Constructive trusts and constructive trustees

Two meanings of the word ‘constructive’

In English law, the word ‘constructive’ can mean one of two things. (For further exploration of this point, see Lionel Smith, ‘Constructive trusts and constructive trustees’ (1999) 58 Cambridge Law Journal 294.)

(1) ‘Imposed’ rather than ‘assumed’. The word ‘constructive’ is used in this way to indicate that something has been imposed by the law, rather than being deliberately created by someone. So we might (though we don’t) talk of someone having a ‘constructive obligation’ if they have an obligation that was imposed on them by the law rather than deliberately assumed by them through entering into a contract.

(2) ‘Fictional’ rather than ‘real’. The word ‘constructive’ is used in this way to indicate that we are going to act as though X is true, even though we all know that X is not true. So, for example, there is a story told by Peter Birks in his Introduction to the Law of Restitution (1989) about an Oxford college: ‘The college’s rules forbid the keeping of dogs. The Dean keeps a dog. Reflecting on the action to be taken, the governing body of the college decides that the labrador is a cat and moves on to next business.’ As Peter Birks observes, ‘That dog is a constructive cat.’ Obviously, everyone knows that the Dean’s labrador is not a cat, but the college has decided, for the sake of its rules, to act as though the labrador is a cat.

Let’s call something that is constructive in sense (1), ‘real, and imposed by law’; and something that is constructive in sense (2), ‘fictional’.

Constructive trusts

Are constructive trusts imposed, or fictional? To answer this question, let’s look at various different situations in which a constructive trust will arise.

(1) Specifically enforceable contract

If A enters into a contract to sell land to B, then he will hold that land on a constructive trust for B. Is that trust imposed, or fictional? It looks real enough: if A goes bankrupt after having entered into a contract to sell Blackacre to B, B will be entitled to say to A’s creditors: ‘Blackacre is held on trust for me, and so can’t be used to help pay off the debts A owed you.’

However, Bill Swadling (in ‘The fiction of the constructive trust’ (2011) Current Legal Problems 1) argues that the constructive trust over Blackacre that arises out of A’s contracting to sell it to B is (like all other constructive trusts, in his view) fictional. When we say that A holds Blackacre on trust for B, we don’t really mean that A holds on a real trust for B; all we mean is that A is liable to be ordered to convey his rights in Blackacre to B. However, this argument does not seem to work. It’s true that the only reason why A is held to hold on trust for B is that his contract to sell Blackacre to B is specifically enforceable, and A is therefore liable to be ordered to hand over Blackacre (or, more technically, the rights he has over Blackacre) to B. However, this shows that Swadling’s thesis does not work in this context. The trust arises out of the fact that A is liable to be ordered to hand over Blackacre to B; A’s liability to be ordered to hand over Blackacre to B does not arise out of the fact that are willing to say that A holds on trust for B. A would still be liable to be ordered to hand over Blackacre whether or not we said that he held Blackacre on trust for B.

(2) The stolen bag of coins

In Westdeutsche Landesbank v Islington LBC (1996), Lord Browne-Wilkinson considered the situation where a thief steals a bag of coins. If the coins are mixed with other identical coins and then withdrawals are made from the mixture, the legal owner of the coins will be unable – under the common law rules on tracing – to find out where his coins have gone, and who has got them. The rules on tracing used by the Courts of Equity to find out where trust money has gone were more flexible and allowed the beneficial owner of the money to trace his money even when the money was mixed with other money and withdrawals were made from the mixture. But those rules could only be taken advantage where the money was held on trust. Lord Browne-Wilkinson held that the legal owner of the bag of stolen coins could take advantage of the equitable tracing rules to find out where his money had gone: ‘stolen monies are traceable in equity’. The reason why is that he held that once the money was stolen it would be held on a constructive trust for the legal owner.

This constructive trust looks fictional. The reason why was identified by Rimer J in Shalson v Russo (2005) at [110]: ‘a thief ordinarily acquires no property in what he steals… If the thief has no title in the property, I cannot see how he can become a trustee of it for the true owner: the owner retains the legal and beneficial title.’ So if a constructive trust does arisen when a thief steals a bag of coins, that trust can’t be a real trust as the thief doesn’t have anything that he can hold on trust for the owner. We must be just saying that he holds the bag of coins on trust for its owner in order to allow the owner to take advantage of the equitable tracing rules to find out where his coins have gone when they have been mixed. But even if we accept that the constructive trust that arises when a thief steals a bag of coins is fictional, not real – and is intended to allow the owner of the coins to overcome the procedural limits on who can take advantage of the equitable tracing rules – Rimer J was still unhappy in Shalson v Russo at finding that the thief holds the bag of coins on trust for its owner:

‘The fact that, traditionally, equity can only trace into a mixed bank account [if the money being traced is trust money] provides an unsatisfactory justification for any conclusion that the stolen money must necessarily be trust money so as to enable [it to be traced]. It is either trust money or it is not. If it is not, it is not legitimate artificially to change its character so as to bring it within the supposed limits of equity’s powers to trace: the answer is to develop those powers so as to meet the special problems raised by stolen money.’

However, Rimer J’s unwillingness to find that stolen money is held on a fictional trust for its owner is hard to reconcile with his later willingness in the same case to find that money will be held on constructive trust in the situation where:

(3) Money is paid under a contract that is later rescinded for fraudulent misrepresentation

If A and B enter into a contract as a result of A’s having made various misrepresentations to B, then B will be entitled to rescind that contract – to make it null and void, as though it had never existed. Until B rescinds the contract, it will be perfectly valid. So if B pays money to A under the contract, A will acquire title to that money. But his title will be voidable: if B rescinds the contract before the money passes into the hands of a bona fide purchaser, legal title to the money will revest in B. In Shalson v Russo, Rimer J agreed (at [122]-[127]) that if B rescinds the contract, and A’s misrepresentations were fraudulent, then A will hold any money that B has paid him under the contract (and which is still in A’s hands) on a constructive trust for B. This constructive trust also looks fictional. Once the contract is rescinded, legal title to the money that A has paid to B will revest in B, so there is nothing A can hold on trust for B if the trust is supposed to really exist. It must be that in this case we are just saying that A holds on trust for B in order to allow B to take advantage of the equitable tracing rules to find out where in A’s holdings his money is now. Etherton J confirmed in London Allied Holdings Ltd v Lee (2007) (at [276]-[280]) that money paid under a contract induced by fraud that was later rescinded would be held on a constructive trust for the payor. But if we are willing to find a fictional trust in such a case, it is hard to understand why we wouldn’t in Lord Browne-Wilkinson’s stolen bag of coins case.

(4) Unconscionable receipt/retention of money paid under a mistake

Where A pays money to B by mistake, unless the mistake is sufficiently fundamental, B will acquire title to the money that A has paid over to B. So in such a case it is possible for B to hold that money for A on a real trust. But will B ever hold that money on trust for A, and if so, under what circumstances? The answer to this question is still very unclear.

In Chase Manhattan v Israel-British Bank (1981) (where money was mistakenly paid over twice by one bank to another), Goulding J found that money that had been paid over by mistake was held on trust for the payor, thereby allowing the payor to trace and recover that money even though the payee was by then insolvent.  In Westdeutsche Landesbank v Islington LBC (1996), Lord Browne-Wilkinson said two things:

(1) That the only way Chase Manhattan could have been correct is if we suppose (as was actually established in the case) that when the payee bank received the money that was mistakenly paid over to it, it was aware at the time it received the money, or shortly afterwards, that the money had been paid over by mistake: ‘Although the mere receipt of monies, 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 constructive trust.’ (Note the ‘may’ in that sentence.)

(2) That if the courts are going to find that people who have been paid money by mistake hold it on trust for the people from whom they received that money, then they should do it via a remedial constructive trust, so that if A has paid money to B by mistake, then A has to go to court and ask the court to create and impose a trust over the money paid to B, thereby enabling him to get it back from B. Such a remedial constructive trust, Lord Browne-Wilkinson thought, would only be available ‘where a defendant knowingly retains property of which the plaintiff has been unjustly deprived’ and in deciding whether or not to create and impose a trust over the property, the courts would tailor the trust ‘to the circumstances of the individual case, [so that] innocent third parties would not be prejudiced and restitutionary defences, such as change of position, [would be] given effect.’

Since Westdeutsche Landesbank was decided, the courts have rejected suggestion (2), holding that they have no jurisdiction to create and impose a trust over property, as opposed to recognising that property is already held on trust (either under an express trust, or what is known as an institutional constructive trust): see Re Polly Peck International (No 2) (1998). That leaves suggestion (1). If A pays money to B under a mistake, and while the money is still in B’s hands, B becomes aware that the money was paid under a mistake, will B hold that money on a constructive trust for A?

This question has divided the courts since Westdeutsche Landesbank was decided. Box v Barclays Bank (1998, Ferris J) and Shalson v Russo (2005, Rimer J at [118]) say ‘no’. On the other side, in Re Farepak (2006), Mann J – after hastily reviewing the authorities (the case was decided under severe time pressure) – ruled (at [40]) that:

‘If and in so far as it could be established that moneys were paid to Farepak by customers at a time when Farepak had decided that it had ceased trading, and indeed at a time when it had indicated that payments should not be received, then there is a strong argument for saying that those moneys would be held by the company as constructive trustee from the moment they were received.’

The reference to the company holding the money as ‘constructive trustee’ is unfortunate (as we will see, we shouldn’t equate the concepts of holding money on a constructive trust for someone with being a constructive trustee) but there is no doubt that Mann J meant here that the moneys were held on a constructive trust, and that that constructive trust was a real trust, giving the customers who had paid over money after the company had decided to cease trading a proprietary interest in that money which allowed them to recover that money in priority to the company’s huge number of unsecured creditors.

In the subsequent case of London Allied Holdings Ltd v Lee (2007), Etherton J noted (at [272]) that there had not been a chance for proper argument in Re Farepak over whether money paid by mistake to someone who was aware (at the time or subsequently) of the mistake should be held on constructive trust for the payor, and he declined to express an opinion on the issue.

For what is worth, the Australian courts have been more enthusiastic about finding that a constructive trust arises in this kind of case. So, for example, in Wambo Coal Pty Ltd v Ariff (2007), the New South Wales Court of Appeal held that monies that had been paid by the plaintiff to the defendant in the mistaken belief that the plaintiff owed the defendant money were held on trust by the defendant for the plaintiff when the defendant became aware (or would have become aware had the defendant not refused to inquire whether the money was really owed for fear of finding out that it was not) that they had been paid by mistake. White J held at [43] that ‘once the recipient is aware that, by a mistake, he has got something for nothing, a proprietary remedy is appropriate.  The fact that the company is insolvent does not affect this conclusion.  It would be an unwarranted windfall for the company’s creditors to share in the payment…’ The fact that the trust found in this case allowed the plaintiff company to recover the money they had paid in priority to the defendant’s other creditors shows that the trust in Wambo was real, not fictional.

(5) Reliance on an assurance of having an interest in land

It is well-established that if A, who owns Blackacre, assures B that he holds Blackacre on trust for her in some proportion, and B relies on that express assurance, then B will be able to argue that A holds some proportion of Blackacre on trust for her. That trust is a real trust: it is capable of binding third party purchasers of Blackacre, and allows B priority in the event that A goes bankrupt. That trust is also conventionally classified as ‘constructive’: as arising not because anyone intended that it should arise, because the law seeks to protect B’s reliance on A’s assurance by giving her an interest in Blackacre. However, Bill Swadling has interestingly argued that this trust is not constructive at all. Rather, it is express. It arises to give effect to the declaration of trust that A made when he assured B that he held Blackacre on trust for her. The fact that A’s declaration of trust might have been made orally is not a problem. While s 53(1)(b) of the Law of Property Act 1925 says that declarations of trust over land must be evidenced in writing if they are to be admissible in court, a defendant will not be allowed to rely on his provision to prevent the claimant entering into court evidence of an oral declaration of trust if doing so would allow the defendant to defraud the claimant in some way. Swadling’s argument is, on the whole, convincing though one slight weakness in it is that a claimant who has relied on assurances that land is held on trust for her may end up, depending on the extent of her reliance, getting less of an interest in the land than she was told she had. See, for example, Eves v Eves (1975), where the claimant moved in with her boyfriend and he told her the house he owned was as much hers as his; but the Court of Appeal ended up holding that the boyfriend only held one quarter of the house on trust for her.

Constructive trustees

Let’s now look at the situations in which the law will hold someone liable as a ‘constructive trustee’ and try to make sense of what the courts mean when they use that phrase.

We can begin by making it clear that we should not equate holding property on a constructive trust for someone else with being a constructive trustee. The two concepts are entirely distinct. The question of what the duties are of someone who does hold property on a constructive trust for someone – assuming that by ‘constructive’ we mean ‘real, and imposed by law’ and not ‘fictional’ –  is a very difficult one. For example, if A contracts to sell his house to B, it is clear that he does not owe B all of the duties that a trustee would normally owe his beneficiary (such as a duty carefully to invest it, or a duty not to make a gain for himself from the way he manages the trust property): see Englewood Properties Ltd v Patel (2005). Saying that someone who holds property on a constructive trust for someone else is a constructive trustee will just obscure that point.

There are two basic situations where someone will be held liable as a ‘constructive trustee’:

(1) Dishonest assistance

If A dishonestly assists B to commit a breach of trust, A will be held liable for the losses arising from the breach of that trust as a ‘constructive trustee’. It is clear that the word ‘constructive’ is being used here in its fictional sense. A is not being held liable because he really was a trustee, who has committed a breach of trust. He is being held liable as though he were a trustee of the trust of which B was a trustee, and is accordingly held liable for the losses suffered by the trust as a result of B’s breach of trust. It is for this reason that Lord Millett said in Dubai Aluminium Ltd v Salaam (2003) (at [141]-[142]) that someone who is held liable for dishonestly assisting a breach of trust:

‘is traditionally (and…unfortunately) described as a “constructive trustee” and is said to be “liable to account as a constructive trustee”. But he is not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property… I think that we should now discard the words “accountable as constructive trustee” in this context and substitute the words “accountable in equity”.’

(2) Unconscionable/knowing receipt of trust property disposed of in breach of trust

While Lord Millett’s words undoubtedly apply to the first case – of dishonest assistance – where someone will be held liable ‘as a constructive trustee’ there is no doubt that he also meant his words also to apply to the situation where A receives £1,000 in trust funds that have been given to him in breach of trust, and A acts unconscionably in accepting those funds or retaining them while they are still in his hands. This is the second situation – that of  ‘unconscionable receipt’ (previously known as ‘knowing receipt’) – where someone will be held liable as a ‘constructive trustee’.

To sharpen up our consideration of this situation, let’s make it more concrete. C holds £100,000 on trust for B. C then gives his girlfriend, A, £1,000 out of those trust funds as a birthday present. A has no idea that the money she is receiving is held on trust, and subsequently spends £250 of that £1,000 on dinner with her best friend in a quality restaurant. At that point, she learns that the money she received was held on trust for B. She doesn’t care: she goes on to spend the rest of the money on a luxury spa weekend at a hotel. In this situation, A will be held liable for £750 as a ‘constructive trustee’ on the basis that she was in ‘unconscionable’ or ‘knowing’ receipt of trust funds disposed of in breach of trust.

Now – Lord Millett and many other commentators would argue that A is not being held liable because she is really a trustee. Instead, they see liability for ‘unconscionable’ or ‘knowing’ receipt as being a bastard cousin of liability in unjust enrichment. The idea is that when A receives the £1,000 that was held on trust for B, she is unjustly enriched at B’s expense. As such, she should be held strictly liable to hand over the value of that money to B, though if she innocently dissipates some or all of the value represented by that money she will be entitled to a defence of change of position that will cut down her liability to the value that remained in her hands at the time she was no longer innocently in receipt of that value. Equity reaches the same result, but by a different route. Instead of making A strictly liable for the value of B’s money, subject to a defence of change of position, A is not held liable at all until she becomes aware that the money in her hands is B’s money, at which point she is held liable for the value of the remaining money in her hands.

One problem with this explanation of liability for unconscionable/knowing receipt is this: How can we say that A is unjustly enriched simply because she has got B’s money in her hands? We don’t say that someone who holds money on trust for someone else is enriched as a result – in fact being a trustee can be a real downer. And we don’t say that a thief who has stolen a bag of coins is enriched as a result, because he is liable to have those coins taken away if he is tracked down by the owner. So why should we say that a recipient of trust funds is enriched?

A more satisfying explanation of A’s liability for unconscionable/knowing receipt is suggested by Charles Mitchell and Stephen Watterson in their paper ‘Remedies for knowing receipt’ (in Mitchell (ed), Constructive and Resulting Trusts (2010)). (See also Peter Jaffey’s earlier paper, ‘The nature of knowing receipt’ (2001) 3 Trusts Law International 151.) They argue that when A is held liable as a ‘constructive trustee’, A is held liable because: (1) she really was a trustee of the £1,000 that she received from C; (2) after she had spent £250 of that £1,000, she knew enough about where the trust funds remaining in her hands to make it fair for the law to impose on her all the duties of a normal trustee, including a duty to preserve the trust funds in her hands; (3) she breached that duty when she spent the remaining £750 on a spa weekend; therefore (4) she is held liable for the loss suffered by B as a result of A’s breach of duty  – that is, £750.

Seen in this way, liability for unconscionable/knowing receipt is not restitutionary at all, but compensatory. And someone who is held liable for unconscionable/knowing receipt is not held liable as though they were a trustee, but is held liable because they really were a trustee (albeit a trustee who has had all the duties of a normal trustee imposed on them, rather than having agreed to assume those duties).

But does the argument stand up? None of the steps in the argument seem to be flawed. On (1), A was obviously held the £1,000 that C gave her on trust for B, because she was not a bona fide purchaser of that money. But at the time she received the money, it would have been unfair to impose on her all the duties of someone who has agreed to be a trustee as those duties are very onerous. That changed when, after she spent £250 of the money she received from C, she discovered that that money was held on trust for B. At that point, she had a choice. She could have given the money back to B. But instead she chose to retain it. As a result, she became what is known as a trustee de son tort (or what Lord Millett in Dubai Aluminium Co Ltd v Salaam (2003) would prefer to call (at [138] a ‘de facto’ trustee ) and was, in Lord Millett’s words, ‘treated in every respect as if [she] had been duly appointed.’ So (2) is made out. Once (2) is made out, steps (3) and (4) in the argument inevitably follow.

Against this, Bill Swadling sniffs (in his essay on ‘The fiction of the constructive trust’ at n 79) that: ‘there is little in the way of authority cited for [Mitchell and Watterson’s argument], just a few Australian cases and unchallenged assumptions in some English cases. No case is cited in which the point was argued and decided in favour of their view.’ This does not seem to be a very strong objection to Mitchell and Watterson’s view: legal argument would not progress very far or very fast if a lack of express authority in favour of an argument counted against its being accepted.

Conclusion

Our survey of the law on constructive trusts and constructive trustees indicates that not all constructive trusts are the same, and not all liabilities to account as a constructive trustee are the same. Some constructive trusts are real and imposed by the law. But others don’t really exist – we just say that property is held on a constructive trust to allow the owner of that property to take advantage of the equitable tracing rules. Someone who dishonestly assists someone else to commit a breach of trust is not really a trustee, but is held liable as though he were. Someone who is held liable for being in unconscionable or knowing receipt of trust assets is held liable because she really was a trustee, and her state of knowledge meant that the law imposed on her all the duties of a trustee, including a duty to preserve the trust assets in her hands.

Offer and acceptance

Two types of contract

One of the systemic problems afflicting contract textbooks is their failure to acknowledge that English law recognise two different types of contract: bilateral contracts (which arise when two people reach an agreement under which they promise to do things for each other) and unilateral contracts (which arise when someone makes a promise to another with the object and result of inducing that other to act in a particular way). Of course, the textbooks acknowledge the existence of these different types of contract, but when it comes to describing how contracts are made, they fail to follow through. Instead of first setting out the rules governing the formation of bilateral contracts, and then setting out the rules governing the formation of unilateral contracts, they attempt to come up with one set of rules that – they claim – govern the formation of all contracts, whether they are bilateral or unilateral in nature. These rules are known as the rules on ‘offer and acceptance’.

Offer and acceptance: bilateral contracts

The language of ‘offer and acceptance’ – and the idea underlying those rules, that contracts are based on agreement – is perfectly suited for the formation of bilateral contracts. After all, bilateral contracts are agreements (under which the parties to the agreement promise to do things for each other). The ‘offer and acceptance’ rules that govern the formation of bilateral contracts are as follows:

(I) If A approaches B with an ‘offer’ (a proposal that they enter into an agreement under which A promises to do something for B and B promises to do something for A), A is free to withdraw that offer (by notifying B that he is withdrawing the offer) at any point up until it is accepted by B.

(II) If B rejects A’s offer (either outright, or by making a counter-proposal of his own), then that kills off A’s offer and it cannot be subsequently accepted by B unless the offer is renewed by A.

(III) B will only be held to have accepted A’s offer if he informs A that he is accepting A’s offer (unless the postal rule applies, in which case posting a letter of acceptance will count as a valid acceptance).

These rules are perfectly designed: (1) to let A and B know what they have to do to enter into a legally binding agreement; and (2) to allow us (and them) to determine with relative certainty when they have entered into a legally binding agreement.

Offer and acceptance: unilateral contracts

Problems arise, however, when we turn to the rules governing the formation of unilateral contracts. Contract textbook writers are committed to the idea that we can use the language of ‘offer and acceptance’ to describe what goes on when two people enter into a unilateral contract. Now – making a unilateral contract has two stages:

(1) A makes a promise to B, with the object of inducing B to do x.

(2) B is induced by A’s promise to do x.

If (1) and (2) occur, then A will be (normally) bound by his promise to B. We say that there exists a ‘unilateral’ contract between A and B in this situation because A is bound by his promise to B, but B does not have any obligations to A.

Now – in order to adapt the language of ‘offer and acceptance’ to the formation of unilateral contracts, the textbook writers are forced to say that (1) is an ‘offer’ and (2) is an ‘acceptance’ of the offer made in (1). So – when A promises B ‘I promise to pay you £1,000 if you mend my car’, A is making an ‘offer’ to B. And when B is induced by A’s promise to mend A’s car, B ‘accepts’ A’s ‘offer’. At that point a contract arises, where A is bound by his promise to pay B £1,000.

But see what complications arise if we apply rules (I), (II) and (III) above – which apply perfectly in bilateral contract situations – to the formation of unilateral contracts.

(1) The rule (I) that A is free to withdraw his offer (by notifying B) up until the point when it is validly accepted by B creates the potential for injustice where A has promised to pay B £1,000 if B mends his car, and B has started work on A’s car but has not yet got to the point where she can claim to have mended A’s car. If B has spent three days working on A’s car but has not yet mended it, and A can then go to her and say ‘Forget it – I’ll have someone else look at it’, that three days work will be wasted. In order to avoid this problem, the courts qualify the rules on ‘offer and acceptance’ as they apply to unilateral contracts to say that if A makes a promise to B with the object of inducing B to do x, and B has begun to do x, then A cannot withdraw his ‘offer’ and must wait to see whether B actually does do x (in which case, A will be bound by his promise): Errington v Errington (1952). A qualification to this qualification then has to be made to accommodate the case where B has consciously taken the risk that A will withdraw his promise at any point up until the point where B has finished doing whatever it is that A wanted to induce B to do by making his promise. For example, if A promises B, an estate agent, ‘I will pay you 2% commission if you find someone to buy my house’, and then B goes about trying to find a buyer, he consciously takes the risk that A will be able at any moment to say ‘Forget it – I’ll get someone else to sell my house’ and so B’s busying himself trying to find a buyer will not mean that A is not allowed to withdraw his ‘offer’ to B: Luxor (Eastbourne) v Cooper (1941).

(2) The rule (II) that a rejection of an offer will kill off the offer seems not to apply straightforwardly in a unilateral contract situation. (There is no authority on this, but what follows seems to be correct.) Suppose that A posts up advertisements in the local paper that say, ‘Fruit pickers needed for this weekend. Turn up to my farm, work for 5 hours picking fruit, and you will be paid £75.’ B sees A after seeing the advertisement and says to A, ‘You can stuff your fruit picking! I wouldn’t be seen dead working on your farm.’ But later on B thinks better of it, and turns up to work on A’s farm (entering the farm unnoticed among a group of other fruitpickers) and does 5 hours’ fruit-picking. When he goes to collect his £75, could A say, ‘Sorry – you rejected my offer, so you couldn’t accept it later on by working for five hours on my farm’? I don’t think so. A crucial feature of this situation is that it is not important to A to know whether or not B is going to pick fruit on his farm. A wouldn’t mind if B told him ‘No’ initially but then later on turns up to work. But in some situations, it will be quite important that A knows where he stands, and a ‘No’ may have the effect of ensuring that A is not bound by a promise that he has made with the object of inducing B to do x, even if B later changes his mind and does x. For example, if A says to B, ‘If you mend my car, I will pay you £1,000’, and B says ‘No – I’m too busy’, I don’t think B could sue for the £1,000 if he later on secretly goes round to A’s house and mends the car. The reason is that A may have responded to B’s ‘No’ by entering into a bilateral contract with someone else (under which C promises to do his best to mend A’s car, and A promises to pay him £1,000 if he does so) on which he could now be sued. So B’s ‘No’ in this case will terminate A’s ‘offer’ to B. But this will not always be the case with unilateral contracts.

(3) The rule (III) that an offer will only be validly accepted if the offeree has told the offeror that he has accepted the offer (Felthouse v Bindley (1863)) does not usually apply to unilateral contracts. The classic case is Carlill v Carbolic Smoke Ball Co (1893). In that case the promise was – ‘If you catch influenza using our smoke ball, we will pay you £100.’ The promise was (obviously) not made with the object of inducing people to catch the flu, but to induce people to buy the defendants’ smoke ball. (So this was a unilateral contract situation where the promise was conditional (‘If you do x, then I will do y for you’) but the condition on the promise was (unusually) not the thing the promisee was trying to induce the promisee to do. What the promisor was trying to get the promisee to do did not appear on the face of the promise.) Mrs Carlill bought the smoke ball in reliance on this promise, and that was enough to make the defendants’ promise binding on them. So if Mrs Carlill did catch influenza using the smoke ball – as she did – they would have to pay her £100. What is important, for our purposes right now, is that the mere act of buying the smoke ball brought a unilateral contract into existence between Mrs Carlill and the defendants. Mrs Carlill did not have to tell the defendants that she had bought the smoke ball – thereby ‘accepting’ their ‘offer’ – in order to bring the unilateral contract into existence. Things would be different, of course, if A’s promise was made with the object of inducing B to tell him something, or to contact A in some way. In such a case, a unilateral contract could not come into existence if B did not get in touch with A in the way A wanted. For example, suppose A said to B, ‘I will pay you £10,000 if you supply me with evidence that my wife is having an affair’. If B then gets some photos of A’s wife in a compromising position and posts them to A but then the photos get lost in the post, A will not have to pay B £10,000 – the promise to pay that sum was made with the object of getting B to supply him with evidence of his wife’s infidelity, and B has not done that.

Life would be much simpler if the textbook writers abandoned the idea that the formation of unilateral contracts can be described through the language of ‘offer and acceptance’. But the idea is now too deeply entrenched for it now to be abandoned – and you will be expected to use such language in the contract exam, whether you are dealing with a bilateral or unilateral contract situation. However, if you are dealing with a unilateral contract situation, bear in mind that the rules on ‘offer and acceptance’ are radically modified in that sort of context, and don’t apply rules (I), (II) and (III) – in their unqualified form, as they apply to the formation of bilateral contracts – unthinkingly.

Auctions

Let’s apply all this to a situation that often comes up in problem questions in the exam, but is often done very badly by students: the situation of a blind auction at a distance. Here is a typical version of the situation I am talking about:

A puts an advertisement in the newspaper: ‘I have a rare first edition of JK Rowling’s Harry Potter and the Philosopher’s Stone. I will sell it to the person who bids the highest price for it by midnight on December 1st.’

The problem question goes on to have various people making various types of bids for the book and has various things happening to those bids. And the question is whether A is bound to sell the book to anyone, and if so who.

The key to doing this problem question properly is to realise that we are dealing with a unilateral contract situation here. A is basically promising ‘If you are the highest bidder at midnight on December 1st, I will sell the book to you for the price you bid.’ And because we are dealing with a unilateral contract situation, we must be careful about what rules on ‘offer and acceptance’ we apply to this situation – we cannot unthinkingly apply the normal rules that would apply to the formation of bilateral contracts. Here are some points that you should bear in mind in analysing this problem question:

(1) The deadline makes it clear that a bid has to be received for it to count as a ‘winning’ bid. A wants to know at midnight on December 1st where he stands – he needs to know who he is supposed to sell the book to. He can only do this if it is only the bids he has received that can count as winning bids. So any bids that are lost in the post or otherwise not communicated (and not through A’s fault in failing to receive them) will not count as valid bids.

(2) Multiple bids, and bids made after rejecting A’s initial ‘offer’, are perfectly acceptable. The only thing that matters is whether you are the highest bidder by the deadline. If you put in a bid, and then thought better of it and put in a higher bid, then that that is fine. If you told A to stuff his offer, and then thought better of it and put in a bid, then that is fine.

(3) It is also acceptable to withdraw a bid that has already been made. As in (2), the only thing that matters is whether you are the highest bidder by the deadline. If you have made a bid before the deadline and then take it back, you are not the highest bidder by the deadline. The bid you made has been nullified by your subsequent act of withdrawing it.

(4) It is a difficult issue, what the position is if A withdraws his ‘offer’ (by placing another advertisement in the paper and notifying all current bidders at the time of withdrawal) before the deadline of midnight on December 1st. In order to deal with this issue, we need to ask – what was A trying to induce people to do by placing his initial advert in the paper?    If the answer is ‘bid for the book’ then A cannot withdraw his offer if anyone has already made a bid for the book. There already exists a unilateral contract between A and anyone who has already bid for the book. A’s promise – ‘I will sell you the book if you are the highest bidder by midnight on December 1st’ – was made with the object of inducing people to bid for the book, and so if anyone is induced by A’s promise to bid for the book, a unilateral contract will then have come into existence under which A is bound to sell the book to that bidder if his bid turns out to be the highest bid by the midnight December 1st deadline. A cannot now get out of that contract by withdrawing his ‘offer’. The ‘offer’ has already been ‘accepted’. If, however, what A was trying to do by making his promise was to induce someone into becoming the highest bidder for the book by midnight December 1st, then his ‘offer’ has not yet been ‘accepted’. The deadline has not yet come, so we don’t know yet who the highest bidder is. But would Errington v Errington kick in to say that A cannot withdraw his ‘offer’ because people (i.e. anyone who has already bid for the book) have relied on that ‘offer’ by making a bid and it would as a result be unfair to withdraw that ‘offer’? I am not sure. It won’t have cost people who have already made a bid anything to make a bid. And while they might, in making a bid, have taken a risk that they will end up having to buy the Harry Potter book for their bid price, they could avoid that risk at any point up and until the deadline by withdrawing their bid (as in (3), above). So it’s not clear that it would be that unfair to them if A was allowed to withdraw his ‘offer’ before the deadline.

There are other complications attached to this kind of problem question – in particular, in relation to the issue of ‘referential bids’ – but they are dealt with in the contract textbooks and need not detain us here.

The Quistclose trust

What is it?

In Twinsectra v Yardley (2002), Lord Millett said:

‘Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and…the lender takes the risk of the borrower’s insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce… Such arrangements are commonly described as creating “a Quistclose trust”, after the well known decision of the House [of Lords] in [Barclays Bank Ltd v Quistclose Investments Ltd (1970)]…’

So when we talk about a ‘Quistclose trust’ we are primarily talking about the trust that arises when A lends money to B making it clear that that money is only to be used for a specific purpose. B will then hold that money on trust – a Quistclose trust. There are two points of dispute about this type of trust:

What sort of trust is it?

As the money handed over to B is only to be used for a particular purpose, we might naturally think that the trust that B holds the money on is a non-charitable purpose trust, under which B is required to use the money for the purpose for which he was given it. Early on in the development of the Quistclose trust, there were a couple of factors that would have weighed in favour of this analysis being the correct one:

(1) In Barclays Bank Ltd v Quistclose Investments Ltd (1970) itself, A lent money to B for the express purpose of paying a dividend to B’s shareholders. The money was paid into a bank account with C, B’s bank. Before the dividend was paid, B went bust, and C (to whom B owed a lot of money) sought to use the money in the bank account to pay off B’s debts to it. A argued that C was not entitled to do that; and the money in the bank account was held on trust for it. The House of Lords agreed. But they held that the money in the bank account had in fact been subject to two trusts. The first trust – which is the trust we commonly talk about when we talk about a ‘Quistclose trust’ – had arisen when A lent the money to B. The second trust – under which B held the money in its bank account on trust for A – arose when B went bust. So we have here a situation where money is handed over to B, is held on a valid trust, and then something happens to collapse that trust, and in its place arises a trust back to the person from whom the money was received. If the first trust that B held the money on was a non-charitable purpose trust, then this sequence of events would make sense. B gets the money, holds it on a non-charitable purpose trust, B’s going bust make the purpose of the trust impossible to fulfil, so that trust collapses, and in its place we have a resulting trust back to the person who set up the trust in the first place. If the first trust that B held the money on was a fixed trust for a particular beneficiary, then this first trust could only have collapsed if it was made clear at the time B accepted the money from A that, ‘You are to hold this money on trust for [whoever], but if you go bust you are then to hold on trust for us.’ But that was never made clear in Barclays Bank v Quistclose Investments; if it had been, the case would probably never have gone to court.

(2) In Carreras Rothman v Freeman Matthews Treasure (1985) – a case where A paid money to B to be used solely for the purpose of paying off debts that A owed to C, various newspapers and periodicals that had carried advertisements for A’s products – Peter Gibson J held that the money paid by A to B was held on a Quistclose trust, and that: (i) the beneficial interest in the trust money was ‘in suspense’; and (ii) C was entitled, under this trust, to compel B to use the trust money to pay off the debts that A owed C. The only way we can make legal sense of this is if Peter Gibson J thought that the money paid by A to B was held on a non-charitable purpose trust to pay off A’s debts to B. If the money paid by A to B were held on trust for C, then C would have a beneficial interest in the money: but Peter Gibson J said that the beneficial interest was ‘in suspense’. The only kind of trust which allows us to say that no one has a beneficial interest in the trust property is a purpose trust.

However, there are formidable difficulties in the way of saying that the Quistclose trust is a non-charitable purpose trust:

(1) There is, first, the authority of Re Endacott (1960), which expressly ruled out the possibility of creating any more exceptions to the rule against non-charitable purpose trusts other than the anomalous exceptions of trusts for the saying of masses for one’s soul, funerary monuments, and identifiable animals. (All these non-charitable purpose trusts owe their validity to the fact that people would not stop making provision for these purposes in their wills, even if they were told that the provisions were invalid. After all, if you think you are going to die, you will want to leave some money aside for masses to be said for your soul (if you believe in Heaven, and more importantly, Hell), for a gravestone so you won’t be forgotten, and for your pets to be looked after, after you die. This accounts for why these anomalous exceptions to the rule against non-charitable purpose trusts are explained away as ‘concessions to human nature’.)

(2) Even if we concede that there may have been some moves at the end of the 1960s to relax the rule against non-charitable purpose trusts (cf. Goff J’s judgment in Re Denley (1969), and Lord Cross of Chelsea’s judgment in Dingle v Turner (1972)), if in Barclays Bank v Quistclose Investments the House of Lords had meant to recognise a new category of non-charitable purpose trust, it would have gone way beyond anything that has been suggested before or since by way of relaxing the rule against non-charitable purpose trusts. As B’s going bust brought the primary trust in Quistclose to an end, if that primary trust was a non-charitable purpose trust, we would have to suppose that the purpose of the trust was to keep B solvent, or to give people the impression that B was solvent. It is very hard to imagine that the House of Lords was intending in Quistclose to say that a trust for such a purpose could be valid.

But if the Quistclose trust is not a non-charitable purpose trust then what is it? Lord Millett’s analysis, advanced in Twinsectra v Yardley, is that when A lends money to B making it clear that the money is only to be used for a specific purpose, then B holds that money on trust for A, subject to a power or permission to use that money for the purpose for which he has been lent it by A. On this view, the House of Lords was wrong to think that the money in Barclays Bank v Quistclose Investments was held on two successive trusts. There was only one trust all along – a trust back to A, subject to a power in B to use that money to pay a dividend to its shareholders.

Lord Millett’s analysis gives rise to a further point of dispute:

How does it arise?

In his judgment in Twinsectra, Lord Millett seemed to be undecided as to whether a Quistclose trust arises because that is what the parties intended (that is, B holds on trust for A subject to a power to use the money for the purpose for which it was lent because A and B agreed that B should hold the money on trust for A) or because such a trust arises as a matter of law when A lends money to B but specifies that the money is only to be used for a specific purpose. At one point he said:

‘the Quistclose trust is a simple commercial arrangement akin…to a retention of title clause (though with a different object) which enables the borrower to have recourse to the lender’s money for a particular purpose without entrenching on the lender’s property rights more than necessary to enable the purpose to be achieved. The money remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not applied it must be returned to him.’

This seems to suggest that the Quistclose trust is something that arises because it was intended to arise by A and B when A lent B the money. However, later on his judgment, Lord Millett said:

‘a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor…did not intend to benefit the recipient. It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it… An analysis of the Quistclose trust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with [this] thesis…’

This seems to suggest that the Quistclose trust arises as a matter of law: when A lent B money specifying that it could only be used for a particular purpose, it is is clear that he did not intend that money to benefit B, and given this, the money must have been held on resulting trust for A (subject to permission to apply the money for the purpose for which it was lent).

Let us consider both possibilities:

(1) Express trust. The possibility of analysing the Quistclose trust as arising because it is intended to arise by A and B when A lends money to B to be used for a specific purpose is criticised by Bill Swadling in his essay ‘Orthodoxy’ (in Swadling (ed), The Quistclose Trust: Critical Essays (2004)). He points out that in Barclays Bank v Quistclose Investments Ltd itself there was no real evidence that A and B intended that the money lent by A to B should be held on trust for A. Moreover, the facts that: (i) the relationship between A and B was one of creditor-debtor; (ii) B was under no duty to keep the money lent by A to B separate from his other assets; and (iii) B was under no duty to act loyally in A’s best interests in dealing with the money lent to him by B, would all normally count against our finding that A and B intended that the money lent by A to B was to be held on trust for A.

(2) Trust arising as matter of law. The difficulty with analysing the Quistclose trust as arising under a rule of law that if A transfers property to B and does not intend that property to be enjoyed beneficially by B, then B will hold that property on a resulting trust for A is that it is questionable whether such a rule exists in English law. (For further discussion of this issue, see the post on ‘Resulting Trusts’ elsewhere on this website.) Proponents of such a rule argue that finding that B holds on resulting trust for A is necessary to prevent B being unjustly enriched. It’s doubtful whether this is true, but as Bill Swadling points out in his ‘Orthodoxy’ essay it is certain that this argument cannot work to justify a resulting trust arising in a Quistclose situation as B is in any case under a liability to repay the money he has received from A.

So neither of Lord Millett’s suggestions as to how the Quistclose trust (if analysed as a resulting trust, whereby B holds on trust for A subject to a power or permission to apply the money received from A for the purpose for which it was lent) might be explained as arising seem to work. My Suggestion is that we can explain the Quistclose trust as arising in the following way. When A lends B the money, he intends that B should hold that money on a purpose trust, to apply the money for the purpose for which A lent it to B. This purpose trust – not being charitable in nature – is invalid. So the money which A has lent B is intended to be held on a trust that fails ab initio (from the start, from the moment the money is handed over). As a result, B holds the money on trust for A, in the same way as happens all the time when someone transfers money to another to be held on a trust that fails. So when A lends B the money, intending that B hold the money on a purpose trust, B ends up immediately holding that money on trust for A. But as A is (for the time being) happy for B to use the money for the purpose for which he lent it to B, B will be allowed to use that money for that purpose even though he technically holds the money on trust for A. So we end up with agreeing with Lord Millett that when A lends B money to be used for a specific purpose, B will hold that money on trust for A subject to a power (or permission) to use that money for that purpose. But that trust does not arise because it was intended to arise, or because there is some rule that a resulting trust will arise whenever A transfers money to B and does not intend that B should enjoy that money beneficially. Instead, the trust arises because when A transferred the money to B he intended that it be held on a purpose trust that was invalid because non-charitable and it is the invalidity of that trust that gives rise to the resulting trust.

Donations

My Suggestion allows us to provide a satisfactory analysis of a situation that Peter Birks made very heavy weather of in his essay on ‘Retrieving tied money’ in the Swadling volume on the Quistclose trust. This is the situation:

‘An announcement is made that a new road has been approved. The map shows the line running straight through a thriving neighbourhood. A local councillor assumes the leadership of the campaign to prevent this disaster. All the residents give generously in response to his appeal for funds “to fight the road”. Six months later, when only one tenth of the fund has been spent, two things happen. First, the proposal for the road is withdrawn. Second, the councillor’s family business collapses, leaving many unpaid creditors. £300,000 at the moment stands in the account which he had opened to hold the campaign funds. He accepts that he owes that £300,000 to the subscribers… He is anxious to repay. His unsecured creditors maintain that the subscribers must stand in the queue waiting to receive, pari passu with themselves, whatever is left when the secured creditors have been paid off.’

Birks wants to argue that the money in the account is held on trust for the subscribers, but finds it difficult to distinguish the case from one where A pays B for goods that aren’t supplied, and the money that A paid B is still traceably in B’s hands. My Suggestion makes it easy.

When the subscribers donate money to fight the proposed new road, they intend that the councillor will hold the money on a purpose trust, under which he will be required to use the money for fighting the road proposal. However, this purpose trust is invalid. It cannot be charitable as it is political. And it obviously does not fall within any of the anomalous exceptions to the rule against non-charitable purpose trusts. So as soon as a subscriber donated money to the campaign, it was held on a resulting trust for him by the councillor. But the subscribers were happy for the councillor to use the money for the purpose of fighting the road, and so the councillor had a power (or permission) to use the money that he held on trust for the subscribers for that purpose. Now that the threat to build the road has gone away, that power has vanished, and the councillor simply holds the money on resulting trust for the subscribers.

There is no comparison with the case where A pays B money for goods that are never supplied. When A pays the money he has no intention that B hold the money on a purpose trust, and so My Suggestion does not apply. The only basis for finding that B holds the money on a resulting trust for A here would be if A and B positively intended that B should hold that money on trust for A until A got his goods, as in Re Kayford (1975).

Resulting trusts

What are they?

It seems most sensible to define resulting trusts as follows –

A resulting trust exists when a trustee holds some right or interest on trust for the person from whom he received that right or interest.

On this view, what marks out a resulting trust as ‘resulting’ is who the trustee holds on trust for – he holds on trust for the person from whom he received the trust property. Under a resulting trust, the beneficial interest in the trust property has ‘jumped back’ (in Latin, resalire) to the person from whom the trust property has derived.

On this definition, it’s a mistake to think that a given trust can be classified as ‘express’ or ‘constructive’ or ‘resulting’. That’s like saying that a jumper can be classified as ‘hand-made’ or ‘machine-made’ or ‘red’. ‘Express’ and ‘constructive’ refer to how a trust came into existence (either it came into existence because the settlor intended to create it, or because it arose under some rule of law); ‘resulting’ refers to what it looks like. A given trust can be classified as ‘express’ or ‘constructive’ when we ask how it arose; it can be classified as ‘resulting’ or ‘non-resulting’ depending on for whom the trust property is held on trust. So it’s conceptually possible for a given trust to be: ‘express resulting’, ‘express non-resulting’, ‘constructive resulting’, or ‘constructive non-resulting’.

Because of s 53(2) of the Law of Property Act 1925, which says that ‘This section does not affect the creation of resulting, implied or constructive trusts’, many people think that when we should not refer to a trust as being ‘resulting’ if it is also ‘express’ in nature. But, as we will see, there are trusts that are routinely referred to as ‘resulting’ which some argue are also ‘express’ in nature.

When do they arise?

There seem to be three situations where a resulting trust will arise:

(1) Where A transfers a right or interest to B and B agrees to hold that right or interest on trust for A.

(2) Where A transfers to B, or purchases for B, an interest in land in circumstances where the law presumes that A did not intend to make a gift of that interest in land to B. (The trust arising in this situation is known as a ‘presumed resulting trust’.)

(3) Where A transfers to B a right or interest, intending that B should hold that right or interest on trust, and that trust fails. (The trust arising in this situation is known as an ‘automatic resulting trust’ – though as people such as Peter Birks and Lord Browne-Wilkinson have pointed out, there is nothing automatic about a resulting trust arising on trust failure. A might have intended that B should keep the right or interest for herself if it could not be held in trust; and in such a case, there will be no trust back to A if the trust on which A intends B to hold the right or interest fails.)

(There is a possible fourth situation (though some would say that it is simply an example of (1) and I would say that it is an example of (3)), where A transfers money to B but specifies that that money is only to be used for a non-charitable purpose. It is generally accepted that in this situation B will hold the money on trust for A, but will be allowed to use the money for the purpose specified by A. This trust is known as a Quistclose trust, and is dealt with in a separate note on this website.)

Why do they arise?

There is no problem with understanding why the resulting trust in (1) arises – it arises because that was what A and B intended.

I also think there is no real problem with understanding why presumed resulting trusts arise – they arise because the law presumes, when A transfers the interest in land to B that A intended that that interest should be held on trust for him, and the law gives effect to that intention. It might be objected that such an explanation is inconsistent with s 53(1)(b) of the Law of Property Act 1925, which provides that:

‘a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust…’

As there will be no writing evidencing A’s intention that the interest in land that was transferred to B should be held on trust for him, it might be argued that the courts would violate s 53(1)(b) if they gave effect to that intention. However, Bill Swadling has convincingly argued that all that s 53(1)(b) says is: ‘If you want to base your claim on someone’s making a declaration of trust over land, then you have to provide some written evidence that that declaration of trust was made.’ But in a presumed resulting trust situation, A has no need to base his claim against B, that B holds on trust for him, on an allegation that he intended that B should hold on trust for him. All A has to do, to make out his claim, is to show that he transferred an interest in land to B, and the courts will do the rest. They will presume that A intended that B should hold that interest on trust for him, and then ask B to provide evidence that that was not A’s intention.

So, for example, in Hodgson v Marks (1971), Hodgson owned a house in which Evans stayed as a lodger. Evans started expressing concerns that Hodgson’s son would force him out of the house. Hodgson sought to allay those concerns by transferring title to the house to Evans. It was understood by both Hodgson and Marks that the house would be held on trust for Hodgson, but nothing was put in writing. Evans later sold the house to Marks. The Court of Appeal held that when Hodgson sold the house to Evans, Evans held it on trust for Hodgson. In so holding, they did not act inconsistently with s 53(1)(b). In order to establish that Evans held on trust for her, Hodgson did not need to rely on their agreement that he would hold on trust for her (which agreement would have had to have been evidenced in writing in order to be relied on under s 53(1)(b)). All she had to do was show that she had conveyed her house for nothing to a comparative stranger and then sit back. The courts would then presume that Hodgson had intended Evans to hold on trust for her and switch their attention to Evans and ask whether there was any evidence that she had intended to make an outright gift to her. As no such evidence could have been offered, the courts would find that the house had been transferred to Evans to be held on trust for Hodgson and give effect to that trust. And that’s exactly what happened in Hodgson v Marks. So, in effect, the resulting trust over the house in Hodgson v Marks was an express trust, where Hodgson did not attempt to prove directly that she intended that the house should be held on trust for her (which would have required that that intention be evidenced in writing) but simply set up a presumption (which went unrebutted) that she intended that the house be held on trust for her by proving that she conveyed it for nothing to a comparative stranger. And all presumed resulting trusts over interests in land can be analysed in a similar manner.

The real difficulty is with so-called ‘automatic’ resulting trusts – trusts arising in situation (3), above. A number of different theories have been advanced as to why such trusts arise. In order to consider them, let’s see how they apply to a stock situation – call it Dead Man – where A transfers money to B to be held on trust for C and C is already dead at the time the transfer is made. The trust for C having failed to come into existence, B ends up holding the money on trust for A. Why?

The first theory – endorsed by Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC (1996) – is that we find that B holds on trust for A in Dead Man because we presume that A intended that if B could not hold on trust for C, then she should hold on trust for A. The big problem with this theory is Vandervell v IRC (1967). In that case, Vandervell transferred 100,000 shares in his company to the Royal College of Surgeons (RCS). The idea was the RCS would receive premiums on the shares, and once they had received £150,000 in premiums (the exact amount they needed to endow a chair in Vandervell’s name), the shares would be purchased back from the RCS for £5,000. The option to repurchase the shares was vested in a trustee company. At the time the shares were transferred and the option to repurchase the shares vested in the trustee company, Vandervell never said for whom the option to repurchase should be held on trust for. It was suggested that it be held on trust for Vandervell’s children or on trust for the employees working in Vandervell’s company. Vandervell was happy with either suggestion, but did not say which option he wanted to go for. The House of Lords held that at the time the option to repurchase the shares was retained, it was held on trust for Vandervell: if A transfers property to B to be held on trust, and does not specify for whom, then it is to be held on trust for A. Now – the decision in Vandervell v IRC creates a problem for this first theory as to why resulting trusts arise in situation (3) because it’s not possible to presume in Vandervell that Vandervell intended that the option to repurchase be held on trust for him. Whatever else we know, we know for certain that the last person in the world Vandervell wanted the option to repurchase to be held on trust for, was him. That’s because if he retained an interest in the shares while they were held by the Royal College of Surgeons he would remain liable for tax on the premiums on those shares. And that’s what happened as a result of the decision in Vandervell v IRC – Vandervell became liable for tax on the dividends paid on the shares before they were repurchased. So it’s hard to say that the resulting trust over the option to repurchase the shares was giving effect to an intention we presume that Vandervell had, that that option to repurchase should be held on trust for him.

In order to overcome this problem, in Re Vandervell’s Trust (No 2) (1974), Megarry J came up with a second theory as to why resulting trusts arise on the failure of a trust. This theory led to these resulting trusts being called ‘automatic’ – a label that has stuck on them to this day, despite academic and judicial denials that such trusts arise automatically. The reason why Megarry J called them ‘automatic’ was because he thought resulting trusts arising out of the failure of a trust arose automatically, irrespective of the intention of the person attempting to set up the trust. They had to arise automatically, Megarry J thought, if we are to explain why there was a resulting trust in Vandervell v IRC. Megarry’s theory as to why resulting trusts arise on the failure of a trust helped to explain – he thought – why they arose automatically. On his theory, the reason why B ends up holding on trust for A in Dead Man is that at the start of the story A has a legal and beneficial interest in the money he wants to transfer to B. A successfully transfers the legal interest in the money to B, but is unsuccessful in transferring the beneficial interest to C. So the beneficial interest remains in A: you keep what you don’t give away. At the end of the story then, B has legal title to the money, and A has the beneficial interest. Hey presto: B holds on trust for A. We can explain the trust in Vandervell v IRC in the same way. At the start of the story, Vandervell has a legal and beneficial interest in the option to repurchase. He transfers the legal title to his trustee company but dithers over who should get the beneficial interest and ends up giving it to no one. So it remains in him: he keeps what he does not give away. At the end of the story then, Vandervell’s trustee company has legal title to the option to repurchase, but Vandervell (horror of horrors from his point of view) still has the beneficial interest. Hey presto: the trustee company holds the option to repurchase on trust for Vandervell.

This seems very neat, but it suffers from a huge problem. The problem is that the entire theory depends on our accepting that at the unencumbered legal owner of property has both a legal and beneficial interest in that property. This is untrue. All the unencumbered legal owner of some property has is legal title to that property. He is able to enjoy the property beneficially, true – but that is not because he has a beneficial interest in the property. It’s because no one else has a beneficial interest in that property that could stop the legal owner enjoying the property himself. Ironically, Vandervell v IRC itself refutes Megarry’s theory as to why resulting trusts arise on trust failure in cases like Vandervell. While the Inland Revenue’s argument that Vandervell had retained an interest in the shares conveyed to the RCS by virtue of the fact that the option to repurchase was held on trust for him, it had also tried to run an argument that the shares that were transferred to the RCS were held by the RCS on trust for Vandervell. The Revenue’s argument was that before the shares were transferred to the RCS, they were held on trust for Vandervell, and Vandervell’s oral instruction to his trustees to transfer the shares to the RCS so that they RCS would become absolute legal owners of the shares was incapable of divesting him of his beneficial interest in the shares. This is because – the Revenue argued – Vandervell’s instruction amounted to an attempted to dispose of his beneficial interest in the shares to the RCS and that could only be done in writing under s 53(1)(c) of the Law of Property Act 1925. The House of Lords rejected this argument. What Vandervell was trying to do in instructing that the shares held on trust for him should be transferred to the RCS was destroy his beneficial interest, not transfer it to the RCS. Compliance with Vandervell’s instruction would result in a situation where the RCS was the legal owner of the shares and no one would have a beneficial interest in the shares: not Vandervell, and not the RCS.

Megarry J’s explanation of why resulting trusts arise on trust failure is now generally rejected. However, Lord Millett might be taken to have attempted to revive it in Air Jamaica Ltd v Charlton (1999), when he observed that:

‘A resulting trust…arises whether or not the transferor intended to retain a beneficial interest – he almost always does not – since it responds to the absence of any intention on his part to pass a beneficial interest to the recipient.’

So, Lord Millett might be taken to be arguing here that in Dead Man,B holds on trust for A because the beneficial interest in the money cannot vest in C, and A does not intend that B should have the beneficial interest. Given this, the only person who can have a beneficial interest in the money is A. However, the problem with this is that it assumes someone must have a beneficial interest in the money. The possibility that no one has a beneficial interest in the money, and B is left free to walk away with the money as its legal owner is overlooked.

However, my view is that Lord Millett misspoke in Air Jamaica and did not intend to endorse Megarry J’s theory as to why resulting trusts arise on trust failure. When Lord Millett said that a resulting trust ‘responds to the absence of any intention on [the transferor’s] part to pass a beneficial interest to the recipient’ he really meant to say that in Dead Man, B holds the money on a resulting trust for A because A didn’t intend that B should benefit from that money. So the focus is not on who A intended should have a beneficial interest (a proprietary concept) in the money, but on who A intended should benefit (a straightforward, non-legal concept) from the money. If A did not intend that B should benefit from the money that he has transferred to B, then B would be unjustly enriched if B were allowed to walk off with the money and enjoy the benefit of it. In order to prevent this happening – as it might if we simply say that B is the legal owner of the money and doesn’t hold on trust for anyone – we find that B holds the money on trust for A, the person at whose expense B would be unjustly enriched if he were allowed to walk off with the money.

This is the Birks-Chambers theory of why resulting trusts arise. It is named after Peter Birks, who first advanced the theory in his Introduction to the Law of Restitution (1989), and Robert Chambers, who developed the theory in a PhD (supervised by Peter Birks) that was turned into a book, Resulting Trusts (1997). On this theory, resulting trusts arise on trust failure to prevent someone enjoying the benefit of property that he was never intended to benefit from. So, on this theory, in Dead Man, B holds the money on trust for A not because (as the first theory would suggest) A had a positive intention that B should hold on trust for A, but because A did not have a positive intention that B should benefit from that money.

(The fact that Lord Millett says in Air Jamaica that resulting trusts arising on trust failure respond to an ‘absence of intention’ on the part of the transferor makes me think that he was actually meaning to endorse the Birks-Chambers thesis, but screwed up by focussing on the absence of an intent to pass a beneficial interest to the recipient instead of focussing on the absence of an intent that the recipient should benefit from the money. He did a bit better in the subsequent case of Twinsectra Ltd v Yardley (2002), where he said that: ‘The central thesis of Dr Chambers’s book is that a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor…did not intend to benefit the recipient.’ But in the very next sentence, he can’t stop himself sliding back into Air Jamaica type language: ‘It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it.’)

The fact that the Birks-Chambers theory as to why resulting trusts arise on trust failure focuses on the fact that in a case like Dead Man, A did not intend that B should benefit from the money rather than (as with the first theory) arguing that A did intend that B should hold on trust for him, means that the Birks-Chambers theory can handle Vandervell v IRC. They can argue that the trustee company held the option to repurchase on trust for Vandervell because, whatever else he intended, he did not intend that the trustee company should benefit from that option to repurchase; so the trustee company was held to hold the option to repurchase on trust for Vandervell in order to stop it exercising that option to repurchase for its own benefit.

So – should we accept the Birks-Chambers theory as to why resulting trusts arise on trust failure? There are two problems with it.

The first problem is that if the Birks-Chambers theory were correct, we would expect to find resulting trusts arising whenever A transfers money to B and does not intend B to benefit from that money. In particular, we would expect a resulting trust to arise in a situation where A transfers money to B by mistake. But there is no authority that a resulting trust will arise in such a situation. The furthest the courts have been willing to go is that where A pays B money by mistake, B may hold the money on trust for A if B was aware that the money was transferred to him by mistake: Chase Manhattan Bank v Israel-British Bank (1981), as explained by Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC (1996). And even then some judges have been unwilling to go that far: see Shalson Russo (2005), per Rimer J at [118].

This problem is not insuperable. It could be argued that if the law doesn’t find resulting trusts when the Birks-Chambers theory indicates that it should, that is a problem that originates in the law’s failure to give full effect to the principles which underlie it, and does not indicate that there is something wrong with the Birks-Chambers theory.

The second problem is much more serious. It is that in a case like Dead Man, it is not clear why the law has to hold that B holds on a resulting trust for A in order to prevent B being unjustly enriched at A’s expense. Why not simply allow A a personal remedy against B, allowing A to sue B for the value of the money that he transferred to B? That would seem to be sufficient to prevent B being unjustly enriched as a result of being allowed to retain the money that A transferred to B. If the Birks-Chambers theory is to satisfactorily explain why resulting trusts arise in a case like Dead Man, it has to explain why a proprietary remedy, rather than a personal remedy, is required to prevent B being unjustly enriched. This is a challenge that has not yet been met.

So – we have looked at three theories so far as to why resulting trusts arise on trust failure and seen that all of them suffer from one flaw or another. The theory that the resulting trust in Dead Man arises to give effect to an intention we presume that A had that B should hold the money on trust for him if it cannot be held on trust for C runs into the rock of Vandervell v IRC. The theory that the resulting trust arises because A has failed to give away his beneficial interest in the money that he transferred to C simply does not work: A never had a beneficial interest in the money to give away. The theory that the resulting trust arises because B would be unjustly enriched if she were allowed to enjoy that money for her own benefit runs into the problem that allowing A to sue B for the value of that money would seem sufficient to prevent B being unjustly enriched. So it seems likely that if we are to explain satisfactorily why resulting trusts arise in cases like Dead Man, we have to look elsewhere.

The fourth theory we should consider is the ‘gap’ theory, first proposed by Lord Denning MR in Re Vandervell’s Trust (No 2) (1974) and revived by John Mee in a recent essay (‘“Automatic” resulting trusts: retention, restitution, or reposing trusts?’ in Mitchell (ed), Constructive and Resulting Trusts (2009)). The idea is that in a case like Dead Man, B won’t be allowed to deny that he holds the money he received on trust, but as C is already dead, we have a problem: we must find that B holds on trust for someone, but for whom? We solve the problem by finding that B holds on trust for A. This theory only works if we accept that B simply won’t be alowed to deny that he holds the money he has received from A on trust. This is plausible: there is something a bit ‘off’ about someone who receives money on the express understanding that they will hold it on trust and then attempts to turn round and argue that they are entitled to enjoy that money for their own benefit. Someone who attempted to play fast and loose with the truth in this way might be held to be acting unconscionably, and Equity could be expected to prevent someone acting in this way. So the ‘gap’ theory has a lot going for it.

An alternative to the ‘gap’ theory is the ‘invalidity’ theory. The idea is that in a case like Dead Man, A’s attempt to create a trust for C has failed. When someone tries to peform a legal act that turns out to to be legally invalid, the natural legal response is to put them back to where they were in the first place. But in Dead Man, Equity cannot do this. A has transferred to B legal title to the money that was meant to be held on trust for C, and Equity cannot reverse that transfer. The best it can do is to find that B holds on trust for A. This is the closest Equity can get to getting A back to where he was before he made his ineffective attempt to create a trust for C. Once B holds on trust for A, A can exercise his Saunders v Vautier rights to get back legal title to his money from B, and that will restore the parties to the position they were in before A attempted to transfer the money to B to be held on trust for C. So Equity finds that B holds on trust for A simply because A has not succeeded in his attempt to create a valid trust for the benefit of C, and finding that B holds on trust for A is the best it can do by way of reversing what A has done.

Either the ‘gap’ or ‘invalidity’ theories seem to me to explain satisfactorily why we find resulting trusts in a situation like Dead Man where a trust has failed. It is very hard to think of a scenario which would determine which theory is ‘better’. But either seems much more satisfactory than the first three theories we considered.