The Trust That Isn't: Unlocking Equity's Ultimate Remedy

In the vast landscape of law, few concepts are as powerful or as misunderstood as the constructive trust. Unlike a typical trust meticulously drafted by a lawyer, a constructive trust is not born from intention but from injustice. It is a legal fiction, a potent remedy imposed by a court of equity to prevent one person from unconscionably benefiting at another's expense. As students in any Equity & Trusts course learn, it is equity’s ultimate tool for preventing what is known as "unjust enrichment."

The Foundation: A Matter of Conscience

At its core, the constructive trust is imposed when the holder of a legal title to property cannot, in good conscience, retain the beneficial interest for themselves. The court effectively says, "You may hold the legal title, but it would be against all fairness for you to enjoy it. Therefore, you are holding it on trust for the person who is the true, equitable owner." This is not about fulfilling the parties' intentions; it is about correcting a wrong. The trust arises by operation of law, regardless of what the parties wanted.

A classic example of this principle in action is the seminal case of Keech v Sandford (1726). A trustee held a lease on a market for a child beneficiary. When the lease came up for renewal, the landlord refused to renew it for the child. The trustee then took the lease for his own personal benefit. The court ruled that the trustee held the renewed lease on a constructive trust for the child. The court's message was clear: a person in a fiduciary position cannot use that position to make a personal profit. It was unconscionable for him to keep the benefit he had only been able to obtain because of his role as trustee.

When Does a Constructive Trust Arise?

Courts have identified several key scenarios where a person's conscience is deemed sufficiently affected to justify the imposition of a constructive trust.

Breaches of Fiduciary Duty

As seen in Keech v Sandford, this is a primary ground. Fiduciaries—such as trustees, company directors, agents, and solicitors—owe a strict duty of loyalty to their principals. If they exploit information or opportunities gained through their position to make an unauthorized profit, that profit will be held on constructive trust. The House of Lords' decision in Boardman v Phipps [1967] is a stark illustration. A solicitor for a family trust used information gained while acting for the trust to purchase shares in a company and make a significant profit for himself and a beneficiary. Even though he acted honestly and the trust itself benefited from his actions, the court held that he held his profits on a constructive trust because he had profited from information that was, in essence, trust property.

The Complicit Third Party

A constructive trust can also attach to a stranger who meddles in a trust's affairs. This liability falls into two main categories. The first is "knowing receipt," where a third party receives trust property that has been transferred in breach of trust. The modern test, established in BCCI v Akindele [2000], asks whether the recipient's knowledge made it unconscionable for them to retain the benefit of the property. The second is "dishonest assistance," where a person dishonestly helps a trustee commit a breach. The landmark case of Royal Brunei Airlines v Tan [1995] established an objective standard for dishonesty: was the person's conduct dishonest according to the "ordinary standards of reasonable and honest people"? If so, they can be held personally liable to account as a constructive trustee.

The Shared Family Home

Perhaps the most common and socially significant application of the constructive trust is in disputes over the family home, particularly concerning unmarried couples. English law, through cases like Lloyds Bank plc v Rosset [1991] and later Stack v Dowden [2007] and Jones v Kernott [2011], developed the "common intention constructive trust." This trust arises when the legal title to a home does not reflect the parties' shared understanding of who owns the beneficial interest.

The court looks for evidence of a common intention that the property was to be shared beneficially. This could be an express discussion, however informal. In the absence of an express agreement, the court may infer an intention from the parties' "whole course of dealing" in relation to the property. This includes financial contributions, how the household was run, and the nature of their relationship. The constructive trust operates to give effect to that shared intention, preventing the legal owner from denying their partner's beneficial share.

A Remedy or an Institution?

A long-standing academic debate surrounds the very nature of the constructive trust. Is it an "institutional" trust that arises automatically by law at the moment of the unconscionable conduct? Or is it a "remedial" trust, a flexible remedy created by the court at the time of judgment to achieve justice?

English law has firmly favoured the institutional model. This means the court does not create the trust but merely declares its pre-existing existence. This has significant consequences, especially for third parties, as the beneficiary's equitable interest exists from the moment the wrongdoing occurred. In contrast, jurisdictions like the United States and Canada have embraced the remedial constructive trust, giving judges more discretion to fashion a just outcome. The senior English judiciary, in cases such as Westdeutsche Landesbank Girozentrale v Islington LBC [1996], has consistently resisted the remedial model, fearing the uncertainty it could create.

In conclusion, the constructive trust remains one of equity's most vital and dynamic creations. It is a testament to the law's ability to look beyond formal titles and strict rules to achieve fairness. It serves as a powerful warning that the law will not permit a person to use their legal rights as an instrument of fraud or to retain a benefit that, in good conscience, belongs to another.