CONSTRUCTIVE TRUSTS

Introduction

 Its existence does not depend on the intention of the parties. It arises through the
operation of law. It is a device by equity justifying its intervention as against an
accountable person where it would be inequitable were the position otherwise. It means
that it is a device to put everything in justice.
 Trust of this nature arise by operation of law.
 Difference between resulting trust and constructive trust is that the resulting trust
involves a claim of an equitable owner to assert a continuing proprietary interest in his
own property while the constructive trust may be imposed in appropriate circumstances
where a breach of fiduciary obligation has given rise to an equity between the parties.
Constructive trust is created by looking at the case after the event has occurred.

The Nature of Constructive Trusts

A characteristic feature of constructive trust is that its existence is not dependant on the
parties’ intention, either actual, inferred or presumed. Trusts of this nature arises by the
operation by law.
Takako Sakao v Ng Pek Yuen
- A constructive trust is imposed by law irrespective of the intention of the parties. And
it is imposed only in certain circumstances. What equity does in those circumstances
is to fasten upon the conscience of the holder of the property a trust in favour of
another in respect of the whole or part thereof.
Snell Equity
- The primary question is whether the defendant has committed the kind of wrong
which is recognized in the authorities as giving rise to constructive trust.
Thus, constructive trust may be viewed as a device under which equity will intervene so as to
create a trust relationship between the parties in order to make a person accountable for the
trust to prevent any unfairness or injustice.
2 types of constructive trust

Institutional constructive trust

 Such trust is through the operation of law. It relates to the function of the courts to
declare that such a trust has arisen in the past. The court is to reinforce the relationship
exists but not the one who creates the relationship.

 Institutional constructive trust relates to the function of the courts in declaring such a
trust has arisen in the past. In Westdeutsche Landesbank Girozentrale v Islington
LBC, it stated that a constructive trust arises automatically and it is to be construed
retrospectively from the time of the circumstances which give rise to it. This means that
the liability of a person to act as a constructive trustee begins from the time the trust is
breached.

Remedial constructive trust

 This constructive trust does not exist. It may not have any relationship at all. The court
have to come out with something such as remedies to help the plaintiff to get back the
property. The court would need to create a constructive trust in order to help the plaintiff
get back what is owned by him.

 Remedial constructive trust has no prior existence. The concept is that there are some
assets in the hand of the defendant and the equity will impose obligation on him to hold
the property for the benefit of another.

When a constructive trust arises :

1. Breach of Fiduciary relationship

 A fiduciary relationship is the one exist between a trustee and a beneficiary. Trustee is
under a duty to act for the benefit of those equitably entitled under the trusts, he or she
will not be allowed to abuse the fiduciary nature of his or her office for personal gain and
advantage.
 Bray v Ford it said that it is an inflexible rule of Court of Equity that a person in a
fidicuary position is not, unless otherwise expressly provided, entitled to make a profit,
he is not allowed to put himself in a position where his interest and his duty conflict.
There is a danger of the person holding a fiduciary interest being swayed by interest
rather than duty, and thus prejudicing those he is bound to protect.
  In Reading v AG it provides that the fiduciary relationship would arise where one person
entrusts the other to deal with the property in order to benefit the one who entrusted him.
The party which is relied on must act in the best interest of the plaintiff. The position of
confidence and loyalty must be created in the fiduciary relationship.
 Re Goldcorp Exchange Ltd held that an ordinary business relationship where the
parties act independently in considering their own interest did not fall within a fiduciary
relationship as there is no considerationThey have a contractual relationship but not a
fiduciary relationship.
 In the case of Boardman v Phipps, Boardman is a solicitor and he is a trustee of a trust
and this particular trust hold 8,000 out of 30,000 share of a company. The company is
not doing well and he is not happy with the company. He personally purchased the
remaining share so that he can control the company. He did well and both the trustee
and the beneficiaries earned the profits. It was held that even though there is no
evidence of bad faith on behalf of him, he is still accountable for the profits he made.

A solicitor to a trust owned some shares in a company. Later he bought some shares
without the consent of the beneficiaries and he benefited from the information received
in a fiduciary position and he had made some personal profit. There was no conflict of
interest because he was not prohibited by the trust to purchase shares. It was held that
he was accountable for the profit and was deemed to be holding the shares as a
constructive trustee.

 Keech v Sandford is an example of institutional constructive trust. In this case, the

trustee took a lease for his personal benefits after the lessor refused to renew the lease
for the trust of which the beneficiary was an infant. A trustee should not make any profits
and benefits which is out of the trust. The trustee was held to be a constructive trust and
was accountable to the trust for the profits and benefits that had been made. Then the
profits and benefits that he earned should be go back to the settlor or the beneficiaries.
Strangers as constructive trustees

 The person is not a party to a trust. There is no fiduciary relationship. This arises where
trustees improperly allow trust property to come into the hands of a third party (stranger
to the trust)
 According to Halsbury’s Laws of Malaysia, it states that stranger is a person who, not
being a trustee and not having authority from a trustee, takes upon himself to
intermeddle with trust matters or to do acts characteristic of the office of trustee make
himself a trustee de son tort, that is a trustee by virtue of his wrongdoing, or, as such
person is also called, a constructive trustee. The responsibility which attaches to a
trustee may extend in equity to a person who is not properly a trustee, if he either makes
himself a trustee de son tort or actually participates in any fraudulent conduct of a
trustee to the injury of the beneficiaries.
 The liability of the stranger :
 No liability – bona fide purchaser for value without notice
 A beneficiary may have a proprietary remedy – the stranger who has acquired
the trust property bona fide without notice but has not given value.
 Stranger as a constructive trustee – to hold the property on trust and be
personally accountable for any loss to the trust.
 A stranger in the 3rd circumstances is known as a trustee de son tort meaning ;
 Not appointed a trustee but intermeddles in the trust by taking it upon himself to
administer the trust
 May be subject to the same liability as if he is an express trustee.
 The strangers will generally assume the same liabilities as validly appointed trustees but
without the same powers .
 Mara v Brown, what constitutes a trustee de son tort? It appears if one, not being a
trustee and not having authority from a trustee, takes upon himself to intermeddle with
trust matters or to do acts characteristics of the office of trustee, he may thereby make
himself what is called in law a trustee of his own wrong i e a trustee de son tort, or, as it
is termed, a constructive trustee
 Jasmins Trustees Ltd v Wells & Hind, the trustees de son tort although may have the
same liability to the beneficiaries as valid appointed trustees, they do not have the same
powers, for example, to appoint new trustees, as those given, whether by the trust
instrument or by statute to validly appointed trustees.
 A person will become a constructive trustee due to his wrongful act.
 Barnes v Addy states that if a stranger is assisting a trustee to do certain things in the
administration of the trust, it does not make a the stranger a constructive trustee unless
the stranger receive and become chargeable with some part of the trust property or they
assist with knowledge in a dishonest or fraudulent design on the part of the trustee. No
 knowledge, the stranger would not be held as a constructive trust. Fulfilled one of the
elements, there is a constructive trust.

Two types of liability under strangers as a constructive trust ( Barnes v Addy )

Accessory liability – knowing assistance

 It refers to helping someone in breach of a trust. Knowing or dishonest assistance.

 Lord Selborne : A person would be liable as a constructive trustee if he had knowingly
assisted in a dishonest and fraudulent design on the part of the trustees.
 Baden Delvaux and Lecuit v Societe Generale pour Favouriser le Developpement
du Commerce et de l’lndustrie en France SA
 provides the four elements which must be established if a case is to be brought
within the category of ‘knowing assistance’. These includes the existence of a
trust, the existence of a dishonest and fraudulent design on the part of the
trustee of the trust, the assistance by the stranger in that design and the
knowledge of the stranger. This four elements must be established if not the
stranger would not be held as constructive trustee.
 There were 5 categories of knowledge, namely :
(i) Actual knowledge
(ii) Wilfully shutting one’s eyes to the obvious
(iii) Wilfully and recklessly failing to make such inquiries a an honest and
reasonable man would make
(iv) Knowledge of circumstances that would indicate the facts to an honest
and reasonable man
(v) Knowledge of cricumstances that would out an honest and reasonable
man on inquiry
 The court normally looks at the objective of the mind. When someone senses something
wrong, but he does not take any reasonable steps to make any inquiry, he is still liable
as a constructive trustee.
 In the case of Royal Brunei Airlines Sdn Bhd v Tan, Tan was the MD and principal
shareholder of a travel company, BLT Sdn Bhd, and his wife was the other director and
shareholder. BLT was an agent of Brunei Airlines and BLT was required under the
agreement to store the money received in a separate account. This was x done, the
money was transferred into BLT’s normal account and was used for ordinary business
 purposes. Subsequently, BLT falled into arrears in respect of its arrangement with
Borneo Airlines.
It was held that the money paid to BLT was held on trust in favour of the airline, Tan was
liable as a constructive trustee since he had acted dishonestly in which he caused or
permitted his BLT to use the money in a way he knew was x authorised by the trust.
(had referred to Baden Delvaux to infer the mental state of the Tan)
Principle: Honesty is an objective standard. A person is dishonest if he fails to act in a
manner in which an honest person would act in such circumstances. If the trustee has
acted dishonestly and the 3rd party knows that and assisted the trustee, then he is
liable.
Dishonesty is a necessary ingredient of accessory liability. It is also a sufficient
ingredient. A liability in equity to make good resulting loss attaches to a person who
dishonestly procures or assists in a breach of trust or fidicuary obligation. It is not
necessary that the trustee or fidicuary was acting dishonestly, although this will usually
be so where the 3rd part who is assisting him is acting dishonestly.
 Lne Network Systems (Asia) Sdn Bhd v Loi Chew Ping, in order to establish
accessory liability in a case of dishonest assistance, the essential ingredient is
dishonesty or conscious impropriety. This is an objective moral standard judged in the
light of what the person actually knew at the material time. In other words, it will not be
open to a defendant to escape liability by simply saying that he saw no wrong in his own
behavior.
 In Twinsectra v Yardley T, the appellant sued Y,S and L for breach of trust. S was a
solicitor from a firm and S was the one who negotiated with T in order to get a loan of
1million. T agreed to lend the money with attached conditions where the loan money
must be retained by the law firm until the actual acquisition occurred and the loan money
only used for land acquisition. The negotiable was successful but the parties did not
follow did not conditions specified when S gave the money to L and L subsequently lend
the money to Y. Later the loan was not paid and T brought an action against three of
them for breach of trust. The court held that there was a constructive trust. The court
stated that L was acting dishonestly as he deliberately shut his eyes when he knew that
the money should not be transferred to Y. He was held liable for accessory liability. Lord
Hutton stated that in order to held a person liable for accessory liability, the person has
to act dishonestly by the ordinary standards of reasonable and honest people and have
been himself aware that by those standards he was acting dishonestly.
Recipient liability – knowing receipt and dealing

 He did not do anything in the breach of trust but he received the trust property as a result
of breach of trust.
 A ‘receipt’ may comprise the following situations
i. One knowingly receives property in breach of trust
ii. One receives trust property without notice of the trust and subsequently deals
with it in a manner inconsistent with the trust of which he has become cognizant
iii. One receives trust property knowing it to be such, but without breach of trust, and
subsequently deals with it in a manner inconsistent with the trusts.
 For i and ii, the claimant must show :
 A disposal of his asset in breach of fidicuary duty
 The beneficial recipt by the defendant of assets that are traceable as
representing the assets of the claimant
 Knowledge on the part of the defendant that the assets he received are traceable
to a breach of trust or fidicuary duty.
 For iii, the stranger is usually an agent of the trustee or receives the trust property
lawfully but then misappropriates it or otherwise deals with it in a manner that is
inconsistent with the trust.
 In Eagle Trusts plc v SBC Securities Ltd, in a knowing receipt, it is only necessary to
show that the defendant knew that the moneys paid to him were trusts moneys and of
circumstances which made the payment a misapplication of them.
 Karak Rubber Co Ltd v Burden, The general law is that a constructive trust may be
imposed on a stranger who has received the property with actual or constructive notice
that it is a trust property transferred to him in breach of trust.
 Actual knowledge or constructive knowledge? In the case of Re Montagu’s Settlement
Trusts, in breach of trust, the trustees transferred various chattels belonging to the
deceased ninth Duke to the tenth Duke. The tenth Duke subsequently sold many of
them. The eleventh Duke, after the tenth Duke's death, claimed the tenth Duke was
 personally liable for the value of the chattels he received and sold. in considering
whether a constructive trust has arisen in a case of knowing receipt of trust property, the
basic question is whether the conscience of the recipient is sufficiently affected to justify
the imposition of such a trust. This primarily depends on the knowledge of the recipient,
and not on notice or him. For this purpose, knowledge is not confined to actual
knowledge, but includes namely actual knowledge that would have been acquired but for
shutting one’s eyes to the obvious or wilfully and failing to make such inquiries as a
reasonable and honest man would make. In such cases, there is a want of probity and it
is justified for imposing a constructive trust.
 Agip (Africa) Ltd v Jackson, the first category of knowing receipt cases is concerned
with the person who received for his own benefit trust property transferred to him in
breach of trust. He is liable as a constructive trustee if he received it with notice, actual
or constructive, that it was trust property and that the transfer to him was a breach of
trust, or if he received it without such notice but subsequently discovered the facts.
 Polly Peck International plc v Nadir (No.2) is a case concerned about a limited
company who actually misapplied the fund. Looking at the liability of the bank, to what
extend they make the bank liable. For a bank to be sued for a breach of trust after
received of funds, it was not necessary to show that the bank knew of the fraud, but
rather that’s it knows the funds were trust funds and they were being misapplied.
 In El Ajou v Dollar Land Holdings plc, Mr Murad is actually an investment manager
who held the cash of El Ajou’s money but he was bribed and as a result, he used the
money to invest in a fraudulent share selling operations with 3 Canadians. They made
some profits from the fraudulent share. Whether the knowledge of one of its director can
be treated as having in the knowledge of the company. It was sufficient that the director
has management and control so far as the receipt of the fraud was concerned, and
having made the arrangement for the receipt and disposal of the money. The director
was informed and aware of the fraud, the company is deemed to have knowledge about
the fraud.
 So, what is the required state of mind? In Bank of Credit and Commerce International
(Overseas) v Akindale, Nourse Lj stated that there is no need for categorization. All that
is necessary is that the recipient’s state of knowledge should be such as to make it
unconscionable for him to retain the benefit of the receipt. He propounded this as a
singes test of knowledge for knowing receipt. In commercial transaction, actual
knowledge is required.
  Lne Network System (Asia) Sdn Bhd v Loi Chew Ping & Ors, to enforce a
constructive trust on basis of knowing receipt, the plaintiff must show that
1. A disposal of his assets in breach of fiduciary duty.
2. The beneficial receipt by the defendant of assets which are traceable as
representing the assets of the plaintiff.
3. The knowledge on the part of the defendant that the assets he received are
traceable to a breach of fiduciary duty.
In the case of knowing receipt, the recipient’s state of knowledge must be such as to
make it unconscionable for him to retain the benefit of the receipt.

Protective Trusts
 Illustrations
 A gift to X for life or until he becomes bankruptcy
 A gift to X for life on condition, that if become bankruptcy, his interest shall
determine.
 A distinction, in law, must be drawn between
 Determinable interest : the determining event is incorporated in the limitation so
that the interest automatically, and naturally determines if and when the event
happens
 Grant upon a condition subsequent : an interest is granted subject to an
independent proviso that the interest may be brough to a premature end if the
condition if fulfilled.
 A protective trust is a kind of discretionary trust with the purpose of conferring a degree
of protection against passing to trustee, for example, in bankruptcy.
 It involves the giving of a determinable life interest with a gift over the occurrence of
specified events.
 Its mechanism : trustees are directed to pay income to the life tenant until he should sell
his right to trust income or until he becomes insolvent then his interest ceases and the
income would be held on discretionary trusts for the beneficiary and his family.

Determinable Interest v Conditional Interest

  The words such as ‘until’ and ‘so long as’ usually denotes the existence of a
determinable interest ;
i. X can use my car until he buys one himself whereupon the car goes to his
wife Y
ii. X can use my car until he changed his nationality whereupon the car goes to
his wife Y
iii. X can use my car until either he or I become bankrupt, whereupon the car
goes to his wife Y
iv. X can use my property until he decides to alienate it whereupon the property
passes to his wife Y.
 The use of words such as ‘but if’ and ‘when, if ever’ generally denotes the existence of
condition interest
i. X can use my car on condition that he does not buy a new one, if he does
but the earlier car goes to his wife, Y
ii. X can use my property on condition that he does not change his
nationaly, in which case, it goes to his wife, Y
iii. X can use my car on condition that if he becomes bankrupt, then the
property in the car is to go to Y
iv. X can use my property on condition that he does not alienate it , if he
does so, it goes to his wife, Y
 Section 38 of the Trustee Act 1949
Protective Trusts – Determining Events
 Burroughts v Fowler
 Re Gourju’s Wills Trusts
 Re Baring’s Settlement Trusts
Agreement to create secret trusts

 A communicates intention to B and B accepts that obligation either expressly or by

implication. A has failed to comply with the requirement of Wills Act, but to allow B to
take beneficially at the expense of C would be to allow statute to be used as an
instrument of fraud.
 The trustee-beneficiary exists outside and independently of the will. If a half secret trust,
the trust should be regarded as a constructive trust as such trust does not be in written
form but is operated through operation of law.
Mutual wills

The basis of mutual wills is this; two persons agree to make wills on identical terms in
favour of each other with the remainder to the same ultimate beneficiary.
 The scenario is that X and Y make separate wills leaving property to each other and
both of them provide for C as the ultimate beneficiary. If X dies first, the property of X will
vest in Y who will hold this property as well as his own for the benefit of C.
 Conceptual difficulties may attach to the question whether the said arrangement gives
rise to an implied or a resulting trust: one option is to conclude that from the moment X
dies Y holds all the combined properties on a constructive basis and Y subsequently will
not be permitted to revoke his will or execute a codicil so as to interfere with the terms of
the trust.
Wills that have identical terms in the wills, the latest surviving party is not entitle to
change the wills.
Re Good Child deceased provides that mutual will is a technical legal device requiring
an intention to form a binding agreement and that this often differs from the "loose moral
obligation" presupposed as binding by the layman.
 In Re Oldham , husband and wife had made a mutual wills in similar form, the court held
that the two wills were made identical terms does not necessary connotes any
agreement beyond that of so making them. Two wills with identical terms does not
necessary make them a mutual will. The most important thing to create a mutual will, it
must establish agreement between the party and they are bound by the agreement and
could not change the will. The court concluded that there was no evidence to suggest
that a mutual will between a husband, since deceased, and wife was intended in all
circumstances to be irrevocable.
 Re Cleaver, The court stated it is necessary to prove that there was an agreement that
none of the parties would revoke the mutual will. There must be clear and satisfactory
evidence of an agreement to this effect. The evidence adduced in this case was
sufficient to lead the court to conclude that there as a ‘clear and satisfactory evidence
that the testator and testatrix did make an agreement which they intended should
impose mutual legal obligation.
 Re Dale, Morritt J held that the principle of mutual wills is not negative by the fact that
the survivor does not benefit from the will.
Other instances

Vendors of land

 Normally in breach of contract, monetary compensation would be awarded. There are

circumstances when it is inadequate, equity will come in, to make sure other party give
effect to contractual terms.
 In Wong Siew Choong Sdn Bhd v Anvest Corporation Sdn Bhd, the appellant
vendor becomes in equity the trustee for the respondent purchaser of the said land sold,
and the beneficial ownership passes to the purchaser subject to the appellant’s right to
purchase money, a charge or lien on the said land for the security of the purchase
money and a right to retain possession of the said land until the purchase money is paid
by the respondent. The beneficial interest passes to the purchaser once he pays the
deposit, thus the seller has the obligation to effect the whole transaction. Whatever the
legal title he hold, will made him a constructive trustee.
Acquisition of property by killing

 Consideration of public policy has led to the principle that a murderer is not to gain or
inherit the victim’s property.
 Re Crippen states that a constructive trust was imposed in favor of those next entitled
under the wife’s intestacy thus denying the murderer husband of his entitlement.