A Legal Overview About Constructive Trust

What is a Constructive Trust 

A constructive trust is a remedy imposed by a court to correct unjust enrichment or prevent fraud. It happens when one party holds legal title to an asset (such as shares or real estate) but has a moral or equitable obligation to transfer or share it with another. This obligation can be based on factors such as a promise, expectation, a relationship of trust, or unjust enrichment. 

Key characteristics of a constructive trust include: 

• Court imposition – Constructive trusts are not created by agreement between the parties but are imposed by a court to prevent injustice. 

• Equitable remedy – They are based on principles of fairness and justice, rather than strict legal rights. 

• Rectification of unjust enrichment – Constructive trusts are used to prevent one party from unfairly benefiting at the expense of another. 

• Moral or equitable basis – The obligation to transfer property is based on factors other than legal title. 

Another type of remedy imposed on individuals who don’t hold legal title to property that is similar to a constructive trust is a resulting trust.  

While constructive trust is created by a court to correct a wrong, the resulting trust is based on the presumed intention of a person. For instance, your parents are transferring land title to you without a clear intention of whether this is an inheritance or a gift – or if they transferred it to you to avoid paying taxes. 

If you believe you’re entitled to a share of an asset and want to protect your rights, contact us for legal advice. 

Most Common Types of Constructive Trust 

There are different types of constructive trusts. Some of the most common ones include the following: 

Property disputes – If a property owner dies without leaving benefits like property or assets to a person who has made contributions to the property, the court may impose a constructive trust to ensure they receive some form of reward from the estate of the deceased. 

De facto relationships – A constructive trust may be imposed to determine ownership interests in property when couples live together without being married. 

Business Partnerships – Constructive trusts can be used to determine ownership interests in business partnerships when there is a disagreement about the partners’ contributions. This is especially important in situations where the partners have not formally documented their agreement or where the agreement is ambiguous. 

Fiduciary Relationships – Constructive trust can arise in situations where one party owes a fiduciary duty to another, such as in a trustee-beneficiary relationship or an agent-principal relationship. 

Unconscionable Conduct – Unconscionability is a legal concept that allows courts to intervene in contracts or other legal relationships where one party has taken unfair advantage of another. While it is a broad concept, it can be applied in various contexts, typically in situations where one party has exploited the other party’s vulnerability, deception, or undue influence. 

How to Prove Constructive Trust 

The burden of proof for enforcing constructive trust will depend on the person claiming to be at a disadvantage. They will need to show that there is unconscionability, common intention, and detrimental reliance. A lack of any of these elements in building their case for the claim may result in the dismissal. 

Unconscionability requires that the act will be done against the norms of society and is not done in good conscience, leading to unfair advantage. 

For example, a business partnership becomes unbalanced when one partner neglects his duties and refuses to renegotiate the profit-sharing agreement despite the other partner’s more significant contributions. 

To prevent an unfair outcome, the court might impose a constructive trust on the negligent partner’s share of the profits, requiring him to hold them in trust for the effective partner’s benefit, and ultimately transfer them to her. This would ensure a fairer distribution of profits based on each partner’s contributions. 

Common intentions between the parties should show that they have beneficial ownership of the property. This intention can be based on the words, conduct, or circumstances of a case and must be clear and unequivocal. It cannot be based on mere speculation or hope. Common intentions don’t necessarily need a written contract or agreement, so guidelines for claiming constructive trust are more flexible.  

Detrimental reliance occurs when the beneficiary is at a disadvantage and suffers a loss because of their reliance on a promise or understanding with the other party. 

For example, an office worker is offered a job at a different city. The newly-hired employee resigns from their current job and moves to a new city in reliance on that offer, only to have the offer rescinded. The person may have a claim for detrimental reliance because the employee acted to their detriment – they lost their existing job, their home, and incurred costs related to moving. If the company had not made that promise, the person might not have taken any of those actions. 

Equitable Defences Against Constructive Trust 

Other than the absence of the elements indicated above, there are other defences that a party may raise to avoid the imposition of the trust: 

• Equitable estoppel can be a defence to a constructive trust if the legal owner can show that the beneficiary has represented or implied that they will not assert their beneficial interest, and the legal owner has relied on this representation. 

• Laches can be a defence if the beneficiary has delayed in bringing their claim, and this delay has caused prejudice to the legal owner. This delay must be unreasonable, and the defendant must demonstrate that they have suffered prejudice as a result. 

• Clean hands doctrine is a defence to a constructive trust if the beneficiary has engaged in wrongdoing or misconduct in relation to the property. However, it is important to note that the wrongdoing must be material and relevant to the claim. 

These are just a few examples of equitable defences, and the specific requirements may vary depending on the jurisdiction and the circumstances of the case. If you believe you have a claim or defence related to a constructive trust, consult with an attorney to discuss legal options. 

Landmark Case: Muschinski v Dodds 

To better understand how constructive trust could play out, here is a real-world example: 

The case of Muschinski v Dodds shows a property dispute between a de facto couple involving unconscionable conduct. This case established the principles for common intention constructive trusts in Australian property law. 

The case involved Muschinski and Dodds, a de facto couple who purchased a property together. Muschinski contributed to the purchase price and made significant improvements to the property. However, the legal title was held solely under the name Dodds. 

When the relationship ended, Muschinski sought a declaration that she had a beneficial interest in the property. The court found that there was a common intention between the parties and that Muschinski would have a beneficial interest in the property based on her contributions and reliance on the common intention. The court imposed a constructive trust in her favour, recognising her equitable interest in the property. 

This case is significant because it established the requirements for establishing a constructive trust based on a common intention, demonstrating the flexibility of the remedy and its ability to address situations where there is no formal agreement or declaration of trust. 

Key points from the case:

• Common intention. The court recognised that a constructive trust could arise if there is a common intention between parties regarding the beneficial ownership of property, even if there is no formal agreement or declaration of trust. 

• Detrimental reliance. The beneficiary must have acted to their detriment based on this common intention. In this case, the female party contributed to the purchase price of a property and made significant improvements to the property, relying on the common intention that she would have a beneficial interest in the property. 

• Unconscionability. The court found that it would be unconscionable for the male party to deny the female party’s beneficial interest in the property, given her contributions and reliance on the common intention. 

Seeking Legal Advice Regarding Constructive Trust 

You should always consult a lawyer over legal matters, especially in complex cases like a constructive trust claim. A lawyer will help you understand your rights and obligations. They can also assist you in gathering evidence, negotiating settlements, and representing you in court. 

To find the right lawyer to represent you, consider these factors: 

• Expertise – Look for a lawyer with experience in the specific area of law that is relevant to your case. To help with your constructive trust claim, you will want to consider those with expertise in property law, family law, or estate disputes.  

• Reputation – Ask for referrals from friends, family, or colleagues. You can also check online reviews and ratings. 

• Location – Consider the lawyer’s location and whether they have experience handling cases in your jurisdiction. You can also opt for someone who is located in the same city or region as you, as they will be more familiar with local ordinances and state laws. 

• Fees – Discuss the lawyer’s fees upfront and get a written agreement outlining their terms and conditions. 

A Look Ahead to Constructive Trust 

Constructive trusts are imposed by courts to rectify unfair situations or prevent unjust enrichment. They differ from resulting trusts, which arise from presumed intentions. Constructive trust claims can arise in different contexts. It can involve property disputes, de facto relationships, business partnerships, fiduciary relationships, and unconscionable conduct. 

To establish a constructive trust, a claimant must typically prove unconscionability, common intention, and detrimental reliance. However, parties may raise defences such as equitable estoppel, laches, or the clean hands doctrine to avoid the imposition of a constructive trust. 

Given the complexity of constructive trust claims, seeking legal advice is important. 

A qualified attorney can provide expert guidance, assess the merits of a case, and navigate the legal processes involved. 

If you believe you may have grounds for a constructive trust claim, contact our team of experienced lawyers. We can provide a thorough evaluation of your case and guide you along the process.