Remedial Constructive Trust Essay 1 - Trusts Law PDF

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Trusts Law (remedial construtive law essay)...

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In Re Polly Peck, Nourse LJ said that the remedial constructive trust gives the court a discretion to vary proprietary rights. Explain this statement and consider whether the courts of England and Wales are right to rule out the use of the remedial constructive trust. Remedial CT provides a remedy (equitable relief) for unjust enrichment, involves the creation of an equitable interest that had not previously existed, arises from date of judgment but it is not recognised in UK. It is best contrasted with institutional constructive trust, where trust comes into being on the occurrence of a certain event, without the intervention of the court. It exists at the time the relevant circumstances occurred. The argument as to whether or not we should recognise the remedial constructive trust is but one battle in a never-ending war. This essay will critical analysis of whether England and Wales are right to rule out the use of the remedial constructive trust. Lord Browne-Wilkinson in Westdeutsche c ase said, under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it. The function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such a trust having arisen (including the potentially unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, and not under a discretion. On the other hand, a remedial constructive trust is different. It is a judicial remedy giving rise to an enforceable obligation, the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court.’ Once such trust is imposed by the court, it would seem to have all the three beneficial characteristics of an institutional constructive trust, which are (i) claimant has priority over unsecured creditors when the defendant is insolvent, (ii) obtaining the benefit of increase in the value of the property held on constructive trust and (iii) recovery of the property or its identifiable substitute from a third party even if he or she was unaware of the circumstances which triggered the constructive trust in the first place. As Virgo commented, UK courts have not adopt remedial constructive trust. He said one of the reason why English and Welsh law is not keen to recognise remedial constructive trusts because of the consequences of constructive trusts as they enable the court to create proprietary interests which had not previously existed. As such, the court would require the transfer to the claimant of an asset, which would otherwise belongs to the defendant and in which the claimant did not have a pre-existing legal or equitable right. There has been a long debate of whether remedial constructive trust should be recognised in the UK. In dealing with this issue, there has been no consensus between judges. For instance, in Re Polly Peck International Plc (In Administration) (No. 2), t he court rejected the remedial constructive trust. Nourse LJ in this case said ‘You cannot grant a proprietary right to A who has not had it beforehand, without taking some proprietary right away from B. No English court has ever had the power to do that, except with the authority of Parliament’. Nonetheless, not all judges agrees with his view. Lord Scott in Thorner v Major said he find it easier and more comfortable to regard equity as established via a remedial constructive trust’. He thought remedial constructive trust will be more helpful. Besides, Lord Denning had mentioned remedial constructive trust in Hussey v Palmer. In this case, a woman sold her house to her daughter and son-in-law and said she would build an extension in the house for them. She paid and built the extension but subsequently, they fell out. The woman sought to claim a beneficial interest in the house. She argued that there was a resulting trust.

Lord Denning said it was more in the nature of a constructive trust. He said constructive trust is a trust imposed by law whenever justice and good conscience require it. It is a liberal process, founded upon large principles of equity, to be applied in eases where the defendant cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or a share in it. The trust may arise at the outset when the property is acquired, or later on, as the circumstances may require. It is an equitable remedy by which the Court can enable an aggrieved party to obtain restitution. Nevertheless, this statement showed that it seems Lord Denning was trying to purport a remedial constructive trust as he said trust may arise later on and it depends on the concept of conscience. Lord browne-wilkinson adopted a neutral stand. He opined, although resulting trust is an unsuitable basis for developing proprietary restitutionary remedies, the remedial constructive trust, if introduced into English law, it may provide a more satisfactory road forward. The court by way of remedy might impose a constructive trust on a defendant who knowingly retains property of which the plaintiff has been unjustly deprived. He did not firmly reject or necessarily endorse future recognition of remedial constructive trusts. He said whether English law should follow the United States and Canada approach by adopting the remedial constructive trust would have to be decided in some future case when the point is directly at issue. Nevertheless, Lord Camden in Doe v Kersey said, the discretion of a judge is the law of tyrants and it is always unknown. Professor Peter Birks also opposed to this recognition because he says remedial constructive trust is antithetical to clarity and predictability, being perceived to involve unrestrained judicial discretion. Besides, practicing lawyers need to be able to advise their clients as to the likely results of litigation. The judges on whom these results depend need the insulation from personal criticism which only objectively ascertainable rules and principles can provide. In 2014, in FHR European Ventures LLP v Cedar Capital, Lord Neuberger cited the passage in Westdeutsche and rejected the concept of remedial constructive trust in UK jurisdiction. He said remedial constructive trust is unprincipled, incoherent and impractical. It renders the law unpredictable, that it is an affront to the common law view of property rights and interests, that it involves the court usurping the role of the legislature. Besides, the development of the remedial constructive trust is largely unnecessary. It was held that the agent in this case held the secret commission on constructive trust for the claimants, and this trust arose automatically because the payment had been received by the defendant in breach of fiduciary duty, and not through the exercise of judicial discretion. But apart from that, he said remedial constructive trust is a pretty good concept. Nonetheless, he did not consider that it was appropriate to recognise it at that point in time. In his recent article, Lord Neuberger said, in the today’s increasingly fast moving world, with expensive and time consuming litigation, and international contracts, a judge should not be too easily swayed by his or her perceptions of the moral merits of a particular case. The view is subjective, and may be highly influenced by the personality of the witnesses and may depend on the identity of the judge. Besides, even if by applying remedial constructive trust, the judgement may appear to achieve a fair result in the case before the judge, it may not produce a just result, and it risks introducing considerable uncertainty of outcome, in a large number of cases which are unknown and unknowable to the judge. In Australia, there are undesirable consequences of introduction of remedial constructive trust such as in Bathurst City Council where the Lord Neuberger himself said he is not entirely sure whether the decision in that case was strictly all remedial rather than institutional constructive trusts. Peter Millett also strongly criticised the introduction of remedial constructive trust. He said whether a proprietary interest exist or not is a matter of property law, not a matter of discretion. Judges should not go around altering property rights and

property ownership, in circumstances which are not sanctioned by statute, and which do not accord with well-established principles laid down by judges over the years. However, as Meagher in his article counter argue, on another side of institutional constructive trust, some outcome could be disproportionate to the defendant and unfair to third party as there are very little judicial discretion and there would be inflexibility. Besides, it is unclear why it would be bad to adopt discretion under remedial constructive trust and CT is far from perfect as it is uncertain of whether there is one principle to explain CT. Furthermore, sometimes judges would also have discretion under institution CT, and it is unclear on how one would contrast the “discretion” between these two trusts.

Comparison with other jurisdiction. Remedial constructive trust are recognised in Australia, Canada and New Zealand. Australian and Canadian judiciary are more willing to embrace creative judicial decision-making with reference to the justice of the case, whereas English judge is generally more likely to emphasize the need for certainty. Virgo opined that it might in part be due to different commercial cultures in different jurisdictions. The English Court, especially the Commercial and also the Chancery courts, are centres for dispute resolution of international significance. Commercial players are perhaps more likely to select the English jurisdiction and choose English law because of a desire for predictability and certainty. The Australian and Canadian courts and judges might be less concerned about the need to attract business to their courts. But even so, adopting remedial constructive trust does not always mean there will be unprincipled reasoning. Deane J in Muschinski v Dodds said the fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles. Proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion. Thus, judges could not say whatever they want they would adhered to consistency. Hence, perhaps remedial constructive trust is not a real disaster. Besides, even in England, though in theory, there should be no role for judicial discretion to modify the operation of the trust, but in reality, there are many cases where the recognition or the operation of the constructive trust depends on the exercise of judicial discretion. In England, the problem of identifying beneficial interests in a house occupied by a cohabiting couple has been dealt through common intention constructive trust. In Jones v Kernott, the majority accepted that imputation of common intent was appropriate where it was clear that the parties intended to share the beneficial interest but it was not possible to determine any agreement as to the proportions in which the interest was to be shared. This does not involve proving an actual intent shared by the parties, but involves the attribution of an intention that they might not have shared, but which the court considers they would have agreed had they thought about the allocation of the beneficial interest. Where imputation of an intention is required, the court must consider what is “fair having regard to the whole course of dealing”. It is this point that the proof of a common intention could disintegrate into a determination of an allocation of the beneficial interest that the court considers to be fair. Etherton J commented, ‘there is now a hair’s breadth between the common intention constructive trust and a remedial constructive trust’. Nature of the common intention constructive trust is controversial, but, whilst in form it appears to be institutional, in reality there is scope for modification of it with reference to

what court considers to be just result. Etherton commented, this moves us nearer once again to the idea that these trusts rest, in part, on the exercise of a judicial discretion and so resemble, to this extent, remedial constructive trusts. Proposal for modification In light of pros and cons both trusts, Virgo commented institutional constructive trust is too rigid but the remedial constructive trust is too uncertain. Thus he proposed an alternative modified constructive trust so it incorporate more flexibility in institutional constructive trust to avoid unfair outcome. Virgo said the defendant should not be allowed to benefit from any gain arising from retention of the money paid by mistake, save where that link cannot be causatively linked to the receipt. If the asset increase in value, the defendant should hold that increase on constructive trust. But, if the defendant used the money paid by mistake to buy a lottery ticket which wins the jackpot, to determine whether that jackpot is held on constructive trust should depend on whether it can be shown that, but for the receipt of the money paid by mistake, the defendant would not have bought the ticket. If the defendant would have bought the ticket anyway, and used the mistaken payment by chance, this would be an appropriate reason to modify the constructive trust so that the jackpot is now hold on trust. If the defendant did not rely on the receipt to buy the ticket, there is no reason why the claimant should have a proprietary claim on the jackpot. Besides, Virgo commented whilst the law assumes that the claimant should have a proprietary claim against such a third party recipients, this is difficult to defend. The claimant should be confined to a personal claim in unjust enrichment against the direct recipient of the mistaken payment, who has not retained that payment or its traceable substitute, and not have a proprietary claim against an innocent third party recipient, at least where the only reason why the equitable proprietary right was created was because of the defendant’s unconscionable retention. If there is no unconscionable, there is no reason why the claimant should have a proprietary claim against that recipient. Furthermore, issue arises in relation to bribe and secret commission situations. When the defendant fiduciary’s profit derived from a third party, requiring the defendant to disgorge that profit to the principal is not justified by correcting injustice through restoring to the principal what he or she has lost, since the principal has not lost anything. Katy Barnett in “Distributive Justice and Proprietary Remedies Over Bribes” said rather, the imposition of liability on the fiduciary effects distributive justice, by ensuring that the fiduciary is deprived of the gain. Since the focus of equity’s response is on the defendant’s gain rather than reversing loss, there is no reason why the principal’s proprietary claim should rank above the claims of the defendant’s unsecured creditors. The principal should simply be regarded as any other unsecured creditor, whose claim should rank equally with those of all the defendant’s creditors. It follows that the advantage of the constructive trust of obtaining priority over other creditors should be modified where the fiduciary’s profits derive from a third party. All said and done, on one side, remedial constructive trust brings uncertainty, and institutional constructive trust is far from perfect yet. Though remedial constructive trust brings justice, it is not the sole concern in law, and that there are other considerations which rightly limit the law’s pursuit of justice. Thus, the law needs to be clear and certain, especially in relation to commercial dealings. It is unlikely that UK would adopt remedial constructive trust at the meantime as FHR is a supreme court case and clearly, it does not agree with introducing remedial constructive trust....