Equity and Trusts

Topic 6 Resulting and Constructive Trusts in Commerce

A. Well-established instances of resulting trusts

Express trust: created voluntarily
Some other are imposed on parties implied trsut

Requirements of establishing a resulting trust

1. Need not be in writing
2. Lack of formality
P only needs to show he is the beneficiary and D is the trustee and there is a trust
The actual taking of accts will not be taken by the court but a master
o Cf: NSW the court will perform the taking of accts
In practice P only needs to show the conducts constituting the breach (e.g. of FD)
3. Substance of the concept: imposed on the legal title owner
Insolvancy protection to improve remedy
Basic concepts
Express trusts vs Resulting/Constructive Trusts
o Express = in writing vs R/CT = no need to be in writing
o Land law context
o Intention of the settlor ET is a voluntary arrangement between the parties
(like contract law) vs
CT = imposed on the legal title holder irrespective of his intention (like
tort law)
RT = based on what must have been the intention of the parties even
though not expressly stated
Two RT
1. Presumed (intention) purchase money resulting trust (based on the
intention of the parties) [not the focus of the course]
Where A t/f an asset to B gratuitously (i.e. did not provide any or all of
the consideration or the transfer), and if there is no reliable evidence
of As true intentions, the court will find that B holds the asset on trust
for A
When I have learnt in Land Law: I spent money and put it in title on a
stranger:
2. Automatic resulting trust [the focus]
Traditional categorization 1st and 2nd cat

1st cat: failure to create a trust fund: when a set law seeks to
create an express trust but fails to do so (but have alr transferred the
legal title to the trustee)
e.g. A has t/f the legal title of a watch to the trustee and tries to
declare a trust over the watch. Can fail for want of formality,
legal uncertainty but the trustee has alr got the legal title, the
law will say that the beneficial interest has to jump back to the
settlor (resalia)
idea: where there is a t/f of legal interest with a view of imposing
a trust on the trustee, if u fail the declaration of trust, the
express trust will not be established, the trustee is not intended
to have absolute ownership the court imposes the trust for the
benefit of the settlor to prevent the trustee from being unjustly
enriched
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 - fail to meet some requirement , but already transfer
properties to trustee
- Jumps back:
Traditional understanding arises automatically irrespective of
the settlors intention does not base on the presumed intention
of the settlor
nd
2 cat: Non-exhaustion of the trust fund: Have alr est. a valid
trust but the trust fails to exhaust the trust fund i.e. there is a surplus
trust fund
e.g. disaster funds the surplus money in the fund after the
relief work has been completed
New instances of trusts do they fit into traditional categories?
Quistclose trusts
2 uses of RT
1st use missing
To give proprietary remedy to the restitution of unjust
enrichment proprietary right on law of unjustenrichment:
what if I have gone bankrupt: what is the position of the
shopkeeper: can he say that the $5 was held on resulting trust?

Traditional categories of RT
Vandervell v IRC
o Fact: subject matter was a share option. Set laws wanted to increase stamp
duty but the scheme doesnt work. Then the relevant right was held on trust.
o The set law did not want to establish a resulting trust, but the RT was still
imposed.
RE Vandervells Trusts (no 2)
o There is automatic resulting trust based on initial failure and subsequent
failure.
Initial failure: where S has t/f property to T upon trust, but has failed to
effectively declare a trust (e.g. lack of one of the 3 certainties,
informality, etc)
Subsequent failure: where a valid express trust fails to exhaust the
trust property (e.g. surpluses)
***Challenge to the traditional basis of RT: Westdeutsche v Islongton London
BC (1996)
o Lord Browne Wilkinson did not agree that only the purchase-money type of
RT is based on presumed intention. Both types (incl. the automatic one)
are based on presumed intention of the trustee
o If the settlor has expressly or by necessary implication abandoned any
beneficial interest in the trust property NO RESULTING TRUST: the
undisposed of equitable interest vests in the Crown as ownerless (bona
vacantia)
o Current view you shud adopt: The traditional categorisation btw the
automatic and purchase money resulting trust are based on presumed
intention of the trustee

The puzzle of the Quistclose trust

4 area of law that really matter: contract, tort, trust, unjust enrichment
When lender goes bankrupt, that does not mean that he does not have money in
bank acc. Question of priorty comes in
Example A: A lends 100 to B

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 o A simple loan contract law
o i.e. if B goes bankrupt then A will line up and get pari passu distribution
o i.e. B is only required to return any $100 note to A (no right over a specific
property). All thats required is the return of an equivalent sum.
o
Example B: A lends 100 to B on the (specific purpose)condition that B will only
spend it on paying his university fees
o B cannot mix that money with the general funds because the money cannot
be used for other purposes breach of condition might lead to breach of
contract: when B goes bankrupt, A would be get the full amount back, give A
the security: even better protection , no need to register
o In effect that $100 is segregated from the rest of the fund (legal segregation,
not physical)
o In equity, that $100 is segregated from other funds. In insolvency, the
money does not belong to Bs bankruptcy estate.
Quistclose refer to both the primary and secondary trusts
Facts:
o Q (lender) advanced a loan to a company called Rolls Razor (borrower) , so
th e latter can pay dividends to its shareholders. Loan monies depositied in a
separate bank acc with B Bank
o Q = lender who lent to the borrower.
o The borrower needed to use the money to pay dividends.
o The loan money was deposited in a separate bank account.
o The borrower was declared insolvent later, need not use the money to pay
dividends to shareholders and the money rests in the bank acct.
o The borrower went bankrupt and had overdraft in the bank acct, the bank
wanted to discharge the overdraft facility with this sum
o Issue: whether the bank can do so?
Held:
o The money was used for a specific purpose created a trust
R was a trustee of the money
o On the facts, because the bank was aware of the arrangement (i.e. used for
the specific purpose) it had notice of the trust bound by the trust
n cannot assert a claim over the money
o The diagram (Barclays have notice)
o An initial/primary trust was created if the purpose of the trust was fulfilled
(ie the dividends were actually paid to the shareholders: the condition
purpose fulfilled) then (secondary relationship) the relationship would be
reverted to a simple loan relationship because the condition is not on the
specific spending anymore
o If the purpose is not fulfilled (as in the present case) a secondary trust
(secondary relationship) arises and the borrower(RR) was the trustee. The
beneficiary would be Q, the original lender.
o Lord Wilberforce: The arrangements give rise to a relationship of a fiduciary
character or a trust, in favour, as a primary trust, of the creditors (The SH)
and secondarily if the primary trust fails of the third person (the lender)
(trust at primary stage: then go either way: if fulfilled then become a loan, if
not fulfill become a secondary trust)
o LW only gave an acct of the primary and secondary trusts but did not explain
the nature of the trusts

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Barclays Bank v Quistclose Investments (1970) AC
Facts:
Q = lender who lent to the borrower. The borrower needed to use the money to
pay dividends.
The loan money was deposited in a separate bank account.
The borrower was declared insolvent later, need not use the money to pay
dividends to shareholders and the money rests in the bank acct.
The borrower went bankrupt and had overdraft in the bank acct, the bank wanted
to discharge the overdraft facility with this sum
Issue: whether the bank can do so?
Conclusions:
Bank could not do so.
Reasoning:

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 Two questions:
1. whether between the lender and banker the loan terms were such as to
impress upon the loan sum a trust in the lenders favour in the event of
dividend not being paid
o An initial/primary trust was created
if the purpose of the trust was fulfilled (ie the dividends were actually
paid to the shareholders)
then the relationship would be reverted to a simple loan relationship
because the condition is not on the specific spending anymore
the lender than has his remedy against the borrower in debt
o If the purpose is not fulfilled (as in the present case) the question arises if
a secondary purpose (i.e. repayment to the lender) has been agreed,
expressly or by implication: if it has, the remedies of equity may be invoked
to give effect to it i.e. to create a secondary trust for the benefit of the
lender, if it has not (and the money is intended to fall within the general
fund of the debtors assets), then there is the appropriate remedy for the
recovery of a loan
2. Whether the bank (the third party seeking to use the trust money) had such
notice of the trust (that the loan is only for a specific purpose and
therefore is trust money)/ the circumstances giving rise to it at the time when
the bank received money, as to make the trust binding upon them
o a mere request to put the money in a separate account is not sufficient to
constitute notice
o But when the bank received the cheque it also received the covering letter
stating that there had been a telephone conversation informing the bank
that the money had been provided on loan by a TP and was to be used only
for a specific purpose sufficient to give the bank notice that it was trust
money and not the assets of the borrower
o The bank not knowing the lenders identity is of no significance
o Also quite apparent from earlier doc that the bank were aware that the
borrower could not provide the money for the dividend and this would have
to come from an outside source and that the bank never contemplated that
the money provided could be used to reduce the existing overdraft

Do you agree with the result that priority is given to the lender who has a security
interest without the need to register? (sec 41) (1:40)

o Policy
Before a company goes bankrupt, it is hard to get security. If we
give Quistclose lenders a security interest, we are encouraging
corporate rescue efforts. security interest to the lender

o Security interest to the lender seems to be an attractive arrangement

o Questions: requirements?
There must be a common intention between the 2 parties
Can be a loan, does not have to be a loan i.e. just pay money for
a specific purpose
The money is to be used for a specific purpose - entails that it cannot
be used with the general funds of the recipient you are not free to
use for other purposes
Twinsectra Ltd: Lord Millet hold Q trust to be an entirely orthodox
example of the knid of default trust known as a resulting trust.
The lender pays the money to the borrower by way of loan, but
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 he does not part with the entire beneficial interest in the money,
and in so far as he does not it is held on resulting trust for the
lender from the outset. (1st stage)
o Take the view that because the lender did not intend to
ttansfer the full beneficiary interest to the borrower,
therefore did not part with the entire beneficiary interest.
Lender retain some beneficiary interest (

When the purposes fails, the money is returnable to the lender,

not under some new trust in his favour which only comesinto
being on the failure of the purpose, but becaue the resulting
trust in his favour is no longer subject to any power on the part
of the borrower to make use of the money. (2nd stage)
o The trust no longer subject to any power of the borrower:
Lord Millet see the trust right from the begining is a resulting
trust, even at primary stage, subject only to the borrower power
or duty (psra 100)
Why the borrower would have the power to use the money for
the purpose? A mandate- something like agency arrangement,
an authority: authorization: power or duty to do that primary
stage; in the 2nd stage: power is gone, just a simple resulting
trust then
Does not have to be physically segregated (1:41) no need have to
have a seperate bank acc, only for draw intention and evidentia;
Nature of the primary trust: (Problems)
Express trust for persons: Problem: whos the beneficiary?
Shareholders? absolutely entitle to the trust asset, can
terminate the trust and have the whole propery trsnferred: here
we do not intend the shareholder to pocket the money in this
way
Express trust for purposes (private purpose trust? not valid ,
nvid, not allow, purpose cant go to the court and sue, cant be a
witness, there has to be a benegicary: purpose can only be a
beneficiary :
Secondary trust: should be a resulting trust: purpose not fulfill, result
back to the settlor

How to establish a Q trust

o What are requirements?
o Barclays: Based on the common intention of the lender and borrower (Lord
Wilberforce) that the money is to be devoted for an exclusive purpose but
not other purposes i.e. will not fall into the general funds of the borrower
Because of that, there is a segregation of the amount from the
general funds (segregation does not have to be physical) only have
to keep separate accts to identify the trust funds from the general
funds (i.e. In Q, the money is kept in a separate acct is NOT a legal
requirement, just an indication of intention)
Only have to show intended segregation
o Twinsectra: LMillet adjusted the requirement a little: based on the objective
intention of the settlor (para 100)
o
o What is the nature of primary and secondary trust
o Primary trust
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o In Barclays Bank v Quistclose, Q gave a sum of money to Rolls Razor for the
purpose of dividends to the shareholders LW described it as a primary
trust (BUT LW or LBW did not tell what sort of express trust it is)
o In analysis, there are two possibilities: -
Express trust for persons? Who is the beneficiary?
Express trust for purposes (private purpose trust)?
o Quistclose trust does not fit into the existing trust categories?
A. Express trust for persons
Possibility 1 for the Shareholders?: If there is an express trust
for persons, need to identify who the beneficiaries are! Two
possibilities here (shareholders [dividends] but this will not fit with
commercial transaction as intended because if the trust is intended for
persons, these ppl collectively own the trust property. IF this applies to
SH, the SH will be able to act collectively to compel the trustee to
transfer the trust property to them! This surely is not the intention of
the trust, therefore this trust principle does not apply to the Q trust.
Possibility 2 for the lenders?: If it is an express trust for the
lender, not a good explanation because Q alr lent out the money! If
Q is treated as a sole beneficiary, then it can act to revoke the trust
anytime. BUT here in the case the trust is not meant to be revoked
the commercial transaction does not contemplate that the loan can be
revoked.
Possibility 3 held in suspense? LMillet (extra judicial) LQR
maybe a trust but as to who the beneficial interest is vested, it is held
in suspense. BUT this is not the orthodox principles we dont have an
accepted situation of beneficiaries in suspense, because the reason
why a trust arrangement is powerful is the check and balance the
only party who can enforce the trust against a trustee is the
beneficiary, because once a trust is set up the settlor drops out of the
trust arrangement.
Conclusion: possibilities 1-3 dont work.

B. Express trust for purpose

Purpose make distributions to SH
If you see it as a purpose trust, probably would fit in the intention of
the transaction but would NOT fit in orthodox principles
If a purpose trust it can only be valid if it is a charitable
purpose trust, not private.
o Because it is the B who are going to monitor the trustee through
proceedings, you have to have either a B, or if you dont, if it is
the charitable trust, the Secretary of Justice will intervene. But if
it is private, the government will not enforce it, nor is there any B
to enforce it. will run into the problem where the trust is not
enforceable.
No matter what option (for person/purpose) you take, you run into
difficulties. The trust therefore does not fall into any of the orthodox
principles.

Look at the case regarding the collective enforcement of trust Saunders v

Fortier

Lord Millets interpretation of the trust nature in Twinsectra (para 100)

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o Twinsectra Lord Millet the justification is to see it as an resulting trust
right from the start i.e. the primary trust is a RT instead of ET.
o The trustee holds it for the lender (because of RT nature) and is subject to
the borrowers power/duty to apply the money in acc with the terms of
the loan.
Concept of agency, mandate, power for agency to do sth: power: may
do it, ; duty: must do it
Whether the borrower is obliged to apply the money for the stated
purpose or merely at liberty to do so, and whether the lender can
countermand (revoke) the borrowers mandate while it is still capable
of being carried out, must depend on the circumstances of the
particular case (must or may?) contractual arrangement
3 advantages of holding the resulting trust right at the start:
1. No other party can claim an absolute interest in the trust fund
(recipient or 3rd aprty cant : what the contractual transaction
meant to achive: separately: only intended to provide some
insurance to provide the fund from insolvency risk; not absolute
interest to anyone legal effect of the resulting trust resemble
the intended commercial transaction
2. Avoid the problem of private purpose trust, because the trust
is invoked: achieve the result of protection against insolvency
3. A good match between the legal principle that he use and the
commercial transaction the party really wanted
Use the resulting trust to achieve insolvency protection &
enforecement for the special condition of the loan: this is to be
dealt agency and mandate/ contract, whether the mandate could
be revoked depend on contractual interpretation of the
arrangement,
The solution offer best fit between doctrine and commercial
reality/ practiacality
One issue: How did the resulting trust arise?
2 Orthodox way: resulting trust arise either at initial point of
failure to set up a trust (automaticla RT) or RT arise because of
subsequent failure of a already valid express trust
o Scholar for equity student: not worthy candidate, surplus
fund left resulting trust, arise when failure to exhaust
the express trust
Here, Lord Millet say there was a RT right from the start not
initial failure or subsequent failure settlor simply retain some
beneficiary interest, only pass legal interest, and retain equitable
interest: consistent?
o This ans is prolly is the best
RT subject to the power none of the parties can assert the
Saunders v Fortier rule
Because the borrower is subject to the duties and powers to use
it
A bit improvement as an alternative to seeing it as an express
trust
Uses the right amount of legal principles to achieve the same
purpose: in Q arrangement, the parties only wanted a legally
enforceable security, but not making it a binding term of the trust, only
trust subject to a mandate to restrict power

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 contract law instead of trust law to enforce the mandate, as long
as a legally enforceable security
trust laws are more complex and expansive
Result: at primary stage, the trust fund will be segregated from the
general fund and the term will be enforceable albeit by contract law
to have a RT, u need to fit it within automatic RT or presumed
purchase money RT. Lord Millet did not tell which kind it falls
into. QT does not fall into automatic RT for initial/subsequent failure
where there is intention to establish a trust but failure to declare. Nor
can u say that there is a surplus of the trust fund because he said that
it is RT right from the trust. Can u say it is a presumed RT purchase
money RT? Not the situation where u pay the purchase price to buy the
property for a TP. This is just the situation to transfer the money
without the intention to make a gift. But alr best fit a presumed RT.
(32)
LH: But cant be too perfectionistic, the reality is that the Q trust
cannot fit perfectly into any of the orthodox principles. What LMillet
suggests will effect the least infringement of the trust principles.
Twinsectra
Facts:
o The solicitor is supposed to forward the money to TP lender only upon
clarification of certain things.
o The solicitor, in breach of that, transferred money onwards.
o There was a breach of the primary trust, the purpose has not failed yet but
the term of the trust is breached
o Issue: Whether can trace through the primary trust into the property

Twinsectra v Yardley (2002) AC

Facts:
Claimant lent a loan to D. Claimant paid it to a solicitor S associated to D who
undertook not to release the money to D except in accordance with loan conditions.
But the solicitor released to the solicitor L acting for D in breach of the undertaking. D
used part of the money to pay off a debt.

Claimant claimed that the money had been impressed with a Q trust and the solicitor Y
had breached the trust when it released the money,.

Issue: if for any reason the purpose cannot be carried out, the question arises
whether
(1) the money falls within the general fund of the borrowers assets, in which case it
passes to his trustee in bankruptcy in the event of his insolvency and the lender is
merely a loan creditor, or
(2) whether it is held on a resulting trust for the lender. This depends on the intention
of the parties collected from the terms of the arrangement and the circumstances of
the case
Conclusion:
- A Q trust was found. The money was never at Ds free disposal. The money
belonged throughout to C, subject only to Ds right to apply it for the acquisition
of property.
- S act in paying the money over to L was a breach of trust but it did not itself
render the money incapable of being applied for the stated purpose. In so far as
L applied the money in the acquisition of the property, the purpose was
achieved.

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Reasoning:
Intention
- A settlor must possess the necessary intention to create a trust, but his
subjective intentions are IR. If he enters into arrangements which have the effect
of creating a trust, it is not necessary that he should appreciate that they do so;
it is sufficient that he intends to enter into them

The effect of the undertaking

- It is unconscionable for a man to obtain money on terms as to its application and
then disregard the terms on which he received it. Such conduct goes beyond a
mere breach of contract
- The duty is not contractual but fiduciary. It may exist despite the absence of any
contract at all between the parties, and it binds third parties as in the Quistclose
case itself.
- The duty is fiduciary in character because a person who makes money available
on terms that it is to be used for a particular purpose only and not for other
purpose thereby places his trust and confidence in the recipient to ensure that it
is properly applied.

The nature of the trust

- Commented on the primary and secondary trust distinctions provided by LBW in
Quistclose clase: what if the primary trust is not for identifiable person
- s, but in the present case to carry out an abstract purpose? Where in such a case
is the beneficial interest pending the application of the money for the stated
purpose or the failure of the purpose? There are 4 possibilities: (i) the lender (ii)
in the borrower (iii) in the contemplated beneficiary (iv) in suspense all the
analyses are not satisfactory
- Held that the Q trust is an entirely orthodox example of RT:
- The lender pays the money to the borrower by way of loan, but he does not part
with the entire beneficial interest in the money and in so far as he does not, it is
held on a RT for the lender from the outset. It is the borrower who has a limited
use of the money, being obliged to apply it for the stated purpose or return it.
The borrower did not part with any beneficial interest in the money, which
remained throughout in the lender subject only to the borrowers power or duty
to apply the money in accordance with the lenders instructions.
- When the purpose fails, the money is returnable to the lender, not under some
new trust in his favour which only comes into being on the failure of the purpose,
but because the RT in his favour is no longer subject to any power on the part of
the borrower to make use of the money.

When the Trust in favour of the Lender arises

- Like all resulting trusts, the trust in favour of the lender arises when the lender
parts with the money on terms which do not exhaust the beneficial interest. It is
not a contingent reversionary or future interest.
- It is a default trust which fills the gap when some part of the beneficial interest is
undisposed of and prevents it from being in suspense.

Reasons why the distinction of Q trust is important (36)

The principles of trust laws can be bent in order to achieve priority in insolvency
o Secondary trust

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 RT/CT no writing is needed. Once u can est that the money u gave someone is
held on trust you can actually take that back. The insolvency estate only
comprises the money beneficially owned by the insolvent.
Always have to bear in mind the priority issues that are at play.

Attempts to use the RT to obtain proprietary restitution

Note on law of unjust enrichment

Whether we allow ppl to use the trust to get proprietary remedy to unjust
enrichment
Examples of (personal) restitution for unjust enrichment
1. A paid B 1m as a result of a clerical mistake. (computer error) (even payor is
negligent, does not matter, payor can still recover)
2. A entered into a contract with B upon the latters undue influence or f.
misrepresentation, and paid B $1m pursuant to the (voidable) contract. (normally
if u rescind the contract u will get back the title to the amt paid)
o Equally applicable in situations of duress
o Primary remedy under contract law: rescission (put u back to the position u
were before you enter into the contract) resitutionary (the court would not
protect the bad bargain
o Right to rescind a voidable contract: personal right (mere equity: if you fail to
rescind before the other party got bankrupt, tough luck) equitable recession:
(no priority)
3. A paid B 1m pursuant to a contract between them. The contract is null and void.

o Only money:
o If paid under a void contract, title over the money still passes: recipient will till
get a valid title; money is currency. D will have a absolute legal title, can only
claim on a personal basis for the equivalent basis
o Void: ulta vires
o Water Department charges water bills: no authority
o Kindergergarden: failed to renew license fee, no authority for charging school
fees
Remedy: In all 3 situations, the law of UE will give A a personal right to recover
the 1m.
The course of action = money had and received
o Actually receives money to my use and therefore have to give it back.
o This is money that recipant had and was recived from thP and now would
have to retuned it to the P
If B go bankrupted before the claim, no prority: big policy question
Undue influence/ f misrep policy basis of recovery when the money is paid it is
not paid with a free exercise of autonomy because the mistake renders the
exercise defective (i.e. impaired consent because of the mistake)
What if B has gone bankrupt before A has recovered the enrichment?
o Depends on whether A has proprietary right over the trust money
If not pari passu
o Q: shud plaintiff (A), in the law of restitution, be entitled to a
proprietary interest? Should u allow A to enjoy priority over Bs
creditor?
Policy:
The competition is not between A&B, but between A and innocent
creditors of B both are innocent parties (all are innocent, lend money
on the appearance of Bs wealth)
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 How to weight between the two innocent groups of people?
1st argument insolvency risk taken (A had not taken insolvency risk,
A is not really lending money to B)
o In contract, when u deal with a person, at least u have seen this
person, you can always ask for security (negotiate some
protection) if u want to avoid insolvency risk. Choosing not to
take security means a voluntary assumption of the insolvency
risk.
o Cf: UE, the plaintiff has not taken insolvency risk because it is a
mistaken payment/ pressed payment no opportunity
o Therefore A deserves priority protection.
of this argument
Not a good justification because whether A has taken an
insolvency risk is a matter of fact
Only that the amt of time and cost to spend on this inquiry is not
worth it
Tort victims also do not take insolvency risks do not enjoy priority
either! (judgment creditor)

2nd argument
o A had swollen (aggregated to bs asset) the asset of B by giving
the money to B making it look as if theres more.
o The extra money is the money that B should not give. If the
creditors have access to this money, then the creditors will be
unjustly enriched. Should not be in a better position than B
himself

Assuming A had a proprietary interest.. but this exactly is the
question itself, In contract, when we pass the money out, even
voidable, the full ownership of money pass
A did give $ to B but to say that this is still money that belongs
to A backs the question. Very often if A gives the $ to B he
intends to transfer absolutely the full ownership right to B,
even in undue influence situations, in turn to get a contractual
right of performance.

1st view: intention to t/f is not defective, just that the motive of t/f
is affected by mistake or undue influence

2nd (alternative) view: because the intention to transfer is

defective, therefore no intention to benefit the recipient can
invoke the RT legal title passes to the recipient but no
intention to pass the beneficial interest to the recipient
beneficial interest still remains in the payor A still has the
priority

Immediate interest will arise at the point of time of t/f if to cut

it back later it is only because of the policy considerations

3rd view halfway house: when there is a mistaken payment, the

intent is defective but it does not immediately give rise to a
beneficial interest/trust, only the power to seek to request the

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 property. When u exercise this power by requesting/noticing
D, by that point of time u get ur interest back.

Cant say the recipients money comes from the swelling of

assets.
Mitchell: Adding up two insufficient arguments make them
sufficient. ??

Problem: Adding up two insufficient arguments strengthens the point

but does not mean the resulting argument is sufficient.

Sweoden: neither argument is good enough: never ever to give

properitary remedies ;

Litigants want to improve their remedy by arguming for the RT and

tried to use CT

Cases:

Case scenario 1: Mistaken payment

Chase Manhattan v Israel-British Bank

Facts:
A payor bank supposed to pay payment to another payee bank, made mistaken
identical payment thereafter (paid over twice, 2nd was mistaken)
Immediately told the recipient bank about it
The following day the recipient bank was declared insolvent
Whether the payor can recover the payment on a proprietary basis?
Held:
A person who pays money to another under a factual mistake (1)retains an
equitable property in it and (2) the conscience of that other is subjected to a FD
to respect his proprietary right#
There is a constructive trust in favour of the paying bank
Took the view that UK law is the same as NY law that the payor retains an eq
interest in the overpaid amount and the conscience of the recipient is affected
subject to Ps proprietary interest in the property
When did such a trust arise?
o At the point of payment, an immediate p right arises in fav of P
Q: is it a CT or RT? (Not explained)
Did not talk abt it but seems it is a CT
Said that it is the same as NY law therefore CT
Comments by LH:
Just an assertion, no explanation of the theoretical basis, no consideration of policy
just a statement
Only first instance, only a dictum
If adopted this case, it would mean all mistaken payment would be recoverable on
a proprietary basis (what about the crediors of insolvent person?)

#Comments by LBW in Westdeutche (disagreed with the reasoning of the court)

The reasoning was based on the concept of retaining an equitable property in
money where, prior to the payment to the recipient, there was no existing
equitable interest (is it because of the non separation of legal and equitable
13
 interests?) therefore the payor cannot be said to have retained an equitable
interest after paying the money over
Also, the recipients conscience could not be affected at a time when he was not
aware of any mistake (at the point of receipt that he was still not told of the
mistake?)
The analogy between UK and NY law is also problematic: UK law only recognized
institutional constructive trusts, while US law recognized remedial constructive
trusts. The former arises by the operation of law as from the date of the
circumstances which give rise to it: the function of the court is merely to declare
that such trust has arisen in the past. The latter is a judicial remedy which lies in
the discretion of the court.
BUT although the reasoning in Chase was not accepted by LBW, the decision was
right: D bank knew of the mistake made by the payor within 2 days of the receipt
of moneys the judge treated this fact as IR, but in LBWs judgment it provides as
proper foundation for the decision. Although the mere receipt of moneys, 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 CT.

Case Scenario 2: Void payment (eg: ultra vires) contracts

Sinclair v Broughham (overruled on the proprietary point by Westdeutsche)

Facts:
An ultra vires deposit taking business (took deposits from customers)
Transpired that it did not have the right license (no authority) whatever entered
into was null and void
Insolvent- no much for everyone
Then gone bust depositor wanted to recover the money

Held:
Can the depositors have a personal right to recover the money?
o NO, because of the old days when the law of unjust enrichment was not very
developed, the basis of recovery was quasi-contract (implied contract) if
the deposit taking company does not have authority to enter into express
contract with you, it of course (no authority) cannot enter into implied
contract with you to restore the money back. rubbish
[overruled in W: the implied contract did not in fact have to be shown, it is
just theoretical. In later cases, the common law restitutionary claim is based
not on implied contract, but on unjust enrichment: in the circumstances the
law imposes an obligation to reply, rather than implying an entirely fictitious
agreement to repay. The contract basis for moneys had and received was
overruled in Westdeutche.]
o LBW in Westdeutche: it follows that the depositors should have had a
personal claim to recover the moneys at law based on a total failure of
consideration. The failure of consideration was not partial: the depositors
had paid over their money in consideration of a promise to pay, and the
promise turned out to be ultra virus and void, therefore the consideration for
the money wholly failed.
It then said that the depositors nonetheless have eq proprietary right in the asset
because the contract was void ab initio
[overruled in W the only way to understand it is to see the practical realities of
the situation in insolvency situation it is hard for the court to say to the victims
that they had the wrong bet in the bank and could not get the money back.]

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 o Wrong because the contract being void will only give P a personal action at
law to recover the moneys paid as on a total failure of consideration he will
not have an equitable proprietary claim which gives him either rights against
TP or priority in an insolvency, nor will he have a personal claim in equity,
since the recipient is not a trustee.

Westdeutshce decision of Lord BW overruled Sinclair (Really really bad)

Facts
Local governments entered into interest-rate swap transactions with banks
(interest-rate swap a derivative contract: A lends B 1m on fixed interest rate and
B lends back 1m on floating interest rate from time to time depending on the
fluctuations in the market, A may have to pay B the shortfall if the fixed>floating
interest rate, or vice versa a form of contract to let 2 parties speculate) just a
gambling contract to hedge risk
The bank had paid money to the local authority (a contractual payment)
Another HOL decision declared such contracts as ultra virus as they are gaming
contracts and govt do not have the authority to enter into the contract, but bank
payment has already made
Bank sought to get back the payment but on a more favourable interest
rate (proprietary claim) (compound interest instead of simple interest) the way
is to claim a proprietary right

Banks argument
= the argument of the immediate trust view
o 1st based on Sinclair once the money is paid over, under existing property
law, whoever possesses the currency has legal title of it, legal title over the
money passes to the local authority. BUT because it is a void contract, the
equitable title does not pass. There is a split between the legal (with local
authority) and equitable title (with the bank).
o When there is a split between equitable and legal title, there must be a trust.
The trust arises through 3 authorities
1st Sinclair proprietary interest if void ab initio
2nd - Chase Manhattan - payor retains equitable interest when the
legal title passes
3rd based on academic argument from Robert Chambers (Peter Birks:
a Roman Lawyer s student: argue for using the RT as a vechicle to
provide remedy for resutition) if u look at the underlying basis of RT
the reason why a RT arises is that the payor/transferor t/f the legal title
to the transferee but did not intend him to receive the money. Can
invoke the resulting trust in fav of the payor. The eq interest can be
seen as being retained by the transferor.
(1)When people transfer legal title to the recipant, but (2)did not
intend the recipant to benefit from it , (3)the property remain
identifiable, then a resulting trust should arise
Bank: we transfer the legal title to the Council, and did not
intend they o benefit form it because its void contract,
REJECTED by BW
o Conclusion: If u pay money under a contract, u part with the money out and
out (not retain any beneficial interest) in return u just get a contract right
on the due date. The intention is defective and therefore u get the beneficial
interest. (1:50)

15
Banks argument for the proprietary interest
1. The legal title passes to the recipient.
2. A legal title over the money passes to the recipient because it is void, beneficial
title is retained by the payor.
3. legal title and equitable title are split there has to be a trust
4. if it is a trust, then it is a resulting trust because the transferor had no intention
to benefit the transferee (the intention is affected by the voidness, did not intend
to benefit the transferee) adopting the Chambers thesis
LBW:
- if u accept the argument will give rise to undesirable consequences:
- means that the proprietary interest arises at the point of receipt even when (1) the
recipients conscience was not affected (he was not aware of that mistake and the
lack of entitlement) if adopt this argument of a bank, the recipient though
innocent will be subject to a trust, creditor would be surprised by these hidden
properitary rights
- if you impose a proprietary right, it is not fair to the innocent general creditors
- to justify the undesirable consequences, need very strong grounds to impose a
trust. Looking at existing traditional orthodox trust principles, a trustee will once
be found if his conscience is affected:
o E.g. an express trust appointing someone as trustee, at least there is room
for him to deny the obligation as a trustee.
o E.g.2 constructive trust trust is imposed on people acted unconscionably
the fundamental principle of the law is that the trustees conscience must
be affected.
- In order to show the banks argument is wrong
o The legal title passes (OK)
o Argument 1: Legal title passes, but equitable title was retained by the
payor
BW: Rebuttal: (refer to the retention of title argument of the
judgment) when a person has full absoute ownership, there is a unitary
full ownership, does not mean u have equitable + legal title (split), but
just a single unitary ownership when a person retains a trust, it is not
a set law that only the legal title passes.
But rather, the settlor passes the full beneficial ownership to the
trustee and at the same time a new equitable title arises in favour of
the payee. Therefore not right for the bank to argue for a
separation of titles that when the legal title passes the payor can
retain the beneficial ownership as he pays full title.
o Argument 2: When legal and equitable title split there has to be a trust
Rebuttal: does not have to be a trust in those situations e.g.
mortgage the mortgagor has the equitable interest of redemption,
without creating a trust.
In Eng law, unlike in civil law, ownership is not a big deal, the
conception is solely: title means all rights relating to the ownership of
a property, regardless of whose right is better than that of the others.
o Argument 3: Resulting trust will arise because the payor did not intend to
benefit the payee
Rebuttal: Sinclair, Chambers
first, in relation to the authority of Sinclair, LBW overruled:
Sinclair is officially a bad law.
Chase Manhattan: when a recipient receives $ upon mistake, the
payor retains an equitable interest LBWs response: thats bad
reasoning, but he tried not to overrule that authority but chose
16
 to say that the decision was correct but just the reasoning was
bad gave a new reasoning: when the payment was initially
made to the recipient mistakenly, there was no equitable interest
in it yet, but the moment when the recipient became aware of
the mistaken payment, his conscience was affected and a trust
arises at that point of time took the view that the trust can be
justified on the basis that the recipients conscience was
affected.
Fits the facts of Manhattan, in fact the mistake was noted shorting
before the recipient went into liquidation the problem is whether you
agree with this new basis? What it means it that all along given the
defendant is receiving the payment he is receiving it in full, the trust
arises just in case you acquire knowledge this stems from LBWs idea
but if u look at existing trust principles that doesnt have to be so: a
trustee can be a resulting trustee even if you are not aware of it an
infant was treated as a resulting trustee can challenge LBWs
proposition that
o Remark on Chambers academic argument:
LBW takes the view that RT is not a good tool to develop proprietary
restitutionary remedies disagrees that RT arises because the P did
not intend to receive the money because RT is based on
presumptions and the relevant presumption is not that the transferor
did not intend the t/e to benefit, but rather a positive intention of
the transferor to create a trust
Absence of intention to benefit the recipant not enough, but
need more, need to show the positive presumed intention to
create the trust theres a difference
Bills Wittliney: look at old law: based on the positive presumed
intention to create the trust; in a void contract, people werent
thinking about that; only think about the contractual payment,
usually intended to transfer the whole ownership
o Argument 4:
LBW: If you wanted to create a trust, the conscience of the trustee
must have been affected, trustee must somehow know that he is
intended to be a trustee,
In a void contract, the conscience of the trustee is not affected when
the Council receive the money, it did not know it was not entitle to it,
not affected here cant impose trust on Council
o RT imposition may give rise to unjust results in the name of unjust
enrichment:
RT would confer on P a right to recover property from or at the
expense of those who have not been unjustly enriched at his
expense at all, e.g. the lender whose debt is secured by a
floating charge and all TP who have purchased an equitable
interest only, albeit in all innocence and for value.
A better way of remedy is for the court to impose a CT on a D
who knowingly retains property of which P has been unjustly
deprived. Since the remedy can be tailored to the circumstances
of the particular case, innocent TP would not be prejudiced and
restitutionary defences are capable of being given effect. (but
this remains to be decided in a future case when the point is
directly in issue)

17
 o Chambers view: a RT arises when there is an absence of intention to
benefit the recipient
CF: LBW: the presence of the positive intention to create a trust is
needed, not sufficient that u merely did not intend to benefit the
recipient.
In situations of void payments, there is no intention to benefit the
recipient (satisfying the Chambers test) but would not satisfy LBWs
stricter test still no presumption that the payor intends to create the
trust.
o Application:
(1): reject the retention of beneficiary interest point not possible for
any trust to arise from the moment of payment
(2): It may be that at the subsequent point the Councils conscience
may be affected, only subsequently, on the fact here, prime facie, you
can recover as personal claim. Council is innocent, it came to know
that the contract was void only a few years later when HOL declare the
contract is void. It is subsequently. By then, the money is mixed, cant
identify anymore, cant impose RT ot CT anymore
If the recipt had received the monry and while hes still innoncent and
mixed with general fund, even laterhe found out its void and the
conscience therefore be affected, its too late. Property no longer
identificable. Different if in separate account.
LBW: Manhaattems result was right, only the reasoning was
wrong, and gave a new reasoning to justify this
Chase Manhattan: when a recipient receives $ upon mistake, the
payor retains an equitable interest LBWs response: thats bad
reasoning, but he tried not to overrule that authority but chose
to say that the decision was correct but just the reasoning was
bad gave a new reasoning: when the payment was initially
made to the recipient mistakenly, there was no equitable interest
in it yet, but the moment when the recipient became aware of
the mistaken payment, his conscience was affected (the CT
arose when the receving bank knew about the mistaken
paymeny, its conscience has been affected at that point) and a
trust arises at that point of time, and because insolvency
interfere a few days later, it does not matter, the CT has already
arrose took the view that the trust can be justified on the basis
that the recipients conscience was affected. ( time is when the
bank obtain knowledge while the money remain identifiable
special fact)

Current position:
After Westdeutsche, the mere fact that it is a void payment can only give rise to
an in personem payment.
(1) No proprietary interest in the payment made, except if under Westdeutches
reasoning, at the time when D acquires knowledge of it, that his conscience is
affected.
(2) If the property remains identifiable, then there is a trust.

Application to the facts of Westdeusche

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 On the facts of W, money is paid over, there is a right to recover it in personem,
but no proprietary right over it at the time of receipt.
Too late to impose trust because there is no identifiable property by the time D
acquires knowledge.

Criticisin of Westdeushe
Made some mistake: (2008) article

Case Scenario 3: Payments under voidable contracts

Orthodox law: recession (ask for equivalent to be returned)- mere equity , personal
claims
E.g. undue influence, misrep (not limited to fraudulent misrep, could be
innocent, negligent or fraudulent)
3 cases where P tries to argue for a proprietary interest in the money paid over
success but all adopt different reasonings. Need to reconcile them and identify
which one helps u when applying to case facts.

1. El Ajou:
o The case involves fraud Lord Millet made 2 important points (1 st instance
dictum)
(1) In a situation where there is a voidable contract like in fraudulent
misrep, from the moment of receipt onwards, the plaintiff has the right
to rescind the transaction and revest the equitiable title to the
purchase money in themselves ( Orthodox). That right to rescind is
good enuf to support an equitable tracing claim to give you proprietary
remedy. (dictum) When successfully trace, a claim of constructive
trust or charge which would give a proprietary right; also, to be
succeed in propreitar right; you need an initial beneficiary interest/
fiduciary relationship
From the dictum, seems that from the moment of
payment/receipt, you have a right to trace the proprietary right
Lord Millet seems suggest even a mere equity is sufficient to
equitiable tracing
(2) When you trace, the trust u get at the end of the day is not a
constructive trust but a resulting trust (dictum)
Influenced by Peter Bird thinking, RT is suitable for unjust
enrichment when I successfully trace into certain property, im
recovering what I have lost, that should be RT, different from CT
(because of some unconscionable conduct on the part of the
legal title holder, such as fid taking bride
It seems that the moment u enter into a voidable contract and pay
money over, you have a right to resind that right to rescinf would
Justify to allow you to trace in equity. It is unclear whether what that
mean it that once youy successful trace in equity, you therefore get a
proprietary right. Or simply sufficient to kick start the evidential
process (latter: weaker; former; stronger, duno which he mean)
o ^the above is some judicial support for the view that payments under
voidable contract can give u a right to rescind to justify tracing and to obtain
a resulting trust seems to fit in Xxchambers
2 comments:
o if a person has the right to rescind, the right is not a legal title nor an
equitable title as in ownership. The title is a mere equity which is an in

19
 personem right (not a proprietary right) not legitimate for LM to say that it
can justify equitable tracing and the imposition of a trust.
But maybe he wasnt referring to it being an equitable title in itself, but
it only justifies a tracing claim, which will lead u to a trust. (there is
room of ambiguity here)
o the trust of a proprietary interest at the time to receipt maybe LMs
meaning is that this right to trace is not as good as an equitable property
right ???

2. Re Goldcorp a scam (1995)

Facts:
o Gold dealer takes money from investors to invest in gold
o Instead of giving the investors actual gold, the former gave them certificates
of ownership of the gold and he kept the gold in the box, they claim there
are sufficient physical gold there and being audited by a accounting firm
o Went into insolvency gold not sufficent
o Some small customers realized that there is not sufficient gold
o They claim they have the certificate so they are the real owner, but legally
they have no trust
o Instead, some gold is subject to a charge by a bank, where the gold dealer
get further financing from
o There is a priority conflict between the bank vs customers
o Customers argued for a proprietary interest
1st Argument
o They claim that when they enter into the sale and purchase agreement, they
claim that the legal title over the gold has passed to them; hence the
certificate of ownership is to evidenced it; only Goldcorp is keeping the
physical possession
o PC: No, not true, because its a sale and purchase of property from a big
bulk, unless and until the property has been appropriated for the customer,
legal title does not pass
Unless put a tag or there is a intention to transfer ( re Londonwine)
Certificate of ownership is not sufficient as appropriation
nd
2 Argument:
o There is a fid relationship between the claimant and Goldcrop exchange
because Goldcop put forward itself as somene that they can trust, can rely
on (being lay customer, place high trust and confidence in Gold corp
exchange)
o PC: rejected, you still have to look at the esstential contract between the
parties coz here the esstial contract was a sale and apurchase contract, no
additional duty in this contract that show that they are of a fid relatiopbship.
Only duty is the purchase and sale, payment of money and delivery ( in the
mean time, retention of physical property)
rd
3 Argument:
o Use the Quitsclose trust: when I give you money to buy the gold in Goldcorp,
it is for the specific purpose for buying gold, therefore, the purchase money
was subject to QT, the money become the part of the QT
o PC: rejected, when the customer gave money to the seller, under a sale and
purchase agreement, no restriction on the use of money. Recpient are free to
depose the money, no QT
4th Argument:

20
 o There should be a remedial CT
o It does not matter that I could not prove a continuing equitable interest, the
court would just as a matter of discretion at date of judgment declare certain
property to be held on trust, because thats the best way to do justice, purly
discretionary
o PC: rejected, US law did that regularly

PC Held:
o Orthodox law: all you can say that the contract was induced by fraudulent
misrep (company had not meant to maintain the gold for the customers) to
induce the customers to buy the gold in
o PC: since the contract was induced by f misrep at most give a voidable
contract all the right is the right to rescind (the recipant return the
equivalent amount to you, strictly speaking, not revesting), before rescindion
was effected, no proprietary interest. In the facts, no rescission before
insolvency, cannot say the title has been revested. Until the payment was
actually made, then you have a properitary interest there.
o Right from the start of the contract, it is true that the customer has a right to
rescind the contrac, just mere equity, peronsal right, no properitary right for
the property. The party has not rescinded the contract before insolvency
intervene. did not do so, so you are just a general creditor
o In this case, specific context, there is a priority conflict between the bank
(given a floating charge) vs customers, on insolvency, the floating charge
crystallised into fixed charge, so insusbstance secured creditor. It might
look very sad that the big bank has won the battle. But we must not be
tempted by this to twist the law.
o
Goldcorp: have to rescind first before title can revest in you. From the point of
rescission, the title can be revested.
Cf: El Ajou: pushes the time back earlier as soon as the payment is received,
there is an immediate right to rescind

Once succeed in rescinding, u r protected from insolvency, because equitable title

revests back to you. But different approaches adopted in El Ajou and Re Goldcorp
as to the point of time of rescission.

Eg: yoga club, gym, when you paying upfront membership fee, you are taking
insolvency risk, when you pay the money, you have not got insolvency protection;
if they insolvent, tough luck, cant recover thing,

Eg: cake coupon, when u buycake coupon, the undertaking is that they will get you
a dozen of cake, purly contractual undertaking, if they insolvent, no insolvency
protection become useless paper

El Ajou: seems to suggest by dictum, when you have a fraudulent transection, voidable
contract, you might have a right to trace
Oppositely, Re Goldcorp: this right is just a personal right

How to reconcile?? THINK

Westdeutsche (3rd approach) confuses the picture

Dictum on fraud
Rationalalisation of Chase Manhattan

21
 o How this can have powerful effect on voidable contract LBW: once your
conscience has been affected, the trust will arise (seems to mean CT), as
long as property is identifiable
o Apply to a fact: if you pay over money on fraudulent misrep, when will the
trust arise? At point of recipt? Or later?
o if im fraduletnt, I defaulted you, at the moment I received it, my conscience
has already been affected, the implication of LBW mean at moment of recipt
(money has not been mixed yet), such a CT will arise? Have the effect of
changing the orthodox law suggested in Goldcorp (LH: there are problem in
Westdeutsche)
o Do you give that special treatment to frad misrep? Which mena everytime
there is a fraudulent recipet, there is a CT arise? compare with orthodox
law (personal right to rescind it)
o
Ought to have an immediate proprietary interest before the right to rescind e.g.
theft stolen beggar coins
when someone steals your property, the thief gets only possessory title because
common law says there is no ownership right. The original owner had an
immediate right of possession which is stronger than the factual possession of the
thief. Therefore can sue thief in tort of conversion to take the property back or to
get paid the market value of the watch as compensation. [Common law solves
theft without proprietary analysis]
What about proceeds of sale? If sell the watch and keep the proceeds. CLs
answer: you can also sue for the proceeds seen if the person holding the proceeds
is in liquidation, it doesnt matter because even if he has gone bankrupt, the
trustee for bankruptcy is not a bona fide purchaser, and is bound by the claim for
conversion as well. But what it also means is that if a watch has been passed to
some other people, u cant have proprietary claim against some third party. In
some jurisdictions, in order to allow ppl to claim against the subsequent recipient,
it is suggested to use a trust where the recipient are constructive trustees. But UK
law has not come that far yet, and still tries to resort to the limited resort of
common law.
LBW know that there is no authority to support the recipient being CT but believe
that property retained by fraud should be subject to a CT a pure dictum without
any supporting reasoning
When you are applying this dictum in relation to voidable contracts entered into as
a result of f misrep that would mean that the CT would arise from the time of
receipt of the payment because under that dictum property obtained by fraud is
subject to constructive trust

3 authorities above adopt different reasonings

IMPORTANT Comparison:
El Ajou (assert) and Westdeutsche: proprietary right arise at the time of receipt
Re Goldcorp: orthodox eg: you dun have any proprietary right to the underlying
property, just a right to rescind, when you exercise your personal right to rescind,
the other party only owes you the duty to return the equivalent sum, maybe after
the sum was indeed returned, you will have a proprietary right, thats after: much
latter)

A point on tracing - the stolen bag of coins in Chase Manhattan case, elaborated by
LBW

22
 At law the coins remain traceable only so long as they are kept separate: as
soon as they are mixed with other coins or paid into a mixed bank account they
cease to be traceable at law.
Cf - In equity: traceable if there has been at some stage breach of fiduciary duty
(e.g. the coins were stolen trust moneys) or such interest arise under a RT at the
time of the theft or the mixing of the moneys i.e. a RT must arise either at the
time of the theft or when the moneys are subsequently mixed

Time line: when does the proprietary interest arise?

(1) payment (right to restitution or rescission arises) [El joe] [Westdeustche
only dictum and no authority is cited]
(2) P takes steps to recover Unjust Enrichment or rescinds the contract (for
mistaken payment under the factual contract u recover purely on the law of unjust
enrichment, but if with contract, u would be rescind the contract and such right will be
exercised with the right of rescission) [Re Goldcorp] [Shalson v Russo see below]
(3) D knows P seeks to recover or rescind
(4) D restores UE or contract rescinded
Summary:
if the steps u take are sufficient steps to rescind at that moment the contract has
been rescind (case? Finance? ) the proprietary interest arises
at which time insolvency intervenes, if after the contract is alr rescinded, there is
no problem because doesnt make a diff where u make rescission, as u have alr
established a proprietary interest attached to your property
at some point among the 4, only some authorities matter

1. UE - Transferring money to Ms Chan but misspelt Chan as Chen then paid to Chen
recover on the basis of UE, not recission
2.
3. Fraudulent misrep when recover, have to recover within the contractual remedies
the rescission.

Constructive Trusts
Personal side vs property side
- when you could be bother trying to prove there is RT and CT; When to use property
claim, when use personal claim
o Fid and trustee do wrong: personal remedy as compensation
o Broadman v Phipps: solicitor for family trust: give it to me assertion (made
profit, account for profit): does it matter for him to get money or share?
o 5 times: (1) when you actually want the asset and not the value: shares
to control the interest of the company, painting; (2) when the D is insolvent,
put you ahead of other unsecured creditor; (3) increase in value: successful
investment of the trust money; dun only want the 10000 trust money taken
want the substitute money; what to claim?--> proprietary; (4) limitation
period for personal claim; proprietary claim has no; (5) claim against the 3 rd
party: prove the primary D and prove that he pass to 3 rd party: expanding the
claim to someone else
- how to split tracing, RT, CT?

23
 o Tracing: at the end of all property claim: before you start, you have to prove
you have an initial property interest right at the beginning:
Fosckett v M: Start off with property claim:
Assuming you start off with property claimL (1( im a beneficiary of a
express trsut; or RT or CT
Then oou trace, then you make some claim
In HK law, we protect your equitable property right; property interest is
preserved in the substitute property: common law features
o RT: weird
Property rights jumps back to the original holder
Arise by operation of law; look for box of fact
o CT: arise by operation of law not so about of intention
When arise? Consue the fact and deciding that the trust has arise
(1) unconsiciable for the D to insist that they has the legal and
beneficaial interst in the property: what fact?
(2) D is under an obligation to transafer back to the claimant which the
law will specifically enforece equity will treat as done which ought to
be done
Overlap quite a lot
IS that really worth for them to claim a CT or a proprietary claim?
Disgrorment of profit is often of windfall: why they worth a better
protection? difficult policy question: ought to be done? but still
why?
Look at fact patternof different case

Doctrine of CT
Difference between RT and CT in commercial context (not land)
RT CT
Raising a trust to give effect to what Imposing a trust not to give effect to
transferor must have intended a purported intention, but for other
(situations where either the trust reasons such as the prevention of
fails or when you transfer property to unconscionability despite the
another without specifying why this intention of the settlor - usually when
person is to have the money and the legal title holder has done sth bad
where the presumption of to obtain the legal title and the court
advancement does not arise i.e. thinks they shud not keep the money
some evidential gap) e.g. when the son kills his father in
order to inherit the will a CT will be
Purports to uphold the intention of imposed on the son.
the settlor
Treat u as if u r a trustee often the
CT is a technique used to compel the
legal title holder to transfer the
property to the victim the idea is
simply a label used to justify ordering
reconveyance of the legal title to the
beneficiary of the constructive trust

Effect of CT in commercial context

o U get priority in insolvency
o Increase in value: u pursue a CT to reap the increase in value
o Interest rate: recover on compound interest not simple interest
24
 Can CTs in the commercial context arise in the following situations?
o Misappr of trust funds. The jurisdiction is clear cut - definitely can impose a
CT in that situation.
CT: can trace the property to which the trust fund is misapplied (bottle
cow duck)
o Mistaken payments?
o Fraud?
o Breach of FD without misappr property?
When FD breaches his f duty such as the no conflict/no secret profit
rule/ receive a secret bribe would he be holding the bribe on CT for
the principal? Still debating on the issue - Supreme court judgment
may be handed out before the exam

1. Misappr of trust funds (topic 7) (breach of fid duty)

Foskeet v Mckeown :
o When you take the trust asset from trust fund, they are held on trust (if you
intended that both legally and beneficially to be yours, they are not yours
beneficially )
o Comment: This is about property you take , but not about information:
information is not property
o Another route to get remedy for fid misusing Information: (1) breach of
confidence; (2) you make a profit out of your breach of fid duty, taking an
opportunity which should have belonged to the trust (1:07)
Broadman v Phips (HOL)
o Majority of judge treat information as property:
o dissenting judge: information is not property explaining why its not, also
explain eve why it is not pitching an opportunity that belong to the trust:
most often cited
El ajou RT seems to extend tracing beyond misappr of trust fund to
money/benefit paid under voidable contract by saying when u have a right to
rescind, justify tracing rule. The trust is not a CT but a classic institutional RT
(contrary to the existing authority that after tracing the claim u assert is a CT)
One thing to note abt the remedy: not very controversial because P had clearly
existing proprietary rights in the property and the breach of the trustee infringes
that proprietary right, therefore not controversial to give proprietary remedy)

2. mistaken payments
Chase Manhatten CT arises during receipt
o Fact: paid the payment twice; issue: do they have to pay bank?
o At least has a personal claim unjust enrichment: expect to get it back as a
personal claim
o Here: insolvency: identify your 2 million; argue for a trust
o Pricinple: yes, when it receipt the 2 million, immediately held on (CT):
assume the judge think that is a CT:
o conscience of the person is affected upon receipt so they have to respect
CMs right
o Heavily criticized: ie before they even knew there is a mistake: CT arise
o Not been overruled
Westdeutsche CT arises during retention after conscience is affected
o Fact: interst rate swap: limitation on borrowing: still borrowing (contract
become void ab into )

25
 o Making a voluntary transfer; they expect to get back what they had
transferred: when you are reapying, you have holding CT ( argument run )
to get compound interest
o Held: NO, only a personal claim, no propretiary claim
o Void contract no trust
o Voidable contract : have trust
o Lord Goff: presumed RT: this void contract cases plainly dont fall into this
catergory: voluntary transfrer by A to B where there is evidence of no
intenton to make a gift. The question is whether we should extent the RT to
this situation? (doesnt fit RT) and nor (commercial world argument):
elimate the personal trustee obligation part coz they here dont know they
are trustee ; cant fit CT conscience not affected
o Lord BW: the intention
o Rationalization of Chase Manhantten: once conscience is affected, hold on
trust
o Critique: if the property is not belong to you at first; why cant take back?
Critique:
o Difficult decision of CM and W
o
3. Breach of Fid duty other than misapporatation
If it is a (1 : 10), if you can prove it as a breach, (it is not always easy whther there
is a breach)
Butler v Bultre: next door land is of course an interest : tough case (the property to
be held on trust)
Women v Diuea: (1:16)
Azsum v Benum: partnership
Why do we say they also deserve a properitary claim?
o English case :SC: FA chart European case:
o Aus ans

4. Fraud (deceit; theft)? (there is an overlap of the cases here with that in f misrep)

Heading D : Conscienablity and fraud:

Westdeuche: there was a RT was supported by case of thieft steaibg bag of coin: can
the theif mix up and get legal title ?

Obiter: arise from a CT, when property is obtained by fraud, equity give rise
a CT on it

Other case: Purchase money RT : didnoy intent to make gift ( no one run this
judicially)

(1:20 2nd lec)

Dictum on property obtained by fraud
o Westdeutsche re stolen bag of coins LBW: a CT arises when property is
obtained by fraud. (dictum)
o Shalson v Russo criticism of the dictum where Rimer J in that case said
that there is sth wrong in principle in Ws view in relation to stolen property
because it is not sth u can rescind. U can only rely on the dictum of fraud.
BUT this does not exist in the law, when u steal the property u just get
factual possession and factual possession is not a property right and cannot

26
 be held upon trust. Queried whether u can actually use that dictum by LBW
to deal with theft cases.
Reasoning: A thief acquires no property in what he steals and cannot
give a title to it even to a good faith purchaser: both the thief and
purchaser are vulnerable to claims by the true owner to recover his
property. If the thief has no title in the property, he cannot be a trustee
of it for the true owner who retains the legal and beneficial title.
Additional comment: if the thief mixes stolen money with other money
in a bank account, the CL cannot trace into it. Equit has traditionally
been regarded as similarly incompetent unless it could first identify a
relevant fiduciary relationship, but in many cases of theft there will be
none.
o LH: In relation to stolen property u can get quite far in common law
doctrines, can even deal with insolvency situations. If willing to declare it on
trust, the proprietary remedy will reach further from the thief to the
subsequent recipeints. how
Implied rescission: Shalson v Russo
o When parties take steps to rescind, u can treat that as implied rescission,
from that moment onwards the equitable title revests in the plaintiff.
o If u put this view to voidable contracts can add this case as a fourth
argument in voidable contract context above.
o The theif did not have nay titleo n what he steal (on property) , cant transfer
title to 3 party (moey : can)
o
Comment by LH (Attacking the law)
o Any rights (e.g. a chose in action) can be a subject matter of a trust. You do not have to have a legal ownership of
something to have a trust
o when A transfer property to B, there is already a chose in action, capable of being a subject matter of a trust. No
need to have an implied right to rescind to revest proprietary interest, creating a trust.
o
Shalson v Russo (2003) Chancery Division
Facts:
Extensive frauds perpetrated by Russo upon 2 businessmen, Shalson and
KMimran
Issue: whether Shalson can trace the money paid to Russo
Dictum:
LBW in Westdeutshce: stolen bag of coins: stolen moneys are traceable in
equity. But the proprietary interest which equity is enforcing arises under a
constructive, not RTbut it is difficult to find authority for that proposition
o Comment on obiter observation of LBW in Westdeutsche: stolen bag
of coins: a thief acquires no property in what he steals and cannot
give title to it even to a good faith purchaser: both the thief and the
purchaser are vulnerable to claims by the true owner to recover his
property. If the thief has no title, he cannot be a trustee of it for the
true owner who retains legal and beneficial title. If the thief mixes
stolen money with other money in a bank account, the common law
cannot trace into it. Equity is similarly incompetent unless it could
first identify a relevant fiduciary relationship, but in many cases of
theft there will be none.
LBW in Westdeutshce: property obtained by fraud is automatically held by
the recipient on a CT for the person defrauded
o The authorities cited to support his view do not actually support the
view that property transferred under a voidable contract induced by
27
 fraud will immediately (prior to any recission) be held on trust for the
transferor
In case of a void contract property/ money purported passing from C to D
cannot be held by D as a trustee for C: D acquires no proprietary interest in
it, the entirety of which is retained by C and so D holds no interest in
respect of which he can be a trustee Cs proprietary rights entitle him to
recover the property, but his claim to do so cannot and does not need to
be dependent on the existence of a supposed trust relationship.
Adopted the view in Halifax Building that it cannot be elevated principle
that whenever there is personal fraud the fraudster will become a trustee
for the party injured by the fraud. Westdeutsche, whose judgment was
concluced 1 month after that of Halifax, did not mention the latter, but the
judge in this case prefer the CAs more cautious appeal to be attached to
McCormick.
Reasoning:
As P intended to make the loan payment to D (even though induced by
fraud), the money advanced became Ds property both legally and
beneficially.
In place of money, P acquired a chose in action in the nature of a right to
claim payment by D of the money so advanced.
X in equity the money remained in P from the moment it was paid over
Upon discovery of the fraud, the mere making of the claims amounted to
an implied rescission of the loan contracts. revest in P the title to the
money he had been induced to advance to D, carrying with it a right to
trace it onwards

The position is supported by Millet J in El Aljou, adding that such a trust is only an
old fashioned institutional RT instead of a new model remedial CT

Cf: In the earlier case Goldcorp (1995), Lord Mustill expressed the view (obiter)
that the consequence of any rescission by the purchasers of their purchase
contracts for misrepresentation would be to entitle the purchasers merely to
personal rights to recover the money paid under the contracts, but would not
entitle them to any sort of proprietary right in respect of such money.

Justice Rimers Comment: the Board in Goldcorp was only referred to El Ajou,
but to none of the other authorities to which he has referred on the proprietary
consequences of a rescission. Rimer J interpreted Mustills view as saying no
more than that until rescission the property is vested in the representor, and if it
is disposed of to a good faith purchaser, that purchaser will obtain a title which
will be unimpeachable after any rescission. Such purchasers will include the
representors charges.
Absent such third party right, upon the implied rescission of the loan contracts
effected by P bringing the claim, P has revested in him the property in the money
advanced and entitled himself to tracing
Conclusion:
P could trace the money since he had recovered his proprietary right in it

Retention of mistaken payment after conscience affected

o Farepak, Netsle Oy the facts of two cases are similar
A company had already decided to cease trading but still took money
from customers - subsequently went into liquidation. All customers
were all paying for contractual agreements.
28
 Orthodox approach in common law: Customers did not ask for security
all recovery would be on contractual basis in personem right but
the company alr gone bankrupt so the customers just fall into the
general creditors
But the company ought to have stopped receiving money once they
ceased trading
Held: money that are paid after the company had decided to cease
trading ought to be held on trust for the customers (no justification at
all.) orthodox approach would have said that it is f misrep so could
rescind, but did not rescind before insolvency
Invoked Westdeustche
When customers know money without knowing the company
ceased trading paid on mistake
Recipient knew right from the start that mistake and the
conscience was affected right from the start at the time of
receipt.
Because of accounting issues, judge did not order proprietary remedy
because on the facts it was not easy to tell when the money actually
came in.
The court did say that these are cases the liquidation happened shortly
before Christmas and customers (old ladies living on pension) were in
great anxiety. The judge only had a couple of days to look at all the
evidence to give an order. Given the restraint in timing, not good to
make good law.
Yes CT.,
Re Farepak Food and Gifts Ltd (2007) BCLC 1
Facts:
A company had already decided to cease trading but still took money from
customers - subsequently went into liquidation. All customers were all
paying for contractual agreements.
Conclusion:
money that are paid after the company had decided to cease trading ought
to be held on trust for the customers (no justification at all.)
Reasoning:
In a similar former case, Neste Oy, money was paid and received at a time
when the recipient company had resolved to cease trading immediately.
Held that at the time of receipt the company could not be in good
conscience retain the payment and that accordingly a CT is to be inferred.
Reliance was placed on Lord Browne-Wilkinsons remark on Chase
Manhattan Bank in Westdeustche that proprietary interest might arise once
the recipient had knowledge of the mistake of the payer as to whether the
recipient would fulfill the contract. The retention of the money might give
rise to a constructive trust.
Reasoning of Neste Oy modified in Farepak: the payment was one made
under a mistake, so that at the moment of receipt the recipient knowing
that he would not fulfill the contract and obviously appreciating that the
payer must understand otherwise, could not in good conscience keep the
money.not just the pricking of conscience that gives rise to CT, but
something more [knowledge].
Mann J held that if it could be established that moneys were paid to the
recipient by its customers at a time when the former had decided that it had
ceased trading, then at a time when it had indicated that payments should

29
 not be received, then there is a strong argument for saying that those
moneys will be held by the receiving company as constructive trustee from
the moment they were received.
So much uncertainy, decline to make a decision on that kind agrement

o Important thing:
All the different authorities above were set in the context of trying to
invoke a constructive instead of a resulting trust. Need to combine the
two in order to have the full analysis of the cases.

30
 Mistaken Payment Void Voidable (includes but Fraud (theft; f misrep
not limited to f misrep) overlapping with the 3rd
category)
Resulting Chase Manhattan did Westdeutsche - RT only El Ajou: In a situation
not clearly talk about the arises if there is a where there is a voidable
nature of the trust, but positive intention of the contract like in fraudulent
since it said it was transferor to create a misrep, from the moment
following the NY position, trust. of receipt onwards, the
seems it is a CT plaintiff has the right to
rescind. That right to
rescind is good enuf to
support an equitable
tracing claim to give you
proprietary remedy.
(dictum)
- From the dictum, seems
that from the moment of
payment/receipt, you
have a right to trace the
proprietary right
- When you trace, the
trust u get at the end of
the day is not a
constructive trust but a
resulting trust (dictum)
 Cf: Re Goldcorp: since
the contract was induced
by f misrep at most
give a voidable contract
all the right is the
mere right to rescind,
before rescinding, no
proprietary interest. After
rescinding, the title can
be revested.

Constructi Chase Manhattan CT Westdeutsche re stolen

ve arises during receipt bag of coins LBW: a CT
arises when property is
Cf: Westdeutsche obtained by fraud.
commenting on Chase (dictum) but no
CT arises during supportive reasoning
retention after
conscience is affected Cf: Shalson v Russo
criticism of the dictum
where Rimer J in that
case said that there is sth
wrong in principle in Ws
view in relation to stolen
property because it is not
sth u can rescind. U can
only rely on the dictum of
fraud. BUT this does not
exist in the law, when u
steal the property u just
get factual possession
and factual possession is
not a property right and
cannot be held upon
trust. Queried whether u
can actually use that
dictum by LBW to deal
with theft cases.
- When parties take steps
to rescind, u can treat
that as implied
rescission, from that
moment onwards the
equitable title revests in
the plaintiff.

Farepark, Nestle Oy
moneys that are paid
after the company has
decided to cease trading
ought to be held on trust
for customers
Refer to Twinsectra comment:
- Voidable contract: only if C elects to rescind before insolvency can C declare a
proprietary interest in the property but it is a mere equity rather than an
equitable interest i.e. it will bind a TP who is a volunteer or a purchaser with
notice, but not a bona fide purchaser without notice of a legal or equitable interest
in the assets (p.669 of HM)
- Void: CT arises at the moment of transfer
(c) Breach of fiduciary duty without misappropriation of property (Pure breach)
(e.g. the conflict of interest rule, bribes & secret commission) (1:10)
- what kind of thing courted as a breach?
- if its a breach and you can identify the asset which is produced in the result of the
breach held on CT
The benefit may not come from P & P does not have pre-existing equitable
ownership.
P should only have an in personem right: imposing the CT will be more
controversial
Acquisition of property that should have been acquired on behalf of the trust
(Keech v Sanford)
o Trustee renewing the lease on behalf of the infant beneficiary
o Held by court that the trustee holds the new lease on CT
o The controversy of imposing a CT is not serious because D Trustee is given a
specific task to acquire a property so the Ps connection with the trust
property is much closer
Usurpation of business opportunity or use of information
o Boardman v Phipps
Solicitor used his own funds to buy up shares in order to acquire the
majority shareholding in a company held in trust with majority
shareholding, he is able to reorganize the company
The share value of the company has increased
Both the company and the trustee have made profit, a win-win
But B turned around and sued T for breach of FD for misusing the
information and obtained profit as a result of it
Remedies:
Declaration of constructive trust over the shares held by the
solicitor
Account of profits subject to equitable allowance
The court did impose CT. However there is no insolvency involved.
Although CT was imposed, seems to be imposed as a tool to require
the defendant to account for profits Not a real test case to see if the
CT has actual proprietary effect (no conflicting TP rights).
Lord El John: Not a breach, not taking an opportunity that belong to the
trust, no conflicting duty, Look at dissenting judgment: its not always
easy to decide whether something is a conflict of interest

o Bhullar v Bhullar
A company has resolved not to engage in property investment for a
period but during the period the directors have come across a land for
sale and bought the land for themselves using their own funds
Held: not withstanding the resolution to cease making property
investment, the director came across the opportunity which if the
company knew would be interested in buying because that piece of
land was adjacent to the company an opp that the company would
 be interested in developing if it had known not appr for the director
to acquire the property himself
Remedies
Impose a CT (does not depend on deeming the opp as a
property) rather the rule is: once infringe the secret profit rule,
then CT will be imposed as a remedy
Cf: normal case: If the breach involves infringement of property
right property right through CT is not controversial
Effect:
The piece of land was held in CT. The director then owes a duty
to reconvey the land to the company in exchange for the
purchase price paid.
o The imposition of CT has never been controversial in the above 3 cases. Two
things to note:
None of the cases involves insolvency. They arent test cases for the
difficult policy question as to the priority conflicts between 2 innocent
groups of ppl: B and TP.
Even though Ct is imposed, it is used as a tool to order the
reconveyance of the legal title to the beneficiary. fiction of CT CT is
just a tool (legal label) for the court to make a substantive order
against the legal title holder to convey the property to the beneficiary

The above cases where some opp or some misuse of information have been involved or
the trustee is usurping some property he is meant to acquire

Bribes (benefits obtained by civil servants to induce them into acting a way
not permitted) and secret commission (1:20)
- We have to consider the policy reason for and against the judgment
Lister v Snubbs (English CA): EE get bribes from one supplier and promise not to
buy from another supplier (3rd catergory)
The outcome is based on policy
o If EE does that then EE (bribee) should account for the bribe as an equitable
debt (in personem duty only) but not an in rem right should not be a
proprietary CT over the bribe
o Reasoning (brief)
If you are F and receives some money (secret commission you ought
not to) you owe a duty to account for profits in personem a debt
recognized in equity (an equitable debt) i.e. only a duty to pay
(personal account), not a proprietary one
Policy agruemnt against CT:
Held: the 3 consequece must follow, if they follow these benefits
(1) priority over insolvency free , unacceptable benefit
(2) if the trust arise, principle could compel all profit to be hand
over (09:07 2nd lec) critique: why should we take into acc of
3rd party? most common law dun care the 3rd aprty positiion
If you took property from Prinicpless property ( F v M: CT) or just bribe
(disgrogaement of profit)

There is conflicting CA case

Disapproved by AG v Reid (badly reasoned): PC decision from NZ (not fall into the
orginal line of authority)
o 2nd box; property ought to belong to the principle
o Facts (originated from HK):
High ranking police officer DDP receiving bribes to suppress criminal
prosecutions
He bought two orchards in NZ
Govt sought to obtain proprietary rights over that property
Problem: jurisdiction issue in NZ and name was not Reid
Need a CT and trace into the land
o Result: Proprietary rights of P established when the bribe was received
o Comments: (repeat lord millet)
Doesnt fall into breach of FD categories: cant say that the bribes are
property that the HK govt would want to acquire but intercepted by
Reid, nor can u say it is the opp that HK govt had but was usurped by
the fiduciary Reid
o Controversy: in UK Lister case if the EE does that, EE should account for the
bribe as an equitable debt but it is an in personem duty only, not an in reim
right. There should not be a proprietary constructive trust over the
bribe. The reasoning was brief.
Underlying justification: if you are F and receive some money e.g.
secret commission that you ought not to, you owe a duty to account
for profits. And because that is an in personem duty, that is like an
equitable debt (just a duty to pay, not a proprietary right)
o The principle in Lister was not followed in AG v Reid (PC) strictly
speaking Reid did not overrule Lister, but decided to depart from Lister
Court decided in favour of the HK govt that it had proprietary interest
in the property because it was purchased with bribe money
Basis for that conclusion: its not possible to say the bribe money
belonged to / was an opp to the govt.
Lord Temperman (without Chancery background, only common law):
bribery is an evil practice that damages the foundation of any
civilized society (should we follow this? Or criticize the decision on the
basis that it is not founded on sound principle?)
Reasoning
1. A F (DPP is a fid)owes a duty to account for the bribe to the P
(it is an equitable debt)
2. Prinicple: Equity treats as done what ought to be done if there
is a bribe, they must hand over the bribe at the instance they
receive it (problematic: although this maxim is existent, it has
always been used in a narrow concept e.g. trust for sale ppl
hold a trust property for sale treat the trustee as holding the
proceeds on sale. Lord T treats it to be so much wider will
incorrectly turn all equitable obligations into proprietary rights)
If u follow Lord Ts approach, trust arises at the date of receipt
and therefore if there were any TP/ insolvency subsequent to the
receipt under property law principles, first in time prevails, this
would mean B would have priority over all subsequent TP give
overprotection to B at the expense of general creditors.
3. The moment the bribe is received, equity treats the bribe as
alr have been repaid
4. Therefore the proprietary title of the principal arises at the
moment of receipt, even if the legal title was in the bribee
 Different policy reasoning: the only way for the fid to disgorage
the profit by having a properitary claim bribe is an evil thing:
must be banned: if the bribe is identificable then should be held
on trust:
PC persavtive, not binding
Conclusion
When the bribe is accepted by F in breach of his duty he holds
that bribe in trust for the person to whom the duty is owed
If the property representing the bribe decreases in value the F
must pay the difference between that value and the initial
amount of the bribe because he should not have accepted the
bribe or incurred the risk of loss
If the property increases in value, the F is not entitled to any
surplus in excess of the initial value of the bribe because he is
not allowed by any means to make a profit out of a breach of
duty
Critique of the case by Lord Millet (1998) V118 of LQR starting at p.406
to 407 [Supporting an arising of a trust with a better reasoning]
A constructive trust does not necessarily attract fiduciary
obligations: a contracting vendor of land holds the land on a CT
for the purchaser but no one thinks that he is under any FD
towards his purchaser.
o Because CT is only another way of saying that the vendors
promise to convey the land to the purchaser is specifically
enforceable
o This results in the separation of the legal and equitable
ownership or trust but creates no fiduciary relationship
between the parties
Animpliedtrust,whetherconstructiveorresulting,isatruetrust.There
cannotbeanimpliedtrustwherethereisnotrust;andtherecannotbea
trustwherethereisnotrustproperty.
*Neitheraconstructivenoraresultingtrustcanbeestablishedunless
(i)thepropertyoritstraceableproceedsareidentifiableinthehandsofthe
recipientand
(ii) the propertywas not freely available tothe recipient as part ofhis
generalassets.
Failure to observe this seems to have occurred in Nelson v Rye.
In that case the liability of a musicians manager in respect of
earnings for which he had failed to account to his client was held
to arise under a CT. The judge held that the manager had
received his clients money and that this was trust property. But
the manager was apparently ENTITLED to pay the money which
he received into his own account, mix it with his own money,
deduct his commission and account for the balance to his client.
Itisfundamentaltotheexistenceofatrustthatthetrusteeisboundtokeep
thetrustpropertyseparatefromhisownandapplyitexclusivelyforthe
benfitofhisbeneficiary.Themanager'srighttomixhisclient'smoneywith
his own and use it for his own cashflow was inconsistent with the
existenceofatrust.
 o InsteadhewasaFIDUCIARYandsubjecttoanequitableaswellas
a contractual duty to account; but he was NOT a constructive
trustee.(asintheNelsoncase)
Cf: The decision in AG v Reid does not decide that a breach of FD
inevitably gives rise to a CT. Lord Templeman held Reid was
bound to pay over the bribe at the moment he received it.
It is clear from this that he was NOT entitled pay the money into
his own bank account, mix it with his own money and account for
it later. He was bound to pay it over in specie. Lord Templeman
did not explain why, but it is fairly obvious.
Unlike Mr Rye, Mr Reid had NO AUTHORITY to receive payments
for his ERs account at all, and it follows that he had no authority
to mix them with his own money and use them for his own
purposes, subject only to a duty to account.
Critique by R Goode
whydoesitfollowfromthecorrosivenatureofbriberythattheclaimant
shouldbepreferredtothedefendant'sgeneralcreditors?Theamountofthe
bribecanberecoveredinapersonalclaim,andanytransactionconcluded
astheresultofthebribecanbesetaside.Theonlyrealriskfortheclaimant
isthatthedefendantbecomesinsolvent,butthatisariskbornebyother
creditorsaswell.
o Thepolicyofdeterrenceagainstwrongdoinghasnorelevancetothe
creditors,fortheirownconductcannotbeaffectedbyit.Theyhave
nocontroloverthedefendant'sbehaviour,norcantheirdeprivation
beconducivetoproperstandardsofbehaviourbyfuturebribees.
Fullimplicationsofaccordingaproprietaryremedydonotappeartohave
beenappreciated.UnderEnglishlawaproprietaryremedygiventhrough
the constructive trust is institutional, not remedial. It therefore operates
from the time the trust arises. So if a claim to a bribe is treated as
proprietary the claimant will have priority not only over unsecured
creditorsbutalsooversubsequentequitableinterests,includingequitable
charges.
CourtofAppealinSinclairInvestmentswasrighttorejectitandtofollow
ListervStubbsandMetropolitanBankvHeiron,notonlybecausethose
decisionswerebindingbutalsobecausetheywereplainlycorrect.

There was a first instance decision which adopted AG v Reid (by Reyes but hes
alr not in the judiciary do not know whether to adopt Lister or Reid)
More recently two decisions Eng Supreme Court decisions
o Sinclair (2011) an Eng CoA decision where the Eng CoA expressly said that
it would rather follow Lister than AG v Reid (i.e. made a u-turn) (overruled)
o As a matter of authority, principle and policy
o (1:35) Opportunity Ought to be belong to the P , CT
Facts:
the borrowing for a particular purpose of funds which were then
fraudulently applied to create an appearance of trading which
was not in fact taking place
 investors putting money in a company controlled by a wrongdoer
breached his FD and misappr the money and put the money
into another company controlled by him. Circulated those money
through several other companies controlled by him. The holding
companys (owned by him) shares went up he sold the shares
and made a huge profit
Just used the money in a way that increases the value of
property (shares) already owned by him the ultimate profit
made was based on that increase in value cant see tracing of
the embezzled fund in the profit that he made (no proprietary
link); nor is it about bribes, but a situation that he obtained
benefits causally from his breach of Fd Q = whether P whose
funds were embezzled could pursue a proprietary claim over the
resulting profits?
D bought a yacht with the proceeds. Ds were fighting over the
yacht whether a proprietary interest could be established?
There was no proprietary link though, can there still be tracing?
Result: Proprietary interest not established

The principle in AG v Reid was ignored (that if F accepted a bribe

he could not deny his Ps assertion that the bribe had been
immediately received by F as a legitimate payment to be held
for his principal)
D was treated as a wrongdoer who had committed a breach of
trust. The secret profits made by a F out of his position, as
opposed to property subject to the fiduciary obligation, are not
held on trust for B
The fiduciarys liability can only be a personal liability unless it
derives from property or an opportunity that belonged
beneficially to B
Reasoning:
When impose CT, the reasons are deterrence. But the argument
against it is that the CT will adversely affect the rights of general
creditors. (there is a policy tension).
After going through the lines of authorities above, there is a clear
distinction between
(1) F who enrich themselves by breaching a duty towards P, and
(2) F enriching himself by depriving the P of an asset beneficially
owned by P at the time of his wrongdoing. The judge thinks
cases like Boardman and Keech belonged to the second
category: in the cases it involved the seizing of the property
owned by the principal.
Policy reason: personal remedies: leave fid with the profit of
housee investment: All profit should use proprietary right
Obiter: we could deal with profir personally, what profit was
generated by the breach?
He thought Reid was wrong in principle and doctrine
Split fid breach into 3: (1) hand in the till (2) fids profit taking an
opportunity was properly belong to the principle: (small ) 1,2
peopretary (3) bribe and secret commission: this case: remedy is
not propertirary
 Principle: if u have a situation where benefits are made, in general,
there should only be a duty to account in personem unless in 2
situations (where proprietary rights are ok)
1. Prior to the wrongdoing the assets did belong to P (less
controversial)
2. If the trustee (F) acquires the asset by taking advantage of an
opp or right which was properly that or ought to be of the B (see
the exact wording in 89 and 90)
He thinks that as a matter of policy if the justification of
proprietary right was deterrence, u can achieve deterrence by
equitable compensation i.e. in personem remedy so u can
avoid protecting B at the expense of creditors unless there is
an infringement of a pre-existing right or the the asset was
obtained by taking adv of an opp that was properly that of the B.
Bad reasoning:
o 1. Can achieve deterrence by equitable compensation
Whether EC or Proprietary Right does not matter
because in either case when D is bankrupt the only
sufferer is TP. Correct up to a point that proprietary
right would only apply if D is bankrupt deterrence
is not relevant. But D would not suffer himself as the
property cannot be restored anyway, only creditors
do
Deterrence with equitable compensation wrong
in bribe cases...It was not a compensation for loss of
P. Should be account of profits of Ds gain, not
compensation for loss of P.
o 2. Reference to the second category properly that of the
B seems to suggest that the P owns the propertynot
precise/convincing
Cant say that P own the property because its not
his property hard to justify imposition of CT on the
view that the property belonged to the P
Need better justification
A very controversial decision there was polarized opinion:
Lord Millet said the result was correct, supports imposing a
proprietary remedy, but the reasoning was unsound in that case.
He suggested the same appr in Redferns: if F you are subject to
disabilities cannot make profit for ur own. Making profits, even
if they are bribes or anyt secret profit uncontemplated by P,
equity will treat that as legitimate payment received on behalf of
P on that basis, ok that impose proprietary interest in
Boardman and Keech.
In line with Redferns - Millet: in equity do not treat F as
committing a breach, treat them as legitimate payment as
therefore part of the trust property. If make wrongful
disbursement treat as if not done. Just required T to perform
primary obligation to ensure the property is always there and
pretend that T has always done it correctly.
Cf: His son Rigid Millet QC disagreed with his father he said that
what his father was arguing (payment is always treated as
legitimate payment) was just a form of legal fiction, rather than
 on policy grounds (the conflict between 2 innocent parties
creditors and B)

Criticizing AG v Reid (rejecting its reasoning) based on: (para 73)

1. unsupported by authority
2. principle
3. policy

para 80 deprivation of property vs breach (bribe/ secret commission) personal

liability
Policy not convincing because afftect creditors
Even without proprietary interest can achieve dterrence

AG v Reid Sinclair
Claimanthadnopreexistingproprietaryrighttotheprofitsderivedfrom*L.Q.R.494thefraud,nor
werethoseprofitsreceivedontermsthattheyweretobeheldfortheaccountoftheclaimant

LordTemplemanreliedonthewellknownmaximthatequitytreatsasdonethat
whichoughttobedone,fromwhichitfollowedthattherecipientofthebribewas
notmerelyunderapersonaldutytopayoveritsequivalentbutheldthebribeitself
onaconstructivetrust

Thebribewasneverdestinedfortheclaimant,whoneitherbargainedforitnor
hadanyexpectationofreceivingit,norwasthebribeanassetwhichthedefendant
hadadutytoacquirefortheclaimant.

Onthecontrary,ifthedefendanthadhonouredhisobligationshewouldneverhave
receivedthebribeinthefirstplace,whileforhispartthepersonpayingthebribe
hadnointentionthatitshouldbeheldforanyoneotherthanthedefendant.The
argument of Lord Templeman that the claimant is entitled to treat the bribe as
receivedlegitimatelyfortheclaimant'saccountisunsupportedbyauthority,resting
onlyonthearticlebyMillettJ.referredtobyHaytonJ.

Moreover,wehaveitonthehighestauthoritythataclaimforprofitsderived
from a breach of trust is a purely personal claim. See Target Holdings Ltd v
Redferns(HouseofLords)

Ifa claimant withnopreexistingproprietary base and no entitlement based on

receipt of property for his account seeks to have his claim characterised as
proprietary,thatrequiresjustification.(ButthejustificationbyLordTemplemanis
unsound:whydoesitfollowfromthecorrosivenatureofbriberythattheclaimant
shouldbepreferredtothedefendantsgeneralcreditors?Theamountofbribescan
berecoveredinapersonalclaim)Thisisnotfurnishedbyquestionbeggingappeals
tothemaximthatequitytreatsasdonethatwhichoughttobedoneortheequally
questionbeggingassertionthatthedefendant'screditorsstandinhisshoes.Atthe
endofthedaytheissueisoneofpolicy.
Hayton (commentary)
- if F has obligation, the property alr belongs to the principal
- should not distinguish between the two categories equity permits to be applied
whether after-acquired/ pre-existing propertyas long as there is a fiduciary
obligation
- criticize Sinclair: It relies on Gwenbe case:

Goode:
- There is doubt on the authorities relied upon by Sinclair. In Gwembe, the court did hold that the unauthorised profits did belong in
equity to Gwembe. However, the court in Gwembe held that the case fell within the class 2 constructive trust and denied the plaintiff a
proprietary remedy. The view in Gwembe is applied in Halton. It is submitted that both Gwembe and Halton focused on the phraseology
of the distinction between class 1 and class 2 constructive trust rather than on comparing Lister v Stubbs with Reid

Bribe (27/3)

o FHR European (CoA)

Facts: Bribe case
Acquisition of hotel
Seller paid the agent secret commission the Seller was a
negotiator
The sale went through
Would seem a classic Lister decision and does not fall within the
exceptions of Sinclair
Bribe has been in other hand
Result: BUT Held a proprietary remedy
Held:
Etherton C: the Eng CoA had no choice but was bound by Sinclair
(also CoA) decision. [but a controversial decision] there is a CT
He recharacterised the facts to fit into the 2 exceptions of
Sinclair (i.e. ought not be proprietary recovery unless u fall in
one of the 2 categories asset acquiredproperly that of the P)
the Seller was happy to receive a lower purchase price if not
for the commission
Every opportunity falls into box of ought to belong to the
principle: in every bribe case:
Etherton characterized the facts into that it is a usurpation of
the opp to buy at a lower price
 F should have told the P that the seller was willing to sell the
hotel at a cheaper price but he did not he had obtained an opp
properly belonged to the plaintiff
this point remains a good one even if the cliamants cannot show
that the vendor would in fact have been wiling to accept an
amount previous 10m less/ any specific amount less than the
price actually paid by the claimants
comes within exception 2 of Sinclair
Became the majority judgment
Cf: But Lord Justice Louison (not based on the reasoning that the
opportunity BELONGED to B) suggested alternative reasoning:
considered that we should not recharacterise the secret
commission as involving an opp but considered that if we look at
Bhullar (did not say the opportunity BELONGED to B), the rule
ought to be that once u have breached the no secret profit rule a
CT ought to have been imposed and thus it is possible to trace
into the money paid under the contract no recharacterisation
needed.
o Para 57: an opportunity to acquire property at a reduced
price cannot belong to anyone in the sense of literally
amount to a proprietary right in the opportunity itself you
cannot assign/ transfer/ charge it/ leave it by will after all
Nor was this court referred to Bhullar in which this court
decisively rejected the notion that it was necessary to
identify some form of beneficial ownership of the
opportunity itself In Cooks v Deeks the Privy Council did
not say the opportunity itself belong to the company.
What belonged to it in equity was the contract that came
into existence as a result of the exploitation of the
opportunity.
Is the Bhullar rule less arbitrary than the Etherson
o Arbitrary?
The bribes cannot be an opportunity
BUT actually Bribes of civil servants deserve more deterrence!
Ratio: Lowest common denominator of the judgment the only ratio is
the majoritys finding that there is a constructive trust, but as to how
to come to that finding, there is no ratio decidendi because each
adopted a different reasoning.
By the time this case goes to the Supreme Court it is not likely to use
the 2nd category because there are better bases to justify proprietary
rights.
E.g. when the principals property is intercepted/ interested in
buying e.g. Bhullar, Boardman
Different from pure bribe cases where u just received some
incentives for you to perform duties in a way other than acting in
best interests of beneficiaries
In future, wont be either Lister or AG as the two extremes will be the
following
Start off with the prima facie position
Identify the categories where the performance of duty itself is
more relevant
At least there is a danger for the unsatisfactory nature of the 2 nd
exception in Sinclair that category of opp is very open-ended. The
 facts in FHR showed how unstable the category is by the
recharacterisation of facts to fit in the 2nd exception.
We need a closer look at the policy concerns the range of situations
involved and decide for each individual situation whether proprietary
interest should be imposed acc to the facts
E.g.1 a situation where clearly there is misappr of property previously
belonging to P a clear cut case of imposing prop remedy because it
is really property belonging to P that has been deprived impose prop
remedy will not be unfair to creditors
E.g.2 P did not previously own the property but instructed D to buy a
specific property but D bought it himself [no pre-existing ownership
but P specifically asked him to acquire that property] there seems to
be more reason to require F to account for that specific property
E.g.3 P did not ask D to buy a specific asset but it is an asset that P
surely would be interested to buy had he known about it e.g. Bhullar
the land was not a specific asset P asked D to buy, but P would
definitely have been interested had he been informed, while D
concealed the information and bought it for himself. stronger reason
to impose a proprietary remedy than a secret bribe/commission
situation
E.g.4. P may just be broadly interested in buying property. D came
across the opportunity and not told the P but made the profit out of it
by selling to P.
A commonality of above: usurping a specific property P would want to
get had it known that property
A thesis: the remedy ought to be to make restitution in specie
(i.e. not just the monetary equivalent but the specific thing) in
line with common law we would see an in rem right. Cf: if only
monetary equivalent much less justification for imposing a
prop right.
The key to offering some constructive views tease out different
scenarios where the policy would lead you to different results

SC: Lord newbuger: Reid is correct

- (00:33) has to decided in principle, practicality, legal basis
- There is nt a absolutely right ans in doctrine and policy ,rare case
- In this circumstances, on absence of other good reason, opt fro the simple ans
- You are fid, has to held the profit on CT
- Check for counter agurement:
- (1)taken a bribe, strong presumsion that you have taken a opportunity from the
principle, (2) bribery is an evil practice, pseonal remedy is quite leninant (3)
insolvency: not unfair,why should the unsecured creditor of fid get sth that are
never for yr fid (4) common law practice
-
-
Remedial CT vs Instituional CT

Remedial vs Institutional Constructive Trusts differences

1. Time at which the CT At
arises
2. Courts discretion
Institutional (UK approach) Remedial (US and Aus)
the time of Time of judgment when
wrongdoing the court makes an
order to that effect
X discretion of the court Does not matter initially
Usually involves there was no
deprivation of pre-exiting infringement of
property property right, even it is
just a pure breach of
duty (i.e. FD or
confidence), as long as
u breach that, and the
court in its discretion
considers it just to
impose a CT on the
wrongdoer then the
court can do that
The court can also look
at whether imposing a
CT will upset TP rights,
if so then not create
proprietary interests
but giving the claimant
a mere right to recover
profits made by D

3. Effect on TP Can bind TP whose rights

come afterwards

Institutional constructive trust (the CT arises at the time of wrongdoing, not as

a result of the courts discretion to order it and therefore, depending on the first in
time basis, therefore the institutional CT can bind TP whose rights come
afterwards) e.g. wrongdoing on day 1, the CT passes it on the TP, TP who receive
the property on day 2 will be bound by the B of the cT unless he is the BFP with
value without notice.
o Meaning, look at the fact on a case, if the fact are such that there is
a CT then there is,
Remedial:

o court recognizes that it does not matter initially there was no infringement of
property right, even it is just a pure breach of duty (i.e. FD or confidence), as
long as u breach that, and the court in its discretion considers it just to
impose a CT on the wrongdoer then the court can do that. But to impose a
CT the court can also look at whether it will upset TP rights.
 o Potentially the court can always impose a CT on benefits that are obtained
irrespective of whether the wrongdoing involes deprivation of preexisting
property, but the CT arises purely due to the discretion of the court involving
considerations of TP arises only at the time when the court makes an order
to declare the CT, usually at the time of judgment.
o Originated from US (US is less of a common law jurisdiction than UK): if
someone gets unjust enrichment, then automatically a constructive trustee
(but no reasoning)
o RCT embraced in Australia (Grimaldi) some agents bought gold mines
mining rights on behalf of the company but they received secret commission
whether there ought to be CT on the commission? In Lister and Sinclair was
not followed. Instead, preferred an approach where RCT was used to balance
policy conflicts, taking into acct TP rights. [offered more guidelines as to how
RCT was imposed)
Grandmode (refer to reading)
Fact: secret commission, misappropite corporate commission, ad other secret
commission in doing other deal. Billion dollor venture: question about; is the profit
madeb fid held on trust: (2) can we trace: is output subtuiued the inout? Tracing
problem: how to divide the money?

Reason: bribr are held on CT if that is appropriate, mostly it, (para 185)
There is discretion: (1) it may matter if we are trace to fid or 3 rd party. (2)difference
between trust property and coporate property: trsut property in 3 rd party hand,
held on CT ; company property to 3rd party, is not held on CT__> only is CT if the
3rd prty know they are not bex
it would enable proprietary relief to be tailored to the particular
circumstances of the case
But refused to decide the point since it was not directly in issue
o Polly Peck (1998) opposed to that appr: RCT upsets the statutory
insolvency regime
Held that the variation of property rights should be a matter for the
parliament rather than for the discretion of the judiciary, especially
where the creation of an equitable proprietary right by a judge would
exclude assets from distribution to the unsecured creditors of the
defendant
At that time the distribution of assets on insolvency was governed by
the Insolvency Act 1986 and it was not for the courts to interfere with
this statutory regime

o Cf: London Airline Holdings (2007): more receptive in saying that perhaps no
need to worry about discretion as long as guidelines can be developed in
deciding when pro right shud be developed.
o Re Goldcorp Exchange: Lord Mustill in PC recognized the power of the court
to create equitable proprietary interests by virtue of the remedial
constructive trust.
HK position still open
o Fewer support for RCT in England as opposed to Aus and US.
Argument against RCT (Virgo)
o If RCT is a form of remedy it must be triggered by a cause of action what
should this cause of action be?
Certainly it could be equitable wrongdoing but
 the CT that is exceptionally recognized where there is a breach
of FD is institutional, arising by operation of law rather than
judicial discretion
unconscionable retention of property triggers an institutional CT
rather than remedial CT
o The fact that D has been unjustly enriched at the claimants expense is not a
sufficient reason to recognize an equitable proprietary interest; the claimant
should instead be confined to a personal claim against the defendant
o A remedy without a cause of action is meaningless and for that reason, as
well as the inherent uncertainty of this unbridled judicial discretion, the
remedial CT should not be recognized in Eng law

Policy issue in insolenvy: lecturer: should not take into account of the 3 rd part right after
insolvency, if the creditor is not secured, they are just unlucky,

Summary :
- Claimant seems to be more entitle to the property than the D and more entitle to
the property than anyone else: CT
- 1st catergory:
- Priority to the asset?
- Doctrinal justification for having CT
- Policy justification across the range
- Is the preferable ans is UK ans

Point 2
- Are difficulity just solved by the Gremode appoarch; decide on what seems to be
most fair?
- Speciafully enforceable contract: Why? So unique that has to be CT
- Other catergory: the relationship is special you have a profit, you are a fid,
therefore propertiary: does give beneficiary windfall (broaddman v Phipps)

The nature of constructive trusteeship (from Virgo)

A real trust but does not follow that a constructive trustee is under the same
obligations as other types of trustee
Have legal title to property held on trust for the benefit of others and will be
obliged to convey the trust property to B
But the duties of T will be less onerous than those of an express trustee
o E.g. a Constructive Trustee is under no obligation to invest, and neither is he
required to observe the usual duty of care
o Since a CT may not know that he is a trustee, it would be unreasonable to
impose such obligations, including the FD of loyalty to the truste