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Types of Trust

The document below was the subject of the Society of Will Writers Continuous Professional Development training for September 2014 and, whilst highly technical and informative and designed to educate the reader, you would be forgiven if you read it, or partially read it, and felt confused afterwards. However, I’m not trying to prevent the expansion of your knowledge as a visitor to my site so here it is, in it’s entirety. Enjoy.

Out of interest, I passed the test at the end with a score of 93%, in case anyone is interested.

Types of trust

Trusts are not always as simple as we would think when classifying them for taxation purposes. In the eyes of the law there are many different types of trust which exist and in this month’s cpd we intend to have a look at the different types of trust which exist to help widen our knowledge in regards to how trusts work within a document and outside of a document.

The different types of trust generally fall into several different types:

1) Express Trusts,
2) Statutory Trusts,
3) Resulting Trusts, and
4) Constructive trusts.

The first two of the above are fairly simple and straightforward.

Express Trusts

An express trust is simply a trust which is created in either in a will or made by deed and highlights; what’s in the trust fund, who the trust objects are and how the trust will work is given in the provisions of trust.

A typical example would be a ‘Life interest trust’ or a ‘Discretionary property trust’ which provides clear information with regards to how the trust will function. This is a classic example of an express trust.

Statutory Trusts

With regards to a statutory trust these are trusts that come into place by operation of law. A simple example would be a single parent dies without a will and leaves a minor as the sole beneficiary of the estate. In this case the rules of intestacy leaves a legacy to a child who is under the age of attainment and is therefore unable to take the legacy.

This would create what is known as bereaved minor’s trust which is a statutory legacy under section 71A of the Inheritance Tax Act 1984. However these types of trust are all operational by law.

Other Trusts

The two types of trusts which need consideration in greater detail in this paper are both ‘resulting trusts’ and ‘constructive trusts’. These trust arise under different circumstances and provide an equitable remedy when no other remedy can be provided.

Resulting Trusts

A resulting trust exists when a trustee holds some right or interest on trust for the person from whom he received that right or interest. On this view, what marks out a resulting trust as ‘resulting’ is a trustee who holds on trust for the person from whom he received the trust property. Under a resulting trust, the beneficial interest in the trust property has ‘jumped back’ (or in Latin, resalire) to the person from whom the trust property has derived.

There is no problem with understanding why the resulting trust arises as it arises because that was what was the original intention between A and B. Therefore a presumed resulting trust arises when the trust was created.

A classic example is A transfers the interest in land to B and A intends that the interest should be held on trust for him and the law gives effect to this intention.

It might be objected that such an explanation is inconsistent with s 53(1)(b) of the Law of Property Act 1925, which provides that:

‘a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust…’

As there will be no evidence of A’s intention that the interest in land that was transferred to B it should be held on trust for him, it might be argued that the courts would violate section 53(1)(b) if they gave effect to that intention.

But in a presumed resulting trust situation, A has no need to base his claim against B, but only to assert that B holds the property on trust for him, or provide an allegation that he intended that B should hold the property on trust for him.

All A has to do, to make out his claim, is to show that he transferred an interest in land to B and the courts will do the rest.
They will presume that A intended that B should hold that interest on trust for him, and then ask B to provide evidence that that was not A’s intention.

So, for example, in Hodgson v Marks (1971), Mrs Hodgson who was an elderly lady owned a house in which Mr Evans stayed as a lodger. Mr Evans expressed concerns that Mrs Hodgson’s son would force him out of the house on her death. Mrs Hodgson sought to allay those concerns by transferring the title to the house to Mr Evans to secure his tenure in the property.

It was understood by both Mrs Hodgson and Mr Marks would hold the house on trust for Mrs Hodgson, but nothing was ever put in writing. Mr Evans later sold the house to Mr Marks’. The Court of Appeal held that when Mrs Hodgson had sold the house to Mr Evans who held the property on trust for Mrs Hodgson.

In so holding the property, he did not act inconsistently with section 53(1)(b). In order to establish that Mr Evans held on trust for her, Mrs Hodgson did not need to rely on their agreement that he would hold the trust property for her (which agreement would have had to have been evidenced in writing in order to be relied on under s 53(1)(b)).

All Mrs Hodgson had to do was show that she had conveyed her house for nothing to a comparative stranger. The courts would then presume that Mrs Hodgson had intended Mr Evans to hold the property for her on trust, in turn this would switch the courts attention to Mr Evans and ask whether there was any evidence that she had intended to make an outright gift to him.

As no such evidence could have been offered, the courts found that the house had been transferred to Mr Evans to be held on trust for Mr Hodgson and this gave effect to that trust. And that’s exactly what happened in Hodgson v Marks. So, in effect a resulting trust was created over the house.

The real difficulty is with so-called ‘automatic’ resulting trusts. A number of different theories have been put forward as to why such trusts arise. In order to consider them, we need to understand how the decisions were made.

The first example was endorsed by Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC (1996). In this case B held property on trust for A. We presume that A intended that if B could not hold on trust for C, then they should hold the property on trust for A. The big problem with this theory is derived from the case of Vandervell v IRC (1967).

In the case of Vandervell, Mr Vandervell transferred 100,000 shares in his company to the Royal College of Surgeons (RCS). The idea was the RCS would receive premiums on the shares, and once they had received £150,000 in premiums (the exact amount they needed to endow a chair in Vandervell’s name), the shares would be purchased back from the RCS for £5,000.

The option to repurchase the shares was vested in a trustee company. At the time the shares were transferred and the option to repurchase the shares vested in the trustee company, Vandervell never said for whom the option to repurchase should be held on trust for.

It was suggested that it be held on trust for Vandervell’s children or on trust for the employees working in Vandervell’s company. Mr Vandervell was happy with either suggestion, but he did not say which option he wanted to go for. The House of Lords held that at the time the option to repurchase the shares was retained, it was held on trust for Mr Vandervell: therefore if A transfers property to B to be held on trust, and does not specify for whom, then it is to be held on trust for A.

The decision in Vandervell v IRC creates a problem for this first theory as to why resulting trusts arise in this situation because it’s not possible to presume in the Vandervell case that Mr Vandervell intended that the option to repurchase or for it to be held on trust for him.

Whatever else we know, we know for certain that the ‘last thing in the world’ Mr Vandervell wanted was the option to repurchase the shares or for it to be held on trust for him. That’s because if he retained an interest in the shares while they were held by the Royal College of Surgeons he would remain liable for tax on the premiums on those shares. And that’s what happened as a result of the decision in Vandervell v IRC.

The result was that Mr Vandervell became liable for all income tax on the dividends paid from the shares before they were repurchased, instead of the charity receiving relief on the income tax. It’s difficult to say that the resulting trust, rather than the option to repurchase the shares was giving effect to an intention in a presumption that Mr Vandervell had or wanted the option to repurchase the shares or for them to be held on trust for him.

In order to overcome this problem, in Re Vandervell’s Trust (No 2) (1974), Megarry J came up with a second theory as to why resulting trusts arise on the failure of a trust. This theory led to these resulting trusts being called ‘automatic’ which is a label that has stuck on them to this day, despite academic and judicial denials that such trusts arise automatically.

The reason why Megarry J called them ‘automatic’ was because he thought resulting trusts arising out of the failure of a trust which arose automatically, irrespective of the intention of the person attempting to set up the trust. They had to arise automatically, Megarry J thought, if we are to explain why there was a resulting trust in Vandervell v IRC. Megarry’s theory as to why resulting trusts arise on the failure of a trust helped to explain why he thought why they arose automatically.

On this theory, the reason why B ends up holding on trust for A is at the start of the story A has a legal and beneficial interest in the money which they wish to transfer to B. A successfully transfers the legal interest in the money to B, but is unsuccessful in transferring the beneficial interest to C. So the beneficial interest remains in A: you keep what you don’t give away. At the end of the story then, B has legal title to the money, and A has the beneficial interest and hey presto: B holds on trust for A. We can explain the trust in Vandervell v IRC in the same way.

At the start of the story, Vandervell has a legal and beneficial interest in the option to repurchase. He transfers the legal title to his trust company, but dithers over who should get the beneficial interest and ends up giving it to no one. So it therefore remains with him (he keeps what he does not give away). At the end of the story then, Vandervell’s trust company has the legal title and the option to repurchase, but Vandervell (horror of horrors from his point of view) still has the beneficial interest. Hey presto: the trust company holds the option to repurchase on trust for Mr Vandervell.

This seems very neat, but it suffers one major drawback. The problem is that the entire theory depends on us accepting that at the unencumbered legal owner of property has both a legal and beneficial interest in that property. All the unencumbered legal owner of some property has is legal title to that property. He is able to enjoy the property beneficially, true, but that is not because he has a beneficial interest in the property. It’s because no one else has a beneficial interest in that property that could stop the legal owner enjoying the property himself. Ironically in Vandervell v IRC itself refutes Megarry’s theory as to why resulting trusts arise on trust failure in cases like Vandervell.

‘A resulting trust…arises whether or not the transferor intended to retain a beneficial interest and in most cases he almost always does not want this right since it responds to the absence of any intention on his part to pass a beneficial interest to the recipient.’

Lord Millett might be taken to be arguing if B holds on trust for A because the beneficial interest in the money cannot vest in C, and A does not intend that B should have the beneficial interest. Given this, the only person who can have a beneficial interest in the money is A. However, the problem with this is that it assumes someone must have a beneficial interest in the money. The possibility that no one has a beneficial interest in the money, and B is left free to walk away with the money as its legal owner is overlooked.

Constructive Trust

Whereas a constructive trust can arise in a number of situations and acts to impose a rule of law, rather than being deliberately created by someone. Therefore we might talk of someone having a ‘constructive obligation’ if they have an obligation that was imposed on them by the law rather than deliberately assumed by them through entering into a contract.

“English law provides no clear and all-embracing definition of a constructive trust. Its boundaries have been left perhaps deliberately vague, so as not to restrict the court by technicalities in deciding what the justice of a particular case may demand.” (Edmund Davies LJ in Carl Zeiss Stiftung v Herbert Smith & Co [1969]

An example of a constructive trust is if A enters into a contract to sell land to B, then he will hold that land on a constructive trust for B. Is that trust imposed, or fictional? It looks real enough: if A goes bankrupt after having entered into a contract to sell Chancery House to B, B will be entitled to say to A’s creditors: ‘Chancery House is held on trust for me, and so can’t be used to help pay off the debts A owed you.’

It can be argued that the constructive trust over Chancery House arises out of A’s contracting to sell it to B. When we say that A holds Chancery House on trust for B, we don’t really mean that A holds on a real trust for B; all we mean is that A is liable to be ordered to convey his rights in Chancery House to B.

However, this argument does not seem to work. It’s true that the only reason why A is held to hold on trust for B is that his contract to sell Chancery House to B is specifically enforceable, and A is therefore liable to be ordered to handover Chancery House (or, more technically, the rights he has over Chancery House) to B.

The trust arises because A is liable to be ordered to hand over Chancery House to B. A’s liability to be ordered to hand over Chancery House to B does not arise out of the fact that A holds on trust for B. A would still be liable to be ordered to hand over Chancery House whether or not we said that he held Chancery House on trust for B.

In Westdeutsche Landesbank v Islington LBC (1996), Lord Browne-Wilkinson considered the situation where a thief steals a bag of coins. If the coins are mixed with other identical coins and then withdrawals are made from the mixture, the legal owner of the coins will be unable under the common law rules on tracing to find out where his coins have gone, and who has got them.

The rules on tracing used by the Courts of Equity to find out where trust money has gone were more flexible and allowed the beneficial owner of the money to trace his money even when the money was mixed with other money and withdrawals were made from the mixture. Those rules could only be taken advantage of where the money was held on trust. Lord Browne-Wilkinson held that the legal owner of the bag of stolen coins could take advantage of the equitable tracing rules to find out where his money had gone: ‘stolen monies are traceable in equity’.

The reason why is that he held that once the money was stolen it would be held on a constructive trust for the legal owner.

This constructive trust looks fictional. The reason why was identified by Rimer J in Shalson v Russo (2005) at [110]: ‘a thief ordinarily acquires no property in what he steals…’ If the thief has no title in the property, I cannot see how he can become a trustee of it for the true owner: the owner retains the legal and beneficial title.’

So if a constructive trust does arise when a thief steals a bag of coins, that trust can’t be a real trust as the thief doesn’t have anything that he can hold on trust for the owner. We must be just saying that he holds the bag of coins on trust for its owner in order to allow the owner to take advantage of the equitable tracing rules to find out where his coins have gone when they have been mixed. But even if we accept that the constructive trust that arises when a thief steals a bag of coins is fictional or not real and is intended to allow the owner of the coins to overcome the procedural limits on who can take advantage of the equitable tracing rules, Rimer J was still unhappy in Shalson v Russo at finding that the thief holds the bag of coins on trust for its owner:

‘The fact that, traditionally, equity can only trace into a mixed bank account (if the money being traced is trust money) provides an unsatisfactory justification for any conclusion that the stolen money must necessarily be trust money and therefore money which can be traced. It is either trust money or not. If it is not, it is not legitimate artificially to change its character so as to bring it within the supposed limits of equity’s powers to trace: the answer is to develop those powers so as to meet the special problems raised by the stolen money.’

However, Rimer J’s unwillingness to find that stolen money is held on a fictional trust for its owner is hard to reconcile with his later willingness in the same case to find that money will be held on constructive trust in the situation where.

If A and B enter into a contract as a result of A’s having made various misrepresentations to B, then B will be entitled to rescind that contract, to make it null and void, as though it had never existed. Until B rescinds the contract, it will be perfectly valid. So if B pays money to A under the contract, A will acquire title to that money. But his title will be voidable: if B rescinds the contract before the money passes into the hands of a bona fide purchaser, legal title to the money will revest in B. In Shalson v Russo, Rimer J agreed that if B rescinds the contract, and A’s misrepresentations were fraudulent, then A will hold any money that B has paid him under the contract (and which is still in A’s hands) on a constructive trust for B. This constructive trust also looks fictional.

Once the contract is rescinded, legal title to the money that A has paid to B will revest in B, so there is nothing A can hold on trust for B if the trust is supposed to really exist. It must be that in this case we are just saying that A holds on trust for B in order to allow B to take advantage of the equitable tracing rules to find out where in A’s holdings his money is now. Etherton J confirmed in London Allied Holdings Ltd v Lee (2007) that money paid under a contract induced by fraud that was later rescinded would be held on a constructive trust for the payor. But if we are willing to find a fictional trust in such a case, it is hard to understand why we wouldn’t in Lord Browne-Wilkinson’s stolen bag of coins case.

Where A pays money to B by mistake, unless the mistake is sufficiently fundamental, B will acquire title to the money that A has paid over to B. So in such a case it is possible for B to hold that money for A on a real trust. But will B ever hold that money on trust for A, and if so, under what circumstances? The answer to this question is still very unclear.

In Chase Manhattan v Israel-British Bank (1981) (where money was mistakenly paid over twice by one bank to another), Goulding J found that money that had been paid over by mistake was held on trust for the payor, thereby allowing the payor to trace and recover that money even though the payee was by then insolvent. In Westdeutsche Landesbank vIslington LBC (1996), Lord Browne-Wilkinson said two things:

The first was in the only way Chase Manhattan could have been correct is if we suppose (as was actually established in the case) that when the payee bank received the money that was mistakenly paid over to it, it was aware at the time it was received the money, or shortly afterwards, that the money had been paid over by mistake: ‘Although the mere receipt of monies, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust.

The courts are going to find that people who have been paid money by mistake have to hold it on trust for the people from whom they received that money, then they should do it via a remedial constructive trust, so that if A has paid money to B by mistake, then A has to go to court and ask the court to create and impose a trust over the money paid to B, thereby enabling him to get it back from B. This was suggested by Lord Browne-Wilkinson and thought to only be available:

‘where a defendant knowingly retains property of which the plaintiff has been unjustly deprived’ and in deciding whether or not to create and impose a trust over the property, the courts would tailor the trust ‘to the circumstances of the individual case, [so that] innocent third parties would not be prejudiced and restitutionary defences, such as change of position, [would be] given effect.’

Since Westdeutsche Landesbank was decided, the courts have rejected the above suggestion, holding that they have no jurisdiction to create and impose a trust over property, as opposed to recognising that property is already held on trust (either under an express trust, or what is known as an institutional constructive trust): see Re Polly Peck International (No 2) (1998).

This leaves the question that if A pays money to B by mistake, and while the money is still in B’s hands, B becomes aware that the money was paid by mistake, will B hold that money on a constructive trust for A?

This question has divided the courts since Westdeutsche Landesbank was decided. Boxv Barclays Bank (1998, Ferris J) and Shalson v Russo (2005, Rimer J at [118]) say ‘no’. On the other side, in Re Farepak (2006), Mann J after hastily reviewing the authorities (the case was decided under severe time pressure) and ruled the following:

‘If and in so far as it could be established that moneys were paid to Farepak by customers at a time when Farepak had decided that it had ceased trading, and indeed at a time when it had indicated that payments should not be received, then there is a strong argument for saying that those moneys would be held by the company as constructive trustee from the moment they were received.’

The reference to the company holding the money as ‘constructive trustee’ is unfortunate (as we will see, we shouldn’t equate the concepts of holding money on a constructive trust for someone with being a constructive trustee), but there is no doubt that Mann J meant here that the moneys were held on a constructive trust, and that that constructive trust was a real trust, giving the customers who had paid over money after the company had decided to cease trading a proprietary interest in that money which allowed them to recover that money in priority to the company’s huge number of unsecured creditors.

In the subsequent case of London Allied Holdings Ltd v Lee (2007), Etherton J noted that there had not been a chance for proper argument in Re Farepak over whether money paid by mistake to someone who was aware (at the time or subsequently) of the mistake should be held on constructive trust for the payor, and he declined to express an opinion on the issue.

For what it is worth, the Australian courts have been more enthusiastic about finding that a constructive trust arises in this kind of case. So, for example, in Wambo Coal Pty Ltd v Ariff (2007), the New South Wales Court of Appeal held that monies that had been paid by the plaintiff to the defendant in the mistaken belief that the plaintiff owed the defendant money were held on trust by the defendant for the plaintiff when the defendant became aware (or would have become aware had the defendant not refused to inquire whether the money was really owed for fear of finding out that it was not) that they had been paid by mistake. White J stated the following:

‘once the recipient is aware that, by a mistake, he has got something for nothing, a proprietary remedy is appropriate. The fact that the company is insolvent does not affect this conclusion. It would be an unwarranted windfall for the company’s creditors to share in the payment…’

The fact that the trust found in this case allowed the plaintiff company to recover the money they had paid in priority to the defendant’s other creditors shows that the trust in Wambo was real and not fictional.

It is well-established that if A, who owns Chancery House, assures B that he holds Chancery House on trust for them in some proportion, and B relies on that express assurance, then B will be able to argue that A holds some proportion of Chancery House on trust for them. That trust is a real trust: it is capable of binding third party purchasers of Chancery House, and allows B priority in the event that A goes bankrupt. That trust is also conventionally classified as ‘constructive’: as arising not because anyone intended that it should arise but because the law seeks to protect B’s reliance on A’s assurance by giving her an interest in Chancery House.

However, it has been argued that this trust is not constructive at all, instead it is express. It arises to give effect to the declaration of trust that A made when he assured B that he held Chancery House on trust for her. The fact that A’s declaration of trust might have been made orally is not a problem. While s 53(1)(b) of the Law of Property Act 1925 says that declarations of trust over land must be evidenced in writing if they are to be admissible in court, a defendant will not be allowed to rely on his provision to prevent the claimant entering into court evidence of an oral declaration of trust if doing so would allow the defendant to defraud the claimant in some way.

The argument is convincing though. One slight weakness is that a claimant who has relied on assurances that land is held on trust for them may end up, depending on the extent of their reliance, getting less of an interest in the land than they were told she had. See, for example, Eves v Eves (1975), where the claimant moved in with her boyfriend and he told her the house he owned was as much hers as his; but the Court of Appeal ended up holding that the boyfriend only held one quarter of the house on trust for her.

Let’s now look at the situations in which the law will hold someone liable as a ‘constructive trustee’ and try to make sense of what the courts mean when they use that phrase.

We can begin by making it clear that we should not equate holding property on a constructive trust for someone else with being a constructive trustee. The two concepts are entirely distinct. This assumes that by ‘constructive’ we mean ‘real, and imposed by law’, so not ‘fictional’.

For example, if A contracts to sell his house to B, it is clear that he does not owe B all of the duties that a trustee would normally owe his beneficiary (such as a duty carefully to invest it, or a duty not to make a gain for himself from the way he manages the trust property): see Englewood Properties Ltd v Patel (2005). Saying that someone who holds property on a constructive trust for someone else is a constructive trustee will just obscure that point.

There are two basic situations where someone will be held liable as a ‘constructive trustee’. The first falls under the heading of dishonest assistance and the best way to see such an example: A dishonestly assists B to commit a breach of trust, A will be held liable for the losses arising from the breach of that trust as a ‘constructive trustee’. It is clear that the word ‘constructive’ is being used here in its fictional sense. A is not being held liable because he really was a trustee, who has committed a breach of trust. He is being held liable as though he were a trustee of the trust of which B was a trustee, and is accordingly held liable for the losses suffered by the trust as a result of B’s breach of trust. It is for this reason that Lord Millett said in Dubai Aluminium Ltd v Salaam (2003) (at [141]-[142]) that someone who is held liable for dishonestly assisting a breach of trust: ‘is traditionally (and…unfortunately) described as a “constructive trustee” and is said to be “liable to account as a constructive trustee”.

But he is not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property… I think that we should now discard the words “accountable as constructive trustee” in this context and substitute the words “accountable in equity”.’

The next heading falls under the category of unconscionable and knowing receipt of trust property which is disposed of in breach of trust. While Lord Millett’s words undoubtedly apply to the first case of dishonest assistance where someone will be held liable ‘as a constructive trustee’ there is no doubt that he also meant his words also to apply to the situation where A receives £1,000 in trust funds that have been given to him in breach of trust, and A acts unconscionably in accepting those funds or retaining them while they are still in his hands.

The second situation that arises is that of ‘unconscionable receipt’ (previously known as ‘knowing receipt’) where someone will be held liable as a ‘constructive trustee’. Again it would be better to look at this through a practical example. C holds £100,000 on trust for B and C then gives his girlfriend, A, £1,000 out of those trust funds as a birthday present.

A has no idea that the money she is receiving is held on trust, and subsequently spends £250 of that £1,000 on dinner with her best friend in a quality restaurant. At that point, she learns that the money she received was held on trust for B. She doesn’t care: she goes on to spend the rest of the money on a luxury spa weekend at a hotel. In this situation, A will be held liable for £750 as a ‘constructive trustee’ on the basis that she was in ‘unconscionable’ or ‘knowing’ receipt of trust funds disposed of in breach of trust.

Lord Millett and many other commentators would argue that A is not being held liable because she is really a trustee. Instead, they see liability for ‘unconscionable’ or ‘knowing’ receipt as being a bastard cousin of liability in unjust enrichment. The idea is that when A receives the £1,000 that was held on trust for B, she is unjustly enriched at B’s expense.

As such, she should be held strictly liable to hand over the value of that money to B, though if she innocently dissipates some or all of the value represented by that money she will be entitled to a defence of change of position that will cut down her liability to the value that remained in her hands at the time she was no longer innocently in receipt of that value. Equity reaches the same result, but by a different route. Instead of making A strictly liable for the value of B’s money, subject to a defence of change of position, A is not held liable at all until she becomes aware that the money in her hands is B’s money, at which point she is held liable for the value of the remaining money in her hands.

One problem with this explanation of liability for unconscionable/knowing receipt is this: How can we say that A is unjustly enriched simply because she has got B’s money in her hands? We don’t say that someone who holds money on trust for someone else is enriched as a result, in fact being a trustee can be a real problem. And we don’t say that a thief who has stolen a bag of coins is enriched as a result, because he is liable to have those coins taken away if he is tracked down by the owner. So why should we say that a recipient of trust funds is enriched?

A more satisfying explanation of A’s liability for unconscionable/knowing receipt is suggested by Charles Mitchell and Stephen Watterson in their paper ‘Remedies for knowing receipt’ (in Mitchell (ed), Constructive and Resulting Trusts (2010)). (See also Peter Jaffey’s earlier paper, ‘The nature of knowing receipt’ (2001) 3 Trusts Law International 151.) They argue that when A is held liable as a ‘constructive trustee’, A is held liable because: (1) she really was a trustee of the £1,000 that she received from C; (2) after she had spent £250 of that £1,000, she knew enough about where the trust funds remaining in her hands to make it fair for the law to impose on her all the duties of a normal trustee, including a duty to preserve the trust funds in her hands; (3) she breached that duty when she spent the remaining £750 on a spa weekend; therefore (4) she is held liable for the loss suffered by B as a result of A’s breach of duty (that is, £750).

Seen in this way, liability for unconscionable/knowing receipt is not restitutionary at all, but compensatory. And someone who is held liable for unconscionable/knowing receipt is not held liable as though they were a trustee, but is held liable because they really were a trustee (albeit a trustee who has had all the duties of a normal trustee imposed on them, rather than having agreed to assume those duties).

But does the argument stand up? None of the steps in the argument seem to be flawed. On (1), A was obviously held the £1,000 that C gave her on trust for B, because she was not a bona fide purchaser of that money. But at the time she received the money, it would have been unfair to impose on her all the duties of someone who has agreed to be a trustee as those duties are very onerous. That changed when, after she spent £250 of the money she received from C, she discovered that that money was held on trust for B. At that point, she had a choice. She could have given the money back to B. But instead she chose to retain it. As a result, she became what is known as a trustee de son tort (or what Lord Millett in Dubai Aluminium Co Ltd v Salaam (2003) would prefer to call (at [138]) a ‘de facto’ trustee and was, in Lord Millett’s words, ‘treated in every respect as if [she] had been duly appointed.’ So (2) is made out. Once (2) is made out, steps (3) and (4) in the argument inevitably follow.

Again there is little in the way of authority cited for Mitchell and Watterson’s argument, just a few Australian cases and unchallenged assumptions in some English cases. No case is cited in which the point was argued and decided in favour of their view.’ This does not seem to be a very strong objection to Mitchell and Watterson’s view: legal argument would not progress very far or very fast if a lack of express authority in favour of an argument counted against its being accepted.

A given trust can be classified as ‘express’ or ‘constructive’ when we ask how it arose; it can be classified as ‘resulting’ or ‘non-resulting’ depending on for whom the trust property is held on trust. So it’s conceptually possible for a given trust to be: ‘express resulting’, ‘express non-resulting’, ‘constructive resulting’, or ‘constructive non-resulting’.

Because of s 53(2) of the Law of Property Act 1925, which says that ‘This section does not affect the creation of resulting, implied or constructive trusts’, many people think that when we should not refer to a trust as being ‘resulting’ if it is also ‘express’ in nature. But, as we will see, there are trusts that are routinely referred to as ‘resulting’ which some argue are also ‘express’ in nature.

Conclusion

The cpd paper has focused on the different types of trust and this should have allowed the reader to better understand how different trusts work and how they arise, be it express, statutory or what is known as a resulting or constructive trust.

This paper has explained some of the classical definitions of trusts and by examining the cases in the paper we can see how the courts would view certain circumstances and we can actually see how the courts determine each matter.

This will provide the member a broader sense of knowledge of trusts and how they can arise.

Business in Wills

Business in Wills

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