Introduction

WHY IS IT that we seem incapable of describing, explaining or justifying the law of proprietary remedies without resort to the most arcane language?

Imagine what those in other disciplines must think of us when we slip into the use of legal fictions, equitable maxims, evidential presumptions and estoppels, talk of tracing and subrogation—not to mention our tendency to dwell on the elusive distinction between “institutional” and “remedial” constructive trusts. Rather than being taken seriously in its own right by philosophers or economists, our treatment of proprietary remedies would seem more likely to attract the interest of those, such as anthropologists and sociologists, who specialise in deciphering the significance of odd cultural practices. Equally, however, jurists cannot hope to understand this area of law without first decoding the strange language that characterises it. This book provides a study of doctrines that allow for the acquisition of fully-fledged rights of ownership or security without an owner’s consent and the issues raised by such a redistribution of property rights. The theme is that the key to explaining the odd discourse that pervades the law of proprietary remedies lies in an appreciation of the tension between our recognition of remedies that redistribute property rights and our understanding that property is inviolable.

A satisfactory explanation of the law of proprietary remedies requires some reflection upon the factors that have influenced and continue to influence the evolution of the law in this context. Such reflection is essential, both as an aid to the interpretation of the existing case law and as a basis for predicting future developments. The choice of the factors that are treated—explicitly or implicitly—as influencing the development of the law of proprietary remedies will reveal much about the author’s vision of the nature of the common law and do much to shape the account of this particular area. The task of this introduction then is to clarify exactly what sort of account this book provides.

One might approach this area by seeking to demonstrate that the different remedies in question share fundamental conceptual features that go beyond the basic distinction that they are proprietary, as opposed to personal. This approach might go as far as arguing that the doctrines in question are derived from certain “first principles” that allow them to be presented as part of a systematic whole. This book does not offer that type of account. Indeed, it represents, in part, a critique of such endeavours. Attempts to present the positive law in terms of a crystalline set of first principles are inevitably highly misleading as descriptive accounts. The common law has developed in a piecemeal fashion through the use of fictions and the haphazard extension of existing legal concepts under the

2 Introduction

influence of judges and jurists of divergent legal and political visions. The depiction of the product of this disorderly process as the culmination of an evolution of legal concepts from their primitive origins to their mature forms is rather naïve.

What is more, even assuming that on occasion it is possible to demonstrate the influence of certain axioms in shaping legal development, there are particular difficulties in presenting the area of law in question as based on “first principles”. For, the idea of “proprietary remedies” implies that the courts, rather than simply enforcing existing rights, may award property rights as a remedy. This suggestion is in tension with the understanding that the role of the judiciary is to protect proprietary rights and that the power to redistribute property lies with the legislature alone. This gives the area an inherently unprincipled look. Judges and jurists have spilt a great deal of ink in their quest to reduce the metaphorical language and special pleading that flourishes in this area to a neat set of principles. However, the result tends to be the introduction of new metaphors and fictions.1 Moreover, such accounts leave too much unexplained. For, even if it were possible to depict the law of proprietary remedies as a coherent system of principles, the question would remain: “is it a good system?”. The presentation of judicially developed doctrines in this way reflects a formalistic impulse to divorce the law from fundamental issues of policy. These are issues that we can never escape.

A different form of analysis might treat changes in doctrine as motivated by particular policy choices: for instance, the promotion of efficiency or a specific conception of moral desert. A systematic analysis of these issues is no doubt valuable in its own right. Such a study would certainly give us insight into some of the intuitions that underlie the arcane language that flourishes in this area. In addition, an analysis of this kind would also assist us both to diagnose the law’s failings and to offer prescriptions for its reform. Nonetheless, in itself, such an analysis is unlikely to provide a sufficient basis for understanding the law of proprietary remedies. For one thing, in interpreting, applying and changing the common law, judges do not always, or perhaps even often, openly pursue policy objectives. Indeed, this is particularly true of the law in this area. The judicial justification of proprietary remedies could hardly be more obscure. While scholars examining some areas of law have argued that a consistent policy can be detected behind apparently casuistic judicial discourse,2 such a claim seems untenable with respect to the law of proprietary remedies.

If the desire to produce a “principled” analysis of the law of proprietary remedies is unrealistic and yet the prevalence of this aspiration makes it impossible to understand the law in terms of policy alone, how are we to analyse these doctrines? The key lies in appreciating the tension between the two modes of analysis and in

1See especially infra ch. 15.

2Some in the law and economics movement have claimed that the common law tends to evolve efficient norms: see, for example, P Rubin, “Why is the Common Law Efficient?” (1977) 6 JLS 51. On the other hand, this process is thought to be achieved in spite of, rather than because of “the characteristic rhetoric of opinions” in which “the true grounds of legal decision are concealed rather than illuminated”, see R Posner, Economic Analysis of Law (3rd edn., Boston, Mass., Little, Brown, 1986) 21.

Introduction 3

understanding how this tension is resolved. Much of the law of proprietary remedies is underpinned by a friction between the judiciary’s wish to confer property rights for various well-intentioned ends and the understanding that it has no business doing so. Thus, in substance, the law in this area appears to involve a clash of principle and policy. The rhetoric that has developed in this field serves to defuse this conflict, presenting what is in substance “unprincipled” in a form that is consistent with conventional doctrine. To understand this area of law, one must appreciate, first, the tension between axiomatic notions of property and the policy objectives being pursued, and, secondly, the rhetoric that defuses much of this tension by obscuring it. What is required is neither a study merely of supposed “principles” nor one simply of “policy” but of both and of the devices used to mediate the relationship of the two.

A study of the rhetoric in this area reveals the influence a particular conception of property has in structuring the discourse that prevails in the law of proprietary remedies. Decisions regarding the content and objects of property rights are made against the background of a notion of property that proscribes the non-consensual redistribution of these entitlements. Where this understanding does not result in a redistributive remedy being withheld altogether, it demands that it be conceptualised in a disingenuous fashion. While there are numerous instances in which the judiciary intervenes to readjust property rights, these are disguised through formal devices that maintain the appearance of fidelity with the vision of property as a fundamental limit on, rather than a product of, judicial activity. The result is what Oliver Wendell Holmes characterised as a “paradox of form and substance”3— whereby the law remains logically consistent with certain principles regarded as immutable and yet changes in substance to deal with “the felt necessities of the time”.4

This analysis is not equally true of all jurisdictions. This book examines how, in the United States, changes in legal thought associated with “legal realism” encouraged an abandonment of the aspirations of formalism. In addition, it explores how other jurisdictions have moved from a formalistic understanding of property as free from judicial readjustment toward a more instrumentalist approach that accepts the reality of redistribution. The historical and comparative perspectives provided in this book emphasise the contingency of the discourse of proprietary remedies that prevails in England today. They indicate that property is not something immutable but a dynamic body of norms embedded in and conditioned by deeper assumptions about law and social justice.

In examining the principles, policies and rhetoric in this field, this book does not seek merely to explain the law of proprietary remedies. It also provides a critique of this area and offers suggestions for reform. The profound disquiet over the judicial role in the redistribution of proprietary rights has led to dysfunctional law.

3O Wendell Holmes, “Common Carriers and the Common Law” 13 Am L Rev. 909 at 929 (1879). See G E White, Justice Oliver Wendell Holmes: Law and the Inner Self (New York, Oxford University Press, 1993) 139.

4O Wendell Holmes, The Common Law (Boston, Mass., Little, Brown, & Co, 1881) 1.

4 Introduction

The refusal to acknowledge the normative dimension of common law reasoning has precluded rational policy-making and has meant that legal justification is often structured by unspoken premises and characterised by obfuscatory rhetoric. The studies of different proprietary remedies and remedial processes all offer a normative analysis of the area examined, thus allowing for an evaluation of the positive law in the light of considerations of moral desert and efficiency. They suggest that what is required is a more honest discourse that will provide, not so much a rejection of the absolutist paradigm of property, as an understanding of its proper limits.

Part I

Property and Proprietary Remedies

1

Exploring the Idea of Remedial Trusts

THERE IS considerable hostility expressed toward the notion of the “remedial constructive trust” in English legal discourse. However, the “formidable and continuing problems of terminology which afflict the consideration of many questions on constructive trusts”1 often make it difficult to assess exactly what is meant by a remedial constructive trust and to appreciate quite why it attracts so much antipathy. The purpose of this chapter is to analyse the remedial/institutional distinction and to identify what is thought to be at stake in the rejection of the notion of remedial trusts. It focuses on several different distinctions that are often treated as significant. Ultimately, only one of these can really explain both what is distinct about the English judiciary’s approach to constructive trusts and why English courts are so antagonistic toward the notion of trusts characterised as “remedial”. A theme that is central to this book is that the key to comprehending this and other controversies in the law of proprietary remedies lies in the deeply felt conviction

that the judiciary should not create or redistribute property rights.

I. FROM REMEDY TO PROPERTY: THE DEVELOPMENT OF THE TRUST

The deep distrust expressed in English legal culture toward to the idea of “the remedial constructive trust” is somewhat surprising when one considers the origins of the trust. Initially, the use and its successor the trust were understood as creating personal rights. It was only gradually, as remedies to protect the beneficiary were developed, that these devices took on a more proprietary appearance. Until the mid-fifteenth century, a use could bind only those who took property through a person in whom trust had been reposed. Thus, rogues who disseised a feofee were not bound by a use even if they were aware of its existence.2 It was probably not until the late fifteenth century that it became common to enforce uses against the heir of the feofee or against a third party purchaser of the legal estate who had actual notice of the use.3 The understanding that rights arising from these arrangements were proprietary in nature seems to have begun to take root in this period.4 Nonetheless, the received wisdom in Coke’s time was that a

1Re Polly Peck International plc (in administration) (No 2) [1998] 3 All ER 812 at 830 per Nourse LJ.

2See AWB Simpson, A History of the Land Law (Oxford, Clarendon Press, 1986) 181.

3Ibid. at 180.

4JH Baker An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) 286.

8 Property and Proprietary Remedies

trust of land gave rise merely to an unassignable personal right of action, rather than an interest in land.5

The Courts of Chancery were willing to enforce trusts, as they had previously enforced uses, against third party purchasers with express notice of a trust.6 Subsequently, this protection was extended, and by the end of the sixteenth century the trust had taken on much of its modern form as an arrangement that was enforceable against all except a bona fide purchaser of the legal estate without notice.7 Nonetheless, it seems that it was only in the course of the following century that the courts recognised that the beneficiary’s interest prevailed against other claims against the trustee’s estate, such as those of the trustee’s creditors or that of a trustee’s widow claiming dower.8 Eventually, it became established that beneficiaries had a right of action against creditors of a trustee who had enforced judgment against assets subject to the trust.9 In addition, legislation was enacted establishing that interests arising under trusts were the property of the beneficiary for the purpose of administering beneficiaries’ estates.10

By the time of Lord Nottingham’s tenure as Lord Chancellor, the trust was treated by the Courts of Chancery as a proprietary interest; and from the middle of the eighteenth century it was recognised as such by the courts of common law. Thus, Lord Mansfield insisted that “the forum where they are adjudged is the only difference between trusts and legal estates”.11 The depiction of equitable rights as proprietary served a powerful ideological function in justifying equitable intervention. In many respects, the trust functions as “a contract for the benefit of a third party”.12 As such, it was highly suspect in the light of the common law doctrine of privity of contract. The characterisation of the beneficiary’s rights as proprietary, and, thus, by definition, as binding third parties, legitimated equity’s role in this area. It is a tactic that has remained available to those seeking to side-step the constraints of the doctrine of privity. As Winfield observed, “When the courts wish to enable the [third party] beneficiary to sue they make the promisor a trustee and when they wish to prevent him from doing so they fall back on the shibboleth of privity of contract”.13

5JH Baker, An Introduction to English Legal History (3rd edn., London, Butterworths, 1990) at

6Wildgoose v. Wayland (1596) reproduced in JH Baker and SF Milsom, Sources of English Legal History. Private Law to 1750 (London, Butterworths, 1986) 125. Baker, supra n. 4 at 351.

7Simpson supra n. 2 at 206.

8Medley v. Martin (1673) Rep t Finch 63 (creditor); Tassel v. Hare (1675) 73 SS no 339 (doweress). See Baker, supra n. 4 at 351.

9Finch v. Earl of Winchilsea (1715) 1 P Wms 277. See Baker, supra n. 4.

10Statute of Frauds 1677, 29 Car II c 3 s 10. See Baker, supra n. 4. The enactment was drafted by Lord Nottingham and probably amounted to a codification of what he understood the position to be in equity.

11Burgess v. Wheate (1757–9) 1 Eden 177.

12FH Lawson, A Common Lawyer Looks at the Civil Law (London, Butterworths, 1953) 200; J Langbein, “The Contractarian Basis of the Law of Trusts” (1995) 105 Yale LJ 625 at 628.

13W Winfield, The Province of Tort (Cambridge, Cambridge University Press, 1931) 107. See, e.g.,

Lord Strathcona Steamship Co. v. Dominion Coal Co. [1926] AC 108; Binions v. Evans [1972] Ch. 359.

Exploring the Idea of Remedial Trusts 9

In a time in which the prevailing political theory stated that the protection of property was the very reason for government,14 Chancery judges were eager to characterise equitable norms as property rights. At the turn of the nineteenth century, Lord Eldon insisted that equity protected property rights alone, and so was available only when the plaintiff had a right in rem.15 While this was an unfortunately restrictive view of the role of equity, the justificatory power of which does not withstand close analysis,16 it provides a good illustration of the ideological power of the rhetoric of property.

On the other hand, these equitable rights differed substantially from the property rights of the common law. Procedurally, equity was said to act in personam on those whose consciences were affected. The substantive consequence of this was that, of those who acquired a legal interest in property, only those who were volunteers or who had purchased the interest with notice of the beneficiary’s rights were bound. The limited protection afforded to these rights led some to doubt whether they really deserved the name “property”.17 In large part this doubt can be attributed to a misconception that property rights must necessarily be absolute. The better view is that a judicial willingness to enforce these arrangements against a class of third parties is indicative of the status of beneficial interests as property rights.18 In any event, by the time Maitland and Stone queried the validity and pitfalls of characterising a beneficiary’s rights as proprietary,19 this characterisation had probably been employed for too long to be denied. Nonetheless, even today, judges and commentators wishing to transcend the constraints of conventional

14J Locke, Two Treatises of Government (ed. Peter Laslett, Cambridge, Cambridge University Press, 1988) bk II § 123 at 350. See also Entick v. Carrington (1765) 19 St Tr 1029 at 1060 per Camden CJ: “The great end for which men entered into society was to secure their property. That right is preserved sacred and incommunicable . . . ”.

15Gee v. Pritchard (1818) 2 Swans. 402 at 413. The notion resurfaces from time to time. Thus, it has recently been argued that a plaintiff may recover the profits of a tort only where the wrong involves a breach of property rights: see Stoke-on-Trent City Council v. W & J Wass Ltd. [1988] 1 WLR 1406 at 1415 per Nourse LJ; Surrey County Council v. Bredero Homes Ltd. [1993] 1 WLR 1361 at 1364 per Dillon LJ. However, this tendency was criticised in AG v. Blake [2001] AC 268 at 283 per Lord Nicholls.

16See, A Gambaro, “Property” in A Candian, A Gambaro and B Pozzo, Property, Propriété, Eigentum (Padua, Cedam, 1992) 1 at 167.

17On the other hand, the proprietary status of the rights of beneficiares might be thought to be emphasised by the conventional view that equitable rights are good against all who subsequently acquire equitable interests in the asset in question, even bona fide purchasers. See, e.g., Phillips v. Phillips (1862) 4 De G F & J 208 at 217; Lac Investments v. Hotel Terrigal Pty. (1965) 113 CLR 265. This state of affairs has been regarded as justifying judicial caution in recognising equitable interests:

Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 704 per Lord BrowneWilkinson. However, the matter may not be so clear-cut. Australian courts, e.g., have shown a willingness to judge the relative merits of competing equitable claims rather than inevitably giving priority to the earlier interest: Heid v. Reliance Finance (1983) 154 CLR 326 at 341 per Mason and Deane JJ. See M Cope, Proprietary Claims and Remedies (Leichhardt, NSW, Federation Press, 1997) 104–6.

18See, e.g., A Honoré, “Rights of Exclusion and Immunities Against Divesting” (1960) 34 Tulane Law Rev 453 at 466.

19Maitland, supra n. 9 at 47; H Stone, “The Nature of the Rights of the Cestui Que Trust” (1917) 17

Col. L Rev. 467.

10 Property and Proprietary Remedies

understandings of property are apt to emphasise the origin of equitable rights as personal obligations.20

II. DIFFERENT USES OF THE CONSTRUCTIVE TRUST

In addition to trusts that gave effect to consensual arrangements, the courts of Chancery recognised certain trust relationships that were said to arise by operation of law. In contrast to the express trust, the resulting trust arises as a result of the presumed intention of the transferor of property—it is not necessary that the transferee (the trustee) share this intention.21 More strikingly, the constructive trust often comes into being even where there is no evidence that the beneficiary intended it and it is positively contrary to the will of the constructive trustee.

The constructive trust emerged as a device for constraining errant trustees and recipients of trust property but proved so useful that it came to be employed more broadly. As a result, constructive trusts are imposed in widely differing situations, and much of the lack of clarity that pervades analyses of this area flows from a failure to distinguish clearly between these.

Constructive trusts are sometimes used merely to protect what we have come to see as an existing equitable proprietary right.22 This is true of constructive trusts imposed upon a person who has received trust property and cannot claim to be a bona fide purchaser of the legal title for value without notice.

While it is often asserted that the constructive trust is imposed irrespective of the intention of the parties, intention is an essential ingredient in many instances in which the device is employed. A constructive trust is imposed where it would be unfair not to give effect to an owner’s intention to transfer property despite the lack of formalities normally required for such a transfer. Illustrations of the use of the constructive trust in this way are interests that arise where owners have done everything in their power to effect a transfer,23 and where an intention to transfer property is made in contemplation of death.24 Constructive trusts also arise where, because of the transferee’s detrimental reliance, it would be unfair to deny the effect of the transferor’s intention to confer an interest despite the absence of the formalities usually required. Constructive trusts are imposed in this way in the

20 See, e.g., Muschinski v. Dodds (1986) 160 CLR 583 at 615 per Deane J; C Rickett, “The Classification of Trusts” (1999) 18 NZULR 305 at 309.

21 See Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 708 per Lord Browne-Wilkinson. Cf the view that there was also a class of trusts that arose automatically, without reference to intention because of a settlor’s failure to dispose completely of his or her beneficial interest in the property.

22S Gardner, An Introduction to the Law of Trusts (Oxford, Clarendon Press, 1990) 232; R Grantham and C Rickett, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000) 406.

23Re Rose, Midland Bank Executor and Trustee Co. Ltd. v. Rose [1949] 1 Ch. 78; Re Rose, Rose v. IRC [1952] 1 Ch. 499. See Oakley, Constructive Trusts at 318; N Hopkins, The Informal Acquisition of Rights in Land (London, Sweet & Maxwell, 2000) 15.

24See, e.g., Sen v. Headley [1991] Ch. 425. Hopkins, supra n. 23, at 22

Exploring the Idea of Remedial Trusts 11

context of mutual wills,25 where there is a common intention to share beneficial ownership,26 in the context of estoppel by representation.27 Similarly, constructive trusts are imposed upon the acquisition of property, in circumstances in which it would be unconscionable for the recipient to assert beneficial ownership of the property because of a prior agreement and detrimental reliance. This is true where the property was transferred on condition that it be held on trust,28 where there was a contract to transfer the property when acquired and the transferee has furnished consideration,29 where a purchaser of land has promised to honour a contractual licence.30 and where there was a joint venture whereby the property was to be acquired for the parties’ mutual benefit.31

The constructive trust is also employed to regulate the transitional stages of consensual transactions, providing a fair distribution of entitlement and curbing opportunities for exploitation. Thus, vendors subject to a specifically enforceable contract of sale hold the property on trust prior to the transfer of legal title.32 Similarly, a trust arises in favour of mortgagors over the mortgaged property after redemption,33 or in respect of their share of the proceeds of any mortgagee sale.34

The more controversial applications of the constructive trust arise in situations that cannot be readily characterised as enforcing either existing property rights or informal transfers or as involving the regulation of consensual transactions. For example, a constructive trust arguably arises where it is unconscionable for a recipient to retain property in circumstances where the transferor’s intention to pass title was vitiated.35 Still greater a source of anxiety are instances of the

25Dufour v. Pereira (1769) Dick 419 at 421; Re Cleaver [1981] 2 All ER 1018 at 1024. See Oakley,

Constructive Trusts at 263.

26See, e.g., D Hayton, “Remedial Constructive Trusts of Homes: An Overseas View” [1988] Conv. 259 at 264; S Gardner, supra n. 22 at 228–31; S Moriarty, “Licences and Land Law: Legal Principles and Public Policies” (1984) 100 LQR 376.

27Lloyds Bank plc v. Rosset [1990] AC 105; Giumelli v. Giumelli (1999) 161 ALR 473.

28The constructive trust is sometimes claimed to be the basis of relief for secret trusts. See, for instance, RP Austin, “Constructive Trusts” in P Finn (ed.), Essays in Equity (Sydney, Law Book Co., 1985) 196 at 197; Birks, An Introduction to the Law of Restitution at 65; Paragon Finance Plc v. DB Thakerar & Co. [1999] 1 All ER 400 at 408–9 per Millett LJ. On the other hand, many commentators argue that the constructive trust has nothing to do with the courts’ treatment of this area: see e.g., Oakley, Constructive Trusts at 260–3.

29Holroyd v. Marshall (1862) 10 HLC 191.

30Ashburn Anstalt v. Arnold [1989] Ch. 1 at 23–6 per Fox LJ; Lyus v. Prowsa [1982] 1 WLR 1044. See Hopkins, supra n. 23 at 47–60.

31Banner Homes Group Plc v. Luff Developments Ltd. [2000] Ch. 372; Pallant v. Morgan [1953] Ch. 43; Chattock v. Muller (1878) 8 Ch. D 177.

32Lysaght v. Edwards (1876) 2 Ch. D 499 (land); Oughtred v. IRC [1960] AC 206 (shares in a private company). See Oakley, Constructive Trusts at 275.

33The constructive trust no longer has any real relevance in this field in English law since the Law of Property Act 1925 indicated that mortgages were to be made by way of charge rather than conveyance. See Oakley, ibid. at 307.

34Banner v. Berridge (1881) 18 Ch. D 254. Again, this use of the constructive trust has been rendered irrelevant by the implementation of a statutory trust in the Conveyancing Act 1881, s 21(3)—a provision reenacted in the Law of Property Act 1925. See Oakley ibid. at 308.

35Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd. [1981] 1 Ch. 105; cf Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669. See infra ch. 6.

12 Property and Proprietary Remedies

constructive trust that appear to redistribute property without regard to the parties’ intentions. This is true of constructive trusts employed in conjunction with tracing to claim proceeds of property.36 Another example is provided by trusts that arise to prevent trustees or other fiduciaries from acquiring beneficial ownership of property obtained in breach of duty.37 A third illustration is provided by trusts arising in favour of one who has indemnified another pursuant to a contract of insurance38 or has cared for the victim in order to prevent a victim’s overcompensation by a party liable for the loss caused.39

III. THE REMEDIAL/INSTITUTIONAL DICHOTOMY

Analysis of the nature of the constructive trust is commonly framed in terms of whether it is an “institution” or a “remedy”. While it has been in vogue in this context for over 40 years,40 the term “institutional” is particularly unhelpful.

Roscoe Pound first used the expression in this area, commenting that the constructive trust was a remedial rather than substantive institution.41 It is evident that Pound assumed that, regardless of the function of the constructive trust, it was indeed an institution.42 It appears that he used the term “institutional” to mean nothing more than an established practice. Pound was writing of developments in the years 1918–19. While today we tend to distinguish between English and American approaches to the constructive trust, Pound was in no way suggesting that American law had developed the constructive trust in novel ways. This is not surprising, given that he was writing almost two decades before his colleagues at Harvard, Warren Seavey and Austin Scott, produced the Restatement of Restitution. In Pound’s view, “[l]ittle that is new” was involved in the cases upon which he was reflecting. Instead, his analysis merely concerned “a few interesting applications of settled principles”.43 Thus, he focused on the historic role of the constructive trust and cited a mixture of English and American cases.

36For a striking recent example see Foskett v. McKeown [2001] 1 AC 102.

37See, e.g., AG for Hong Kong v. Reid [1994] AC 324; Lac Minerals v. Corona (1989) 61 DLR (4th) 14; Soulos v. Korkontzilas (1997) 146 DLR (4th) 214.

38Lord Napier and Ettrick v. Hunter [1993] 1 AC 713.

39Cunningham v. Harrison [1973] QB 942; Hunt v. Severs [1994] 2 AC 350.

40In an article published in 1959, Maudsley observed that “English law has always thought of the constructive trust as an institution, a type of trust”: RH Maudsley “Proprietary Remedies for the Recovery of Money” (1959) 75 LQR 234 at 237. The institutional/remedial dichotomy was further entrenched in D Waters’ work, The Constructive Trust (London, Sweet & Maxwell, 1964).

41R Pound, “The Progress of Law” (1920) 33 Harv. L Rev. 420 at 420–1.

42Drawing on Pound, Scott made the same distinction in an article published in the Law Quarterly Review in 1955. Scott commented that, “as Professor Pound has pointed out, a constructive trust, unlike an express trust, is a remedial and not a substantive institution”: AW Scott, “Constructive Trusts” (1955) 71 LQR 39 at 41. While the terms remain rather poorly explained, Scott quite rightly understood the distinction drawn by Pound as “remedial”/“substantive”, not “remedial”/“institutional”. The latter distinction seems to have come into vogue with Maudsley’s article four years later (see supra n. 40).

43Ibid. at 421.

Exploring the Idea of Remedial Trusts 13

Subsequently, many judges and jurists have used the expression “institutional” without explaining its import, while those who have paused to clarify the matter have tended to use the term in quite different ways.44 Thus, Charles Rickett recently suggested that:

the term “institutional constructive trust” is an attempt to corral all those cases we call “constructive trusts”, and which have some historical pedigree, which we cannot avoid, and with which we essentially feel happy.45

The remaining sections examine some of the characteristics that have been thought to distinguish the remedial constructive trust from its institutional counterpart and consider what it is about some applications of the constructive trust that makes us uncomfortable.

1. Rights and Remedies

(a) A Dichotomy Between Substantive Rights and Remedies

Pound’s remarks have sometimes been interpreted as drawing a distinction between substantive rights and remedies46; and, independently, other commentators have relied upon such a contrast in analysing this area. Thus, it has been said, rather cryptically, that the constructive trust and tracing “are not so much remedies as part of the process of establishing the substantive rights of the parties”.47 This seems a rather unpromising distinction. It is unlikely that Pound, who profoundly influenced the realists and was writing at the time of Hohfeld, was relying on such a misconceived dichotomy. It has long been observed that, while they are analytically distinct, rights and remedies are correlative. Where one can find a remedy, one will be able to point to a right that determines that it is available; and one has a right only where the law provides a remedy for its breach.48

The notion that rights and remedies are not inextricably linked was given short shrift by Goulding J in Chase Manhattan Bank v. Israel British Bank.49

44While, commentators generally place a good deal of significance on the distinction, as Malcolm Cope observes, “[t]here is, however, no agreement as to what situations are institutional and what are remedial”: M Cope, The Constructive Trust (Sydney, Law Book Co., 1992) 15.

45Rickett, supra n. 20 at 325.

46See, e.g., D Waters, “The Constructive Trust in Evolution: Remedial and Substantive” [1991]

Estates and Trusts Jnl. 334 at 334.

47Sir Robert Megarry and PV Baker (eds.), Snell’s Principles of Equity (27th edn., London, Sweet and Maxwell, 1978) 572.

48A Corbin, “Legal Analysis and Terminology” (1919) 29 Yale LJ 163 at 167; R Stevens, “Restitution, Property and the Cause of Action in Unjust Enrichment” (1989) 39 U of Tor. LJ 258 at

285.See also Muschinski v. Dodds (1985) CLR 583 at 616 per Deane J.

49[1981] Ch. 105. It was argued that in New York the constructive trust was a remedy and therefore formed part of its procedural rather than substantive law—a distinction that would have had jurisdictional consequences.

14 Property and Proprietary Remedies

He observed that:

Within the municipal confines of a single legal system, right and remedy are indissolubly connected and correlated, each contributing in historical dialogue to the development of the other, and save in very special circumstances it is as idle to ask whether the court vindicates the suitor’s substantive right or gives the suitor a procedural remedy, as to ask whether thought is a mental or a cerebral process. In fact the court does both things by one and the same act.50

Thus, in itself, the distinction between rights and remedies cannot illuminate the controversy over the remedial constructive trust.

(b) Facilitative Institutions and Remedies

We tend to associate remedies with the redress given for breaches of what H.L.A. Hart termed “primary rules”: those rules that require people to act or prohibit them from acting in particular ways. However, in addition, there are what Hart referred to as “secondary rules”: those rules that provide “individuals with facilities for realizing their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law”.51 The norms that allow parties to enter into contracts or express trusts are good examples of secondary rules. These provide frameworks that allow individuals to choose to structure their legal rights and liabilities to suit their needs.

This seems to be the distinction that Pound was drawing so long ago. He used the phrase “substantive trust” as a synonym for “express trust”,52 and he noted that “one of the most effective remedial expedients” available to the Chancellor “was to treat a defendant as if he were a trustee”.53 Thus, to Pound, real trustees were those who voluntarily assumed the primary obligations of the facilitative institution of the express trust. In contrast, the constructive trust, as the name suggests, was not a true trust (i.e. a facilitative institution) but a remedy imposed by the courts.54

Perhaps the notion that the express trust is a “substantive” as opposed to “remedial” institution, as Pound put it, derives from the fact that it plays a part in people’s lives outside the context of the judicial process in a way that the constructive trust does not. Thus, it is said that, while the express trust is a product of intention, the constructive trust arises by operation of law.55 The express trust is a pervasive

50Muschinski v. Dodds (1985) CLR 583 at 124.

51HLA Hart, The Concept of Law (Oxford, Clarendon Press, 1960) 27.

52See infra n. 67.

53Pound, supra n. 41 at 421.

54See A Kull, “Restitution in Bankruptcy: Reclamation and Constructive Trust” (1998) 72 Am. Bankcy. L J 265 at 288.

55See, e.g., FW Maitland, Equity: A Course of Lectures (2nd edn., Cambridge, Cambridge University Press, 1936) at 53. This distinction is not entirely helpful. Intention does often play a role in constructive trust doctrines. However, the constructive trust is perhaps never awarded solely in response to the parties’ intention. Thus, the constructive trust is used as a facilitative device to enforce certain consensual arrangements, such as transfers of land (see infra ch. 8). Here it provides for an allocation of the risks arising in the transitional stages of sales transactions. Elsewhere, through the doctrine of the

Exploring the Idea of Remedial Trusts 15

instrument that people employ in managing their affairs, while the constructive trust surfaces merely as a tool used by the judiciary when things break down.

In contrast with the express trust, when used in the context of fiduciary relationships, the constructive trust functions to remedy breaches of consensually assumed primary rights. For example, the constructive trust is used to protect express trust relationships where trust property comes into the hands of a third party. In addition, outside the context of express trusts, the constructive trust is used to punish other breaches of fiduciary duties.56 Thus, by providing a remedy for breaches of express trusts and other fiduciary relationships, the constructive trust gives those institutions much of their content.

The express trust appears to have a life of its own in the way the constructive trust does not. While, in positivistic terms, we might view the express trust as no more than a reflection of the remedies presently available to enforce it,57 it can be seen as something more than this. In the context of the development of the trust, the relationship between prohibitions, rights and remedies has been and continues to be dynamic and reflexive. If it is ultimately true that in some sense the remedies constitute the institution, they nevertheless seem to assume its existence. As Goulding J observed, right and remedy have “each contribut[ed] in historical dialogue to the development of the other”.58 Prohibitions, rights and remedies give the express trust its structure but also are shaped with reference to an idea of the “trust” as a legal relationship that serves a particular function.

In contrast, we have no equivalent notion of what the essential nature of the constructive trust might be. The metaphors commentators use to describe the constructive trust suggest the distaste that those who seek principle and order have for this device. To them the law of constructive trusts consists of nothing more than “a rag-bag of instances having little in common”59 or a “a vague dust-heap for the reception of relationships which are difficult to classify or which are unwanted in other branches of the law”.60 Edmund Davies LJ addressed this issue in more sympathetic terms in Carl Zeiss Stiftung v. Herbert Smith (No 2),61 arguing that:

English law provides no clear and all-embracing definition of a constructive trust. Its boundaries have been left perhaps deliberately vague, so as not to restrict the court by technicalities in deciding what the justice of a particular case may demand.62

“common intention” constructive trust, the device is used to confer rights that arise, not merely as the result of the parties’ agreement, but because of detrimental reliance upon that agreement (see infra ch. 10.II.1).

56Although whether constructive trusts rather than the remedy of account should be awarded in this context is another question. See infra ch. 9.I.

57Cf. Millett LJ’s remark that someone “is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary”: Bristol & West Building Society v. Mothew [1996] 4 All ER 698 at 712.

58Chase Manhattan Bank v. Israel British Bank [1981] Ch. 105. See supra, text accompanying n. 50.

59Austin, supra n. 29 at 196.

60EI Sykes, “The Doctrine of Constructive Trusts” (1941) 15 Aust. LJ 171 at 175.

61[1969] 2 Ch. 276.

62Ibid. at 300.

16 Property and Proprietary Remedies

Strangely, as a defence for the English approach to the area, this sounds rather like an apology for “palm tree justice”—that spectre which English lawyers so often argue haunts the use of the constructive trust in jurisdictions other than their own. In any event, it is difficult to square this vagueness with the “technicalities” that do litter this area of law, such as the insistence on a fiduciary relationship as a prerequisite for tracing.63

2. The Constructive Trust as a Device for Protecting Fiduciary Relationships

(a) Constructive Trusts and Fiduciary Relationships

There is a tendency in English legal thought to regard the constructive trust as inextricably linked with consensual equitable relationships.64 Certainly the use of the constructive trust to remedy breaches of the primary rights associated with the fiduciary relationship gives that facilitative institution much of its structure. However, it does not follow that the constructive trust does not have applications beyond this role.

As Waters put it, “[t]he fiduciary relationship permeates the whole of English constructive trust thinking”.65 For many commentators this is why the constructive trust is viewed as substantive in English legal thought and the extension of the device beyond this role is thought to give it a more remedial quality. Thus, according to Goode, it is because of the increasing availability of the constructive trust that “it more closely resembles the American remedial trust than the traditional institutional mode created by English law”.66

It was the tendency to limit the device to situations where there was a pre-exist- ing fiduciary relationship that was the target of Roscoe Pound’s criticism in that much cited but little analysed article of 80 years ago. Pound lamented a judicial tendency to treat the constructive trust “as something substantive” by assuming that the remedy was available only for someone “who is the beneficiary of a substantive trust”.67 In particular, he complained that this habit prevented or complicated the use of the constructive trust to prevent those who killed fellow joint tenants from benefiting through the operation of survivorship.

On this analysis, the point is not that the constructive trust is not a remedy, but more that it is an integral part of the key institutions of the law of equity: the express trust and the fiduciary relationship. This gives rise to the impression that to use the constructive trust as a more general remedy outside these institutions

63See Re Diplock [1949] Ch. 465.

64For analyses of this tendency, see P Maddaugh and J McCamus, The Law of Restitution (Aurora, Ont., Canada Law Book, 1990) 82, 87–93; Waters, supra n. 40 at 2.

65Ibid. at 19–22.

66R Goode, “Twentieth Century Developments in Commercial Law” [1983] LS 283 at 292.

67Pound, supra n. 41 at 423.

Exploring the Idea of Remedial Trusts 17

would be somehow unprincipled.68 According to this view, the constructive trust serves to bring interlopers under the umbrella of existing fiduciary relationships and to force errant fiduciaries to disgorge profits made in breach of their duties.69 This attitude led Austin Scott to bemoan the tendency of English scholars to define the constructive trust in terms of breaches of fiduciary duty.70 In particular, he complained that Keech v. Sandford71 was treated “as though it were the constructive trust”.72

Thus, until recently, in arguing for the availability of a constructive trust, commentators thought it important to point to the existence of a fiduciary relationship.73 Thus, in the New Zealand Court of Appeal in Liggett v. Kensington, Gault J emphasised the perceived importance of fiduciary relationships in this context.74 Similarly, in Re Polly Peck (No 2),75 Mummery LJ argued that one of the features that distinguishes the Canadian remedial constructive trust from the English institutional variety is that the Canadian courts do not require a pre-existing fiduciary relationship.76

The notion that the constructive trust’s role is limited to enforcing trusts and fiduciary duties in part explains the requirement that a fiduciary relationship must exist before one can trace in equity and claim a constructive trust.77 It also accounts for the tendency to argue that the way to develop the law in the area is through being “more ready to categorise wrongdoers as fiduciaries”.78

The continuing significance attached to the connection between the constructive trust and fiduciary relationships was also apparent in AG for Hong Kong v. Reid,79 where the Privy Council concluded that an employer became the beneficial owner of a bribe accepted by an employee. What seemed to be a remedial

68For observations to this effect see Hunter Engineering Co. v. Syncrude Canada Ltd. (1989) 57 DLR (4th) 321 at 349 per Dickson CJ; M Neave, “The Constructive Trust as a Remedial Device” (1978) 11 MULR 343 at 343; D Waters, Law of Trusts in Canada (2nd edn., Toronto, Carswell, 1984) 381; G Klippert, Unjust Enrichment (Toronto, Butterworths, 1983) 185; J Dewar, “The Development of the Remedial Constructive Trust” (1982) 60 Can. Bar Rev. 265 at 275; Cope, supra n. 44 at 16.

69Cope, supra n. 44 at 13.

70Scott referred to the following definition: “[a] constructive trust is raised by a court of equity wherever a person, clothed with a fiduciary character, gains some personal advantage by availing himself of his situation as a trustee”: Lewin, Trusts (15th edn., London, Sweet & Maxwell, 1950) 155. See Scott supra n. 42 at 47.

71(1728) Sel. Cas. t King 61.

72Ibid., at 47 (emphasis in the original).

73This is apparent, for instance, in the 1986 edn. of R Goff and G Jones’ text, The Law of Restitution (3rd edn.). On the one hand, the authors argued that in undue influence cases, “[e]ven if a fiduciary relationship is deemed necessary, the courts will undoubtedly hold that the equitable title remains in such a transferor” (ibid. at 256). On the other hand, they thought it necessary, in arguing that the courts should be prepared to grant proprietary remedies for duress, that they “should not be inhibited from doing so by the absence of any fiduciary relationship” (ibid. at 247).

74[1993] 1 NZLR 257 at 281.

75[1998] 3 All ER 812.

76Ibid. at 825.

77This has been the received wisdom in England since Re Diplock [1949] Ch. 465 which interpreted Sinclair v. Brougham [1914] 2 Ch. 356 as establishing this position.

78Sir Peter Millett, “Equity—The Road Ahead” (1995) 9 Trust Law International 35 at 40.

79[1994] AC 324.

18 Property and Proprietary Remedies

constructive trust, in that it neither reflected the parties’ intentions nor protected existing property rights, was justified because it enforced a fiduciary relationship.80 Subsequently, in Halifax Building Society v. Thomas,81 which involved an attempt by a bank to recover the profits of a mortgage fraud, the Court of Appeal distinguished AG for Hong Kong v. Reid on the basis that the rogue in Halifax was not a fiduciary.82

(b)The Role of the Constructive Trust Beyond Fiduciary Relationships

(i)The Use of the Device Beyond Fiduciary Relationships in North American law

It is in this light that we can appreciate the observation that the birth of the remedial constructive trust in American law is marked by the divorce of the device from consensual fiduciary relationships in the decision of the New York Supreme Court in Newton v. Porter.83 There, the plaintiff was allowed to claim a constructive trust against a thief and trace the proceeds of his property despite the absence of a preexisting fiduciary relationship. The significance of this development was noted by Dickson J in the Supreme Court of Canada in his influential dissenting judgment in Rathwell v. Rathwell.84 In a passage that admirably identifies a difference in attitudes regarding the scope and function of the constructive trust in English and American law, he observed that:

English law has long treated [the constructive trust] as an analogous institution to the express trust arising in certain definite situations such as the assumption of trustee duties by a stranger to a trust, the participation in the fraud of a trustee by a stranger, and reception and dealing with trust property by stranger in ways inconsistent with the trust. . . .

The examples mentioned above are situations where a man against his will is brought within the express trust institution, but in the United States the constructive trust has never been so limited. Its amplitude oversteps the substantive trust machinery. It is a remedial mechanism.85

(ii)Constructive Trusts Employed Outside Fiduciary Relationships in English Law

Nonetheless, it is true that, even in English law, the constructive trust has always had a role beyond the enforcement of existing fiduciary relationships. This is so

80See infra ch. 9.III.1.

81[1996] Ch. 217. See infra ch. 9.III.3(b).

82Ibid. at 229 per Peter Gibson LJ.

83(1877) 69 NY 133. The significance of the case is described in similar terms by Goulding J in Chase Manhattan [1981] Ch. 105 at 125 relying on the testimony of Prof. George Palmer. A similar severance of the constructive trust from pre-existing fiduciary relationships took place in New Zealand in Elders Pastoral Ltd. v. BNZ [1989] 2 NZLR 180.

84(1978) 83 DLR (3d) 289.

85Ibid. at 305.

Exploring the Idea of Remedial Trusts 19

where the device is used in the context of consensual relationships that are not conventionally characterised as fiduciary in nature. Consider the use of the constructive trust to constrain a vendor of real estate prior to completion or to control the mortgagee in the use of the proceeds of sale of mortgaged property. The transactions into which the parties enter cannot be said to be inherently ones in which one party reposes trust and confidence in the other. Rather, a limited relationship is imposed through a constructive trust to regulate risks that arise in these transactions. Similarly, constructive trusts are imposed by operation of law in some circumstances to prevent one party unconscionably departing from a promise or agreement that has been relied upon by the other party. This is true of the constructive trusts that enforce a common intention to share the beneficial ownership of property, those awarded in the context of proprietary estoppel to enforce assurances given by a legal owner, and those imposed to enforce mutual wills.

In all these cases, the constructive trust that arises is generally characterised as coming into being by operation of law rather than as a direct response to the intention of the parties.86 What is it then that makes the imposition of a constructive trust outside a pre-existing fiduciary relationship acceptable in these cases? In all the situations mentioned above, constructive trusts are employed to regulate consensual relationships. In contrast, the recognition of a constructive trust outside the context of consensual relationships is perceived as a more radical imposition, and, hence, tends to be pejoratively labelled “remedial”.87

The unease generated by the use of the constructive trust beyond its role in the regulation of consensual relationships is apparent from instances in which the device has been used in the context of vitiated transfers. The constructive trust has been used in some cases to confer equitable title where transferors have transferred legal title but their intention to do so was vitiated in some way or where it would have been unconscionable for the transferee to assert beneficial title to the property in question. Examples include the rather cryptic House of Lords’ decision in

Sinclair v. Brougham,88 the High Court decisions in Chase Manhattan Bank v. Israel (British) Bank89 and Neste Oy v. Lloyds Bank Plc,90 and Lord BrowneWilkinson’s analysis of the area in Westdeutsche Landesbank Girozentrale v.

Islington LBC.91 At first sight, it is tempting to conclude that these decisions indicate that the remedial/institutional distinction has nothing to do with any concern about the use of the constructive trust outside the context of fiduciary

86 See Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 at 708 per Lord Browne-Wilkinson.

87It is in these terms that Charles Rickett analyses the tension in Quistclose trust jurisprudence between a “pure trusts law philosophy” that emphasises intention and a “remedial trusts law philosophy” that imposes proprietary relief for other rationales. See C Rickett, “Different Views on the Scope of the Quistclose Analysis: English and Antipodean Insights” (1991) 107 LQR 608.

88[1914] AC 398.

89[1981] Ch. 105.

90[1983] 2 Lloyd’s Rep. 658 at 666.

91[1996] AC 669. See infra ch. 6.II.2(c).

20 Property and Proprietary Remedies

relationships.92 However, this is not so clear. The House of Lords in Westdeutsche Landesbank overruled the holding in Sinclair v. Brougham that those who had made payments to the defendant under contracts that were void ab initio because they were ultra vires were entitled to proprietary relief.93 Moreover, Chase Manhattan and Neste Oy have always been very controversial, and have often been viewed as representing remedial applications of the constructive trust.94 Finally, Lord Browne-Wilkinson’s explanation of the role of the constructive trust has been criticised by influential opponents who would deny the device any real role in this context. This is apparent in the extra-judicial analysis of Sir Peter Millett who, when a Lord Justice of the Court of Appeal, argued that the only role the constructive trust has outside fiduciary relationships is in the enforcement of rights to recover unique property in the context of specific performance or rescission.95

Yet, even if the constructive trust is generally limited to enforcing fiduciary duties and regulating consensual relationships, it is hardly obvious that it should be so restricted in its availability. There are certainly good arguments for employing the constructive trust more broadly.

3. The Content of the Constructive Trust

(a) The “Trustee’s” Duties

The express trust is an institution consisting of a set of rights and privileges enjoyed by the beneficiary, along with correlative obligations and prohibitions that bind the trustee and certain third parties who deal with trust property. The device provides for the creation of relationships of varying degrees of complexity from a bare trust to an active trust with detailed duties of management. What then is the nature of the constructive trust? Does it give rise to a complex legal relationship or does is it simply amount to a proprietary remedy that gives plaintiffs the right to have specific assets transferred to them?

To a large degree, the answer to that question seems to depend on the jurisdiction in which one asks it. In the United States, the constructive trust is not regarded as creating an active trust analogous to an express trust at all; indeed, no fiduciary relationship arises.96 In the view of American scholars, the constructive trust is essentially a fiction.97 It merely denotes that the defendant is under a

92See, e.g., S Gardner, “The Element of Discretion” in P Birks (ed.), The Frontiers of Liability Vol II (Oxford, Oxford University Press, 1994) 186 at 187.

93Supra n. 91, at 686–9 per Lord Goff, 713 per Lord Browne-Wilkinson.

94See, e.g., A Tettenborn, “Remedies for Recovery of Money Paid by Mistake” [1980] CLJ 272 at

95Sir Peter Millett, “Restitution and Constructive Trusts” (1998) 114 LQR 399. See infra ch. 6.II.4.

96Salisbury v. Tibbetts 259 F 2d 59 at 64 (1958); Scott, supra n. 42 at 40–1.

97See, e.g., J Langbein, “The Later History of Restitution” in WR Cornish et al., Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Oxford, Hart Publishing, 1998) 37 at 37; Kull, supra n. 54 at 287.

Exploring the Idea of Remedial Trusts 21

specifically enforceable duty to convey property to the plaintiff.98 Thus, it is a simple property right rather than a true trust. As Waters puts it, “[t]he constructive trust is the terminological vehicle for conferring specific property upon the claimants”.99 Similarly, the Australian High Court recently stated that “[s]uch a trust does not necessarily impose . . . the various administrative duties and fiduciary obligations which attend the settlement of property to be held by a trustee upon an express trust for successive interests”.100 Instead, the court concluded that the declaration of a constructive trust was “akin to orders for conveyance” made in proprietary estoppel cases.101

Indeed, it would make little sense to impose all the duties, such as those of investment, assumed by a trustee under a complex express trust arrangement upon a third party who receives trust property.102 The device seems to be designed to require the defendant to make specific restitution; it is not intended to give rise to an enduring relationship.103 Occasionally where a continuing relationship is desirable, the court might prescribe a more extensive set of obligations.104 However, generally, it is more likely that all that is created is, at most, a “passive” trust and that the declaration of the interest merely entails that the defendant should transfer the property to the plaintiff.

In contrast, there has been a tendency in England and at times in the Commonwealth to assume that the constructive trust does indeed impose a fullyfledged fiduciary relationship.105 This is due in part to the rather tortured development of the constructive trust. In imposing liability on “strangers to the trust” the courts and jurists have treated these third parties as voluntarily assuming the position of trustees.106 While this may be true in some circumstances, more often it is an absurd fiction that highlights the trust’s uncertain position hovering between obligation and ownership. Before the express trust had come to be seen as proprietary in effect, the courts felt obliged to rely on the fiction that constructive trustees had consented to their responsibilities.107 Now that we accept that these rights have a proprietary dimension, we may dispense with this charade. Instead, we can analyse the matter on the basis that an express trust consists of a complex of personal obligations (fiduciary duties) and proprietary rights. While

98Waters, supra n. 40 at 23; Cope, supra n. 44 at 25.

99D Waters, “The Nature of the Remedial Constructive Trust” in P Birks (ed.), Frontiers of Liability Vol II (Oxford, Oxford University Press, 1994) 165 at 183.

100Giumelli v. Giumelli (1999) 161 ALR 473 at 475.

101Ibid. (citing Dillwyn v. Llewelyn (1862) DE GF & J 517; Riches v. Hogben [1985] 2 Qd. R 292).

102See Lonrho plc v. Fayed (No 2) [1992] 1 WLR 1 at 12 per Millett J; Rickett, supra n. 20 at 328; J Martin (ed.), Hanbury & Martin: Modern Equity (15th edn., London, Sweet & Maxwell Ltd, 1997) 287–8; Cope, supra n. 44 at 16.

103Gardner, supra n. 22, at 187 and 190.

104Waters, supra n. 68 at 404.

105Cope, supra n. 44 at 12.

106See, for instance, Austin, supra n. 29 at 207.

107See supra, text accompanying n. 2.

22 Property and Proprietary Remedies

the latter bind the world, the former probably ought to bind only those who accept them or, at the very least, have express notice of them.

The difficulties that arise from the assumption that constructive trusts inevitably involve fiduciary duties can be seen in Lord Napier and Ettrick v. Hunter.108 There, the House of Lords concluded that an insurer, who had indemnified an assured in respect of particular losses, was entitled to a proprietary remedy in respect of moneys subsequently recovered by the assured from a third party liable for those losses. However, fearing that the imposition of a constructive trust would place unduly burdensome obligations upon the assured, their Lordships concluded that the appropriate remedy was an equitable lien.109 This conclusion would not have been necessary if they had accepted that the constructive trust might not involve all the incidents of an express trust.

The differing perceptions regarding the extent of a constructive trustee’s duties is one way in which we may make sense of the notion that the constructive trusts of English and American law are different creatures. And yet, in both jurisdictions, the constructive trust is a remedy; it is merely a question of how complex and onerous a remedy it is. Moreover, if this is what sets the American constructive trust apart, it is not obvious why this difference should be seen as a cause for concern.

(b) The Liability of Innocent “Trustees”

The assumption that the device gives rise to active duties also explains much of Lord Browne-Wilkinson’s analysis of the constructive trust in Westdeutsche Landesbank Girozentrale v. Islington LBC.110 Citing the maxim that “equity operates on the conscience of the owner of the legal interest”, he concluded that a constructive trust arises only where recipients of property have sufficient knowledge of facts that would make it unconscionable to treat the property as their own.111

This may seem a promising argument, given the present state of the law of knowing receipt. As the authorities stand, those who have received but do not retain trust property are liable to account for it only if they had sufficient knowledge to make their receipt or subsequent dealing with the property unconscionable.112 What then is the nature of the relationship of an innocent recipient of trust property and the beneficial owner? Lord Browne-Wilkinson argued that “innocent receipt of property by X subject to an existing equitable interest does not by itself make X a trustee despite the severance of the legal and equitable titles”.113 This appears to assume that the legal and equitable interests could

108[1993] 1 AC 713.

109Ibid. at 738 per Lord Templeman, 745 per Lord Goff, 752 per Lord Browne-Wilkinson. See infra ch. 12.I.2.

110[1996] AC 669.

111Ibid. at 705.

112See BCCI v. Akindele [2001] Ch. 437.

113[1996] AC 669 at 707.

24 Property and Proprietary Remedies

point of calling it a trust? Moreover, stripped of any proprietary consequences, it is difficult to see what useful role “these emasculated trusts” might serve.117 If the law of proprietary remedies is to be rationalised, a more fruitful inquiry would involve an effort to identify when the award of fully-fledged proprietary rights is merited.118

4. Is the Remedy Discretionary?

A central issue in the remedial constructive trust debate is whether the trust “arises

. . . in defined circumstances and in accordance with settled principles of equity, or [whether it] . . . is imposed by the court in its discretion whenever it is considered just to do so”.119 Thus, several commentators have argued that what distinguishes the remedial constructive trust from other constructive trusts is the discretion that the courts exercise in deciding whether it should be granted. 120

It has been suggested that “the question whether a restitutionary proprietary claim should be granted should depend on whether it is just, in the particular circumstances of the case”.121 However the more orthodox view is that, given the effects of proprietary claims on defendants and on third parties, the availability of these rights should not be determined pursuant to ad hoc judicial evaluations.122 Thus, Sir Peter Millett, as he was then, argued extra-judicially that “proprietary remedies should be granted only in defined circumstances and then ordinarily as a matter of course, so that rights of property may be fixed and ascertainable in advance”.123

While Millett apparently favours the constructive trust being available as a matter of course, by qualifying the prescription with the word “ordinarily”, he robs it of much of its certainty. And, indeed, we may ask whether discretionary constructive trusts are really something foreign to English law. The flexible approach taken in the context of proprietary estoppel suggests that they are not.124 Furthermore, we may ask whether the manner in which constructive trusts are employed in other jurisdictions is really discretionary in a worrisome way.

In what sense then is the constructive trust a discretionary remedy in American law? If we consider first whether the device is available only in defined circumstances, it would seem that the determination of when plaintiffs will be entitled to

117P Birks, “Trusts Raised to Reverse Unjust Enrichment: The Westdeutsche Case” [1996] RLR 3 at

14.

118See, e.g., E Sherwin, “Constructive Trusts in Bankruptcy” (1989) University of Illinois Law Rev.

297.

119Millett, supra n. 95 at 399.

120See, especially, Gardner, supra n. 92 at 190–2; P Birks, “The End of the Remedial Constructive Trust?” (1998) 12 Trust Law International 202 at 203.

121Goff and Jones, The Law of Restitution (3rd edn.) at 78.

122Millett, supra n. 95 at 399; Birks, An Introduction to the Law of Restitution at 378.

123Millett, supra n. 95.

124See infra ch. 13.IV.

Exploring the Idea of Remedial Trusts 25

a constructive trust is all too well defined. Defendants who are unjustly enriched may be required to hold specific property obtained at the expense of a plaintiff on constructive trust.125 As regards the second question whether the constructive trust is available as a matter of course, it is safe to say that it is not. The courts exercise a discretion in this context because equitable remedies are available only where common law remedies would be inadequate. However, if the remedy is needed because unique property is involved or because the defendant is insolvent, the courts will award it. This is a relatively constrained discretion; indeed, it is fair to say that, like the remedy of specific performance, its exercise is well enough regulated to be “only technically discretionary”.126

On this analysis, the difference between the English and American approaches is not so much a conceptual one but one of degree. Ultimately, the real objection is not that the approach taken in the United States is too discretionary but that the remedy is too widely available.

One reason that we may be suspicious of the hostility expressed toward the notion of discretion in proprietary remedies is that there is an important class of proprietary rights that are best understood as arising upon the exercise of a power of election by the plaintiff. Thus, where they have a right to rescind a contract and revest rights to property in the process or to claim property acquired by a fiduciary in conflict of interest, plaintiffs exercise a discretion. The plaintiff’s election has retrospective effect and third parties other than bona fide purchasers of the legal title are bound by the equity in question.127 Third parties who have notice of the facts that give rise to the equity are treated as taking their chances if they deal with the property at issue. Is there any reason why a similar philosophy should not apply to a reasonably constrained judicial discretion to grant a proprietary remedy?

Much of the discussion regarding the discretionary nature of the remedial constructive trust has focused on recent developments in Canada.128 While there are some dicta that suggest that Canadian courts foresee themselves preserving a high degree of discretion in this area, the matter is not clear-cut. There are equally dicta suggesting the need to develop principles to constrain the use of the device, given its effect on third parties.129 It may be that it is only because we see the Canadian law in a state of transition that its constructive law has a discretionary quality. The freeing of the remedy from traditional categories offers an opportunity for the development of a more principled and systematic law of constructive trusts and it may well be that, as this process takes place and guidelines develop, the courts will cease to exercise a strong discretion in this area.130 Thus, Donovan Waters

125The Restatment of Restitution at § 160.

126Cf. P Birks, “Proprietary Rights as Remedies” in P Birks (ed.), Frontiers of Liability Vol II (Oxford, Oxford University Press, 1994) 214 at 217.

127Bainbridge v. Browne (1881) 18 Ch. D 188.

128See, e.g., Gardner, supra n. 92 at 193.

129See, e.g., McLachlin J in Peter v. Beblow (1993) 101 DLR (4th) 621 at 643–4.

130Dewar, supra n. 68 at 275; J Dodds, “The New Constructive Trust: An Analysis of its Nature and Scope” (1988) 16 MULR 482 at 520.

26 Property and Proprietary Remedies

suggests that the discretion identified in Canadian law may be characteristic of “the formative age” of the remedial constructive trust, rather than an enduring feature of the device.131 Again, this suggests that the key to rationalising the constructive trust in Canadian law, and indeed in any jurisdiction, is the identification of principles that may determine the circumstances in which proprietary relief will be appropriate.

5.Does the Trust Arise Automatically?

(a)Automatic Vesting as the Basis for the Institutional/Remedial Constructive

Trust Distinction

In the debate on whether the constructive trust is institutional or remedial a surprising amount of energy has been focused on the question of when the proprietary rights in question arise. The term “institutional” has been used to denote “a relationship which arises and exists under the law independently of any order of a court”.132 Many have seen this as the critical issue in determining whether a constructive trust is remedial.133 Thus, in Westdeutsche Landesbank, Lord BrowneWilkinson remarked that “an institutional constructive 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”.134 In contrast, the remedial constructive trust has pejoratively been described as being “created by the court after the event”.135

(b) The Suggestion that Constructive Trusts Must Arise Automatically

There is a tendency to assume that constructive trusts must arise automatically. Thus, Andrew Kull argues that “the claimant’s property right necessarily antedates its judicial acknowledgement in the same way that entitlement to damages always precedes their calculation”.136 The analogy is not helpful. A right to damages does not give a plaintiff an interest in anything specific. Neither the practical consequences of the constructive trust—in particular the timing of its effects on third parties—nor the manner in which it is conceptualised is inevitable. For example, a right may be either a right in rem or a right ad rem,137 the latter being a personal

131Waters, supra n. 99 at 184.

132Muschinski v. Dodds (1985) 160 CLR 583 at 614 per Deane J. See also Martin, supra n. 102 at 290.

133See, e.g., G Elias, Explaining Constructive Trusts (Oxford, Clarendon Press, 1990) 161; Waters, supra n. 46 at 340. See also Atlas Cabinets and Furniture Ltd. v. National Trust Co. Ltd. (1990) 68 DLR (4th) 161 at 169–70 per Lambert JA.

134[1996] AC 669 at 714. This is also viewed as the defining quality of the institutional constructive trust by the majority of the New Zealand Court of Appeal in Fortex Group Ltd. (in Receivership & Liquidation) v. MacIntosh [1998] 3 NZLR 171 at 172 per Tipping J (Gault and Keith JJ concurring).

135Polly Peck (No 2) [1998] 3 All ER 812 at 824 per Mummery LJ.

136Kull, supra n. 54 at 287.

137For a discussion, see R Goode, “The Right to Trace and its Impact in Commercial Transaction— I” (1976) 92 LQR 360 at 363.

Exploring the Idea of Remedial Trusts 27

right to have the thing transferred that is not necessarily enforceable against third parties. Moreover, even if the remedy is to be in rem, it need not arise prior to its declaration. A proprietary remedy may take effect prospectively upon being declared. Alternatively, the interest in question may be conceptualised as arising when declared by the court but taking effect retrospectively.138 Thus, prior to judicial declaration, a plaintiff’s right may be characterised as an equity—a right to a proprietary interest—rather than a fully-fledged property right.

Constructive trusts are not natural phenomena; it is in our power to determine whether they arise automatically. We could take the view that rights to specific property give rise to a property right that pre-exists any judicial recognition, but we need not. The decision should be made with a view to its practical implications.

(c) Difficulties in Regarding the Timing of the Interest as the Key Indicia of the

Remedial Constructive Trust

Despite the importance that has been attached to the question of the timing of the plaintiff’s proprietary right, it is unlikely that this consideration can provide a satisfactory basis for distinguishing between remedial and institutional constructive trusts. For one thing, there are conceptual difficulties with regarding many applications of the constructive trust in English law as generating a property right at the time of the events giving rise to the claim. In particular, where the decision to award a proprietary remedy lies in the discretion of the court, it makes little sense to treat it as arising automatically.139 A defendant who is the subject of a claim that the court may in its discretion decide merits a proprietary remedy has a property right in assets in question, albeit one that may be defeated, depending on how the court exercises its discretion. It follows that, prior to judgment, plaintiffs in such a situation cannot be said to have an existing proprietary right, but merely a right to have a court consider whether they should be granted such a right. Once again, we may observe that the use of the constructive trust in the context of proprietary estoppel is hardly consistent with the assertion that the remedial constructive trust is unknown in English law.140

There are also difficulties regarding any constructive trust that arises upon tracing as automatic. For, plaintiffs who have successfully traced may choose to assert either a constructive trust or an equitable lien. Whenever this election takes place, it is clear that it must happen at some point after the events that give rise to the plaintiff’s claim.

We may argue that the discretion acknowledged in proprietary estoppel case law is an aberration and downplay the significance of the remedial discretion conferred on plaintiffs in the context of tracing. But, even so, the timing of the interests arising in this context does not seem capable of explaining why the

138See, e.g., Re Dow Corning Corp. 192 BR 428 at 436 (Bankr ED Mich, 1996) per Spector J; Re 512760 Ontario Inc. (1992) 9 DLR (4th) 719 at 730 per Adams J.

139Waters, supra n. 46 at 356.

140See infra ch. 13.IV.

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constructive trust is thought to be remedial in North America but institutional in England. For, the orthodox view in North America is that constructive trusts arise automatically.141 If this is the criterion that sets it apart from constructive trusts of the institutional variety, once again, it is difficult to identify concrete examples of the remedial constructive trust.

(d) Interests that Arise Only when Declared as “Repugnant to Legal Certainty . . . and the Rule of Law”

What is it about the notion that constructive trusts may not arise automatically that causes us anxiety? Perhaps the harshest critic of the possibility of proprietary interests arising only when declared by the court is Peter Birks.142 In his view, “[w]ere this . . . not wrapped in the impenetrable language of the ‘remedial constructive trust’, it would instantly reveal itself as ugly, repugnant to legal certainty, the sanctity of property and the rule of law”.143 Birks’ judgement that a proprietary interest that does not pre-exist its declaration by a court is necessarily “ugly” does not readily lend itself to analysis. However, his other criticisms are illuminating.

The argument that such a proprietary remedy would be repugnant to the demand for legal certainty is, in itself, simply unsustainable. This appears to assume something more: that proprietary remedies that do not arise automatically are discretionary in a strong sense. The issues are linked but not inseparable. If it is true that it is very difficult to accept that discretionary proprietary remedies can give rise to property rights that pre-exist their declaration, it does not follow that nondiscretionary rights must arise automatically. It would be perfectly possible to establish a rule that provided the requisite certainly by holding that a plaintiff was entitled to relief on the proof of particular defined facts but which still provided that the remedy given had only prospective effect.144 Thus, the real objection is not to proprietary remedies that do not arise automatically. Rather, the objection to the remedial constructive trust is that, first, the remedy is discretionary and, secondly, that the proprietary interest granted operates retrospectively to the prejudice of third parties—both features that may be thought to be contrary to the rule of law.

(e) Interests that Arise Only when Declared as “Contrary to the Sanctity” of Property

It may be true that a proprietary remedy that comes into being only when declared by the court would be repugnant to axiomatic notions of “the sanctity of prop-

141AW Scott, The Law of Trusts (3rd edn., Boston, Mass., Little, Brown & Co, 1967) v, 5 § 462 at 3416. This view was also favoured by the majority of the Canadian Supreme Court in Rawluk v. Rawluk (1990) 65 DLR (4th) 161.

142P Birks, “Property and Unjust Enrichment: Categorical Truths” [1997] NZLR 623 at 641.

143Ibid.

144Something that was contemplated by Deane J in Muschinski v. Dodds (1985) 160 CLR 583 at 614. See S Evans, “Property, Proprietary Remedies and Insolvency: Conceptualism or Candour” (2000) 5 Deakin LR 31 at 36.

Exploring the Idea of Remedial Trusts 29

erty”. However, it does not follow that interests that pre-exist judicial declaration may not be similarly stigmatised. Indeed, there are many instances where particular proprietary remedies will be inconsistent with notions of the inviolability of property whether they take effect automatically or not.

In considering the threat that the constructive trust poses to “the sanctity of property” commentators have placed too much weight on the issue of the timing of the interest. This has encouraged among English lawyers a feeling, noted by Donovan Waters, that the constructive trust “seems to be adjectival, rather than inherently remedial. It is the description of a result, not a remedy”.145 Burrows, for example, argues that the constructive trust arises automatically in that the court “merely recognises and declares the parties’ pre-court rights” and consequently it cannot be a remedy because remedies “must be either constitutive or coercive”.146 Yet, in many contexts, new interests are brought into being by a constructive trust, in which case the device is, to use Burrows’ terminology, “constitutive” of a new legal relationship.147 That it may be said to arise automatically does not change the fact that the constructive trust is, nevertheless, a remedy. In determining whether it may be regarded as contrary to the “sanctity of property” of property, the real issue is whether it is a redistributive remedy.

Ultimately, the significance of the issue of whether the constructive trust arises automatically is not so much practical as ideological. Where a constructive trust is redistributive, the conceptualisation of the interest as arising automatically does little more than obscure the fact that our understanding that property rights are inviolable is being compromised. The characterisation of redistributive constructive trusts as automatic allows them to take on some of the appearance of conventional remedies that enforce pre-existing, consensually created interests. This obfuscation of the judicial role in readjusting property rights reflects an inclination to avoid directly confronting the policy issues that would inevitably arise were it acknowledged that some constructive trusts create new property rights.148

(f) The Merits of Automatic Vesting

Given that one consequence of automatic vesting is that the constructive trust will bind third parties prior to any judicial declaration, a decision that the interest arises in this way should follow from a conclusion that its effects would be merited. Unfortunately, there is a danger that the courts may be seduced by the comforting effects of conceptualising the constructive trust as arising automatically

145D Waters, “The English Constructive Trust: A Look Into the Future” (1966) 19 Vanderbilt L Rev. 1215 at 1253.

146Burrows, The Law of Restitution at 36.

147Consider, e.g., AG for Hong Kong v. Reid [1994] AC 324; Lord Napier and Ettrick v. Hunter [1993] AC 713; Cunningham v. Harrison [1973] QB 942.

148P O’Connor, “Happy Partners or Strange Bedfellows: The Blending of Remedial and Institutional Features in the Evolving Constructive Trust” (1996) 20 MULR 735 at 758.

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and fail to give adequate consideration to the consequences this would have for third parties.149

(i) Who do these Rights Affect?

The question whether automatic vesting is appropriate ought to be determined in light of which parties will be affected by the interest in question. Where there is a purchase of a legal title in property subject to an equitable interest, the conflict between the interests of the beneficiary and those of third party purchasers is regulated by the rule that purchasers must have at least constructive knowledge of the interest before they will be bound. This rule largely absolves those who are free from fault and in most cases probably provides a reasonable accommodation of competing interests. However, this approach is open to criticism. As a matter of moral desert, we may ask whether purchasers who have not taken care, who have merely constructive knowledge of any beneficial interests, should bear the risks of improper dealing by a fiduciary. Moreover, as a matter of efficiency, we may be concerned that this approach is liable to add to the search costs of prospective purchasers. Typically, these constructive trusts arise out of breaches of fiduciary duty. Where the beneficiaries are sui juris they may often be in a better position to prevent such breaches. On the other hand, an objective standard of constructive knowledge may well be more efficient to administer than one that invites the parties to dispute whether a purchaser had actual knowledge of any beneficial interest. Thus, the law probably strikes a reasonable balance in holding that, prior to any curial intervention, the constructive trust binds those who are not bona fide purchasers without notice.

(ii) Are these Interests Readily Identifiable by Third Parties?

As mentioned, it is difficult to regard remedies that are to some degree discretionary as arising automatically. On the other hand, that a plaintiff’s right does not crystallise automatically into a proprietary interest need not in itself determine whether it binds third parties prior to its crystallisation. However, caution needs to be exercised. Generally, it should not be enough that purchasers know of the facts that give rise to the plaintiff’s action; those facts should be such that it can be relatively easily predicted that, should the matter go to court, a property right will be recognised. This was, at least in part, what Lord Wilberforce had in mind in National Provincial Bank v. Ainsworth150 when he insisted that a proprietary interest in land must be “definable [and] identifiable by third parties”.151 Where the determination of the remedy appropriate to vindicate the plaintiff’s rights is subject to a substantial degree of discretion, the plaintiff’s interest is not precisely “definable” and therefore not readily “identifiable by third parties”. This was a difficulty with the “deserted wife’s equity” that was in question in Ainsworth. It

149This is well illustrated by Browne-Wilkinson J’s analysis in Re Sharpe [1980] 1 WLR 219. See infra ch. 13.IV.2.

150[1965] AC 1175

151Ibid. at 1248.

Exploring the Idea of Remedial Trusts 31

may also be true of rights arising out of the courts’ identification of the “minimum equity to do justice” under the doctrine of proprietary estoppel.152

6. Remedial Constructive Trusts as Redistributive

In Re Polly Peck (No 2)153 Nourse LJ defined the remedial constructive trust in terms that provide an indication of why the concept causes so much anxiety in English legal culture. In his view, the remedial constructive trust involves “an order of the court, granting, by way of remedy, a proprietary right to someone, who, beforehand, had no proprietary right”.154 He argued that:

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.155

Similarly, Mummery LJ noted with concern that in Canada the constructive trust had developed in such a way that the remedy could be awarded “even though there is no pre-existing right of property”.156

Thus, the more difficult it is to characterise relief given in a particular context as merely enforcing existing rights or a consensual transfer, the more likely that relief will be characterised as “remedial”. For example, although one would never guess it from reading Lord Templeman’s judgment, counsel for the appellant in AG for Hong Kong v. Reid, who were seeking specific recovery of the proceeds of bribes accepted by the respondent, framed their argument in terms of a “remedial constructive trust”.157

This does indeed point to an important difference between North American and English constructive trust jurisprudence. On the other side of the Atlantic, judges and jurists have openly accepted that constructive trusts may give a plaintiff a new proprietary right.158 In contrast, in England, in some contexts the courts have declined to award a constructive trust for the reason that it would be redistributive.159 Moreover, in other contexts, English courts have conceptualised what appear to be redistributive constructive trusts in a manner that suggests that they involve the enforcement of existing proprietary rights.160

Concerns about judicial redistribution of property are at the heart of many of the tensions in the law of proprietary remedies. As we have already seen, this explains much of the importance attached to the issue of the timing of the

152See infra ch. 13.IV.1(b).

1533 All ER 812.

154Ibid. at 830.

155Ibid. at 831.

156Ibid. at 825.

157Birks, supra n. 126 at 216.

158See, e.g., Forest J in Lac Minerals v. Corona Ltd. (1989) 61 DLR 14 at 50.

159See, e.g. Gissing v. Gissing [1971] AC 886.

160See, infra, ch. 2.V.2.

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proprietary interest established in constructive trust cases. For, the characterisation of a redistributive remedy as automatic can serve to obscure the fact that the remedy is creating new property rights, rather than enforcing existing ones. In addition, while there are independent considerations that militate against judicial discretion in the award of proprietary relief, discretion also causes unease because it emphasises the judicial role in determining property rights.

An understanding of the acute anxiety raised by redistributive proprietary remedies requires a consideration of the role of property in legal thought. This is the focus of the following two chapters.