TRUSTS IMPLIED BY LAW AS CREATURES OF EQUITY The equitable nature of trusts implied by law Creatures of conscience.

That trusts are implied, not inferred The trusts considered in this Part [5] are described as being implied by law whereas they might possibly be described as being inferred by law. That they are said to be implied by law suggests that it is the courts who impose the trust as a means of controlling the defendants conscience,1 as opposed to inferring the existence of such trusts from sets of factual circumstances which conform to established patterns in the case law. To imply suggests an active imposition of a judgment, whereas mere inference suggests a passive extraction from circumstance. Trusts drawn by law are said to arise by operation of law2 and as such it might be anticipated that they are inferred by the courts as a result of some automatic process which the judges simply observe and declare to have happened. However, it is a judicial implication of these trusts which is closer to the true position. Whereas the courts, somewhat coyly, prefer to suggest that the trusts come into existence without the active interference of the judiciary a nod to the mechanistic theory of jurisprudence whereby judges simply declare situations to be the case without interposing their own opinions it is nevertheless the case that trusts implied by law operate so as to control the conscience of the legal owner of property.3 By definition, judgment on the conscionability of another persons actions involves a value judgment. In many circumstances that value judgment may involve factual circumstances, such as fraud or duress or theft, which do not seem to involve particularly difficult moral niceties on their face because the moral quality of such activities are such that no court could find them otherwise than unconscionable. However, there are situations in which the imposition of concepts based on trusts implied by law do more than simply vindicate pre-existing property rights and instead operate on the basis that certain actions are to be considered to be morally wrong or that some actions justify the imposition of a trust, as considered above.4 Trusts imposed by operation of law are thus to be understood as being implied, on the basis of value judgments which are hardened by case law into principle, they are not inferred mutely or passively from the circumstances. Constructive trusts as equitable responses to circumstances It is suggested that the customary division between institutional and remedial constructive trusts is not entirely helpful.5 By maintaining the fiction that constructive trusts must arise on one basis or the other, the central, organising principle of constructive trusts is hidden. The constructive trust is imposed by courts, rather than
1 2

As is suggested by Westdeutsche Landesbank v Islington [1996] AC 669. Paragon Finance plc v DB Thackerar & Co [1999] 1 All ER 400. 3 Westdeutsche Landesbank v Islington [1996] AC 669. 4 See para 5 C Rotherham, Proprietary remedies in context (2002, Oxford: Hart) chapter 1 generally.

arising by operation of law like some conjuring trick, as a response to any situation in which a defendant acts knowingly and unconscionably in relation to the claimants property. No civil remedy or trust arises prescriptively: that is to say, one does not claim common law damages nor impose a constructive trust before some wrong, breach or unconscionable action (as appropriate) has been committed. Rather, they are imposed after the event as a means of responding to that wrong, breach or unconscionable action. A common law or equitable remedy seeks to measure the defendants culpability and measure that against the claimants loss; an award of equitable compensation or some instances of proprietary estoppel seek to identify the extent of the claimants loss or detriment and to effect compensation for them. A constructive trust operates differently. A constructive trust reacts to the unconscionable act of the defendant by imposing an equitable proprietary right over any relevant property which the defendant holds. If the defendant does not have that property under his control so as to be susceptible of being held subject to such an equitable proprietary interest, then the defendant is required to account to the claimant-beneficiary for the value of the loss which the claimant has suffered. That calculation is the same as for a trustee under an express trust being an amount of money or other property of sufficient value so as to effect restitution to the trust fund. Importantly, restitution here is not used in the sense of restitution of unjust enrichment.6 Rather, it is used in a very different, but vernacular, sense of making compensation to the claimant for the loss that the claimant has suffered. This sense means, in relation to the law of trusts, the restoration of the value of the trust fund. That is the root of the calculation of the defendants liability and not a measurement of any enrichment garnered in by the defendant. In this sense, when Lord Templeman held in A-G for Hong Kong v. Reid 7 that in the event of a fiduciary receiving a bribe which is invested realising a loss then that fiduciary is required to make good that loss, that liability equates to the liability of a trustee of an express trust to reconstitute the value of the trust fund in cash in the event that the trust property itself cannot be recovered.8 Otherwise, it is suggested that any profit made from the transaction will be capable of being held on constructive trust as an unauthorised profit. In these senses it is sufficient to accept that this type of law cannot act prospectively. A criminal cannot be punished until after the crime has been committed. Similarly, a constructive trust cannot be imposed until after some unconscionable act has been performed. The categories of unconscionable act on which equity has operated have been set out in this chapter. A constructive trust will be a response to one of those acts imposing either proprietary rights in favour of the claimant or personal liability to account to the claimant on the defendant. In either case, the constructive trust operates as a response in personam against the conscience of that person. By contrast an automatic resulting trust will function in recognition of a pre-existing right so as to assign to the claimant ownership of property which he has failed to transfer to some other person. The conscionable aspect of the automatic resulting trust is therefore to require the trustee to hold the property to the order of the previous beneficial owner of that property instead of purporting to hold it on his personal account. A purchase price resulting trust, more akin to a constructive trust than the
6 7

Cf. Swindle v. Harrison [1997] 4 All ER 705. [1994] 1 AC 324, [1993] 3 WLR 1143. 8 Target Holdings v. Redferns [1996] 1 A.C. 421, [1995] 3 W.L.R. 352, [1995] 3 All E.R. 785.

automatic resulting trust, prevents the legal owner of property from denying the equitable interest of a contributor to the purchase price of that property. It could be argued either that this form of resulting trust does so in recognition of the pre-existing right which is acquired at the time of contribution to the purchase price or alternatively that it arises only once the defendant seeks to deny the contributors claim. It is suggested that the former explanation is the better one because the right would need to come into existence at the date of contribution to recognise that such a contribution in itself may found a right in property (if it is in line with the common intention of the parties) and to protect the rightholder against the defendants insolvency. To decide otherwise would be to confuse the policy motivation of such a doctrine with its role as a means of protecting a persons rights in property.