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2018 What Are the Duties of Constructive Trustees? 1297
WHAT ARE THE DUTIES OF CONSTRUCTIVE TRUSTEES?
DANIEL REYNOLDS *
There is little discussion in either case law or academic commentary on the duties of constructive trustees. Largely, this is because both streams of discourse are primarily concerned with the circumstances in which constructive trusts are imposed, and the appropriateness of the label of ‘trust’ in such cases. Those questions are of fundamental importance, however the focus on them has led to the result that there is little clarity as to what being a constructive trustee involves at a practical level. This article seeks to answer that question in respect of each of the categories of constructive trust that are generally recognised in Australian law. It does so by examining the rationale of each of the duties of express trustees, and considering their applicability to each category of constructive trust in light of those rationales.
I INTRODUCTION
Constructive trusts tend to get a bad rap. The often heard criticism is that there is no unifying theory that can satisfactorily account for the myriad of circumstances in which constructive trusts are imposed. 1 Instead, we have inherited what Dr Edward Sykes called, over 75 years ago, ‘a heterogenous collection of relationships to which the phrase “constructive trust” is loosely applied’,^2 and then somewhat less charitably, ‘a vague dust-heap for the reception of relationships which are difficult to classify or which are unwanted in other branches of the law’.^3 There is no shortage of such epithets in the commentary and case law: constructive trusts have been described as a ‘mess’, 4 a ‘monster’,^5 a ‘kaleidoscope’,^6 a ‘taxonomical nightmare’,^7 a ‘fertile source of
- Solicitor, Herbert Smith Freehills. I would like to thank Michael Bryan, Elise Bant, Mohammud Jaamae Hafeez-Baig, Jordan English and the anonymous reviewers for their helpful comments on an earlier draft of this article. All views are my own. 1 Cf Ying Khai Liew, Rationalising Constructive Trusts (Hart Publishing, 2017). 2 Edward I Sykes, ‘The Doctrine of Constructive Trusts’ (1941) 15 Australian Law Journal 171, 171. 3 Ibid 175. 4 Imobilari Pty Ltd v Opes Prime Stockbroking Ltd (2008) 252 ALR 41, 47 [18] (Finkelstein J). 5 John P Dawson, Unjust Enrichment: A Comparative Analysis: A Series of Lectures Delivered under the Auspices of the Julius Rosenthal Foundation at Northwestern University School of Law, in April 1950 (William S Hein & Co, 1999) 30.
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confusion’,^8 a ‘cluster of outcomes masquerading under [one] label’,^9 ‘a vague hinterland between the trust relationship and other relationships’^10 and a ‘rag-bag of instances having little in common’.^11 Faced with such a disarray, the project of commentators in this area has been to impose order through taxonomy. That project is marked by great debates, such as whether constructive trusts belong more naturally to equity or to the law of restitution,^12 and to what extent constructive trusts are ‘remedial’ or ‘institutional’. 13 A large volume of the commentary is devoted to ascertaining the circumstances in which particular constructive trusts arise. Rarely is the more prosaic question asked: ‘what are the duties of constructive trustees?’ As Professor Michael Bryan observed almost 20 years ago, ‘[t]he volume of writing on the duties of a constructive trustee does not approach the quantity, or quality, of literature on the circumstances giving rise to the imposition of a constructive trust’.^14 That is no longer true as far as quality goes, for a few excellent pieces on aspects of the topic have since been produced,^15 however in quantitative terms, the greater volume of commentary remains concerned with explaining when and why constructive trusts will be imposed, rather than the duties that attend their imposition. This article aims to answer the practical question of what is involved in being made a constructive trustee, and to identify factors that might enable an assessment of which duties apply to which kinds of constructive trust. This task has never been undertaken in a systematic way in Australia.
6 G E Dal Pont, ‘Equity’s Chameleon: Unmasking the Constructive Trust’ (1997) 16 Australian Bar Review 47, 47. 7 Keith Mason, ‘Deconstructing Constructive Trusts in Australia’ (2010) 4 Journal of Equity 98, 98. 8 Sir Peter Millett, ‘Introduction’ in Ewan McKendrick (ed), Commercial Aspects of Trusts and Fiduciary Obligations (Clarendon Press, 1992) 3. 9 Keith Mason, above n 7, 98. 10 Sykes, above n 2, 171. 11 R P Austin, ‘Constructive Trusts’ in P D Finn (ed), Essays in Equity (Law Book, 1985) 196, 196. 12 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 685 (Lord Goff of Chieveley). While this article takes an agnostic stance as to that ongoing controversy, it is of present relevance for two reasons. First, it may be observed that a good deal of academic writing on constructive trusts, some of which is discussed later in this article, has been animated by the position taken by jurists on the restitution debate. That does not impugn their analysis, but it does place it in context. Secondly, it is submitted that an examination of the duties of constructive trustees may help to shed some light on the broader debate, though as will shortly be explained, that is only an incidental purpose of this article. 13 See Muschinski v Dodds (1985) 160 CLR 583, 614 (Deane J). It is unnecessary however to wade into this area of discourse for the purpose of this article: it is sufficient for present purposes to note that the declaration of a constructive trust always follows a curial ascertainment of the rights and liabilities of the relevant parties. At the time of declaration, the court must intend the term ‘constructive trust’ to have some meaning, and that meaning is the subject of this article. 14 Michael Bryan, ‘Restitution Past, Present and Future – Essays in Honour of Gareth Jones’ (1999) 21 Adelaide Law Review 151, 155. 15 See especially Charles Mitchell and Stephen Watterson, ‘Remedies for Knowing Receipt’ in Charles Mitchell (ed), Constructive and Resulting Trusts (Hart Publishing, 2010) 115; William Swadling, ‘The Fiction of the Constructive Trust’ (2011) 64 Current Legal Problems 399; Elise Bant and Michael Bryan, ‘Specific Restitution without Trusts’ (2012) 6 Journal of Equity 181.
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exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. 22 It is hoped that the analysis in this article will likewise aid in ascertaining the true ambit of the term ‘constructive trust’ in Australian statutes. To the extent that some categories of constructive trust are found to come with all the duties of express trustees, that circumstance may support their candidacy to be re- classified as express trusts. Conversely, to the extent that some categories of constructive trust come with so few duties that they are in substance no more than a mechanism for returning property to a person wronged, they may be suitable candidates for assimilation into the law of restitution. Those in the middle – neither amply nor sparingly endowed – should perhaps retain their present classification. Part II of this article sets out the various approaches that have been propounded by courts and commentators as to what duties constructive trustees owe, and explains the approach adopted in this article for analysing whether a given duty might apply to particular constructive trusts. Part III provides an overview of the duties of express trustees and seeks to articulate the purpose that each of these duties serves. Part IV sets out the constructive trusts generally recognised in Australian law, asking for each category: ‘which duties might apply here?’ A table is provided summarising the answers proposed. Part V offers some concluding remarks.
II ASCERTAINING THE DUTIES OF CONSTRUCTIVE
TRUSTEES
A Case Law There is little precedent bearing directly on the duties of constructive trustees. The best-known pronouncement on the issue is the High Court’s description in Giumelli v Giumelli of the nature of a constructive trust that may be imposed where a proprietary estoppel is made out. Gleeson CJ, McHugh, Gummow and Callinan JJ held as follows: The term ‘constructive trust’ is used in various senses when identifying a remedy provided by a court of equity. The trust institution usually involves both the holding of property by the trustee and a personal liability to account in a suit for breach of trust for the discharge of the trustee’s duties. However, some constructive trusts create or recognise no proprietary interest. Rather there is the imposition of a personal liability to account in the same manner as that of an express trustee. An example of a constructive trust in this sense is the imposition of personal liability upon one ‘who dishonestly procures or assists in a breach of trust or fiduciary obligation’ by a trustee or other fiduciary. In the present case, the constructive trust is proprietary in nature. It attaches to the … property. Such a trust does not necessarily impose upon the holder of the legal title the various administrative duties and fiduciary obligations which attend the settlement of property to be held by a trustee upon an express trust for successive
22 Ibid 1197–8 [9] (Lord Sumption SCJ).
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interests. Rather, the order made by the Full Court is akin to orders for conveyance …^23 That passage contained faint echoes of the judgment of Sir George Jessel MR some 120 years earlier in Earl of Egmont v Smith , a case concerning a vendor– purchaser constructive trustee, who was held to be ‘a trustee, no doubt, with peculiar duties and liabilities, for it is a fallacy to suppose that every trustee has the same duties and liabilities’. 24 Similarly in the Victorian decision of Nolan v Collie , it was held that while a vendor–purchaser constructive trust had come into existence, ‘it does not follow that every incident of a conventional trust flowed, nor that [the vendor] had all the rights and liabilities of conventional trustees’. 25 Read in context, these statements must be understood as establishing no more than that the duties of constructive trustees are not necessarily the same as those of express trustees, rather than as purporting to make any kind of exhaustive statement of the duties involved in particular categories of constructive trust. Some authorities, however, have taken a more definitive stance, albeit only in relation to particular categories of constructive trust. For instance, in the New South Wales decision of Agusta Pty Ltd v Provident Capital Ltd , Barrett JA (with whom Campbell JA and Sackville AJA agreed) said of a trustee de son tort that ‘its duties and liabilities, as well as its rights (including rights of indemnity), were the same as if it had been duly appointed’.^26 Here then is a suggestion that one category of constructive trust, that of the trustee de son tort, comes with all of the duties that are found in express trusts. The same conclusion was reached in the UK decision of Williams v Central Bank of Nigeria , where Lord Sumption SCJ said of trustees de son tort: They are true trustees, and if the assets are not applied in accordance with the trust, equity will enforce the obligations that they have assumed by virtue of their status exactly as if they had been appointed by deed.^27 By contrast, Lord Sumption SCJ held that a person made a constructive trustee for knowingly participating in a breach of fiduciary duty was not a ‘true’ trustee and was not subject to the duties of an express trustee: No trust has been reposed in him. He does not have the powers or duties of a trustee, for example with regard to investment or management. His sole obligation of any practical significance is to restore the assets immediately. 28
23 (1999) 196 CLR 101, 112 [4]–[5] (emphasis added) (citations omitted). 24 (1877) 6 Ch D 469, 475. See also Byrnes v Kendle (2011) 243 CLR 253, 292 [119] n 192 (Heydon and Crennan JJ). 25 (2003) 7 VR 287, 300 [34] (Ormiston JA). See also Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488, 504 (Kearney J). 26 [2012] NSWCA 26, [36]. 27 [2014] AC 1189, 1197 [9]. 28 Ibid 1208 [31].
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trust’ that are in fact express trusts misclassified: Rochefoucauld v Boustead trusts and secret trusts.^33 The minimalist view was also espoused by Professor Austin Scott in his textbook The Law of Trusts in the following terms: ‘In the case of an express trust the trustee ordinarily has active duties of management. In the case of a constructive trust, the duty is merely to surrender the property’.^34 At the other end of the spectrum is the view that to treat constructive trusts as mere orders for payment or conveyance is to ignore what courts actually do, and explicitly tell us that they do, in cases involving constructive trusts.^35 The leading proponents of this view are Charles Mitchell and Stephen Watterson, who argue that while constructive trusts certainly do involve a ‘core restorative duty’, they can also come with ‘additional, positive duties’ over and above the duty to restore. 36 For example, in knowing recipient cases, Mitchell and Watterson argue that so long as the property is in the knowing recipient’s custody, it is not inconsistent with the restorative duty for the constructive trustee to have a duty to get in the trust property, and even to invest it if it cannot be immediately restored (for example because the identity of the parties to whom restoration should be made has not yet been ascertained). 37 Mitchell and Watterson place significant reliance on Evans v European Bank Ltd , 38 in which the NSW Court of Appeal held those very duties to be applicable to the receiver of a company that had been involved in defrauding around 900 000 credit card account holders in the United States. 39 This case is discussed in more detail in Part IV(A)(2). Most commentators take an intermediate stance, contending that the duties of constructive trustees vary according to the category of constructive trust in question (and indeed, the approaches canvassed above can fairly be described as ‘intermediate’ in the sense that both are qualified to some extent). For instance, the authors of Ford and Lee: The Law of Trusts put the matter thus: The duties of a constructive trustee are defined by the purposes for which constructive trusteeship was imposed. It will often be the case that the sole duty of a constructive trustee is to convey the property held on trust to the beneficiary … But constructive trustees are also subject to other duties, such as the duty to account and the duty to preserve trust property pending its surrender to the claimant. The duty to surrender may also include subsidiary obligations, such as to get in trust assets, although these obligations will be less extensive than the equivalent obligations imposed on trustees of express trusts since a constructive trustee by definition has not been chosen by a settlor to manage his wealth.^40
33 Ibid 416–18. 34 Austin Wakeman Scott, The Law of Trusts (Little, Brown and Company, 3rd^ ed, 1967) vol 5, 3415, cited with approval in Westpac Banking Corporation v Ollis [2008] NSWSC 281, [26] (Einstein J). 35 Mitchell and Watterson, above n 15, 129. 36 Ibid 138. 37 Ibid 138–42. 38 (2004) 61 NSWLR 75 (‘ Evans ’). 39 Ibid 107 [162] (Spigelman CJ). 40 Thomson Reuters, Ford and Lee: The Law of Trusts (at 1 March 2017) [22.080].
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Similarly, the authors of Jacobs’ Law of Trusts in Australia observe that the categories of constructive trusts: are not uniform in the sense that the incidents of the trusts involved vary; in one category the obligation is to account for a profit, in another to hand over specific assets, in another to effect restitution for a loss.^41 The shared conviction of those who ascribe to the ‘intermediate’ view is that the duties of constructive trustees vary from category to category. There is less commentary, however, as to precisely what the duties are in each category, and importantly, how the duties for particular categories of constructive trust are to be ascertained. A notable exception to that is Darryn Jensen, who suggests the following: The normative justification for treating the relationship as analogous to an express trust might not justify imposing all of the consequences of express trusteeship upon the legal owner … To minimise the risk of imposing too many or too few consequences, we need to conceptualise these trusts by analogy in positive terms – that is, we need to understand them in terms of the justifications which the law gives for the construction of those circumstances as trusts. When we perform this exercise, we find that ‘constructive trust’ is not a homogenous category of legal phenomena. Instead, we can observe a ‘spectrum’ of analogy in which the analogy with express trusts varies in content and strength. What particular obligations of trusteeship the defendant acquires varies according to the normative justification for the law’s imposition of a remedy and, hence, the remedial work that is justified.^42 This is an excellent starting point. Applying Jensen’s heuristic, the first question becomes: ‘why is the remedy of constructive trust imposed in this sort of case?’ It could scarcely be doubted that the identification of the rationale of a given constructive trust is a necessary step in the task of ascertaining which duties might apply to it. Elise Bant and Michael Bryan engage in exactly this kind of reasoning in their 2012 article ‘Specific Restitution without Trusts’.^43 They take issue with Mitchell and Watterson’s theory that constructive trustees are subject to positive duties such as to manage and invest trust property, on the basis that this will often be inconsistent with the rationale of a given constructive trust (taking delinquent fiduciaries as their example): Much of the analysis supportive of positive duties for constructive trustees comes from the law relating to delinquent fiduciaries … These need not, however, only be understood through the prism of express trust obligations. Indeed, one would be hard pressed to identify any circumstances in which a defaulting fiduciary would or should be impressed with management duties with respect to assets in her hands, as opposed to simply becoming subject to an immediate obligation to restore the asset to the plaintiff or his legal representative. Such a fiduciary is the last person who should be entrusted with managing trust assets in the best interests of the beneficiaries.^44
41 J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8 th^ ed,
- 299 [13-02] (‘ Jacobs’ ’). 42 Darryn Jensen, ‘A Typology of Trusts by Analogy’ in Elise Bant and Michael Bryan (eds), Principles of Proprietary Remedies (Thomson Reuters, 2013) 55, 56 (emphasis in original) (citations omitted). 43 Bant and Bryan, above n 15. 44 Ibid 187. They apply the same approach to the question of the thief as constructive trustee at 189.
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should apply. That is done by considering whether the rationale of the constructive trust is consistent with the rationale of the particular duty, or indeed whether it would be furthered by the imposition of that duty. Sometimes, this inquiry will yield a clear answer; sometimes, a range of possibilities. For each possible pairing of a duty with a constructive trust, one of three labels is sought to be given: ‘included’, ‘excluded’ or ‘debatable’. A duty will be ‘included’ for a given category of constructive trust where there is undoubted authority to that effect or where the case for its inclusion is particularly strong. ‘Excluded’ has the converse definition. The remaining duties are ‘debatable’. There are some limitations to this approach. It cannot, and does not, purport to state conclusively whether each duty applies to each constructive trust. Further, the conclusions reached in this article as to which of the three labels should apply for each pairing of duty and constructive trust are ultimately matters of judgment on which minds may differ. That is to be embraced, as the primary aim of this article is to identify factors that might enable an assessment of which duties are appropriate to which kinds of constructive trust, rather than to have the final say on what the result of that assessment should be. One final matter should be noted. Although no concluded view is expressed in this article on whether those duties labelled as ‘debatable’ should be treated as applicable or not, there is a significant reason to lean in favour of holding that they are not. It is well established that before a constructive trust is imposed, a court should first decide whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust. 48 If a particular category of constructive trust is held to be attended by a large number of duties, the result is that it will be seen as a more onerous remedy and will therefore be appropriate in fewer circumstances. By contrast, if the trust has only minimal duties, it will more often be seen as an available choice.^49 Erring on the side of minimalism has the advantage that it preserves the constructive trust’s remedial flexibility. Minimalism affords the court a discretion as to whether obligations corresponding to the duties of express trustees should be imposed on a defendant in the form of ancillary orders,^50 rather than having those duties apply automatically in circumstances where the court would not intend them to. Of course, to adopt this course is to require a certain degree of prescription from judges in spelling out precisely what obligations are intended to accompany the imposition of a constructive trust in each case, but this may be a small price to pay for the benefit of flexibility.
48 Giumelli v Giumelli (1999) 196 CLR 101, 113 (Gleeson CJ, McHugh, Gummow and Callinan JJ); Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566, 585 [42] (The Court); John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1, 45–46 [128]–[129] (The Court). 49 Sarah Worthington, ‘Exposing Third-Party Liability in Equity: Lessons from the Limitation Rules’ in Paul Davies and James Penner (eds), Equity, Trusts and Commerce (2017, Hart Publishing) 331, 340–1. 50 Bant and Bryan, above n 15, 189.
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III THE DUTIES OF EXPRESS TRUSTEES
This Part describes the various duties to which express trustees are subject. 51 For convenience of exposition, these have been grouped into four types: (1) duties relating to the instrument of trust; (2) duties relating to the trust property; (3) duties relating to the beneficiaries; and (4) duties of a fiduciary nature.
A Duties Relating to the Instrument of Trust
1 Duty to Become Acquainted with the Terms of the Trust
The first duty of express trustees, according to Jacobs’ , is ‘to become thoroughly acquainted with the terms of the trust and all documents, papers and deeds relating to or affecting the trust property as come into their possession and control’.^52 The rationale given for this duty is that it is necessary in order for trustees to ‘know precisely the nature and circumstances of the trust property’, and to ‘know exactly what they are required to do’ with it.^53 In practice, this duty may be merely facultative in character given that trustees already have substantive duties to adhere to and carry out the terms of the trust and to exercise reasonable care. 54 Indeed, in the two cases often cited for the duty to become acquainted with the terms of the trust, the duty was mentioned not to visit liability on the trustees, but rather to absolve them. In the first, Harvey v Olliver , Kay J held that because it was the incoming trustees’ duty to see what the trust estate consisted of, their costs in doing so were properly incurred and they were therefore entitled to be reimbursed from the trust estate.^55 In the second, Hallows v Lloyd , the question was whether the incoming trustees were liable for acting in disregard of a settlement of which they had been unaware. 56 Kekewich J found for the trustees, on the basis that even if they had properly acquainted themselves with the terms of the trust, they would not have found anything giving them notice of the settlement.^57 It is clear from the cases that the underlying rationale of the duty to become acquainted with the terms of the trust is to ensure that the trust is properly administered in accordance with its terms. More fundamentally, it can be said
51 See Heydon and Leeming, above n 41, 324 [16-02]. 52 Ibid 336 [17-01]. See also Lynton Tucker, Nicholas Le Poidevin and James Brightwell, Lewin on Trusts (Sweet & Maxwell, 19 th^ ed, 2015) 568–9 [12-034]–[12-035]. 53 Heydon and Leeming, above n 41, 336 [17-01]. 54 The subsidiary role of this duty is also evident in the circumstance that where there is a suggestion that the trustees have failed to acquaint themselves with the terms of the trust, relief is more likely to be pursued through the lens of a claim that the trustees breached their duty to adhere to and carry out the terms of the trust: See, eg, Turner v Turner [1984] Ch 100; Nestlé v National Westminster Bank plc [1994] 1 All ER 118. In such cases, the duty to become acquainted with the terms of the trust will have little independent work to do. 55 Harvey v Olliver (1887) 57 LT 239, 241. 56 (1888) 39 Ch D 686. 57 Ibid 691.
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Lastly in this regard, it may be observed that the duty to adhere to and carry out the terms of the trust includes a subsidiary duty: the duty ‘to pay and transfer the trust property and its income to the right persons’.^66 It is submitted that the latter is no more than a specific application of the former, the cases on the latter turning on whether or not various impugned distributions and transfers of property conformed with the terms of the trust as properly construed. 67 Yet as will be seen, this subsidiary duty to pay and transfer the trust property and its income to the right persons can assume central importance in the field of constructive trusts, and in some cases it may be the only duty of practical significance, as for example where a constructive trust can rightly be described as ‘merely a formula for giving restitutionary relief’.^68 Of course, where there is a court order expressly requiring transfer of the trust property, the obligation to transfer property comes from that order and need not be conceptualised in terms of trustee duties: it is only meaningful to speak in terms of duties where the orders impose a constructive trust with nothing more.
3 Duty Not to Impeach the Validity of the Trust Instrument or the Title of the Beneficiary An express trustee has a duty not to impeach the validity of the trust instrument^69 or the title of the beneficiary,^70 provided the trust was accepted, or at least not disclaimed, at the time of his or her appointment. 71 The duty is not so absolute as to prevent trustees in all circumstances from asserting proprietary rights at odds with the trust instrument, 72 but it does prevent them from relying on doubts about validity as an excuse for avoiding the performance of their trustee obligations in the interim, 73 and it also prevents them from seeking to place the burden of establishing validity on the beneficiaries. 74 The proviso that the trustee must not have disclaimed the trust at the outset is of critical importance to this duty, as one of its primary rationales is to hold trustees to the obligations they have voluntarily accepted. The importance of voluntary acceptance can be seen in a number of judicial statements of the duty, which speak in terms of a trustee who ‘knowingly and expressly acquires the
66 As to which, see Heydon and Leeming, above n 41, 368 [17-35]. 67 See, eg, Barratt v Wyatt (1862) 30 Beav 442, 444; 54 ER 960, 961 (Sir Romilly MR); Hilliard v Fulford (1876) 4 Ch D 389, 393–4 (Jessel MR); Re Hulkes (1886) 33 Ch D 552, 557 (Chitty J). 68 Williams v Central Bank of Nigeria [2014] AC 1189, 1216 [70] (Lord Neuberger P), quoting Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400, 412 (Millett LJ). 69 McGregor v McGregor [No 2] [1919] NZLR 286. 70 Devey v Thornton (1851) 9 Hare 222; 68 ER 483; Beddoes v Pugh (1859) 26 Beav 407; 53 ER 955; Newsome v Flowers (1861) 30 Beav 461; 54 ER 968. See generally Heydon and Leeming, above n 41, 338 [17-03]. 71 As to which, see Heydon and Leeming, above n 41, 312 [15-73]. This is sometimes also referred to as a ‘duty not to set up rights of others’: see Thomson Reuters, Ford and Lee: The Law of Trusts (at 25 June
- [9.22010]. 72 Allen v Roughley (1955) 94 CLR 98, 107 (Dixon CJ). 73 Devey v Thornton (1851) 9 Hare 222, 232; 68 ER 483 (Sir Turner V-C), 487–8; Beddoes v Pugh (1859) 26 Beav 407, 416–7; 53 ER 955, 959 (Sir Romilly MR). 74 Allen v Roughley (1955) 94 CLR 98.
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possession of property as a trustee’,^75 ‘acknowledge[s] the trust for a considerable time’,^76 or ‘agrees’ to hold property on trust.^77 Again, it is doubtful whether it is meaningful to speak of a duty not to impeach the validity of the ‘trust instrument’ in the context of constructive trusts (except perhaps for those categories of constructive trust that arise in connection with an already existing written instrument, such as in the cases of mutual wills or trustees de son tort). For most constructive trusts, the only written source of obligations is the court orders. 78 Those orders will be final and binding, except in the limited circumstances where they may be set aside, such as on appeal or in equity as a judgment fraudulently obtained. 79 There can hardly be any objection to a constructive trustee pursuing those avenues where appropriate. In any event, the duty is clearly inapposite to those categories of constructive trusts that involve no element of voluntary acceptance of trustee obligations on the part of the constructive trustee (ie, most categories).
B Duties Relating to the Trust Property
1 Duty to Get In the Trust Property
As the High Court unanimously held in CGU Insurance Ltd v One.Tel Ltd (in liq) , ‘[o]ne obligation of a trustee which exists by virtue of the very office is the obligation to get the trust property in, protect it, and vindicate the rights attaching to it’.^80 It is plain from the cases that the rationale of this duty is to ensure the realisation and protection of trust assets. For instance, in Re Brogden; Billing v Brogden , a case about a trustee who had neglected to call in a sum of money owed to the trust in a timely fashion, Fry LJ explained: A trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which and at which he shall carry his duty into effect. But his discretion is never an absolute one; it is always limited by the duty – the dominant duty, the guiding duty – of recovering , securing , and duly applying the trust fund.^81 In similar vein, it has been said that the duty requires trustees to ‘realize the trust estate’, 82 to ‘get the trust funds into their hands’,^83 to ‘obtain all the property that belongs to the trust’,^84 to ‘bring [the trust property] into their own personal custody’,^85 and to ‘preserve the trust fund under their own control’.^86
75 A-G (UK) v Munro (1848) 2 De G & Sm 122, 163; 64 ER 55, 73 (Knight Bruce V-C). 76 Newsome v Flowers (1861) 30 Beav 461, 470; 54 ER 968, 972 (Sir Romilly MR). 77 Van Rassel v Kroon (1953) 87 CLR 298, 302 (Dixon CJ). 78 See further above n 13. 79 See generally Clone Pty Ltd v Players Pty Ltd (in liq) (rec and mgr apptd) (2018) 92 ALJR 399. 80 (2010) 242 CLR 174, 182 [36] (The Court); see also Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588, 605 [34] (Gaudron, McHugh, Gummow and Hayne JJ); Fischer v Nemeske Pty Ltd (2016) 257 CLR 615, 655 [111] (Gordon J). 81 (1888) 38 Ch D 546, 571 (emphasis added). See also at 554 (North J), 564 (Cotton LJ), 574 (Lopes LJ); Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149. 82 Field v Field [1894] 1 Ch 425, 429 (Kekewich J). 83 Re Forest of Dean Coal Mining Co (1878) 10 Ch D 450, 453 (Jessel MR). 84 Young v Murphy [1996] 1 VR 279, 282 (Brooking J). 85 Tucker, Le Poidevin and Brightwell, above n 52, 1516 [34-015].
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The authorities on this duty are sparse; and we should expect no greater certainty than that of which the subject matter admits. At the very least, however, the early cases do evince a general concern that property capable of being put to productive use should not be allowed to lie fallow, and that it is a dereliction of duty to the beneficiaries if that occurs.^91 The standard measure of relief in those cases was an order that the defaulting trustee or executor pay the amount of interest that the property could have been expected to produce had it been properly invested. Whether the duty to invest trust property can be traced to the labour theory of property, or perhaps to some more specific view predicated on the personal undertaking by the trustee or the dependence of the beneficiaries, is not clear. That being so, it would be unwise to make any universal conclusion as to whether the duty might be applicable to constructive trusts. Rather, as with the duty to get in trust property, its applicability is best determined on a category-by- category basis. And in doing so, it should be borne in mind that the rationale of the duty need not be the controlling consideration in any event: rather, if the duty is a good ‘fit’ with the category of constructive trust in question, for example because it would advance its purpose, it may be arguable that it applies. As Sir Anthony Mason wrote extra-judicially, ‘[r]ules can transcend both their origins and their history and they can serve more than one purpose’.^92 As with the duty to get in the trust property, the need for legal authority to comply with the duty, and the appropriateness of conferring the duty on a wrongdoer, will be important factors in the ultimate analysis. A further important consideration will be the question of duration: it is hard to see how a duty to invest can be appropriate where a constructive trust is designed to last only for a short period of time, for instance in order to facilitate a conveyance of property.
C Duties Relating to the Beneficiaries
1 Duty to Act Impartially Between the Beneficiaries
The duty to act impartially between beneficiaries was explained by Megarry V-C in Cowan v Scargill in the following terms: The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries.^93 As with a number of the duties discussed in this article, it is perhaps easier to see what this duty requires than why it requires it. What it requires is that trustees act even-handedly, and with due consideration to the beneficiaries as a whole, when exercising discretionary
91 Rocke v Hart (1805) 11 Ves Jr 58, 60–61; 32 ER 1009, 1010 (Sir Grant MR); Holland v Hughes (1809) 16 Ves Jr 111, 114; 33 ER 926, 927 (Sir Grant MR); Moyle v Moyle (1831) 2 Russ & My 710, 715; 39 ER 565, 567 (Brougham LC); Earl of Egmont v Smith (1877) 6 Ch D 469, 475–6 (Jessel MR). 92 Anthony Mason, ‘Fusion’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook, 2005) 11, 14. 93 [1985] Ch 270, 286–7.
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powers conferred upon them under the trust. 94 It has been suggested that the duty requires beneficiaries to be treated equitably, rather than equally.^95 The duty has been said to apply to the exercise of discretionary powers of management and investment of the trust property,^96 but not to a discretionary power to choose which beneficiaries, or which classes of beneficiaries, should be the recipients of trust benefits, as such a power necessarily entitles a trustee to choose and to prefer some beneficiaries over others. 97 However, even in the latter case the trustee will be required to exercise the power in good faith for the purpose for which it was given,^98 and not to take into account irrelevant, irrational or improper factors in doing so.^99 The indications as to why the duty exists, such as they are, point in a number of directions. Suggested rationales include: that the duty is practically necessary to give efficacy to the system of trusts generally;^100 that it serves to ensure fulfilment of the settlor’s intentions;^101 that it is an aspect of the trustee’s fiduciary responsibility;^102 and that it is no more than a specific manifestation of the general rule that a person entrusted with a discretionary power must exercise it solely for the purpose for which it is given.^103 Because the explanations for this duty are varied, its rationale will be a less weighty factor than usual in considering the categories of constructive trust to which the duty might apply. However, two points may be taken away. First, this duty is clearly predicated on there being reposed in the trustee a discretionary power capable of affecting the beneficiaries’ interests. Where a constructive trustee has no such power, the duty will be of little utility. Secondly, whatever the rationale, it is clear that this duty is apt to protect the interests of those beneficiaries against whom the trustee would prefer to discriminate. Where such protection is considered desirable in the context of constructive trusts, the duty may well be of use.
94 See Re Tempest (1866) LR 1 Ch App 485, 487–8 (Sir Turner LJ); Re Sandys; Union of London and Smiths Bank v Litchfield [1916] 1 Ch 511, 515 (Sargant J); Re Charteris; Charteris v Biddulph [1917] 2 Ch 379, 399 (Warrington LJ). 95 Thomson Reuters, Ford and Lee: The Law of Trusts (at 25 June 2018) [9.710]. See, to similar effect, Nestlé v National Westminster Bank plc (Unreported, Chancery Division, Hoffman J, 29 June 1988) 4–5, quoted in Re Mulligan (deceased) [1998] 1 NZLR 481, 501 (Panckhurst J). 96 Re Charteris; Charteris v Biddulph [1917] 2 Ch 379; Cowan v Scargill [1985] Ch 270; [1984] 2 All ER
97 Edge v Pensions Ombudsman [1988] Ch 512, 533; [1998] 2 All ER 547, 567 (Sir Scott V-C). 98 Armitage v Nurse [1998] Ch 241, 253–4 (Millett LJ); Rankine v Rankine [1998] QSC 48; Hancock v Rinehart (2015) 106 ACSR 207, 223–4 [57] (Brereton J); Crossman v Sheahan (2016) 115 ACSR 130, 189–91 [288]–[303] (Ward JA). 99 Edge v Pensions Ombudsman [1988] Ch 512, 533 (Sir Scott V-C). 100 Knox v Mackinnon (1888) 13 App Cas 753, 768 (Lord Macnaghten). 101 Tanti v Carlson [1948] VLR 401, 405 (Herring CJ). 102 Re Stewart [2003] 1 NZLR 809, 816 [25] (Laurenson J). 103 Edge v Pensions Ombudsman [2000] Ch 602, 627 (The Court).
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D Duties of a Fiduciary Character
1 Duty Not to Deal with the Trust Property for Personal Benefit or Otherwise to Profit by the Trust The duty not to deal with the trust property for personal benefit or otherwise to profit by the trust is the quintessential fiduciary duty. 108 As a unanimous High Court explained in Warman International Ltd v Dwyer , the duty exists ‘to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage’.^109 As with the earlier fiduciary duties, the applicability of this duty to constructive trusts will need to be worked out on a category-by-category basis. To the extent that, without the duty, a wrongdoer who has been made a constructive trustee may be able to cheat the beneficiaries for a second time, the duty may serve a purpose. The rationale for its imposition would be more to do with preventing the constructive trustee from misusing the position (to the extent that the ‘position’ even affords such an opportunity), and less to do with precluding the fiduciary from ‘being swayed by considerations of personal interest’ (for in the case of wrongdoers made into constructive trustees, it is obedience, rather than loyalty, that is demanded).^110
2 Duty to Exercise Reasonable Care
Whether a trustee’s duty to exercise reasonable care is fiduciary in character is a controversial question.^111 Without attempting to resolve that question here, it is possible to say at least that, as a matter of Australian law, the question remains open, as the authorities indicating that the duty may not be fiduciary are largely from other jurisdictions^112 or have arisen in the context of duties owed by persons other than trustees: 113 and indeed there is Australian authority pointing in the
108 See Keech v Sandford (1726) 2 Eq Cas Abr 741; 25 ER 223 (Scott LC); Parker v McKenna (1874) LR 10 Ch App 96, 124 (Sir James LJ); Commonwealth v Colonial Combing, Spinning and Weaving Co Ltd (1922) 31 CLR 421, 470 (Higgins J). 109 (1995) 182 CLR 544, 557–8 (citations omitted). As a side note, it can be observed that the ‘duty to act gratuitously’ is simply a specific illustration of this general duty, and the two are sufficiently closely related that it is difficult to think of categories of constructive trust where one but not the other will apply: see further Heydon and Leeming, above n 41, 371–2 [17-39]. 110 Chan v Zacharia (1984) 154 CLR 178, 198 (Deane J). 111 Heydon and Leeming, above n 41, 356 [17-18]. 112 See, eg, Girardet v Crease & Co (1987) 11 BCLR (2d) 361, 362 (Southin J); Lac Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574, 597 (Sopinka J); Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 155, 205 (Lord Browne-Wilkinson); Bristol & West Building Society v Mothew [1998] Ch 1, 17 (Millett LJ); Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664, 681 (Gault J); Hilton v Barker Booth & Eastwood [2005] 1 All ER 651, 660 [29] (Lord Scott); Base Metal Trading Ltd v Shamurin [2004] EWCA Civ 1316. 113 See, eg, Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 237–8 (Ipp J) (relating to company directors).
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opposite direction.^114 Further, compelling arguments have been made elsewhere as to why the duty is properly characterised as fiduciary.^115 Another reason to group this duty with other ‘duties of a fiduciary character’ is that the cases articulating the content of the duty strongly suggest that its rationale from the start has been to fulfil the expectations that the trustee had in reposing confidence in the trustee.^116 In an early authority on the duty, Clough v Bond , Cottenham LC explained that if it is breached, the trustee ‘will be liable to make [the loss] good, however unexpected the result, however little likely to arise from the course adopted, and however free such conduct may have been from any improper motive’.^117 That statement tends to dispel two possible alternative explanations for the duty: first, that it is akin to the duty of care in negligence, which is predicated on the foreseeability of the harm suffered; and second, that the duty is designed to redress intentional wrongdoing. Indeed, by excluding the possibility of a defence of bona fides, this dictum is directly at odds with the alternative theory which asserts that the duty is not fiduciary because a ‘servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty’.^118 Lastly, the fiduciary theme is then seen in most of the early cases, which explain the duty by reference to distinctly fiduciary circumstances: in particular, that confidence was reposed in the trustee to manage the affairs of the trust;^119 and that the trustee undertook, and thereby came under a responsibility, to manage the trust estate with reasonable care. 120 The question of whether this duty should apply to constructive trustees is not without difficulty. One reason for the difficulty is the uncertainty as to whether constructive trustees are themselves fiduciaries. At least in cases where a constructive trust is imposed to vindicate an actual, but unperfected, intention to create an express trust (as with secret trusts, for instance), it is a short step to conclude that the constructive trustee is no less a fiduciary than an express trustee is. By contrast, where constructive trusts are imposed as a remedial response to wrongdoing, it is far more difficult to conclude that the trustee is a
114 See, eg, Youyang (2003) 212 CLR 484, 500 [38]–[39] (The Court); Maguire v Makaronis (1997) 188 CLR 449, 468, 470, 474 (Brennan CJ, Gaudron, McHugh and Gummow JJ); Charlton v Baber (2003) 47 ACSR 31, 44 [49] (Barrett J). 115 For example, that the duty is an objective one, that a trustee in breach of it must personally make good any loss and pay interest, and that the duty is not one that cannot admit of any competing self-interest of the trustee: Antony Goldfinch, ‘Trustee’s Duty to Exercise Reasonable Care: Fiduciary Duty?’ (2004) 78 Australian Law Journal 678. See also Denis S K Ong, Trusts Law in Australia (Federation Press, 4 th^ ed,
- 235; J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis Butterworths, 5 th^ ed, 2015) 200–10 [5-325]–[5-375]. 116 See J D Heydon, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook, 2005) 185, 217. 117 (1838) 3 My & Cr 490, 496; 40 ER 1016, 1018. 118 Bristol & West Building Society v Mothew [1998] Ch 1, 18 (Millett LJ). 119 Re Speight; Speight v Gaunt (1883) 22 Ch D 727, 762 (Bowen LJ); Speight v Gaunt (1883) 9 App Cas 1, 29 (Lord FitzGerald). 120 Re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347, 350 (Cotton LJ); White v Jones [1995] 2 AC 207, 271 (Lord Browne-Wilkinson).
