It is a new year and people are making resolutions, setting new goals, seeking out new opportunities and so on. We all want to advance ourselves in our careers, business and personal lives. I encourage people to advance and grab new opportunities with both hands but in doing so be mindful of the relationships involved. You don’t want to burn bridges or breach contracts, both of which are of value to your future success.
Being mindful of the relationships involved and how you break away from one situation to take advantage of the next are important because with certain relationships, your advancement may not only create bad blood, it may also create a trust with you being trustee of the advantages you gain for the benefit of the person(s) in the relationship you left behind. The trust that you create is known as a constructive trust.
I have written previously about trusts as a device by which property can be transferred to beneficiaries. With such trusts there is an express intention to create a trust. A constructive trust is however different as there is no such intention. The constructive trust is a remedial device imposed by equity to prevent a person from benefiting from fraudulent conduct or taking unfair advantage of a fiduciary position. What is important with constructive trusts is that fraud or mala fides are not necessary to impose a trust, what matters is that a fiduciary relationship exists and that relationship has been used to gain an unfair advantage.
Nolo’s Plain-English Law Dictionary defines a fiduciary relationship as one “… in which an individual places complete confidence, trust, and reliance in someone who has a fiduciary duty to act for the individual’s benefit. A fiduciary relationship need not be formally or legally established; it may be assumed where the fiduciary has superior knowledge and training compared to the person whose affairs the fiduciary is handling.” There are certain recognised categories of fiduciary relationship and they include the relationships between: trustee and beneficiary; principal and agent; mortgagee and mortgagor; lawyer and client; accountant and client; company directors and the company; partners and co-partners; and public servants and government. This list is not exhaustive as the courts have left open the definition of a fiduciary relationship so that outside of these established categories, the particular facts and circumstances of a relationship may justify the imposition of fiduciary duties and a fiduciary relationship. I have written before that the law of equity and trusts is founded on good conscience, that which is fair, just and equitable, rather than the letter of the law.
In the report on Fiduciary Duties of Investment Intermediaries ( EWLC 350) the English Law Commission stated that test of determining the existence of a fiduciary relationship is based on a legitimate expectation, grounded on discretion, power to act and vulnerability, that one party will act in another’s interest. Fiduciaries have duties imposed on them to ensure that they act for the benefit of the relationship, avoid conflicts of interest and generally act in good faith.
I will share a few cases to illustrate the circumstances where the courts have imposed a constructive trust and where they have declined to do so.
The remedial principle of constructive trusts goes back to the 18th Century. The case of Keech v Sandford ( EWHC Ch J76) is often cited as the starting point. That case, also known as the Rumford Market case, involved a trust relationship where the lease of a market was the trust object for the benefit of an infant. Before the expiration of the lease, the trustee applied to the lessor for a renewal, for the benefit of the infant, and the lessor refused to renew the lease to a minor. The trustee then had the lease assigned to himself. When the minor beneficiary came of age, he sued for the lease to be assigned to him and for the trustee to account for the profits made on the lease. Even though there was clear evidence to show that the lessor had refused to renew the lease for the benefit of the infant, the court set down a very strict approach, the Lord Chancellor saying,
“I must consider this as a trust for the infant; for I very well see, if a trustee, on the refusal to renew, might have a lease to himself, few trust estates would be renewed to cestui que use; though I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use. So decreed, that the lease should be assigned to the infant, and that the trustee should be indemnified from any covenants comprised in the lease, and an account of the profits made since the renewal.”
In Gabbett v. Lawder( 11 L.R. Ir. 295) the administrator of an intestate estate held certain lands under a lease as trustee. The fee simple reversion was offered to the administrator of the estate, but he declined to purchase it at the offer price. He later purchased the reversion for himself at an auction where it was offered at a lower price. Chatterton V.C. stated, “It has long been settled by a current of authorities that a trustee of a leasehold interest who obtains a renewal of the lease … cannot hold the interest he so acquired for his own benefit, but as a constructive trustee of it …”The administrator therefore became a constructive trustee of the reversion for the persons beneficially entitled to the personal estate of the deceased, although he was entitled to the costs incurred by him in purchasing the reversion.