The English courts have been careful to control the circumstances in which a constructive trust will be declared.

Introduction

As a matter of broad principle, an asset will be held by A on constructive trust for B whenever it would be unconscionable for A to assert his own ownership and deny B's beneficial ownership of it. The English courts have been careful to control the circumstances in which a constructive trust will be declared, and have rejected the idea (accepted in other jurisdictions) that the court has a discretion to create a constructive trust. This is partly because a constructive trust may have the effect of giving one creditor of an insolvent defendant priority over others.

In Re D&D Wine International, the Supreme Court has held that an agent receiving money from a third party in the course of his agency will not hold the money on constructive trust for his principal merely because the agent knows when he receives it that he will be unable to account to the principal because of his own imminent insolvency.

D&D: agent in liquidation – no constructive trust in favour of principal

The dispute was between the principal and the agent's liquidators. The first question was whether the agent's authority to collect payment from third party buyers of the principal's goods survived termination of the agency. However, the (arguably) more interesting question was whether it was unconscionable for the agent to retain payments once collected and allow them to fall into its insolvent estate when, at the time of receipt, it knew that its imminent insolvency would mean that it couldn't perform its duty to pay the money to the principal. The contract of agency did not create any express trust of third party payments or otherwise deal expressly with the question.

The Court of Appeal decided that, if the agent had a contractual right to collect the sale proceeds in order to recover its commission, it could not have been unconscionable for the agent to retain the money.

Lord Sumption, giving the judgment of the Supreme Court, thought that there were more fundamental objections to the imposition of a constructive trust. Whether to impose or declare a constructive trust of assets in an insolvent estate involves a competition between the person claiming beneficial title to the assets and the general body of unsecured creditors. The court's task is to determine whether that claimant has (not, should be granted) a right of ownership or property; it must do so according to "settled principles". Lord Sumption noted the traditional antipathy of English law to "the discretionary adjustment of property rights", and its refusal to recognise the so-called "remedial" constructive trust imposed in other jurisdictions.

Lord Sumption accepted that a recipient of money may be liable to account for it as a constructive trustee if he cannot in good conscience assert his own interest in the money as against some other person of whose rights he is aware. However, good conscience "involves more than a judgment of the relative moral merits of the parties" ([28]). Noting that the exact circumstances in which a restitutionary proprietary claim may exist is a "controversial question", he went on to say:

"…where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that the intention was vitiated, for example because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party. One or other of these is a necessary condition, although it may not be a sufficient one."

In this case, none of those elements was present. If the agent had the right to collect the proceeds of sale for the principal, then the buyers' payments to the agent were not mistaken – they were made in the (correct) belief that the agent had due authority to receive the money or at least that payment would discharge the duty to pay for the goods.

Furthermore, Lord Sumption held that the constructive trust in Japan Leasing was wrongly imposed, as it had been justified on the basis that the agent knew that the consideration for which he received the money – i.e. his promise to account – would fail entirely.

Comment

There is no "overarching theory" or "clear and all-embracing definition" of the constructive trust in English law. The approach is essentially incremental, depending on the various circumstances in which constructive trusts have been imposed in the past.
Proprietary restitutionary remedies are going through a period of development in England. One of the situations in which courts have traditionally granted them, namely to vindicate pre-existing property rights via tracing, has been the subject of recent consideration by the Supreme Court and (arguably) expansion: see Menelaou v Bank of Cyprus.

In cases like D&D, the claimant is not the original owner of the property and has no pre-existing property right. His claim is essentially that the property should have been transferred to him, but because of some unjust circumstance it was not. D&D clearly establishes that knowledge of impending insolvency is insufficient to affect the defendant's conscience and give rise to a proprietary remedy.

In cases (unlike D&D) where the defendant's conscience has been affected, it is (as the editors of Hayton & Underhill note) nevertheless hard to see why the claimant's position relative to the defendant's other creditors should be improved by a change in the defendant's state of mind at some time between the date of receipt and the date of his insolvency. In such circumstances, there may (as comments of the Court of Appeal in Triffit Nurseries v Salads Etcetera and D&D suggest) be an additional requirement that it must be unconscionable for the creditors to oppose the proprietary claim.