Download Constructive Trusts in Bankruptcy: Impact on Creditors & Transactions and more Summaries Law in PDF only on Docsity!
THE DEVELOPMENT OF THE CONSTRUCTIVE TRUST
AS A REMEDY IN AUSTRALIA
By
A .J. Oakley*
1. Introduction In the context of a seminar entitled "The Scope for Intervention in Commercial Dealings", discussion of the development of the constructive trust as a remedy in Australia calls for a consideration of the extent to which the imposition of a constructive trust is capable of amounting to an intervention in commercial transactions. At first sight, this question is relatively straightforward since the Australian courts have, generally speaking, resisted the temptation to utilise the constructive trust as a remedy as between the parties to a commercial transaction. This admirable reticence is entirely justified in the light of the potential consequences of the imposition of a constructive trust, which may prejudice not only the person upon whom that trust is imposed but also third parties and, in particular, his general creditors. In fact, however, the imposition of any constructive trust is capable of prejudicing the interests of the general creditors of the constructive trustee and, consequently, of amounting to an interference in the commercial transactions already entered into between the constructive trustee and third parties, something which is not generally taken into account by the Courts when deciding whether or not the imposition of such a trust is an appropriate remedy. It seems appropriate, therefore, to consider first the precise consequences of the imposition of a constructive trust and, subsequently, the extent to which the recent decisions handed down by the Australian courts can be regarded as capable of amounting to an intervention in commercial transactions. 2. The consequences of the imposition of a constructive test When property is declared to be the subject matter of a constructive trust, the imposition of that trust produces liabilities both of a proprietary and of a personal nature for the constructive trustee. Not only will the beneficiary necessarily be entitled to proprietary rights in the subject matter of the constructive trust, the constructive trustee will also be subject to the liability which is imposed on every trustee to account personally to his beneficiary for his actions as such. What is the relationship between these two distinct liabilities? Where the property upon which the constructive trust is imposed is still identifiable in the hands of the constructive trustee, both these remedies will be available to the beneficiary who will be able to choose either to exercise his proprietary rights in the subject matter of the constructive trust, or to rely on the personal liability of the constructive trustee to account.^1 Where a beneficiary chooses to rely on his proprietary rights, his position will obviously depend on the precise nature of the constructive trust that has been imposed. If the beneficiary has been held to have an absolute interest in the subject matter of the constructive trust, he will be entitled to call for the transfer of the property to him together with any income or other fruits that the property has produced since the constructive trust
*** M.A.,LL.B.(Cantab), Lecturer in Law in the University of Cambridge, Fellow of Trinity Hall Cambridge, Adjunct Professor of Law, Queensland University of Technology**
1. In rare circumstances, the beneficiary may choose to exercise both of these remedies. See footnotes 2 and 3 below.
20 QLD. UNIVERSITY OF TECHNOLOGY^ LAW^ JOURNAL
arose. If, on the other hand, the beneficiary has been held to have less than an absolute interest, such as a joint interest, life interest or future interest, in the subject matter of the trust, he will have the rights appropriate to whatever beneficial interest he has. Where a beneficiary instead chooses to rely on the personal liability of the constructive trustee to account, he will in effect be claiming damage for breach of trust from the constructive trustee. Thus he will be entitled to recover the value of his interest in the property as at the date when the constructive trust arose, following payment of which the constructive trust will be discharged and the constructive trustee will thereafter be beneficially entitled to the property formerly subject thereto. Where the constructive trustee is solvent, the election between the two remedies will not normally have any particularly significant effects on the measure of the recovery of the beneficiary. When the property has neither produced income or other fruits nor changed in value while it has been in the hands of the constructive trustee, both remedies will lead to exactly the same measure of recovery. When, however, the property upon which the constructive trust has been imposed has produced income or other fruits or has risen in value while it has been in the hands of the constructive trustee, it will obviously be preferable for the beneficiary to choose to rely on his proprietary rights since this will enable him to recover the income, the other fruits or the increase in value in question. And when the property upon which the constructive trust has been imposed has fallen in value while it has been in the hands of the constructive trustee, it will obviously be preferable for the beneficiary to choose to rely on the personal liability of the constructive trustee since this will enable him to recover the amount that the property was worth when it reached the hands of the constructive trustee and so ignore the subsequent fall in its value.^2 Where, on the other hand, the constructive trustee is insolvent, the election between the two remedies will be immensely significant. If the beneficiary chooses to rely on his proprietary rights, he will take priority over the general creditors of the insolvent constructive trustee, whereas if he instead chooses to rely on the personal liability of the constructive trustee to account, he will rank with, rather than ahead of, the general creditors. Consequently, except in extremely unlikely circumstances, the beneficiary will inevitably choose to rely on his proprietary rights so as to obtain this priority.^3 This will in turn diminish the mass of general assets available for distribution among the general creditors of the insolvent trustee so that each general creditor will therefore obtain a smaller proportion of the sum owed to him. Thus the imposition of a constructive trust upon a person who is, or subsequently becomes, bankrupt will almost inevitably prejudice the interests of his general creditors, who will ex hypothesi not be before the court to object to the imposition of the constructive trust in question. As has already been mentioned, this potential consequence of the imposition
2. This will certainly be the best remedy for the beneficiary where the fall in the value of the property cannot be held to have been brought about by the conduct of the constructive trustee. But where it can be shown that the constructive trustee was responsible for the fall in value of the property, there seems no reason why the beneficiary may not alternatively seek to rely on both the remedies available to him. If this is indeed possible, he will be able both to call for the transfer to him of the property and, by relying on the personal liability of the constructive trustee to account, to obtain damages **for the fall in value of the property itself.
- The only situation in which the beneficiary is likely to chose to rely on the personal liability of the constructive trustee to account will be where the property which is the subject matter of the constructive trust has fallen in value to a percentage of its original value smaller than the percentage that is likely to be paid out by the trustee in bankruptcy to the general creditors. Of couse, in the event that it can be shown that the constructive trustee was responsible for the fall in value of the property, it will always be in the interest of the beneficiary to take advantage of the possibility mentioned in footnotes 1 and 2 above, to both recover the property and claim damages for the fall in its value. This is because such a double claim will give him both the property and the same percentage of the claim for damages as is paid out to the general creditors.**
22 QLD. UNIVERSITY OF TECHNOLOGY LAW JOURNAL
Where, on the other hand, the constructive trustee is insolvent, the absence of any proprietary rights will be extremely significant since it will prevent the beneficiary from being able to claim priority over the general creditors of the constructive trustee since the liability of the latter to account will rank with, rather than ahead of, the claims of the general creditors. Such a situation will thus be likely to be extremely prejudicial to the beneficiary but will limit the possible prejudice to the general creditors to the extent to which the personal liability of the constructive trustee increases the total amount of his unsecured debts.
3. The circumstances in which a constructive trust will be imposed It is a matter of some controversy precisely what trusts may properly be classified as constructive trusts.^7 However, for present purposes it is necessary to consider only the three well established situations in which it is generally accepted that a constructive trust arises. First, where a fiduciary has obtained an advantage as a result of a breach of his duty of loyalty. Secondly, where there has been a disposition of trust property in breach of trust and, thirdly, where a person has obtained an advantage by acting fraudulently or unconscionably. To what extent is the imposition of a constructive trust in these three situations capable of bringing about a direct or indirect intervention in commercial transactions?
3a. Constructive trusts imposed where a fiduciary has obtained an advantage as a result of a breach of his duty of loyalty The authorities which establish that a constructive trust will be imposed upon a fiduciary who has obtained a benefit as a result of a breach of the duty of loyalty which he owes to his principal are both well known and extremely stringent. A fiduciary may, in appropriate circumstances, be deprived of any right to remuneration for his services, of the benefit of transactions into which he has entered in a double capacity, and of benefits which he has obtained as a result of his position to the exclusion of his principal.^8 Many commercial transactions expressly create fiduciary relationships. This will be the case where it is expressly provided that one or more of the parties is subject to fiduciary obligations or where the transaction has expressly created a relationship which is always classified as fiduciary such as the relationships of agent and principal, director and company, or partner and partner. In such circumstances, however, the parties will necessarily be aware of the applicability of these highly onerous duties of loyalty. Consequently, the application by the Courts of the well-established authorities which govern these duties can hardly be said to constitute an interference with the commercial transaction in question. Where, on the other hand, a commercial transaction does not expressly create fiduciary obligations, there is enormous scope for the Courts to intervene in that transaction simply by finding that such obligations have nevertheless arisen since such a finding exposes the party classified as the fiduciary to all the potential liabilities mentioned above. To what extent, therefore, have the Australian Courts been prepared to uphold the existence of fiduciary obligations in commercial transactions where these have not been expressly created by the parties? It is generally accepted that there is no comprehensive definition of the expression "fiduciary". Consequently, what determines whether or not any particular relationship is fiduciary is a simple question of fact — whether or not one of the parties to the relationship has undertaken to act for or on behalf of the other.^9 In commercial transactions, the answer
7. A.J. Oakley, Constructive Trust, 2nd edn., Sweet & Maxwell, London, 1987 at 14-18. 8. P.D. Finn, Fiduciary Obligations , The Law Book Company Limited, Sydney, 1977 at Chapters 19-22, A.J. Oakley ibid. n.7 at Chapter 3. 9. P.D. Finn, supra n. 8 at 201.
THE DEVELOPMENT OF THE CONSTRUCTIVE TRUST 23
to this question inevitably has to be determined by the provisions of the contract between the parties. Generally speaking, however, where no fiduciary obligations have been expressly created, the Courts have been reluctant to classify commercial relationships entered into at arm's length and on an equal footing as fiduciary relationships and have thus resisted the temptation to intervene in such transactions. The leading Australian authority is the decision of the High Court in Hospital Products Limited v. United States Surgical Corporation and others}^0 In this case, the plaintiff granted to the defendant the exclusive right to distribute in Australia certain surgical products manufactured by the plaintiff. However, the defendant in fact intended to utilise this contract as the means of establishing itself as a manufacturer and distributor of similar products in direct competition with the plaintiff. Consequently, once it had arranged to manufacture in Australia components of the products, it began to defer fulfilment of orders for the plaintiff's products and, subsequently, terminated the relationship with the plaintiff and fulfilled the accumulated orders for the plaintiff's products with products of its own manufacture. The plaintiff claimed that the relationship between the parties was not only contractual but also fiduciary and that, consequently, the defendant was both liable in damages for breach of contract and held its business on constructive trust for the plaintiff. The imposition of such a constructive trust would have enabled the plaintiff to recover the past and future profits made by the defendant from selling its own products, a measure of recovery which would not have been available by way of damages for breach of contract. The New South Wales Court of Appeal had held that the contract between the parties contained an express term that the defendant would devote its best efforts to distributing the plaintiff's products and building up its market in Australia in their mutual interest and an implied term that the defendant would not during the distributorship do anything inimical to the market in Australia for the plaintiff's products.^11 The effect of these terms was that the defendant was bound to act on behalf of and in the best interests of the plaintiff and not only in its own best interest.
Such an obligation was clearly of a fiduciary nature and so the defendant held its business on constructive trust for the plaintiff. However, the High Court unanimously rejected the term so implied into the contract by the New South Wales Court of Appeal. Four of the five members of the High Court then went on to hold that the express terms of the contract did not impose any fiduciary obligations on the defendant for two reasons. First, because the arrangement between the parties was a commercial transaction entered into at arm's length and on an equal footing and, secondly, because it had been clear from the start that the whole purpose of the transaction from the defendant's point of view was to make a profit. Mason J. however held that there was nevertheless a limited fiduciary duty arising out of the exclusive responsibility of the defendant for marketing the plaintiff's products in Australia and the manner in which those products were to be promoted which placed the defendant under a duty not to make a profit by virtue of its fiduciary position and he therefore dissented. Three of the members of the High Court therefore concluded that the defendant was not a constructive trustee of its business for the plaintiff but was merely liable in damages for breach of contract.^12
10. (1984) 156 CLR 41. **11. [1983] 2 NSWLR 157.
- Mason J., having held that the defendant was under a limited fiduciary duty, obviously dissented on this point. Deane** J., who had agreed that the defendant was not subject to any fiduciary obligations, expressed the view that the defendant nevertheless could have been held liable as a constructive trustee on an alternative ground which will be considered below and so also dissented on this point.
THE DEVELOPMENT OF THE CONSTRUCTIVE TRUST^25
particularly likely that the party classified as the fiduciary will be deprived of the benefit of transactions into which he has entered into a double capacity for the very simple reason that the opportunity of entering into such transactions is unlikely to arise in the context of a commercial relationship. The most probable consequence is rather that the party classified as the fiduciary will be deprived of benefits which he has obtained as a result of his position to the exclusion of the other party. This was of course precisely the relief
sought in Hospital Products Limited v United States Surgical Corporation and others and
in United Dominions Corporation v Brian. In the former case, the plaintiff claimed to be entitled to the past and future profits made by the defendant from selling its own products on the basis that its business was subject to a constructive trust while in the latter case the plaintiff claimed that the defendant was not entitled to retain the profits of the joint venture against sums advanced to the third party. Such liabilities are likely to be substantial and, as will be seen later, are capable of causing considerable prejudice to the general creditors of the fiduciary. This is of course a further reason why the Courts should continue to decline to uphold the existence of fiduciary obligations in commercial transactions where these have not been expressly created by the parties. Finally, to what extent is the imposition of a constructive trust on a fiduciary who has obtained an advantage as a result of a breach of his duty of loyalty capable of prejudicing the interests of his general creditors in the event of bankruptcy? It is not likely that any such prejudice will be possible when a fiduciary is deprived of unauthorised remuneration or secret profits. Such remuneration is unlikely to form a substantial proportion of the assets of a fiduciary while any secret profits of a substantial size are normally concealed and are therefore not likely to be visible to and so mislead a third party creditor. Nor is it likely that the general creditors will be potentially prejudiced when a fiduciary is deprived of the benefit of transactions into which he has entered in a double capacity. The fact that such transactions are normally set aside means that the principal will have to return to the fiduciary the consideration which he originally provided so that there is unlikely to be any substantial reduction of the assets available to the general creditors. However, substantial prejudice to the general creditors is possible when a fiduciary is deprived of benefits which he has obtained as a result of his position to the exclusion of his principal. This will have the effect of depriving the fiduciary of both the past and future profits of the transaction in question, profits to which he will have appeared to be entitled and whose disappearance is capable of reducing very considerably the assets available for his general creditors. Unfortunately, this is not a factor which the Courts tend to consider when deciding whether or not to impose liability of this type, something which is particularly unfortunate in the light of the stringent attitude normally adopted in cases of this kind. In this respect, therefore the imposition of a constructive trust on a fiduciary who has obtained an advantage as a result of a breach of his duty of loyalty is capable of prejudicing his general creditors in the event of his bankruptcy and to this extent at least the imposition of such constructive trusts is capable of amounting to an intervention in commercial transactions. 3b. Constructive Ihists imposed as a result of a disposition of trust property in breach of trust The situations in which constructive trusts are imposed on recipients of trust property which has been disposed of in breach of trust cannot properly be classified as examples of intervention in commercial dealings. This is simply because the beneficiaries of the trust in question cannot successfully maintain any claim against a bona fide purchaser for value of a legal estate in the property without notice of the breach of trust or the statutory equivalent in the case of land. A party to a commercial transaction under which he has acquired an interest in trust property disposed of in breach of trust will have only himself to blame if he is unable to establish such a defence and in such circumstances the interests
26 QLD. UNIVERSITY OF TECHNOLOGY LAW JOURNAL
of his general creditors cannot possibly be regarded as having priority to the equitable
proprietary interest of the beneficiaries in the trust property.
However, where trust property has been disposed of in breach of trust, constructive trusts
can be imposed not only on the recipients of that property but also on any person who
has assisted in bringing about the disposition of the property in breach of trust. Such persons
are normally agents of a trust such as solicitors or bankers who, as a result of following
the instructions of the trustees, have actually made or facilitated the disposition in question.
Such a constructive trustee is liable to refund to the beneficiaries the entire value of the
trust property in question. Admittedly this does not give the beneficiaries any priority over
the general creditors of the constructive trustee since no part of the property disposed of
in breach of trust will be able to be identified in his hands and so the beneficiaries will
only be able to rely on his personal liability to account, a liability which, as has already
been seen, will rank with, rather than ahead of, the claims of the general creditors. However,
since such liabilities can be very substantial, this can nevertheless prejudice the general
creditors in that it will reduce very considerably the percentage able to be paid out to them.
There is important recent Australian authority on the circumstances in which constructive
trusts of this type will be imposed. The basic rule is that agents will only be held liable
as constructive trustees if they assist with knowledge in a dishonest and fraudulent design
on the part of the trustees.^15 There has been considerable controversy as to precisely what
types of knowledge should lead to the imposition of such a constructive trust.^16 However,
in Consul Development Pty Ltd v. D.P.C. Estates Pty Ltd ,^17 the High Court unanimously
expressed the view that such a constructive trust should only be imposed if the agent either
actually knows of the breach of trust, or has consciously refrained from making any enquiries
for fear that he may learn of a breach of trust, or knows of facts which themselves would
make a reasonable man aware of the breach of trust.
18
However, a majority of the Court
took the view that a constructive trust should not be imposed on an agent who has merely
been negligent in failing to make any enquiries.^19 These statements were recently applied
by the Supreme Court of Western Australia in Ninety Five Pty Ltd v. Banque Nationale
de Paris ,
20
in which Smith J. held that the defendant bank was liable as a constructive trustee
for permitting the plaintiff company to be purchased with its own money in breach of s.
of the Western Australian Companies Act 1961 (WA) in circumstances which would have
made any reasonable banker aware of what was happening. The defendant was therefore
held liable to refund to this plaintiff the sum of $1,933,866.62 which had been utilised for
this purpose, together with interest thereon of up to $7,235,072.35. Substantial liabilities
of this kind will in many cases inevitably lead to the bankruptcy of the constructive trustee
and reduce very considerably the percentage able to be paid out to the general creditors.
However, it is difficult to argue that the types of knowledge which will lead to the imposition
of this type of constructive trust should be reduced any further. General creditors are of
15. Barnes v Addy **(1874) 9 Ch App 244.
- In England there are at present conflicting lines of authority on this point. See R.P. Austin,** Essays in Equity, The Law Book Company Limited, Sydney, 1985 at 196, Oakley supra **n.7 at Chapter 4.
- (1975) 132 CLR 373.
- In this case it was claimed that the defendant company had either received property of the plaintiff company or** alternatively assisted with knowledge in a dishonest and fraudulent design. Although the defendant was not an agent of the plaintiff, the High Court fully reviewed the authorities on agents in reaching the conclusion that the defendant **lacked the necessary knowledge to be liable on either ground.
- MdTiernan J., considered that a constructive trust should also be imposed on an agent who has merely been negligent in failing to make any enquiries.
- [1988] WAR 132.**
28 QLD. UNIVERSITY OF TECHNOLOGY LAW JOURNAL
commercial transactions and, although the imposition of a constructive trust in such
circumstances is obviously capable of prejudicing the general creditors of the transferee,
the fraudulent or unconscionable conduct of the transferee clearly justifies such priority
being given.^25
However, constructive trusts of this type have not been confined to cases of such clearly
fraudulent or unconscionable conduct. During the last thirty years, constructive trusts of
this type have at times been imposed as a result of conduct classified merely as inequitable
with the underlying and indeed often expressed objective of preventing results which would,
otherwise, have been inequitable. Decisions of this type have, in general, been confined to
cases concerning joint enterprises between members of a family or a de facto relationship
and have usually concerned the beneficial interests in the residential property which they
occupy.^26 Such joint enterprises cannot of course in any sense be classified as commercial
transactions so that the imposition of a constructive trust to do justice and equity as between
the members of a family or a de facto relationship does not of itself constitute an interference
in a commercial transaction. However, such trusts also necessarily give priority to the member
of the family or the de facto relationship in question over the general creditors of the
constructive trustee and it is not easy to justify such a priority being given merely because
the imposition of such a trust produces an equitable result as between the members of the
family or the de facto relationship. The imposition of constructive trusts on this ground,
therefore, can certainly be regarded as constituting an interference in commercial transactions.
The traditional rule in governing the acquisition or variation of beneficial interests in
property acquired in the course of joint enterprises was laid down by the House of Lords
in Pettitt v. Pettitt^27 and Gissing v Gissing ,^28 Beneficial interests in such property have to
be determined in the light of the intentions of the parties at the time of the acquisition
of the property in question or in accordance with any subsequent agreed variation thereof.
The intentions of the parties have to be deduced from their words and deeds at the time
taking into account established principles of property law such as the presumptions of
resulting trusts and of advancement. Thus, rights of property are to be determined according
to the basic rules of property law, not according to what is reasonable and fair or just in
all the circumstances. However, in the course of his speech in Gissing v Gissing , Lord Diplock
stated the following proposition:
A resulting, implied or constructive trust — and it is unnecessary for present purposes
to distinguish between these three classes of trust — is created by a transaction between
the trustee and the cestui que trust in connection with the acquisition by the trustee
of a legal estate in land, whenever the trustee has so conducted himself that it would
be inequitable to deny to the cestui que trust a beneficial interest in the land acquired.
29
This statement, when thus isolated from its context, appears to suggest that the courts
may impose a constructive trust to do justice inter partes whenever the result would otherwise
be inequitable and it was indeed duly cited as authority for that proposition in several
subsequent cases in the English Court of Appeal. A typical illustration is the decision in
25. See Last v Rosenfeld [1972] 2 NSWLR 923 and Ogilvie v Ryan [1976] 2 NSWLR 504. Where a third party takes the property with notice of the transaction, he will also be liable as a constructive trustee (see Binions v Evans **[1972] Ch 359).
- One of the groups of English authorities concerned the effect of contractual licenses on third parties but these authorities** have never been adopted in Australia and are in any event now discredited, although not as yet overruled, in England, **in England.
- [1970] AC 777.
- [1971] AC 886. 29.** Ibid, at 905.
THE DEVELOPMENT OF THE CONSTRUCTIVE TRUST 29
Cooke v. Head.^10 The plaintiff was the mistress of the defendant. They decided to acquire some land on which to buy a bungalow. The defendant paid all the outgoings save for a small amount, but the plaintiff helped him greatly in the actual task of building the bungalow which the parties never in fact occupied because they split up before it was completed. The plaintiff brought an action claiming a share in the proceeds of sale. At first instance, the Judge applied Pettitt v Pettitt and Gissing v Gissing and, since the plaintiff had contributed one-twelfth of the outgoings, awarded her a one-twelfth interest in the proceeds. However, in the Court of Appeal, Lord Denning M.R. said that, whenever two parties by their joint efforts acquire property to be used for their joint benefit, the Courts may impose or impute a constructive or resulting trust. Applying this principle, he held that the plaintiff was entitled to a one-third interest in the proceeds. In this decision, as in all the other cases of this type, no account was taken of the fact that Lord Diplock had placed an immediate limitation on his statement in the following sentence, in which he said: And he will be held so to have conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land.^31 The effect of this limitation and the essential difference between the two approaches is admirably illustrated by the judgments in Eves v Eves.'^2 The parties, who were living together as man and wife, purchased a dilapidated house as a home for themselves and their children. All the purchase price was found by the man but the woman did a very considerable amount of work on the house. The English Court of Appeal held that she was entitled to a one- quarter share therein under a constructive trust. Lord Denning M.R. based this conclusion on the principle that he had enunciated in Cooke v Head. But the other two members of the Court, Browne L.J. and Brightman J., held that it could be inferred from the circumstances that there had been an arrangement between the parties whereby the woman was to acquire a beneficial interest in the house in return for her labour in contributing to its repair and improvement. Hence her work, in pursuance of this inferred arrangement gave her, under Pettitt v Pettitt and Gissing v Gissing , a beneficial interest in the house. This latter approach is infinitely preferable, not only as a matter of precedent but also as a matter of principle. The operation of the rule enunciated by Lord Denning M.R. is wholly unpredictable and prevents litigants from being safely advised as to their position. Further, the effect of the imposition of a constructive trust to do justice inter partes has the effect of giving the person in whose favour it is imposed priority over the interests of the general creditors of the constructive trustee. These authorities had to be considered by the New South Wales Court of Appeal in Allen v Snyder.™ During the last eight years of a relationship of approximately thirteen years, the parties lived together in a house purchased through the War Service Homes Department. The necessary loan was only forthcoming because the woman made a statutory declaration that she was living with and financially dependent on the man. However, the appropriate legislation did not permit the title to be placed in the name of a de facto wife. Consequently, the property was placed in the name of the man, who paid the whole of the purchase price and loan repayments. The woman purchased the furniture. The parties intended that the
- woman should acquire a half interest in the house as and when they married and the man made a will in her favour. They subsequently separated without having married. The Court
30. [1972] 1 WLR 518. 31. Supra **n.29.
- [1975] 1 WLR 1338.
- [1977] 2 NSWLR 685.**
THE DEVELOPMENT OF THE CONSTRUCTIVE TRUST 31
thirds was borrowed on a mortgage, which they had obtained by representing themselves to be married and under which they were jointly and severally liable. The repayments of the mortgage were in fact made by the man. The High Court held, by a majority of four to one, that the fact that the balance of the purchase price had been raised by a mortgage under which both parties were liable to the mortgagee constituted a contribution by the woman to the purchase price even though the parties had agreed that the man alone would make the repayments.^39 Thus the parties held the legal estate on trust for themselves as tenants in common in shares proportional to their contributions. When remitting the case to the Supreme Court of New South Wales for this decision to be applied, Gibbs C.J. made reference to the need to take accounts between the parties in which consideration would have to be given to the fact that the man had in fact repaid the mortgage but had, on the other hand, been in sole occupation of the property since the relationship had broken down. 40 The joint judgment of Mason J. and Brennan J. also made brief reference to the possibility of the Supreme Court considering whether the man was entitled to any relief against the woman in respect of his payment of the mortgage instalments.^41 These remarks were subsequently taken up in Muschinski v Dodds. 42 In this case, the parties, having lived as man and wife for three years in a house owned by the woman, bought a cottage as tenants in common in equal shares with the object of restoring the cottage for use by the woman as an arts and crafts centre and of purchasing and erecting a prefabricated house as a home for both of them on another part of the property. All of the purchase price was paid by the woman, the man undertaking to assist in setting up the arts and crafts business and pay for and erect the prefabricated house. The relationship terminated before he had been able to carry out the majority of this work and he was held to have contributed only one eleventh of the total costs. The High Court held unanimously that the woman had intended to give the man an unconditional one half share in the property and that the presumption of resulting trust arising out of her payment of the whole of the purchase price was therefore rebutted. Consequently, the surplus arising on the sale had to be divided in equal shares between the parties. However, the Court went on to hold, by a majority of three to two, that before ascertaining this surplus each party was entitled to be credited with all the expenditure incurred.^43 A constructive trust was imposed to give effect to the variation in the beneficial interests which this process would inevitably produce and it was expressly stated that, in order to avoid any possible prejudice to third parties, this trust would take effect as from the date of the publication of the judgments. The majority reached this conclusion by two different routes. Gibbs C.J. adopted an attitude similar to that which he had taken in Calverley v Green and based his conclusion on the fact that the parties had been made jointly and severally responsible to pay the purchase price of the land so that if either discharged more than his or her proper share, he or she could call on the other for contribution.^44 Mason J. and Deane J., on the other hand, adopted
**39. Murphy J. dissented on the grounds that the legal title reflected the interests of the parties and there were no circumstances
- displacing it. 40.** Supra n.36 at 253. 41. Ibid, at 264. 42. Supra **n.36.
- Brennan J. and Dawson J. dissented on the grounds that the woman's claim to be entitled to the full beneficial interest was necessarily based on the hypothesis that she paid the price as sole purchaser and so left no room for a finding that she paid it to discharge a joint and several debt so as to entitle her to contribution. Consequently, her only possible claim was for damages for failure by the man to fulfil his personal obligation to her. 44.** Ibid, at 596-598. This argument is very limited in ambit since it will function only when the parties are so jointly and severally responsible and even so is restricted to payments of the purchase price.
32 QLD. UNIVERSITY OF TECHNOLOGY LAW JOURNAL
a much wider view and based their conclusion upon a general principle of equity derived
from the authorities on partnerships and contractual joint ventures which
operates upon legal entitlement to prevent a person from asserting or exercising a
legal right in circumstances where the particular assertion or exercise of it would
constitute unconscionable conduct... Those circumstances can be more precisely
defined by saying that the principle operates in a case where the substratum of a
joint relationship or endeavour is removed without attributable blame and where the
benefit of money or other property contributed by one party on the basis and for
the purposes of the relationship or endeavour would otherwise be enjoyed by the
other party in circumstances in which it was not specifically intended or specially
provided that the other party should so enjoy it. The content of the principle is that,
in such a case, equity will not permit that other party to assert or retain the benefit
of the relevant property to the extent that it would be unconscionable for him to
do so.^45
Only this second explanation of the decision in Muschinski v Dodds was mentioned in
the subsequent decision of the High Court in Baumgartner v Baumgartner.^46 In this case,
the parties lived together as man and wife for four years, initially in a house owned by the
man. This house was subsequently sold and the proceeds were used as the down payment
on a further property on which a house was subsequently built. The mortgage repayments
and their other living expenses were paid out of their joint earnings which they pooled,
of which the man contributed 55% and the woman 45%.
47
The man subsequently asserted
that the land and house were his sole property. The High Court, applying Muschinski v
Dodds for the reasons expressed in that case by Mason J. and Deane J., held unanimously
that this assertion amounted to unconscionable conduct which attracted the intervention
of equity and the imposition of a constructive trust under which the man held the property
on constructive trust for the parties in proportion to their contributions. However, the Court
held that the man was entitled to receive out of the proceeds of sale repayment of the
contributions effectively made by him before and after the period during which the parties
had been living together, namely the proceeds of sale of his former property and the mortgage
repayments paid since the separation less an occupation rent, and also the value of furniture
purchased from the pooled earnings which the woman had taken with her.
These decisions of the High Court unquestionably establish a brand new legal principle
unsupported by any prior authority. In reality, the Judges have taken the decision to apply
to joint enterprises between members of a family or a de facto relationship a rule derived
from the authorities which govern commercial relationships such as partnerships and
contractual joint ventures. That is not to say that this new principle is wrong — in fact,
it seems eminently sensible — but that its creation amounts to an act of judicial legislation
for which the High Court may not be the most appropriate forum. Viewed as a legal principle,
the new rule has the very considerable merit of certainty and predictability, thus permitting
litigants to be safely advised as to their position.^48 In this respect, the rule is overwhelmingly
45. Ibid, at 620 per Deane J. with whose judgment Mason J. agreed. 46. Supra **n.36.
- The figures were adjusted to compensate the woman for the three months when she was bearing and caring for the** **child of the parties.
- Thus the predictable result was reached in** Arthur v The Public Trustee (1988) 90 FLR 203, where a couple were living together and pooling their assets when the man won a substantial prize in Tkttslotto. Despite making statements that the winnings were jointly owned, he deposited them in a bank account in his own name and spent them as he wished save that he purchased in his own name a house property intended as their matrimonial home. He was killed before the marriage and the woman claimed a beneficial interest in the property. She failed, the Court of Appeal of the Northern Territory holding that he had not intended to create an express trust, that the common intention of the parties was for her to receive an interest only after marriage, and that he had not behaved unconscionably. As Asche CJ said at 213: "Darwin may be truly blessed by a colourful array of palm trees. But they are not there for the judges of this Court to sit under."
(^34) QLD. UNIVERSITY OF TECHNOLOGY LAW JOURNAL
Conclusion
The Australian courts have, generally speaking, been reluctant to classify commercial
relationships entered into at arm's length and on an equal footing as giving rise to fiduciary
obligations where such obligations have not expressly been created by the parties and thus
have resisted the temptation to utilise the constructive trust as a remedy in commercial
transactions. In light of the effect of the imposition of constructive trusts on the general
creditors of the constructive trustee, it is very much to be hoped that this posture is continued.
On the other hand, the Australian Courts have not considered particularly fully the effect
on the general creditors of the constructive trustee of the imposition of constructive trusts
outside the area of commercial transactions. Admittedly the recent decisions handed down
by the Australian Courts cannot be regarded as capable of unduly prejudicing the interests
of such general creditors. However, it is much to be hoped that the Australian Courts continue
to resist the temptation to utilise the constructive trust as a general equitable remedy to
do justice inter partes , something which would undoubtedly prejudice the interests of the
general creditors of the constructive trustee and thus amount to an unjustified intervention
in commercial dealings.
