What is constructive trust?
A common question we are asked is, what is a constructive trust agreement? Constructive trusts are a trust that may be imposed by the Court where inequitable or unconscionable conduct occurs and 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 harsh and inflexible results of a strict application of the law. Where a construct 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, in poor conscience, keep a benefit.
The key requirement for the ordering of constructive trust is unconscionability. Unconscionability involves more than unfairness; it requires that the act done be against the norms of society and is contrary to good conscience. Equity does not allow a person to rely upon 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 favor of some 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.
Why is constructive trust important?
Constructive trust is adopted by Courts of equity to make persons accountable in certain circumstances where it would be inequitable for those persons 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”:
- A declaration that property is subject to a trust in favor of a person to secure a proprietary remedy (a remedy attached to the specific property) for the disadvantaged party.
- A declaration of personal liability to the effect that someone is personally liable for losses and gains as if he or she were a trustee without necessarily requiring the defendant to hold specific property on trust for the plaintiff.
When will equity intervene and impose a constructive trust?
Constructive trusts are generally imposed by the Courts in the following situations:
- joint relationships end without attributable blame;
- where parties have pooled their resources together;
- where parties are working together for a joint purpose;
- mutual wills;
- where there was an assumption or common intention that the property is held according to joint contributions or for a specific purpose; or
- where one party unconscionably denies the other party’s contributions.
Nature of constructive trusts
Constructive trusts may be molded to give effect to the application of equitable principles in the circumstances of the 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 be operative from the:
- date of a judicial decision; or
- breakdown of the relationship; or
- some other time.
Example of constructive trusts
One of the leading cases on constructive trusts, Muschinski v Dodds is summarised below as an example of when a Court may impose a constructive trust upon the parties.
Mr. Dodds and Mrs. Muschinski were in a personal and commercial relationship. Together they bought land as tenants in common. On this land, they were planning on building a house to live in and to restore an existing cottage to use as an arts and crafts center. Mrs. Muschinski paid the purchase price of the land. The property was 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 but 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 Mr. Dodd’s reliance was unconscionable and as a result, a constructive trust arose for him to repay an equal amount and then he would own his equitable share of the property.
What is a common intention of 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:
- 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;
- This common intention is to be inferred as a fact from the words or conduct of the parties,
- 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
- 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
It is also important to note that there are many different kinds of trusts. People often associate and confuse resulting trusts and constructive trusts with one another. 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 would occur where for instance Peron A agrees to sell their house to person B for $2,000,000. After their agreement, the property transfers ownership from person A to person b. Person B however fails to pay Person A the agreed-upon $2,000,000. In this situation, a resulting trust would be imposed and the property would revert back to Person A.
If you have any questions about any of the above and need further information regarding constructive trusts, please do not hesitate to contact our Australian constructive trust legal experts.
The blog published by Rostron Carlyle Rojas Lawyers is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the author. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.