Summary Notes on Law of Trust & Equity : Constructive Trust

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Law of Trust & Equity : Constructive Trust

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CHAPTER 4 : CONSTRUCTIVE TRUST

è  General Concept

§        CT is another type of implied trust.

§        To revise, there is no need for any writing formalities to validate the implied trust.

è  Case : Law Tanggie

FOC : The pf in this case has purchased a piece of land and transferred it to his uncle with the believed that such land will be transferred back to him, as in the mean time he needs to fulfil the requirement of being a ‘native’ and acquire ‘majority age’. This agreement however was reduced in oral form. Once he acquired both requirements, uncle refused to give back the land.

Held : The land must be given back to Pf, and an oral agreement for implied trust is not an issue as there is no requirement for such trust to be reduced in written form.

§        To Differed from RT, CT cases are based with the issue relating to the unconscionable conduct in the trust and not the intention of the parties either it be express / presumed. (Case : Carl v Herbert)

è  Case : Takako Sakao

Facts : It was about the restaurant business of a joint partners. The Japanese lady in this case has provided for capital $250k which balance of $700k (full price). She later has sold the business to her husband, the 3^rd party in this case.

Held : CT was invoked in this case as to prevent the unconscionable conduct of the lady to sell such business to another party without consent of the joint partner. The transaction with the husband also considered void as he was not a bona fie purchaser for a value without notice. Here, he aware of the situation but proceeded to buy the business. The business now owned half for each of the partners. CT is imposed by law irrespective the intention of the parties. The circumstances in which it may be imposed aim to fasten the conscience of the holder of the trust prop. who hold such prop. for another person.

*P/ S: For CT which involved claim of joint prop. (eg : homes purchased by couple / mutual wills / secret wills), common intention is paramount.

è  Case : Paragon Finance v DB Thakerar

Held : CT arises via the operation of law in the circumstances where it is unconscionable for the owner of the prop. to prioritize his own beneficial interest over the trust prop. & deny the beneficial interest of another.

è  Characteristic of CT

§        There are 5 of them namely:

1)       It is imposed by operation of law (by court).

2)       Design to prevent inequity (inequitable for the persons to hold the trust prop.)

3)       Design to prevent unauthorised gains & require account of profits by fiduciaries.

4)       Design to prevent unconscionable conducts.

5)       Design to prevent unjust enrichment.

è  Circumstances Giving Rise to CT

1)       Where there is unauthorised profit made by fiduciary

2)       Liability of 3^rd party :

        Strangers that intermeddling with the trust prop.

        Strangers that ‘dishonest assistance’ to the trust.

        Strangers that ‘knowing the receipt’ to the trust.

3)       Conveyance (Transaction) by fraud / inequitable conduct  (This a bit overlapping with liability of 3^rd party)

4)       Secret trusts

5)       Mutual wills

6)       Contested interest in family homes

7)       Prop. acquired via killing

è  Circumstances Giving Rise to CT

Ì  UNAUTHORISED PROFIT MADE BY FIDUCIARY

ü  Who is a FIDUCIARY?

§      These include trustee, promoter, agent to client / agent to co & etc (so long as that indi owes some duty upon the beneficiary).

è  Case : English v Dedlam

Held : This category of FIDUCIARY must never been closed up to certain group of people only as after all this is not more than formulae for an equitable relief.

è  Case : Gutcharan v Vellasamy

Held : Lawyer to client is a FIDUCIARY.

è  Case : Phipps v Boardman

Held : Lawyer to client is a FIDUCIARY.

ü  Fiduciary’s SCENARIO?

§      The possible scenario would be when the fiduciary receive unauthorised profits without the beneficiary consent / allowed by court.

§      Examples of situations are as follows :

1)    Where fiduciary receives profits that he is not entitled to.

è  Case : Regal Hastings v Gulliver

Facts : Regal were in negotiation for the purchase of two cinemas in Hastings. Regal created a sub-co, Hastings Amalgamated Cinemas Ltd, with a share capital of £5,000. There were six directors on its board, who included the Df who also the directors in Regal. Regal was only prepared to subscribe £2,000. Consequently, each of the directors in the sub-co will pays 500 shares. The df however said that he would find investors to pay on behalf of him. He did so when co. called Seguliva, South Downs Land Co, and an indi named Miss Geering paid for him. However, it was found that the df is the director for both of co. who paid on his behalf and Miss Geering is a good friend of him. The shares in the sub-co were subsequently sold at a profit.

Issue : Whether the df were liable upon acquiring the profit.
Held : Df are liable to account for activities outside the company if (i) what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors and (ii) what they did resulted in profit for themselves. Lord Russell ‘The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit. In this case, the df did liable for the (ii) category.

2)    Where fiduciary enter transaction on his own behalf when he should enter on behalf of the beneficiary.

è  Case : Takako Sakao

Facts : It was about the restaurant business of a joint partners. The Japanese lady in this case has provided for capital $250k which balance of $700k (full price). She later has sold the business to her husband, the 3^rd party in this case.

Held : CT said as partners, the lady shall not sold such business to another party in intention not to have mutual profits, but to gain sole profit for herself only.

3)    Where fiduciary uses confidential info for personal gain.

è  Case : Phipps v Boardman

Facts : Df has acted as solicitor to the Pf family trust and not the direct appointed trustee. Most of the funds were invested in the family firm. As an agent / 3^rd party, he had bought remainder of the shares in which at the beginning is being considered as not profitable, & this has been done without the consent from the beneficiaries. Later, both of the shares own by the beneficiaries & Df gained a good profits.

Issue :  Was the solicitor liable for his personal profit?

Held : Yes, liable as he as the 3^rd party in this case has used the opportunity arose from his fiduciary position to gain such profit. But still, he is entitled with some payment for the work and skills to bring in such profits for beneficiary.

4)    Recipient of bribe / secret commission.

è  Case : Reading v AG

Facts : A sergeant received bribe to smuggle some goods out of Cairo.

Held : It was held that any position which enabled a servant to earn money (bribe / secret commission / money under table), will indirectly give the masters a right to receive the money so earned even though it was earned via criminal mean.

è  Case : Mahesan v M’sian – Cooperative Ltd

Facts : A prop. was cost about RM456k. A director and the secretary of the df (a co.) has caused the society to pay RM944k for a prop., instead of RM456k as the the df and the vendor have some secret commission agreement between them. Here, the df received RM122k for as a secret commission for selling of the prop.

Issue :  Is the commission is claimable?

Held : Yes.

Ì  LIABILITY OF A 3^RD PARTY

è  Case : Barnes v Addy

Held : It is held that :

♥        3^RD party here referred to the party who is not the direct trustee who has been appointed for the trust, but it is those who :

        i.      Making themselves ‘de son tort’.

       ii.      Participate in the fraudulent act of the appointed trustee which bring injury to the beneficiary.

♥        However it must be noted that the 3^rd party (stranger) will not be made as a ‘constructive trustee’ merely because they acts as an agent of the appointed trustees.

♥        This agent of the trustees only liable under this category if:

        i.      The agents received & become chargeable with some part of the trust prop.

       ii.      The agents assist the trustee while aware that such act of trustee if fraudulent and dishonest.

ü  Strangers that intermeddling with the trust prop.

§      Here the concept of ‘trustee de son tort’ will be explained.

§      Trustee de son tort = the 3^rd party / stranger / constructive trustee that acted as trustee without authority of being so.

§      Such stranger liable as he in doing the related act has acted as a trustee – without a proper appointment of doing so.

§      So, despite having no legal appointment of being a trustee, a stranger still liable as he owed responsibility upon the beneficiary.

è  Case : Phipps v Boardman

Held : Refer discussion before this.

è  Case : James v Williams

Facts : In this case the Pf mom died intestate leaving the home to be equally divided among 3 siblings, James, William Jr. (Older Brother)& Thirza. The older brother despite the fact that he aware that the home is not solely owned by him, has took possession upon it and transferred it to Thirza upon his death. Thirza further transferred it to Df upon her death. Pf now claimed for 1/3 share of the house, but he was time barred.

Held : As the brother is the executor son de tort since he knew he is not entitled to the house solely, he held such trust prop. on CT. As there is fraudulent issue in this case, there is not time bar to make a claim for the trust prop.

è  Case : Ng Tien v Chow N. Y.

Facts : App in this case has made a claim for a declaration from court that the Resp only held a piece of land in this case as a constructive trustee of the beneficiaries. In reply, Resp said Ng Tien doesn’t have any locus standi to make the claim as he never being appointed as a valid trustee for the trust.

Held : Despite the fact that the App is not an appointed trustee in the trust, as he was a trustee de son tort, the claim was allowed as equity does not want for trustee. (Equity is not really about the trustee, but aim for fairness).

è  Case : Khor K. v Hj Yasin

Facts : The court in this case has ordered the App to pay to the Resp sum of RM59,040 which he had received as a compensation from the State Govt on the acquisition of part of his land which he had sold to the a buyer who had in turn sold it to the Resp.

Issue :  Is the sum payable as for the issue of time bar?

Held : Yes, the sum is payable. This is because 1) The App is a constructive trustee over the money which he had been paid, that is on behalf of the purchaser, the Resp. 2) The claim is not time bar as the Resp only aware of such event in the year of 1970 that the compensation money has been before that is paid to the App.

è  Case : Guindarajoo v Satnasingam

Facts : In this case, Pf has claim for prop own by MM, the deceased. Pf claimed that he was adopted by MM and such prop. has been given to him as a gift during the lifetime of MM. However, in this case Df has entitled with the prop. & also given the letter of admins certificate to own such prop., as he was the only family relative (nephew) who qualified.

Held : Such prop. is an intervivos gift from the MM to the Pf. The Df in this case only being regarded as the trustee de son tort as he neither been appointed to be one & nor has considered himself to be one (he never being a responsible man for the trust).

ü  Strangers being the  ‘dishonest assistance’ to the trust.

§        Under this class, it is a bit different with the 1^st category of the ‘stranger intermeddling with the trust prop.’, as here it involves the ‘Accessory Liability’ and not the ‘Recipient Liability’.

§        ‘Recepient Liability’ = Stranger that commits the breach of trust and hold the prop. / having control over it.

§        ‘Accessory Liability’ (Dishonest Assistance)=

♥  Stranger doesn’t hold the trust prop. (so no proprietary issue), but has dishonestly assisted the trustees to breach the trust.

♥  Here, a mere negligence without intention to assisting dishonestly will never make such stranger liable for the breach of trust.

♥  If stranger is found liable, such stranger will be personally liable for the loss in the trust.

è  Case : Roya Brunei Airlines v Tan

Held :

§ Liability in equity relating to the breach of trust also entrenched to the strangers who dishonestly assisting for the breach.

§ What is important here is to prove that the stranger is dishonestly assisting the trustees.

§ The fact that the trustee may not know / realize that he is breaching the trust is irrelevant, as long as the STRANGER is aware that the trustee is acting out of the authority on the trust.

§ This is because, in some cases, the trustees may think that they have authority to act so & end up in breaching the trust, but the STRANGER who from beginning aware of the fact that trustees should not act so, but still assisting them will be liable and can’t escape from the liability just because the trustee is unaware of their breaching act.

§ So, Breach of Trust = No need to prove Dishonesty / Fraud on Trustee, Instead prove Dishonest Assistance on part of Stranger.

Ì  TEST : Dishonest Assistance Objective Test

è  Case : Royal Brunei Airlines v Tan

Facts : Pf has appointed Borneo Leisure Travel (BLT) to be its agent for the booking passenger flight and cargo transport in Sabah & Sarawak. The Df here is the managing director & main shareholder of the BLT. It was agreed between the Pf and the BLT for all the money received by BLT to be put in one separate account. BLT failed to do so, as the Df with full knowledge of the situation has used the money for BLT own purposes & never put the money in separate account from the BLT’s account. Later, BLT went bankruptcy and never paid such money to Pf.  Pf claimed the money back from Df. At the 1^st court, the Df was held liable but this was further appealed.

Court of Appeal :  It was held that the Df was the stranger / constructive trustee & BLT was the trustee of the trust, but as there was not fraud / dishonesty on part of the trustee, the Df can’t be made liable. This case is further appealed to Privy Council.

Held : The Df was liable for the new test produced in this case called the objective test.

♥  OBJECTIVE TEST : Although this test is being used in Tort, but the way it function for this category of dishonest assistance is quite different as there is still subjective element in questioning one’s personal conduct. It is not like the negligent / reckless in the Tort case where the reasonable man on the Df situation would be easily set as standard of behaviour. So here, in deciding on the standard of Honesty of an individual, ct firmly stated that it will never depend on each of individual level of honesty as that will make all the Df to lower down their honesty level just to escape the liability.

♥        Subjective element : ( state of df knowledge) plus test of Objective ( what is considered dishonest).

♥  Standard of the objective test : Is an honest man would in the Df circumstance act like him? If yes, then the stranger is not liable, but if not, he is liable.

♥  Important Qs: Is the stranger aware of the breaching action of the trustee, but still assisting the trustee dishonestly? If yes, the stranger is liable.

♥  Scope of what an Honest person will NOT do :

                  i.         Honest man will not INTENTIONALLY deceive others to the detriment.

                 ii.         Intentionally take others property.

               iii.         Participating in misapplication of assets.

              iv.         Shut his own eyes upon the breaching acts of the trustee which he is fully aware of & never inquire the trustee about it.

♥  To sum up :

1) There is breaching act by Trustee irrespective whether trustee is aware or not.

2) The stranger aware about it, but still assist for the breach of trust.

Ì  CASES IN MALAYSIA WHICH APPLY / NOT APPLY / MIX THE OBJECTIVE TEST

è  Case : Twin Sectra v Yardley [2002]

Held : Introduce a combined test of Objective & Subjective test. But this is only Dicta, not binding.

è  Case : Pharmmalaysia v Dinesh Kumar [2004]

Held : Reinforced the objective test as prescribed in Royal Brunei Airlines case.

è  Case : Abuo_Rahmah v Abacha [2007]

Held : Followed the objective test but take it one further away by saying that as long as the stranger act dishonest, whether or not he is conscious about that dishonest act is irrelevant as it still make the stranger liable.

è  Case : Kuan P. S. v Robert Doran [2013]

Held : The objective test should be followed.

è  Case : CIMB v Maybank Trustee [2014] – Federal Court

Facts : Pesaka in this case was handling a govt. project, & for that reason, they raised fund to get the capital. In return for the fund collected, they offer bonds to the fund-raiser. In the memorandum, it was agreed that Pesaka will get the project based on the fund provided by the bonds holder & such funds will be kept in separate account held by Maybank who acted as the trustee. Such fund was kept in CIMB & should be ‘ring-fence’ (State of the funds where it can’t be withdrawn by a single party), but part of the funds has been withdrawn by the managing director [Rafi] & his wife [Murnia], and they executed some RECEIPT (action of receiving) through that withdrawal. CIMB here aware of that act still assisted both of the individuals to withdrawn such money.

Held : CIMB was not liable for dishonest assistance as they only acted out as what has been requested by the customers (Rafi & Murnia). There is no dishonesty in the eye of the reasonable man for honouring such relationship with the customers. Maybank Trustee is solely liable in this case.

v  Reinforced the dicta in Twin Sectra case where in this case a combined test has been used in deciding the case. Combined test is as follows:

♥        Objective test : Is the act is dishonest in the ordinary standard or reasonable & honest people?

♥        Subjective test : With he himself knowing that the act is dishonest as per subjective dishonest test.

♥        QS : Which test will be used in any problematic qs?

♥        Answer : The Objective Test in the Royal Brunei Airlines & reason to use this one is that in the objective test of Royal Brunei Airlines also got the objective & the subjective element. So quite the same with the Twin Sectra. It just that the way it is applied is clearer and firmer. It is not have basis only as an objective test, as it have the element of both subjective & objective element. It just that the name has been made objective to avoid confusion.

z Subjective element : ( state of df knowledge) plus test of Objective ( what is considered dishonest).

Ì  Additional info : Prior the Objective Test, Ct has used Knowing Assistance TEST. (NO LONGER BEING USE)

§        This case has been widely used before the Royal Brunei Airlines case come into existence.

§        There were 5 types of knowledge / ‘knowing’ according to the case of :

è  Case : Baden Delvaux

Held : 5 types of knowledge that the stranger might use, which will make him liable for dishonest assistance :

1.       Actual knowledge.

2.       Wilfully shutting one’s eyes to an obvious breach of trust acts. (Know about the breach of trust but do nothing to stop it.)

3.       Wilfully & recklessly failing to make such inquiries as an honest & reasonable man would make.

4.       Knowledge of circumstances which would indicate the facts to an honest & reasonable man &

5.       Knowledge of circumstances which would put an honest & reasonable man on inquiry.

♥        P/S : Only no. 1-3 stay put in the current objective test in Royal Brunei Airlines case.

ü  Strangers that liable for  ‘Liability for Receipt’.

§        This is referring to the act of the stranger in receiving the trust prop.

§        Here, it is irrelevant whether the party commits fraud / assisting or not assisting for the breach.

§        As long as he ‘receive’ the prop. as he is not authorised so, he will be liable.

è  Case : BCC1 v Akindele

Held : The test for ‘Liability for Receipt’ is that :

♥        The recipient state of knowledge must be such as to make it unconscionable for him to gain benefits of the receipt.

♥        Qs to be asked : Should / Shouldn’t the Df get such benefits & whether he conscious about it. If he is conscious about his act & it is seen that the benefits shouldn’t be acquired by that stranger, he would liable for such ‘Liability For Receipt’.

♥        To sum up : The ELEMENTS ARE -

1)       Stranger receives the prop.

2)       Strangers fully aware that the prop. is subjected to the trust.

3)       Receiving the trust prop. is equivalent to breach of trust.

♥        Defence : If the stranger said they acquired such prop. as a bona fide purchaser for a value without a notice,  they will have to return it in order to avoid liability.

è  Case : Re Montague Settlement Trust

FHeld : When the stranger not aware about BOT, he need to return such property to avoid personal liability.

♥        If the stranger is merely carrying out the ministerial duties, no liability on his part :

è  Case : Williams A. v Price

Held : The solicitor in this case is held not to be liable as he only invested the money out of the instruction given by the trustees. The solicitor is not liable as he acted honestly on the instruction given by the trustee.

Ì  FRAUD / INEQUITABLE CONDUCT

è  Case : Bannister v Bannister

Facts : Pf transfered prop. from Df on the verbal promise that she can stay rent free for life. Trust was not put in writing.

Held : Just because it doesn’t complied with the requirement to put the trust in writing will never make such promise to be let go just like that. The promise can’t be avoided and the requirement to put in writing shall not be used as the engine of fraud. Estoppel was used in this case.

è  Case : Pallant v Morgan

Facts : Neighbours enter into an agreement to acquire the nearby land to prevent it from falling inti the hands of the stranger. One of them bid for it & the other withdraw his bid.

Held : It was held that the one acquire hold share of the others in constructive trust. Test used in this case is :

♥        When A has an arrangement with B with an understanding that B will act upon the prop. owned by A in certain ways as agreed by both, B is said to hold such prop. as constructive notice in trust for A.

è  Case : Dr Mohan Swami

Facts : In this case the Df has agreed to allow the Pf to buy back the shares in qs within a stipulated time. But the Df continued to sell it to others.

Held : Injunction granted as there is fraud & deception done by Df as not honouring the promise between him and the Pf.

Ì  SECRET TRUSTS

§        Refer to Amelia Fazira’s complete notes on this J

Ì   MUTUAL WILLS

§        Refer to the act of both of parties who arranging the prop. to be put in trust during their lifetime.

§        After this arrangement has been done, if one of the parties died, survivor shall not change the arrangement.

è  Case : Re Cleaver

Facts : A couple married in 1967 & made a mutual wills by saying that a subsidiary gift will be made upon the 3 children. But after the husband dead, the wife made a new will leaving the prop. to one child only.

Held : As the mutual will has been made during the lifetime of the parties, the wife was estopped from denying the will after the death of the husband.

Ì  CONTESTED INTEREST IN FAMILY HOME

§        This refer to arrangement done between the husband / wife or between the cohabitee with mutual promises, where the parties must prove that they own certain share within the prop., and as the relied on the promise, they suffered some detriment upon the breach of promise of the other party.

§        ‘COMMON INTENTION’ of the spouses is very important to be prove to show that both agree upon the arrangement that both suggested.

§        Besides, the parties also has to prove that they own share in the prop. via the ‘CONDUCT IMPUTE TO THE AGREEMENT’.

è  Case : Hammond v Mitchell

Held : It is an acceptable proof that the wife owned some share upon the prop. when she proved that she has looking after the house & the children since from the beginning.

è  Case : Eves v Eves

Held : Labouring work to enhance the prop. was accepted as conduct that show the party owned some part of the prop.

è  Case : Lim K. C.  v Chan P. Y.

Facts : The spouse in this case has long time separated from each other. The issue before the court was on the matrimonial home & a piece of vacant land.

Held : Court regarded both of the prop. to be owned equally by both they owned a common intention upon each other.

Ì  PROP. ACQUIRED VIA KILLING

§        The rule here is that, a murderer is not allowed to benefits from his/her crime by inheriting prop. of the victim.

è  Case : Re Crippen

Facts : Crippen killed her wife who died intestate. Later he died & it was found that he left some prop. to Ethel.

Issue : Whether Ethel can gained the prop. left by Crippen which he gained from his wife?

Held : No. Cannot be benefited from the crime.

Ì  Additional info : LIMITATION PERIOD

§        Sec. 2 Of Trustee Act – No limit to acquire a prop. from he hand of trustee. (Sabrina v Eugene)

§        Sec. 22 Of Trustee Act – No limit if the prop. is acquired by the trustee via fraudulent act.

§        Sec. 24 Of Trustee Act – Time limit will be stop if there is any disability on the related parties.