Constructive Trust & Financial Consequences of Relationship Breakdown - Case Study Example

Constructive Trusts Show the Conscience of Equity at Work Introduction When equity developed as a parallel system to the common law, it was considered innovative by acknowledging “new” rights where common law failed to provide “justice”1. The intrinsic nature of this innovative system lay in the judicial “discretion” referred to by Lord Hoffman in Co-operative Insurance Society Limited v Argyll Stores Holdings Limited2. Moreover, the very nature of equity and innovation is rooted in the notion of fairness and justice. To this end, the constructive trust has been extrapolated as a prime example of the conscience of equity at work and the overriding aim of this analysis is to critically evaluate this assertion. It is submitted at the outset that the wide applicability of constructive trust renders it necessary to undertake a contextual approach focusing on particular areas. As such, this paper will consider the statement in context of constructive trust applicability in equitable tracing and fiduciary duties and the financial consequences of relationship breakdown. 2. Constructive Trusts & Equitable Tracing From a historical perspective, equity developed as a result of inflexibility of common law and “wiped away the tears of the common law”3. In common law, the doctrine of tracing enables a claimant to trace the path of their misappropriated property, identify the proceeds of the property along with persons who have handled the property. Moreover, the common law remedy of tracing enables an applicant to make a claim against the property itself4 However, tracing money at common law is inherently fraught with difficulties, especially where monies have passed through bank or similar accounts and in practice claimants often rely on the equitable doctrine of tracing5. The fundamental problem in common law tracing is the identity requirement, perpetuated by the common reality of funds being mixed. For example, the case of Taylor v Plummer6 affirmed that in order to succeed in a claim for tracing at common law, the property had to be identifiable and distinguishable from other property. Conversely, the Court of Appeal in Agip Africa v Jackson 7 asserted that equity will however allow tracing through mixed bank accounts through the imposition of fiduciary duty and constructive trust, which lends itself to support the assertion that constructive trusts act as the conscience of equity. A prime example of the broader scope of equitable tracing in contrast to legal tracing is the Privy Council decision in AG for Hong Kong v Reid.8 The dispute in the case centred on whether the solicitor general’s subsequent investment of the proceeds in land could be claimed. The land had significantly increased in value and the Privy Council determined that the profit attributable to the increase in value of the land was directly linked to the proceeds of the bribe and as such, the claimant had a right to the property, notwithstanding the increase in its value compared with the total sums received form the bribes. Accordingly, a significant advantage of equitable tracing is that firstly, tracing is a proprietary remedy and not a personal claim and therefore factors such as bankruptcy or the potential rights of other creditors are irrelevant9. However, whilst mixed funds are no bar to the equitable remedy, the various methods of recovering mixed funds have created problems in practice. The mechanism for recovering mixed funds is either through the rule in the Clayton’s case10, the rolling charge and pari passu11. Notwithstanding these methods of recovering funds in mixed accounts, The House of Lords decision in Westdeutsche Landesbank Girozentrale v Islington London Borough Council12 approved the dicta in ReDiplock’s Estate13and asserted that it was “now clear beyond doubt that tracing in equity requires an initial fiduciary relationship and constructive trust”14. This further highlights the use of constructive trust as tool for ensuring a just result and serving the purpose of equity as a parallel system to the common law. Accordingly, in addition to the complex methods of tracing mixed funds in equity, the doctrine of equitable tracing is inherently limited by the requirement of establishing a fiduciary relationship between the applicant and the perpetrator15. Once a fiduciary relationship has been established, the procedure requires obtaining a declaration from the court that the funds are held under constructive trust,16which is applied in order to address the lacunas in common law tracing and is further rooted in the equitable maxim which presumes that anyone in possession of another’s property will try and repay it17. In order to succeed in an application for constructive trust, it is also necessary to establish that there is a continued existence of the trust fund, which is dependant on establishing knowing receipt or knowing assistance18. However, the traditional trust concepts of knowing receipt and knowing assistance have been problematic in practice, particularly where financial institutions are involved, with extensions of these grounds being applied to ensure an equitable outcome19. For example, Lord Selborne presiding in the case of Barnes v Addy20, asserted that “strangers are not to be made constructive trustees unless (they) receive and become chargeable with some part of the trust property or unless they assist with knowledge that it is a dishonest and fraudulent design on the part of the trustees”21. However, in the case of Royal Brunei Airlines v Tan22, the Privy Council indicated that third party liability could apply regardless of whether a trustee and the third party had both acted dishonestly, which questions whether equitable tracing has actually developed as a set of sophisticated rules or is in fact a set of case by case decisions with the overall objective of preventing unconscionable results through the constructive trust paradigm. The latter would appear to be more realistic in light of subsequent judicial assertions23 that where someone interferes with a trust and deprives the beneficiary of some or all of their property, the constructive trust will be imposed for equitable tracing24 automatically. This is further bolstered by the view that breach of fiduciary duty automatically creates a trust in respect of funds appropriated directly as a result of the breach, without a need to prove the traditional complex requirements of trust law, particularly the requirement that there be certainty of subject matter before the imposition of a valid trust25. Furthermore, this has been extended to enable victims to make a claim against the banks for knowing assistance and knowing receipt. For example, In the case of Polly Peck International plc v Nadir and others (No 2) 26 the House of Lords held that the central issue was knowing receipt as to misapplication of trust funds and it was not necessary to demonstrate whether the bank had actively been involved in dishonesty or deceit or even that the bank had acted fraudulently. 3. Constructive Trust & Financial Consequences of Relationship breakdown The area of law relating to claims for beneficial interests in land under an implied trust is inherently complex, further compounded by judicial categorisation of trusts into resulting and constructive trusts. Moreover, many commentators have criticised the courts’ wide interpretation of established trust law principles as contradicting the primary purpose of the implied trust;27 which in turn has created uncertainty for individuals claiming beneficial interests. As such, this further lends itself to the view that constructive trusts operate as equity’s conscience however it further highlights the inherent tension between the flexibility of equity and the need for legal certainty. This is further highlighted by the law in relation to the division of rights in the family home on the break of a relationship, where implied trust principles overlap. The changing dynamic in the family nucleus coupled with socio-economic variances shaping property ownership can be problematic on the breakdown of a family relationship whether in the context of marriage or cohabitation28. The increase in cohabitation has also fuelled debate regarding the law’s approach to determining rights on subsequent relationship breakdown, and the rising divorce rate29 has increased the importance of effective legal mechanisms in determining proprietary rights. With regard to relationship breakdown, the difficulties and uncertainties surrounding rights to a family home have been traditionally dealt with through resulting or constructive trusts30. Moreover, whilst detailed provisions under the Matrimonial Causes Act 1973 specifically accord rights to married parties on relationship breakdown, the court does not have such wide ranging powers in relation to cohabitees and a sole owner will continue to own the property notwithstanding a relationship breakdown31. If a partner has made contributions to the property under cohabitation they currently have to rely on the complex principles of constructive and resulting trust with no equivalent statutory right of occupation as is applicable to marital relationships32. The difficulty that has exercised the courts in particular is the concept of contributions and the need to balance this so as to not apply discriminatorily. Traditionally, cases have had to address the pattern whereby the women have been homemakers, (with property registered in their partners’ name) looking after the children only to face the possibility of no proprietary rights to a property on subsequent relationship breakdown33. Whilst clearly unfair, the common law does not provide any protection and in such cases equity has sought to address the balance through resulting trust or constructive trust34. Resulting trusts usually involve contribution to the initial cost of the family home, which is registered solely in the name of another person35. Equity does not presume an outright gift, but rather a presumption that the contributing party intended to retain a beneficial interest in the property36 (despite no evidence of actual intention). Whilst this approach has been criticised theoretically as the imposition of an “artificial presumption37”, it is arguably a necessary approach to protect third party interests. However, the resulting trust will not cover a situation where one party has foregone a career and been a full time home-maker and in this case the constructive trust is relied upon, which to a degree supports the argument of constructive trust as equity’s conscience. The leading case of Lloyds Bank plc v Rosset38 highlighted the essential requirements for the imposition of a constructive trust asserting its foundation in the common intention of the parties to share the properties. Lord Bridge further asserted in this case that “intention” could be express or inferred from conduct39. Furthermore, Lord Bridge highlighting the reasoning in Gissing v Gissing40 asserted the concept of detrimental reliance in order for there to be a constructive trust. A prime example of this is the case of Eves v Eves41, where the defendant told the claimant that the only reason the house was being put in his sole name was as she was under 21. In reliance on this promise, the claimant redecorated the house and undertook significant works to the house. As a result, she was awarded a quarter shares in the proceeds of sale. Notwithstanding the widening interpretations of trust law to accommodate relationship breakdown, the constructive trust is limited by reluctance to acknowledge indirect contribution, which has worked primarily against women in practice42. Moreover, the courts’ approach has been positively inconsistent in relation to indirect contributions. For example, in the case of Hussey v Palmer43, the wife had paid for an extension to the house and it was held to constitute a beneficial interest, however the court had great difficulty in deciding whether it was a resulting trust or constructive trust, thereby highlighting the inherent flaw in artificial legal distinctions. Conversely, in the case of Thomas v Fuller-Brown, 44 where the claimant had carried out substantial works to the house registered in her husband’s name, she was held to have not beneficial interest. However in the case of Burns v Burns45, Fox LJ obiter suggested that if a woman makes a substantial contribution even indirectly it could result in an indirect interest, under the common intention constructive trust. The inconsistency in application of the constructive trust suggests the importation of “false” presumptions applied on policy grounds on a case by case basis, undermining legal certainty in implied trusts. Moreover, there is no consistent approach to what constitutes a “substantial contribution”, which is clearly evidenced in the approach to determining a beneficiary’s share in the proceeds of the sale under constructive trust46. Alternatively, the courts have been reluctant to extend the application of common intention constructive trust and “contribution” to cohabitation, with the result that cohabitees generally have to rely on the resulting trust, which is limited to contribution at the time of purchase. However, it is submitted that this fails to address the modern reality of cohabitation and arguably undermines the overriding purpose of equity’s “conscience” being achieved through the constructive trust model. Indeed, if we compare the position with the Canadian approach to constructive trust cases and cohabitees, in the Canadian case of Pettkus v Beckers47, although the Supreme Court was not considering property legislation, the Court suggested policy changes and Dickson J asserted that “I see no basis for any distinction, in dividing property and assets between marital relationships and those more informal relationships which subsist for a lengthy period48”. 4. Conclusion The above analysis demonstrates that whilst the constructive trust paradigm is clearly a useful tool in enforcing the conscience of equity, it is certainly not an absolute statement and ultimately depends on the contextual scenario. Indeed, the dichotomy between the judicial approach to constructive trusts in tracing and vis-à-vis cohabitees in contrast to married couples on relationship breakdown, highlights the inherent limitations of the constructive trust as equity’s conscience. Moreover, case law regarding the common intention constructive trust remains arbitrary, often reliant on ad hoc judicial importations of “artificial presumptions” rooted in policy considerations, which in turn leads to selective enforcement of equity’s conscience. BIBLIOGRAPHY Barlow., Duncan., & James., (2005)Cohabitation, Marriage and the Law. Hart Publishing. Roger, Bird., (2007). Ancillary Relief Handbook. 6th Edition Jordan Publishing. Dennis J Block & Barton (2006). 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