cardozo J.; see also Kotoye v. Saraki [1994] 7 N.W.L.R. (Pt. 357)

414 at 444 per Kutigi J.S.C. Trusts of this nature relates to a variety of circumstances which may result in constructive trusts. In a way,  resulting  trust may be confused with constructive trusts, but they are essentially different. In respect of constructive trusts, they occur by operation of law, dating back to the event which gave rise to it and this is merely declared by the court. See Westdeutsche Landesbank v. Islington B.C. [1996] A.C. 669. Resulting trusts on  the other hand are based on the presumed intention of the parties.

Constructive trust is concerned with preventing the legal owner of a property from escaping with an unconscionable conduct. In this way, it is related in a way to the principles of proprietary estoppel, thus protecting existing rights in property. This  is often referred to as institutional constructive trust and not remedial constructive trusts, which is a judicial remedy for the enforcement of equitable obligation and commonly used in the United States of America. See Westdeutsche Landesbank v. Islington B.C. (supra).

The essential feature you have to note with constructive trusts is that fiduciary relationship must exist between the constructive trustee and the claimant, and that the relationship has been breached by the constructive trustee  withholding  property from the claimant in an unconscionable way. Thus, a constructive trust is imposed by law whenever justice and good conscience requires it. See Hussay v. Palmer [1972] 1 W.L.R. 1286 at 1290 per Lord Denning. If a trustee has  no interest in property, constructive trust cannot arise.

Another issue you have to note is that charitable trusts  are  normally exempted from compliance with the requirements of creation of express trusts. See Sector 8 Statute of Frauds 1677; Section 78(2) Property and Conveyancing Law, Cap. 100 Laws of Ogun State 1978. These laws exempted this class of trusts from the requirements of writing, as requiring otherwise will be to defeat the very essence  of constructive trusts.

SELF ASSESSMENT EXERCISE (SAE) 1

Mention and discuss two essential features of a constructive trust and why the features are fundamental to this class of trusts.

Practical Situations of Imposition of Constructive Trusts

Constructive trusts have been imposed in the following circumstances:

Stranger intermeddling with trust property

This heading covers diverse situations, for example, where a stranger, without acting as a trustee or having the authority of the trustee takes it upon himself to intermeddle with the trust property; he becomes a trustee of his own wrong, i.e. a trustee de son tort, otherwise called a constructive trustee. See Mara v. Browne (1896) 1 Ch. 199 at 209 per A.L. Smith, L.J. Another situation is where a trustee transfers the trust property to a stranger who receives it, knowing  that  same to be in breach of a trust, irrespective of whether such a notice is actual, constructive or imputed. See Soar v. Ashwell (1893) 2 Q.B. 390.

However, where the stranger is a purchaser for value of the legal estate without notice of the beneficiary’s equitable interest, he takes free of all equities, including that of the beneficiary. See Boursot v. Savage (1866) L.R. 2 Eq. 134 and Cave v. Cave (1880) 15 Ch. D. 639. In the case of volunteer who receives notice of the beneficiary’s equitable interest after acquiring the property, the law will convert him to a constructive trustee for the beneficiary.

The Vendor as a Constructive Trustee

Where there is a contract for the sale of a real property, once the vendor receives the purchase price for the property, he holds the property as a constructive trustee for the purchaser until the contract is completed and title is transferred to the purchaser. This is premised on the fact that this sort of contract is one enforceable at equity and the purchaser has acquired equitable interest in the property notwithstanding that the vendor still retains the legal interest; since equity regards as done that which ought to be done. See Lysaght v. Edwards (1876) 2 Ch.D. 499.

The Mortgagee as Constructive Trustee

As it is with the case between a vendor and the purchaser, the mortgagee is a constructive trustee for the mortgagor. A mortgagee in possession of  the mortgaged property for instance is a treated as a constructive trustee of the mortgagor and is liable to account for all rents and profits received in  respect of  the property.

A mortgagee exercising his power of sale also cannot involve in sharp practices by selling the mortgaged property to himself or someone nominated by him. See Robertson v. Norris (1857) I Giff. 421. Furthermore, where a mortgagee in realizing the security for the mortgage has exercised his power of sale, he is to apply the money realized to meet the mortgage loan, costs and other charges due  on the mortgage and whatever residue that is left on sale is to be paid to the mortgagor. For the statutory provisions on this position, see Section 127 Property and Conveyancing Law Cap. 100 Laws of Western Nigeria, 1959.

Furthermore, you must realize that when exercising his power of sale, the mortgagee must find proper price for the mortgage property. See Eka-Eteh v. Nigeria Housing Development Society Ltd. [1973] 3 S.C. 183.

Trustee Profiting from Position of Trust

It is a cardinal equitable rule that a trustee must not profit from his position or use the same to his advantage by virtue of the fiduciary position in which he stands. When a trustee breached this fiduciary duty and by so doing gains a personal advantage, he becomes a constructive trustee of the gains made for the beneficiary. See Keech v. Sanford (1726) Sel. Cas. King 61; 25 E.R. 223 and  the  Nigerian  case of Marques v. Edematie (1950) 19 N.LR. 75.

This equitable principle applies generally to persons standing in fiduciary  positions, such as partners, mortgagors or mortgagees, tenants for life –  see  Okesuji v. Lawal [1986] 2 N.W.L.R. (Pt. 22) 417; joint tenants, executors and administrators. See Re Biss (1903) 2 Ch. 40.

Acquisition of Property by Fraud

Where a person has acquired property by personal fraud, he may be compelled by equity to hold such property as constructive trustee for the benefit of the person injured by the fraud. See McComick v. Grogan (1869) L.R. 4. Where a claimant has acquiesced to the fraud, constructive trust will not be imposed in such circumstances. See Lonrho Plc. v. Fayed (No. 2) [1992] 1 W.L.R. 1.

This principle enunciated here equally covers cases of transfers inter vivos, intestacy and wills. For example, in situations where a person had  been induced  not to make a disposition by will on the strength of the promise of the person entitled intestate, to distribute the properties according to the wish of the donor; if on the death of the donor, the person entitled on intestacy failed to distribute the properties as agreed with the donor, equity will make the person to hold the properties as constructive trustee. See McComick v. Grogan (supra).

Persons in Fiduciary Positions

Similar to what was treated above under the sub-heading, “Trustee Profiting from Position of Trust”, generally, persons who stand in a fiduciary positions to others such as agents, trustees, executors, administrators, etc. are not entitled to make profits either directly or indirectly by virtue of their position and also should not  put themselves in positions whereby their interests will conflict with their duties. See Marques v. Edematie (supra). To make profit by persons in fiduciary positions constitutes a fundamental breach of that position. See Regal (Hastings) Ltd v. Gulliver & Others [1942] 1 All E.R. 378.

The fact that the person in fiduciary position did not obtain his profit fraudulently or corruptly is irrelevant. See Boardman v. Phipps [1967] 2 A.C. 67. The person having beneficial interest also need not suffer any injury as a result of the profit made. See Parker v. McKenna (1874) L.R. 10 Ch. 96.

Profit form Crime

On grounds of public policy, a person will not be allowed to make profit or claim any benefit from his own crime. See Cleaver v. Mutual Reserve Fund Life Association (1892) 1 Q.B. 147. Where for example, one joint tenant kills the other so that the property can devolve on him as a joint tenant, he will hold the property on constructive trust for himself and the deceased’s estate or next of kin. See Rasmanis v. Jurewitsch [1970] N.S.W.L.R. 650.

In Cleaver v. Mutual Reserve Fund Life Association (supra) a wife who is entitled on her husband’s dead to the benefit of an insurance policy poisoned and killed her husband in order to claim the benefit. The court appropriately disallowed her and her assignee of the benefit to claim the benefit. However, in Re K [1986] Ch. 180 a wife, who has been convicted of her husband’s manslaughter through inadvertent killing by using a loaded gun intended to frighten her husband, successfully  secured an order against forfeiture based on the evidence that the deceased  husband had for years violently attacked her.

Mutual Wills

Where two persons enter into agreement for the disposal of their property in a particular manner after the death of the person who first die, and in view of this the parties executed a mutual will to reflect their agreement; any survivor will not be allowed at equity to vary or disregard such an agreement either by an amendment  or a revocation of the mutual will, in order to give effect to the agreement of the parties. The survivor thus becomes a constructive trustee for the deceased party in respect of the property to be disposed. See Duffour v. Pereira (1769) 2 Hargr.  Jurid. Arg. 304 where a wife who survived her husband by her own will at her death disregarded the agreement contained in the mutual will she made with her husband in respect if a common fund to be pooled from the residuary estate of the two of them. The will of the wife in disregard of the joint will was disallowed as  the court reasoned, “…For no man shall deceive another to his prejudice…” (Ibid  at 310 per Lord Camden, L.C.).

SELF ASSESSMENT EXERCISE (SAE) 2

Mention and discuss with the aid of decided cases, two situations in which constructive trust may be imposed.

CONCLUSION

Constructive trusts are in a special class and this special position exempted them from formal requirements. The imposition of constructive trusts in appropriate cases is in affirmation of the general objective of equity not to allow persons to suffer a wrong without a remedy. Thus, constructive trusts  are  imposed irrespective of the intention of the parties and the situations where such trusts can be imposed are by no means a close one, in order to prevent people in certain fiduciary positions from profiting from unconscionable conducts.

SUMMARY

In this Unit, you have learnt about the features of constructive trusts, the equitable reason and justification for the imposition of constructive trusts and an examination of the varying circumstances where this trust can be imposed. You also learnt that the essential underpinning for the imposition of constructive trust is the existence of a fiduciary relationship. You have been exposed to the rationale why constructive trusts are exempted from the formal  requirements  associated with the creation of trusts. You can observe the necessity and the ingenuity of the law to impose constructive trusts in some of the circumstances examined. This should equip you to be able to discern practical situations when this type of trust can appropriately be imposed. In the next Unit, you will learn about discretionary trusts.

 TUTOR-MARKED ASSIGNMENT (TMA)

1. Distinguish and justify the appropriateness or otherwise of the distinction between constructive trusts imposed in respect of trustees profiting from position of trust and persons in fiduciary positions generally. Support your answer with decided cases
2. Discuss with the aid of decided cases, the equitable rationale behind the prohibition of persons in fiduciary positions from making profits either directly or indirectly. Is this prohibition reasonable even when such profit has been made honestly and without any injury to the beneficiary’s interest?

REFERENCES/FURTHER READINGS

Banire, Muiz. (2002). The Nigerian Law of Trusts. Lagos: Excel Publications. Fabunmi, J.O. (2006). Equity and Trusts in Nigeria. Ile-Ife: Obafemi Awolowo

University Press Ltd.

Hayton, D.J. (2001). Hayton & Marshall Commentary and Cases on The Law of Trusts and Equitable Remedies. London: Sweet & Maxwell.

Jegede, M.I. (1999). Law of Trusts, Bankruptcy and Administration of Estate.

Lagos: MIJ Professional Publishers Limited.

Property and Conveyancing Law Cap. 100, Laws of Western Nigeria, 1959. Statute of Frauds 1677.