LAW AND COMMERCE The Significance of the Remedial Constructive Trust
Westdeutsche,13 which has been cited in all subsequent cases concerning the remedial trust in both jurisdictions.
It must first be understood that the constructive trust is a form of relief frequently sought by litigants. This is because it is a proprietary remedy, as opposed to a personal remedy (such as damages). There are several advantages to a remedy in rem,9 but the primary reason is that a claimant who has a proprietary right will have priority over the rest of the defendant’s creditors in cases where the defendant is insolvent. However, it has been said that trusts are governed by ‘hard-nosed property rights’.10 As a result, an institutional constructive trust adopts a stringent approach guided by property law: the trust either exists from the date of the circumstances, or it does not exist at all. The court merely performs an identificatory function. The corollary of this is that innocent third parties (such as the defendant’s unsecured creditors) are often disadvantaged due to factors beyond their control.
Interestingly, Westdeutsche was primarily concerned not with constructive trusts, but with resulting trusts in circumstances where the settlor’s intention had been vitiated by mistake. The brief facts of the case are as follows. The claimant bank had entered into an interest rate swap with the defendant local authority. It was later discovered in separate proceedings that local authorities in England lacked the capacity to enter into such contracts and the contract was therefore void. The claimant had however previously paid a tranche of money to the defendant pursuant to the agreement. An action was brought for restitution of the said money. The claimant wished to also claim compound interest. Since this remedy was only available in equity (other than in cases of fraud), the claimant therefore sought to establish that a resulting trust had arisen in favour of the claimant. An institutional constructive trust could not have arisen because the defendant had no relevant knowledge (and therefore no unconscionability) sufficient to raise a constructive trust at any time before the moneys became untraceable (when the bank account went into overdraft).14 What is crucial to this discussion is that although Lord Browne-Wilkinson held that resulting or constructive trusts were inappropriate on the facts, he suggested that the remedial constructive trust ‘may provide a more satisfactory road forward’.15 Nevertheless, his Lordship concluded by leaving the possibility of such a doctrine open: ‘whether English law should follow the United States and Canada by adopting the remedial constructive trust will have to be decided in some future case when the point is directly in issue.’
In contrast, the remedial trust is a creature of discretion. Since a remedial trust can operate retrospectively, it effectively allows judges, by an order of court, to grant a proprietary right de novo to someone who previously had none.11 It does not apply, and is therefore not constrained by, hard-nosed property rights. As a result of this lack of rigidity, the remedy granted can be ‘tailored to the circumstances of the particular case, [such that] innocent third parties would not be prejudiced and restitutionary defences, such as change of position, are capable of being given effect’.12 The courts could exercise their discretion and achieve the best possible outcome between the claimant and innocent third parties. In theory, therefore, the remedial trust could be a useful tool.
Status of the Remedial Constructive Trust in the United Kingdom and Singapore In order to comprehensively analyse the future of the remedial constructive trust in Singapore, it is worth taking into account its origins in case law in both the United Kingdom and Singapore, with particular focus on why and in what manner the positions in the two jurisdictions have diverged. The common starting point for both jurisdictions is the House of Lords’ seminal decision in
9 See for example Foskett v McKeown [2001] 1 AC 102 (increase in value of the property); Westdeutsche (n 3) (ability to claim compound interest); Ching Mun Fong (n 6) (better limitation period).
A. The United Kingdom Whatever was left open by Lord Browne-Wilkinson in 13 ibid. It is acknowledged that prior cases such as Metall und Rohstoff (n 3), El Ajou (n 3) and In re Goldcorp Exchange Ltd [1994] UKPC 3, [1995] 1 AC 74 also considered the remedial constructive trust. That being said, Westdeutsche remains the first instance in which the courts clearly laid out the elements of the doctrine and has been the case most cited by the Singapore courts. 14
ibid 707, citing with approval Re Goldcorp (n 13).
11 Metall und Rohstoff (n 3) 478-479; Re Polly Peck (No 2) (n 3) 830; Ching Mun Fong (n 6) [34].
15
ibid 716.
16
(n 3).
12 Westdeutsche (n 3) 716.
17
(n 6).
10 Foskett v McKeown (n 9) 109.
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The positions in the United Kingdom and Singapore diverge from here, starting from the varied treatments of the remedial trust doctrine in the English Court of Appeal’s 1998 decision in Re Polly Peck International Plc (No 2) (“Re Polly Peck (No 2)”)16 and the Singapore Court of Appeal’s 2001 decision in Ching Mun Fong v Liu Cho Chit (“Ching Mun Fong”)17.