Remedial and Institutional Systems

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Brief 102317 Delivery Date: 13/08/2005 Title: “The remedial constructive trust has taken root in the United States and Canada: it is unlikely to do so in England” – Millet LJ in Restitution and Constructive Trusts 1998 114 LQR p399 Explain the differences between remedial and institutional constructive trusts and the advantages and disadvantages of each approach. Discuss whether judges in England and Wales are likely to adopt the remedial system. Introduction Endorsed in jurisdictions from Australia to the United States of America, the remedial constructive trust is a trust settled by court order as a remedy for a wrong. Entitlement to the remedy is an issue for the substantive law, but the trust itself is created by order of the court, not by the acts of the parties, or even by the obligation to make restitution.[1] Remedial constructive trusts are settled by equity notwithstanding any actual or presumed agreement or intention. Academic commentators however, continue to debate the issue as to whether the trust is founded on the enforcement of proprietary rights, the avoidance of unconscionable conduct, or crafted as restitutionary remedy. In so far as a constructive trust functions as a proprietary remedy, it must be carefully distinguished from the equitable process of tracing. Tracing is a necessary initial procedure for a complainant seeking a proprietary remedy.[2] The process empowers the complainant to specify and recover property held by a third party. It may be utilised in a variety of causes of action, including detinue[3] and conversion at common law and for breach of trust in equity. Note that the ordering of a remedial constructive trust is only one among several remedies that may be granted as a result of a wrong categorised as unjust enrichment. Other possible remedies include a damages order, and legal or equitable remedies as the circumstances of each particular case may dictate. Although extensive consideration has been devoted to the characteristics of the remedial constructive trust,[4] it is submitted that its essential features are still in nascent form,[5] in particular in the context of corporate financing. Unhelpfully, common law jurisdictions across the world are not in complete conformity regarding the definition of the trust. That said, Deane J’s obiter on the fundamental features of the trust in Muschinski,[6] , is one possible point of departure. Deane J stated that a constructive trust is: “A remedial institution that equity imposes regardless of any actual or presumed agreement or intention, and subsequently protects, to deny the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principles.”[7] Some of the key characteristics of the remedial constructive trust were identified by Deane J. He found, in particular, that it is not necessary to establish the existence of a pre-existing fiduciary relationship between the parties, although one may well be found to exist. He concluded that the trust is underpinned by long-settled principles of equity and on the basis of ‘idiosyncratic notions of fairness and justice’. His Honour resolved that the constructive trust, should properly be viewed as a remedy in personam, fastening to property that may be shaped to give force to principles of equity in sympathy with the considerations of the case at issue. This insightful statement of principle augments the discretionary aspects and flexibility of the remedial constructive trust as a remedy. Furthermore, it is pertinent to note that the recognition of any pre-existing property rights, is not a prerequisite for the establishment of a remedial constructive trust, as is the case with standard institutional constructive trusts.[8] Distinguishing between remedial and institutional constructive trusts The United Kingdom judiciary, inter alios, have tended to stress the differences between the traditional institutional constructive trust and the remedial constructive trust. It has been held that the former is created on equitable principles and assumes effect from the date of the circumstances that provoke its creation. Consequently, the institutional constructive trust is said to be acknowledged by the court in a declaratory way. Lord Browne-Wilkinson considered the issue in Westdeutsche Bank Landesbank Girozentrale v Islington London BC.[9] His Lordship came to the view that the remedial constructive trust could constitute a more suitable basis than the resulting trust for the development of restitutionary remedies. His Lordship stated that: ‘…the court may, by way of remedy impose a constructive trust on a defendant who knowingly retains the property of which the claimant has been unjustly deprived. Since the remedy can be tailored to the circumstances of the particular case, innocent third parties would not be prejudiced and restitutionary defences, such as change of position, are capable of being given effect.’ Lord Browne-Wilkinson found, however, that the question as to the assimilation of this remedy into English law should be decided in a future case when the point was directly in issue. English courts in such cases as Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc[10] and Re Goldcorp Exchange[11] have observed that the remedial constructive trust concept might become part of English Law. That said, the Court of Appeal reached the conclusion, in Re Polly Peck International plc,[12] that although remedial constructive trusts have been endorsed by the courts in the United States and Canada, these observations were obiter and thus non-binding reasoning. On the facts of Westdeutsche Bank Landesbank Girozentrale v Islington London BC, the court ultimately refused to grant a remedial constructive trust given that there was no cogent or arguable case for the grant of such an order. In terms of the difference between remedial and institutional constructive trusts, Lord Browne-Wilkinson found, in Westdeutsche Bank: ‘Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is to declare that such a trust has arisen in the past. The consequences that arise from such a trust having arisen (including the possibly unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not under discretion. A remedial constructive trust, as I understand it, is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court.’ Institutional constructive trusts are therefore based on principles of certainty and distinguished trust property. They are granted in a variety of situations, including in particular those involving domestic property disputes. A remedial constructive trust, however, is available in cases where no trust of any kind existed before its creation. The latter comprises a creation of the court, functioning retrospectively and yielding an enforceable obligation in equity. Subject to the facts of the case, this may operate to the detriment of third parties. Deane J mused on the validity of the distinction between institutional and remedial trusts in Muschinski.[13] He opined: ‘…the constructive trust is seen as both a ‘remedy’ and an ‘institution’… Indeed for the student of equity, there can be no true dichotomy between the two notions.’ Muschinski[14] indicates that unjust enrichment could conceivably justify the use of a remedial constructive trust. However, it is surely prudent to consider the option on a case-by-case basis, with one keen eye on traditional, equitable notions of unconscionability, justice and fairness on the facts. THE END WORD COUNT: 1153 (excluding footnotes bibliography and case list) BIBLIOGRAPHY Restitution and Constructive Trusts (1998) 114 Law Quarterly Review The Law of Tracing, Lionel D Smith, Clarendon Press, Oxford Chang on Equity and Trusts, Taylor P., SPR Core Text CASES Muschinski v Dodds (1985) 160 CLR 583 Fortex Group Ltd (in rec & liq) v MacIntosh [1998] 3 NZLR 171 Westdeutsche Bank Landesbank Girozentrale v Islington London BC [1996] AC 669 (HL) Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 Re Goldcorp Exchange [1995] 1 AC 74 Re Polly Peck International plc (No 4) [1998] 3 All ER 812 1

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[1] For comment see Chang on Equity and Trusts, Taylor P., SPR Core Text, Chapter 13. [2] See, for background comment: The Law of Tracing, Lionel D Smith, Clarendon Press, Oxford ISBN 0-19-826010-9. [3] At law, detinue is a common law remedy to secure the return of chattels (personal property or portable property) which have been wrongly converted to the use of a third party, or are being unlawfully withheld from a person with good title to the chattel. [4] See eg: Millet LJ in Restitution and Constructive Trusts 1998 114 Law Quarterly Review p399. [5] For supporting comment see: Deane J in Muschinski v Dodds (1985) 160 CLR 583. [6] Albeit a case concerning a de facto property dispute. [7] See note 5 above. [8] Note that the remedial constructive trust was described in similar terms to Deane J in Muschinski in Fortex Group Ltd (in rec & liq) v MacIntosh [1998] 3 NZLR 171, by Tipping J. However, the latter judge also observed that his musings should not be regarded as definitive, or as precluding further development of the concept. [9] [1996] AC 669 (HL). [10] [1990] 1 QB 391. [11] [1995] 1 AC 74. [12] (No 4) [1998] 3 All ER 812. [13] See note 5 above. [14] See note 5 above.

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