A critical response to Lord Neuberger’s statement on the Remedial Constructive Trust.

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[37] “Whether a proprietary interest exists or not is a matter of property law, and is not a matter of discretion. […] It follows that the courts of England and Wales do not recognise a remedial constructive trust as opposed to an institutional constructive trust.”

Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 (Lord Neuberger MR).

Constructive trusts are classified as institutional or remedial. The former involves an existing proprietary right wherein courts do not have discretion[1] and occurs under certain circumstances where a constructive trust has previously arisen by operation of law.[2]Conversely, remedial constructive trusts are imposed by courts, do not arise earlier than the court date and are distinguished by judicial creation of hitherto non-existent proprietary rights.[3]Remedial constructive trusts are recognised in other common law jurisdictions.[4] However,in accordance with Lord Neuberger’s statement, the approach taken to the constructive trust in English law is, purportedly, strictly institutional, due to judicial reluctance to change or create proprietary rights.[5] This is evident from several cases including Sinclair Investments v Versailles Trade Finance,[6] Re Polly Peck International plc,[7]  FHR European Ventures v Cedar Capital Partners LLP,[8] Lonhro plc v Fayed (No. 2)[9]  and Bailey v Angove’s Pty Ltd,[10] and is supported by academics including Millett and Birks. Despite opposition, remedial constructive trusts materialise in practice nonetheless and therefore Lord Neuberger’s statement does not reflect the practical approach to constructive trusts in English law.

Part I: Classes of constructive trusts and their remedial elements

Common intention constructive trusts illustrate that remedial constructive trusts can operate, despite contrary judicial assertions. When determining land interest intentions, courts assess party intention through actual, inferred and imputed intention.[11] While the court did not impute party intention in Jones v Kernott,[12] it did so in Stack v Dowden in the course of varying sole ownership.[13] Thus, imputed intention suggests remedial constructive trusts arise in practice, as judges have capacity to employ discretion and vary proprietary interests uncertain to parties beforehand. Indeed, Etherton argues that common intention constructive trusts provide evidence that remedial constructive trusts exist.[14] Therefore, whilst Lord Neuberger is one of many to denounce remedial constructive trusts, common intention constructive trusts demonstrate that the approach taken, in practice, has the propensity to include both institutional and remedial.

Rescission of contract also demonstrates that the approach involves remedial constructive trusts. Claimants can rescind contracts due to misrepresentation, fraud or undue influence. In order to protect interests on rescission, a constructive trust can arise.[15] Crucially, however, it will not arise until the court rescinds the contract, as opposed to when the claimant intends rescission.[16]Thus, as potential claimants will not know beforehand whether a court will rescind the contract, and subsequently impose a constructive trust, any constructive trust arising is remedial in nature.

The same is true regarding voluntary transactions made by mistake. The third condition set out in Pitt v Holt[17]stipulates the requirement of unconscionability, yet this has been criticised due to lack of clarity as to what circumstances constitute unconscionability.[18] Thus, any consequent constructive trust that arises could be remedial, due to uncertainty regarding whether a court will deem the circumstances as unconscionable. Therefore, voluntary transactions made by mistake detract from the validity of Lord Neuberger’s statement, as they support the conclusion that the approach to constructive trusts in English law is both institutional and remedial.

Post FHR,[19] the law stands that constructive trusts are imposed over property received by fiduciaries through bribes or commission, despite the fact that beneficiaries would not otherwise have a proprietary claim over such assets. While it was explicitly stated in FHR that English law does not accept remedial constructive trusts,[20] that constructive trusts can arise regarding fiduciary bribes seems to directly contradict this. Indeed, the court effectively takes away a proprietary right from the fiduciary and gives the principal beneficial interest to which they would not otherwise be entitled; something the Court of Appeal has stated can only be done by parliament.[21] Thus, these constructive trusts possess remedial elements and therefore Lord Neuberger’s above statement is incorrect as to this jurisdiction’s approach.

Part II: Judicial acknowledgement of remedial constructive trusts

Despite substantial judicial dicta expressing opposition to remedial constructive trusts, contradictory authorities exist which suggest Lord Neuberger’s statement does not reflect the English approach. For example, Reid effectively upheld a remedial constructive trust despite subsequent disapproval.[22] Lord Scott indicated in Thorner v Major that remedial constructive trusts could take hold,[23] and Etherton J stated in London Allied Holdings that debate is required regarding remedial constructive trusts.[24] Moreover, Lord Denning put forth the ‘new model constructive trust’[25] in Hussey, and referenced ‘cases where the legal owner cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or the benefit of it or a share of it’.[26] This statement evidently adopts a constructive trust akin to the remedial. Therefore, not only do remedial constructive trusts arise in practice, but they have also been explicitly acknowledged.

Part III: The academic perspective – a combined constructive trust?

While some academics align with Lord Neuberger’s statement, other academics raise strong arguments that the approach involves both institutional and remedial. Millett opines that the remedial constructive trust will not be established in England and Wales[27] and Birks and Lord Neuberger (extra-judicially) argue remedial constructive trusts are fundamentally irreconcilable with English law, due to the wide discretion to vary proprietary rights.[28] However, Virgo argues a mix could exist[29] and the “fundamental dichotomy” between institutional and remedial is unnecessary.[30] Similarly, Liew argues the purportedly binary distinction is incorrect, and rather, constructive trusts operate on spectrum.[31] Moreover, Delany and Ryan argue that remedial constructive trusts have achieved ‘consistency’ throughout other jurisdictions, and English law may eventually adopt the same.[32] Indeed, the remedial constructive trust successfully exists in both the Canadian and American jurisdictions.[33] Given the discussed evidence that remedial constructive trusts effectively arise in various situations, despite ardent contrary opinion, Virgo and Liew’s arguments are forceful, as the approach in English law is, in reality, a blend of institutional and remedial, with varying degrees of the latter.

Conclusions

While several authorities support Lord Neuberger’s dictum, in practice, the approach to constructive trusts in English law is also remedial. Certain common intention constructive trusts and those arising from rescission of contract and mistaken voluntary transactions demonstrate that remedial constructive trusts operate in English law regardless of judicial dicta. Moreover, constructive trusts arising from fiduciary bribes effectively grant proprietary interests to beneficiaries and could therefore be argued as remedial. Additionally, several judges have hinted at remedial constructive trusts, thereby detracting from Lord Neuberger’s statement. Academic opinion rightly suggests that institutional and remedial constructive trusts operate together and by degree. Therefore, whilst most authorities indicate Lord Neuberger’s statement is ostensibly true, in practice the approach to constructive trusts in English law is both institutional and remedial, and thus his dictum is incorrect.


[1] El Ajou v Dollar Land Holdings [1994] 2 All ER 685.

[2] Halifax Building Society v Thomas [1996] Ch 217.

[3] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669.

[4] FHR European Ventures v Cedar Capital Partners LLP [2015] AC 250 (SC).

[5] Re Polly Peck International Plc (In Administration) (No. 2) [1998] 3 All ER 812 (CA).

[6] [2012] Ch 453 (CA).

[7] Re Polly Peck (n 5).

[8] [2015] AC 250 (SC).

[9] [1992] 1 WLR 1.

[10] [2016] UKSC 47.

[11] Stack v Dowden [2007] UKHL 17.

[12] [2011] UKSC 53.

[13] [2007] UKHL 17.

[14] Terrence Etherton, ‘Constructive Trusts: A New Model for Equity and Unjust Enrichment’ [2008] CLJ 265.

[15] The National Crime Agency v Robb [2014] EWHC 4384 (Ch).

[16] Phillips v Phillips (1861) 4 De G G & J 208).

[17] Pitt v Holt; Futter v Futter [2011] EWCA Civ 197.

[18] Paul Davies and Graham Virgo, ‘Relieving trustees’ mistakes’ [2013] RLR 74.

[19] FHR (n 4).

[20] Ibid, 47.

[21] Re Polly Peck (n 5).

[22] Attorney General for Hong Kong v Reid [1994] 1 AC 324.

[23] [2009] 1 WLR 776 [20]; [21].

[24] London Allied Holdings v Lee [2007] EWHC 2061 (Ch) [247].

[25] Hilary Delany and Desmond Ryan, ‘Unconscionability: a unifying theme in equity’ [2008] Conv 401.

[26] Hussey v Palmer [1972] 1 WLR 1286 [1290].

[27] Peter Millett, ‘Restitution and constructive trusts’ [1998] LQR 399.

[28] Peter Birks, ‘Property and Unjust Enrichment: Categorical Truths’ [1997] NZ L R 623, 641; Lord Neuberger, ‘The remedial constructive trust: fact or fiction’, delivered on 10 August 2014 to the Banking Services and Finance Law Association Conference, New Zealand.

[29] Graham Virgo, ‘The Genetically Modified Constructive Trust’ (2016) 2(2) CJCCL 579, 589.

[30] Graham Virgo, The Principles of Equity & Trusts (3rd edn, OUP 2018) 277.

[31] Ying Khai Liew, ‘Reanalysing Institutional and Remedial Constructive Trusts’ [2016] CLJ 528, 531.

[32] Hilary Delany and Desmond Ryan (n 25), 424.

[33] Peter Millett (n 27), 9.

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