Week 9 - Remedial CT Lecture notes

RCT has proprietary remedies and is often dependent on the tracing process  Is one of the foremost remedies available for breach of trust  A lot of actions for breach of trust are grounded in the fact that this remedy is potentially available – you can imagine if you can prove that a trustee in breach of trust has taken off with property that belongs to benes; automatically the trustee holds that trust property on CT – can you trace the property into the hands of the errant property? Has that trustee passed that property onto a TP?  If yes, can you trace into TP and apply a remedial CT to the TP?  An extremely assessment of this lies in whether or not the property itself has retains its form -> the availability of the RCT is DEPENDENT ON OUR CAPACITY TO TRACE!!!!  RCT itself has a number of different applications and principles and this will be discussed below INTRO  A CT CAN BE CHARACTERISED AS EITHER REMEDIAL OR INSTITUTIONAL  (1) INSTITUTIONAL = can arise by operation of law  These arise by operation of law where the date is FROM THE TIME THE LEGAL CRITERIA WERE SATISFIED  Generally, there must be some sort of unconscionability exists and the elements for that must be satisfied for the imposition of an INSITUTIONAL CT  (2) REMEDIAL = as a remedy against a person whom the court considers should be made to account  These are COSNTRUED by the court  Aim is to ensure that property taken from the bene is protected and isn’t dissipated further -> it is the preferred remedy where trustee has insufficient funds and a PERSONAL REMEDY despite the scope of pecuniary remedies that are available under equity isn’t really going to be effective because the trustee doesn’t have the funds to pay it  If you can get the property before its dissipated, this will be the optimal solution FOR THE BENE  Even though CT do have an institutional application, in the context of BREACH OF TRUST, we are really looking at a remedial view  Remedial objective of the CT in righting the wrong because of breach of trust = fundamental purpose  Even though it is a trust, it is not classically a trust compared to express or resulting trust  Even though remedial constructive trust is construed by court by unconscionability of the circumstances as a directive by the court, it still is a trust -> still has trust property and a bene; its purpose is to ensure that if property exists, the property is re-conveyed to the bene who has been wronged  E.G. TRUSTEE BREACH OF TRUST TAKES TRUST FUNDS AND PUTS THOSE FUNDS INTO HER OWN BANK ACCOUNT and hasn’t done anything to those money, in that specific situation, automatically a RCT arises because breach of trust is sufficient for foundation for application of the trust  BECAUSE TRUST PROPERTY BELONGED TO BENES and trustee has extensive fiduciary and trustee responsibilities to look after the property  That money put into the trustee’s bank account is held by that trustee as a CT; the trustee still owes trustee responsibilities over those funds in their bank account because the CT arises   NOTE: having a RMT doesn’ t preclude any other pecuniary relief – it would have to be distinguishable from the return of the property

 If getting property back pursuant to CT, you cannot get compensation for any loss BUT you can get compensation for other losses that are a product of the breach of trust What is a CT?  Equitable remedy that may be granted to address a breach of, or to give effect to, an equitable doctrine or right  The order gives rise to an interest existing in specie property or other rights  It is an INVASIVE ORDER – has the effect of transferring the beneficial ownership of property from the D to P  CT’s regularly arise in the context of real property  Muschinski v Dodds per Deane J at [6]  Viewed in its modern context, the CT can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention of assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle  Because its remedial perspective doesn’t have to be created, the breach of trust generates in equity that needs to be fixed up – best way to fix that in equity is to impose a RCT if property is still capable of being traced; even though you have taken money and absconded with that money in breach of trust, if property is there, you continue to owe trust obligations into whatever transactional framework you have set up to deal with that money  Doesn’t matter if there was no intention for breacher to be a trustee – doesn’t matter, in equity you are automatically deemed as a trustee because you shouldn’t have taken the fucking money in the first place!   RCT is actually enforces the primacy of the rights that the bene has – the bene has rights which are enforceable against the trustee; if trustee breaches those rights, the RCT is one of the most important remedies note: WHERE THERE IS NO TRUST PROPERTY REMAINING, THEN RCT CANNOT BE IMPOSED BECAUSE THERE IS NO PROPERTY TO GET BACK -> THEREFORE, THE ONLY RECOURSE IN THIS SITUATION IS EQUITABLE COMPENSATION BY WAY OF PECUNARY REMEDY When is a CT imposed?  There are range of different circumstances  Baumgartner v Baumgartner – a CT will be imposed when the legal title owner’s insistence that they are the sole owner  In this case, this was more an institutional CT where contributions were made by both parties to the property  In this case, there was no contribution to the purchase price but you contributed to mortgage repayments and other things around the property and such that you have contributed to the payment and it would be unfair to deny your interest  You can claim a constructive trust -> it is institutional because you are contributing and creating property where it would be unfair to deny  Furthermore, a CT may be imposed by:  Operation of the law ; and i n spite of intention of parties, to place property on trust for the party suffering the breach of an equitable obligation it is not necessary for the resulting bene to own or have intended to do any act in relation to the subject property the court will typically order a CT where it forms the view that equity would consider it unconscionable for the party holding the property in question to deny the interest claimed

 The property which is the subject matter of the CT must be CAPABLE OF BEING TRACED  If it has been dissipated or passed into the hands of a BFTVWoN, there may be no property over which a CT can apply  You can attempt to seek relief against the errant trustee; but if property is traceable, can you impose a RCT against a TP who has dealt with a breaching trustee (only if knowingly receipt or knowingly assisted)  IF TP = INNOCENT, THEN NOT POSSIBLE; MUST RELY ON PERSONAL REMEDIES SUCH AS EQUITABLE COMPENSATION  IF TP HAS SOME KNOWLEDGE OF THE BREACH, HAS ASSISTED THE BREACH THEN THE RCT CAN ALSO APPLY TO THAT TP – (ANCIENT FORESTRY ORDER CASE) CATEGORIES OF WHICH A CT CAN ARISE: SECRET BRIBE  AG v Reid [1995] 1 NZLR 1 CB 182 (refer to textbook)  Principle is that if you have a person who has received a bribe then they will automatically hold that bribe pursusant to a RCT  Rationale is to prevent bribery – especially if you hold public office such as a chief of DPP  Need to distinguish BRIBE from a SECRET COMMISSION  This is an important distinction  Where a secret benefit sometimes constitutes a benefit but not always  Secret benefit = fiduciary or trustee derives from trust property or obtains from knowledge in the course of their office  They are not always accountable for a secret benefit pursuant to a CT; BUT ALWAYS ACCOUNTABLE FOR A BRIBE  A bribe is essentially something which is paid for someone to act disloyally – this goes beyond the remit of a fiduciary  On the other hand, a secret commission is often subtracted from an agent passing funds from the principle and they may or may not attract the application of application of a RCT; BUT there is an important property difference: BRIBES DON’T HAVE A PROPERTY CONNECTION  E.G. you are trustee and you are bribed to take money from trust fund and to transfer it to TP who then uses it to gamble  Problem with imposing RCT over money that represents the bribe is that BENES NEVER HAD OWNERSHIP IN THAT MONEY – AG v REID holds that it doesn’t matter, bribery is an evil practice and therefore such money should be held on automatic CT  BUT if it is a SECRET COMMISSION, such commission reflects “profit” that the errant trustee has made because of the breach of duties  Argument for secret commission is that if you have such a commission, it is often something that is taken FROM the funds that are given to a principal and that could be more conducive to the application of a RCT because fiduciaries are more appropriately regarded as receiving the benefit  Nevertheless, it means that we don’t automatically have a situation of CT where the bribe can be classified as a secret commission   Can benefit acquired as a result of a deprivation of an opportunity be subject to a RCT?  Not yet adopted in AUS but is subject to a case in CANADIAN SUPREME COURT – Soulas v Korkontzilas [1997] 2 SCR 217  In this case, the breaching estate agent who purchased property for himself and deprived client of opportunity held on CT

 The real estate agent in this situation where client had specifically asked for agent to investigate this property did generate fiduciary/trustee responsibilities  What happened is that agent purchased the property and deprived the client of the opportunity  QUESTION: The client NEVER OWNED THE PROPERTY BUT did that breach of fiduciary duty which was based on information he received because of his position as a confidant to the client, did the gain he made from that opportunity, could that be regarded as property that was pursuant to a RCT? Was there a sufficiently close property connection?  HELD by McLachlin: YES – to ensure that real estate agents with limited fiduciary responsibilities kept their “ethical mark”  Therefore, the application of RCT in this situation despite absence of property connection (similar to bribes) was found to be appropriate because that was the purpose of equity  In this situation the CT keeps agents to their ‘ethical mark’  McLachlin identified 4 grounds for imposing a CT at [45]   (2) means that if the asset has been acquired by the trustee in breach and within scope of their fiduciary duties satisfies this point  (3) means that if there is no RCT imposed, this kind of behaviour will continue and to ensure trustees are loyal and are responsive to their extensive equitable obligations, this type of remedy needs to be applied  (4) means that it is still a discretionary consideration by the courts; in general terms, breach of fiduciary or trust duty activates the CT where the breach relates to trust property -> if it doesn’t relate to trust property and there is no property connection, must still justify the application of the CT in the circumstances and failure to imply the trust would be unjust  Subsequently in Ritter v Hoag [2004] ABQB 129 at p16] the court noted “ it is clear from Soulos v Korkontzilas that the law relating to the remedy of CT is still developing” CATEGORIES OF WHICH A CT CAN ARISE: TRUSTEE de son TORT  Where a trustee acts in a manner as IF THEY WERE TRUSTEE OVER PROPERTY, they may be held to be subject to a RCT because they have acted as trustee de son tort – they BECOME A TRUSTEE because of they are behaving they are doing acts in manners where they are not actually a trustee and they are INTERMEDDLING, such INTERMEDDLING generates trustee obligations  If a person/entity – not being a trustee and not having authority from a trustee, takes upon himself to INTERMEDDLE with trust matters or to do acts characteristic of the

 Farah Constructions v Say-Dee (2007 ) 230 CLR 89  TP is not liable unless the TP knows the money/property being applied is in a manner that is inconsistent with the trust  This suggests that for knowing receipt CT, actual knowledge is almost required – wilful blindness may come within that  This case didn’t really adopt the baden categories  Level of knowledge required under SECOND LIMB OF BARNES V ADDY to apply a CT – KNOWING ASSISTANCE  Knowing receipt requires actual knowledge  Knowing assistance means you have assisted in the beach and if you share the gain in that breach, just like trustee is subject to RCT so will you as the TP  To prove knowing assistance requires (1) dishonest or fraudulent breach/design by the fiduciary; (2) assistance by a stranger (the TP in that design) and SUFFICIENT KNOWLEDGE ON THE PART OF THE STRANGER (THE TP)  Consul development v DPC estates (refer to SG and TB)  DPC estates was owned by W, solicitor, who carried on property developing business  G was manager and director of that business  G told C, an articled clerk employed y W, about a number of properties that would make good investments  G said DPC was in financial turmoil and could not afford them  Consul developments, which was C’s family company purchased the properties  DPC subsequently claimed that the properties were held on CT  DPC claimed breach of fiduciary duty by C and Consul Developments (consul = 3 rd party corporate entity) had assisted in the breach  This isn’t so much knowing receipt of trust property because clearly the properties weren’t owned by DPC, it was just DPC estates may have bought them but were in financial difficulty  They argued that in fact was that CONSUL was a THIRD PARTY that knowingly assisted with C in breaching fiduciary duties to not make a gain from opportunity discovered in course of acting as fiduciary  Therefore, that knowing assistance activated a RCT  HC HELD: YES – does consul developments have the requisite knowledge for a second limb Barnes ADDY CT?  On the facts that knowledge had to be ACTUAL  As such, CONSUL WAS NOT A CT  Stephen J concluded that knowledge would only exist within the second limb of CONSUL had on the baden levels 1, 2 or 4  Going to level five on the baden scale would be too far  How could CONSUL know something was UP? C was an articled clerk and if they said that they found out about the properties during the course of acting for a client, it is possible that there is no way consul developments had ANY IDEA  Unless that alert came to them, it is possible that consul was simply going out and purchasing properties   Farah Constructions v Say-Dee adopted Consul Development  Agreed that you should not include CONSTURCTIVE NOTICE – should only be something that is putting an honest and reasonable person on alert that they are participating in a breach; THEREFORE, CONSTRUCTIVE NOTICE IS NOT ENOUGH TO ESTABLISH A SECOND-LIMB BARNES V ADDY CT  IF THAT IS NOT APPARENT ON THE FACTS, it is not enough to establish a CT

 Must show that the TP possessed knowledge falling into the first 4 Baden levels  (1) – ACTUAL; (2) WILFUL; (3) WILFUL OR RECKLESS BLINDNESS AND (4) KNOWLEDGE OF THE CIRCUMSTANCES  BUT (5) WAS GOING TOO FAR AND NOT ENOUGH THAT A REASONABLE PERSON WOULD BE PUT ON ENQUIRY  Michael Wilson v Nicholls [2011] HCA 48  High Court approved of “accessorial liability” and noted that the different remedial consequences against breaching fiduciary and 3 rd party   This means that if you are going down in personam relief, the quantum of relief available against the TP as opposed to a breaching trustee might differ  Grimaldi v Chameleion Mining NL  Talks about capacity of breaching fiduciaries to have accessorial liabilities to be imposed on TPs and makes it clear that relief must be finely calibrated and must be careful when applying RCT to TPs  You need to establish clearly that there was knowledge or equivalent thereof under both limbs of BARNES v ADDY otherwise you are penalising an innocent TP and its particularly the case where you are dealing with a TP that has some connection with the breaching fiduciary  E.g. in Consul it was the family company; in Grimaldi its corporate entities set up by the breaching fiduciary -> it is more possible to establish accessorial liabilities because the TP are CONDUITS for the behaviour of the fiduciary

 In particular, the promise by the parents was that Robert should build house on DWELLING UP PROPERTY and they would give ownership of subdivided portion, which included an orchid, but only if he remained working on the property and did not accept an offer of work from his father-in-law -> strong representation; proprietary estoppel relies on a representations to confer an interest in property by the legal title holder and he has relied upon those representations that he would have a subdivided portion and he had to keep working on the property  RG did not pursue any alternative career in this regard; he built the house on reliance of this promise and continued to work on the land  RG then decided to marry someone his parents did not approve of and they effectively asked him to choose between the property or his new love  RG chose his wife and parents subsequently refused to honour their promise  He brought action in proprietary estoppel against parents -> he wanted proprietary relief; this was unconscionable on the facts and a CT was sought after the circumstances  Trial judge found in favour of RG but felt it might be best to not apply the trust on the facts but give him a monetary amount given that other parties at interests in the land  RG appealed to FC which allowed the appeal and held that parents held property on CT for RG; parents held that this went beyond the reversal of detriment  HC appeal allowed – HC held that the promise led to an estoppel because detriment suffered by RG was a failure to retain the land and that necessarily meant that equity had to protect the expectations  Majority – Gleeson, Kirby, Cullinan, etc. Held that because the primary focus is to enforce the representation to alleviate the unfairness, CT was available BUT at the discretion BECAUSE OF THE INTERESTS OF THE OTHER PARTIES – the equivalent of a CT in monetary relief was appropriate  Basically you had to take account of income RG received from family partnership and other improvements other members carried out on the land and it wasn’t appropriate to give him the whole land  Instead, was more appropriate to award him a monetary award so that he can go get his own land  RATIO: this case recognises that when determining whether or not a CT should apply, particularly in context of CT, the minimum relief necessary to do justice is important  HC held that CT endures because of an important equitable jurisdprudence in AUS but did distinguish between a CT arising …. What?  CTs which are remedial response to a claim in equitable intervention based on good conscience which is what was on proprietary estoppel  Where you have the remedial response, it is appropriate to detrermine whether , even if it is available, whether that is the minimum relief necessary to do justice  Therefore, CT was only available when it was clear that it is consistent with conscience, it isn’t contested and that it doesn’t interfere with interests of other TPs already acquired in the land Westdeutsche Landesbank Firozentrale v Council of the London Borough of Islington [1996] AC 669 (TB 762)  Seminal case because of what Court said about he nature of the CT and foundation of CT  FACTS: decision was handed down by HOL  Interest rate swap agreement in which the parties made reciprocal loans to each other of $25M; one at fixed rate of interest, and another at a floating rate  After it was discovered the agreement was ultra vires, the Bank brought an action against the Council to recover the difference between the $2.5M paid by bank and $1.35M paid by the council during the period the agreement was valid

 This is about whether or not the bank is able to get money (interest) that is paid pursuant to an invalid agreement despite the fact that at the time it was paid, the parties thought the agreement was valid (ultra vires)  COA held that the council was personally liable for the money and relying on old case – Sinclair v Braum – that bank had equitable proprietary claim to the money which entitled it an interest in equity  BUT ON APPEAL TO HOL; the Lords indicated that they were willing to reconsider Sinclair and overrule it  Along the way of whether Sinclair was a correct decision, the CT discussion occurred  Sinclair was either incorrect or inapplicable and the Bank did not have any proprietary claim to the money paid and the bank was only entitled to simple interest and not that actual money paid  Therefore RCT was NOT AWARDED  What was important was that the comments of Lord-Browne-Wilkonson on the nature of trusts – “since the equitable jurisdiction to enforce trusts depends on the conscience of the holder of legal holder being affected. You can’t be a trustee of the property if your ignorance of the facts allege to affect your conscience”  This was the case where the agreement was ultra vires  While his Lordship was prepared to asccept that once the CT is created it is enforceable in equity but until it is created, no property relief is available; this meant that IF THE CT AROSE, WHEN DOES IT ARISE AND HOW IT SHOULD AFFECT INNOCENT TPs?  To evaluate that, his lordship went through a number of principles:  REFER TO PAGE 762-3  There are four proposition fundamental to the law of trusts  (2)  Attorney-General v Reid [1994] 1 NZLR 1 (TB 768) (bribes and secret commissions) pg 768  If you are fiduciary and you breach your duties because you’ve been bribed, can the principal to whom you owe your duties acquire that bribe on trust when they haven’t got any property connection to it   FACTS: Reid was solicitor in NZ and left NZ took up position with HK government; was successful and not just crown counsel or a DPP in HK  In that role, he was a fiduciary which meant that he was an employee that acted on behalf of the Crown  He prosecuted crimes and made decision about which crimes should be prosecuted; he accepted bribes from a range of criminals in breach of fiduciary  There was a perversion the court of justice  Reid was eventually arrested – pleaded guilty and was sentenced in 1980 to eight years imprisonment; ordered to pay the sum of $2.5M NZD to the crown  This was the value of the assets Reid controlled which the court said that could only have been derived from the bribes he was given  NO part of the sum of that amount had been paid by Reid and it was challenged – could a RCT arise for the breach of fiduciary duty (criminal context) for a civil sanction by taking the assets that represented the bribe  IF we go back to Deane in Muchsinski v Dodds – the decision to effectively conclude that the CT was remedial effectively does mean that we have to look @ circumstances and is the most appropriate remedy

 Did Winterfall assist in breach of fiduciary duty by the directors?  Court said no, in effect you had to argue that Winterfall had the requisite knowledge to assist in the breach and this could not be established  It was inappropriate for TP participants to account for benefits paying for the breach and couldn’t be transformed into a vehicle for the UNJUST ENRICHMENT OF THE PLAINTIFFS  Similar to GIumelli because you cannot give someone a benefit pursuant to RCT if it oversteps the mark and goes beyond what is fair and reasonable in remediating the particular unfairness  Therefore, despite the corporate shareholding being increased in Winterfall by the initial contribution by the errant fiduciaries, there were other investors + expertise by Winterfall and the actual market itself that contributed to their increased value  Therefore, Chameleon were unable to extract the entire the full value of the entire shareholdings  Therefore, WINTERFALL couldn’t be held on RCT for chameleon despite the egregious breaches by the directors  FCFC said that TP liability has to be based upon wrongdoing and you must KNOW of that wrongdoing – and knowledge is based upon the BADEN SCALE  Assisting in the breach depends on knowing that you are assisting which depends on some level of KNKOWLEDGE that this amount to a breach of trust  Clearly, if you have a TP that derives a benefit, discretion applies because TP themselves may not have had notice; and if no notice, may have actually contributed to the value of that property  RATIO: when talking about TP CT, it is important to basically find where you have a TP involved and TP is the owner of property, in what circumstance if the TP hasn’t directly committed the inequity, in what circumstance can they be subject to CT? Barnes v Addy (1874) Lr Ch App 244  FACTS: Barnes appointed William, JL and JA to be testators and execs of his Will  Barnes’ money was going to be invested and used as a 100 pound annuity for his wife and three daughters and son  JA, who was the sole remaining trustee appointed another trustee (ADDY’s SOLICITORS) including another solicitor (William DUFFELD) advised against appointing a sole trustee but drew up deeds of appointment and indemnity  They intro’d him to a stokebroker and broker transferred the trustee money; the trustee misapplied the trust property and became bankrupt  The children wanted to sue the solicitor who had advised the trustee and the stockbroker who were both TPs  Clearly trustee was in breach but to what extent are TPs dealing with trustees going to be liable to a RCT when they have clearly been involved in that impropriety?  This case set out two limbs:  (1) a TP who has received property in consequence of fiduciaries breach of obligation, may be held personally accountable as a constructive trustee (AKA KNOWING RECEIPT CT)  Idea is that you are receiving property that is classified as trust property, and if you know or should have known ,you also will be tainted by that trust  Number of elements for looking at imposition of CT under this limb  Remedies against TP are based upon the wrongdoing in terms of receiving property  If there is no property the TP receives and money made through opportunities or knowledge gained by errant fiduciary, knowing receipt CT is not available and where property cannot be TRACED

 So this is a property based remedy – the TP has property they know or should know that constitutes trust property; the misbehaviour by the TP and rationale of TP being subject to the trust is based on KNOWLEDGE  AKA RECIPIENT LIABILITY  (2) a TP has knowingly ASSISTED in a breach of trust is where a CT can arise  THIS IS NOT PROPERTY BASED – based on behaviour  BADEN SCALE is important in establishing the requisite level of knowledge  In Australia, seems to be only levels 1-4  You cannot be assisting in a breach if you DON’T KNOW IF YOU ARE DEALING WITH TRUST PROPERTY  Knowing assistance CT is in effect a breach of trust or fiduciary duty; the breach being fraudulent and dishonest and the TP knowingly assisting in fraud and the dishonest breach; this is often known as ACCESSORIAL LIABILITY FARAH CONSTRUCTIONS v SAY-DEE (2007) 230 CLR 89 (TB 776)  Important about what is said about the first limb of Barnes v Addy – KNOWING RECEIPT  FACTS: Ellis controlled FARAH CONSTRUCTIONS; company was basically set up a property development company  Say-dee was controlled by other parties; they both decided to enter into a joint venture to develop units  Joint venture entered into by both parties have reciprocal fiduciary duties to look after each others interests  Property was co-owned by parties as TIC; but what happened was that they were going to redevelop the TIC property as a series of units  The development application was rejected by the council because the land was too narrow  ELLIAS from FARAH attended this meeting and had this important information and didn’t pass this onto Say-Dee because the information contained clear instructions that the council would approve development if they acquired land adjacent to the TIC land  Thinking this would make them a lot of money, they approached the neighbour and convinced them to sell  They used that information to purchase the property and ELLIAS put that in his wife and daughter’s name  ELLIAS went onto develop the units BUT BEFORE THIS HAPPENED ELLIAS said to Say- Dee to discontinue joint venture and ELLIAS PROCEEDED ON HIS OWN  Say-Dee was unhappy with this and argued breach of fiduciary duty and wanted to get that property and argued in effect that ELLIAS’ wife and daughters held half the property on CT for Say-Dee given the nature of the shared fiduciary responsibilities arising from the joint venture  Argument was that because Ellias was in breach by not passing on the info and not acting to the mutual benefit of FARAH and SAY-DEE, that the wife and daughters had received trust property and that they knew this amounted to trust property and argued knowing assistance  Wife and daughter actually had no involvement whatsoever, they had bare legal title and they were not involved in FARAH  BUT KNOWING RECEIPT (1 st limb) was a potential way in which this type of RCT could be applied  Gleeson, Gummow, Cullinan, Crennan and Heydon J concluded that knowing receipt CT could arise on the facts  There were two main reasons:  (1) confidential info received from the council didn’t actually constitute PROPERTY and there was no trust property that could have been received