Constructive trust

A constructive trust, as opposed to an express trust, arises by the operation of the law of equity rather than by the express intention of a settlor. It is a remedy that seeks to avoid the consequences of unconscionable conduct by one party, to the detriment of a beneficiary. This type of trust is artificially imposed by equity on a person who has control of property where it would be contrary to equitable principles for such person to assert both legal and beneficial ownership.

In Australia, one of the leading cases that relates to constructive trusts is Baumgartner v Baumgartner (1987) 164 CLR 137 (Baumgartner), which affirmed the dissent of Deane J in Muschinski v Dodds (1985) 160 CLR 583. In the latter case, Deane J stated that a constructive trust “can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement”.

Baumgartner concerned the breakdown of a defacto relationship and one partner seeking declaratory relief that she had an equitable interest in the property that was owned by her male partner. The Court held that, because the female had made a financial contribution to the maintenance and repayment of the property (“pooled contributions”), it would be unconscionable for the male partner to retain the sole benefit of the contribution. For this reason a constructive trust was imposed and equity precluded the male partner from obtaining the entire benefit of the property. The female partner was therefore declared to have a beneficial interest in the property.

Additional reading:

The Complete Guide to Trading Trusts for small and medium-sized business