What is a constructive trust?

A constructive trust is an equitable remedy that may be granted to address a breach of, or to give effect to, an equitable doctrine or right. The order gives rise to an interest in existing in specie property or other rights. It is an invasive order that has the effect of transferring the beneficial ownership of property from the defendant to the plaintiff. Constructive trusts regularly arise in the context of real property.

In Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583; 62 ALR 429; Deane J said at [6]:

Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.

When will a Constructive Trust be imposed?

A constructive trust will be imposed when the legal title owner’s insistence that he/she is the sole owner is unconscionable: Baumgartner v Baumgartner (1987) 164 CLR 317.

A constructive trust may be imposed by operation of the law and in spite of the intention of the parties, to place property on trust for the party suffering the breach of an equitable obligation.  It is not necessary for the resulting beneficiary to own or have intended to do any act in relation to the subject property.  The Court will typically order a constructive trust where it forms the view that equity would consider it unconscionable for the party holding the property in question to deny the interest claimed by another (Stepherson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536 at 552, per Gummow J).  Typically, a fiduciary who profits from their position by making an improper gain, such as entering into some engagement in circumstances of conflicting interests and thereby derives a benefit, may be held to be constructive trustee of the improper gain or benefit (Hurd v Zomojo [2012] FCA 1458; (2012) 299 ALR 621).  Unlike compensatory remedies, the constructive trust relates to specific property, and the successful plaintiff is not left to compete with other creditors to enforce its judgment.

The imposition of a constructive trust is discretionary. Generally, the court will consider whether the circumstances warrant the imposition of a constructive trust. Before a constructive trust is imposed, the Court should decide whether, having regard to the issues in the litigation, there is an appropriate equitable remedy which falls short of the imposition of a trust: Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 at [113]. In Bathurst City Council v PWC Properties Pty Limited [1998] HCA 59; (1998) 195 CLR 566 at [585] the High Court said that:

... An equitable remedy which falls short of the imposition of a trust may assist in avoiding a result whereby the plaintiff gains a beneficial proprietary interest which gives an unfair priority over other equally deserving creditors of the defendant.”

There are several distinct types of situations in which the imposition of a constructive trust typically arise. They include:

  1. Breach of a fiduciary duty
  2. Unconscionable transactions
  3. Domestic relationships
  4. Third parties (Barnes v Addy)
  5. Mutual Wills.


In Breen v Williams (1996) 186 CLR 71, Dawson and Toohey JJ said at 92:

There is no precise or comprehensive definition of the circumstances in which a person is constituted a fiduciary in his or her relations with another.

There are presumed fiduciary relationships although it is important to remember that these categories are not closed and so, the Court may find a fiduciary duty in any relationship where there is evidence of trust and confidence being placed in one party by another. The established categories of fiduciary relationships include:

  1. Trustee—Beneficiary
  2. Agent—Principal
  3. Solicitor—Client
  4. Employee—Employer
  5. Directors—Company
  6. Partner—Partner
  7. Accountant—Client

In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 96-7; 55 ALR 417, 454, Mason J said:

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power of discretion which will affect the interest of that other person in a legal or practical sense.

In circumstances where a fiduciary profits by improper use of his or her position or through conflict of interest, a constructive trust is one of the remedies available: Boardman v Phipps [1967] 2 AC 46.

In Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178,  Dr. Chan renewed a lease for himself and to the exclusion of his partner after the partnership was dissolved prior to it being fully wound up. Deane J said at [29]:

…there is an irrebuttable presumption that any right in respect of a new lease of [the property] were obtained by Dr Chan by use of his position as a trustee of the previous tenancy but there is a rebuttable presumption of the fact that any such rights were      obtained by use of his position as a partner in the dissolved partnership whose assets were under receivership and in the course of realisation.

In Chan (at CLR 198–9), Deane J said that the rule which requires a fiduciary to account embodied two themes, namely:

The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage … [T]he two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee …

The fiduciary cannot escape these rules except with the fully informed consent of the person to whom the duty is owed. In Regal (Hastings) Ltd v Gulliver [1967] AC 134, Viscount Sankey said at 137:

The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust.

In Regal (Hastings) Ltd v Gulliver [1967] AC 134, the directors of Regal Hastings decided to form a subsidiary intending that Regal Hastings hold all shares in the subsidiary and that the subsidiary acquire a lease of two theatres in a neighbouring town. The directors subscribed personally £3,000 in shares of subsidiary to raise the necessary paid up capital of the subsidiary £5,000. The directors made a profit from the shares issued to them personally. Regal Hastings was taken over and the new controllers of Regal Hastings argued that the old directors had breached their fiduciary obligations by acquiring shares personally. The House of Lords held unanimously that irrespective of whether or not Regal Hastings could have purchased the shares, the directors were liable to Regal Hastings for the profit they made. The old directors acquired shares in the subsidiary only by reason of their capacity as directors of Regal Hastings, and therefore the fact that they were acting bona fide and in the interest of the company did not detract from their breach of fiduciary duty. The shares were held on constructive trust for Regal Hastings.  Lord Macmillan said at 153:

The sole ground on which it was sought to render [the directors] accountable was that, being directors of the plaintiff company and therefore in a fiduciary relation to it, they entered in a course of their management into a transaction which they utilised the position and knowledge possessed by them in virtue of their office as directors, and that the transaction resulted in a profit for themselves. The point was not whether the directors had a duty to acquire the shares in question for the company and failed in that duty. They had no such duty. We must take it that they entered into the transaction lawfully, in good faith and indeed avowedly in the interests of the company. However, that does not absolve them for accountability for any profit which they made, if it was by reason and in virtue of their fiduciary office as directors that they entered into the transaction.

In the context of fiduciary breach, “accountable” may mean simply that the court takes an account and makes a monetary (compensatory) order.  However, where the property acquired by the breaching fiduciary is ascertainable, the circumstances may justify the imposition of a constructive trust over the property.


In Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362, the plaintiff, Blomley sought specific performance of a contract of sale made by Ryan, a 78 year old farmer, the subject of which was his grazing property, for ₤25 000. The defendant alleged that, at the time of the signing, he was ‘an old man, lacking in education, suffering from the effects of intoxication, mentally and physically weak, without proper advice, unable to protect himself and on unequal terms with the plaintiff’. The issue, held by the Court was whether the defendant was suffering from a special disability such as to allow equity to intervene in the unconscionable advantage taken of his condition by the plaintiff. The Court held that the transaction was thoroughly unconscionable, one which no court of equity could allow to be enforced at law. Fullagar J said at 405:

One other general observation may be made before proceeding to the facts of the present case. The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any  kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of  education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other.

The test of unconscionable conduct was further explained in the case of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. The High Court set out two circumstances in which conduct will be held to be unconscionable. The first is when ‘unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary’. The second is when ‘advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest’.

In Amadio, Mr and Mrs Amadio signed a guarantee and mortgage to guarantee the debts of their son’s company. They were Italian immigrants, had little command of the English language and minimal formal education and business experience. Their son, Vincenzo, lived an expensive lifestyle, but was in significant debt.  He had told his parents that the guarantee was for a period of 6 months and for $50,000. This was not the case. 

A representative of the bank visited the home of the Amadios to sign the mortgage documents. The Amadios did not read the documents and the bank’s representative failed to provide an explanation to Mr and Mrs Amadio about the documents that they were signing and the subsequent risks involved. The representative did however point out that the guarantee was not limited to six months, upon hearing the incorrect representation made by the Amadios son. In the days following the guarantee and mortgage being signed, Vincenzo’s overdraft increased from $189,000 to more than $270,000. Vincenzo’s company continued to suffer financial losses and subsequently went into liquidation. The bank then demanded that the Amadios make pay the debt under their guarantee to pay the debts. The Amadios were unable to meet the obligations of the guarantee and a notice was given that the power of sale under the mortgage would be exercised.

The majority of the High Court of Australia held that the Amadios had suffered a special disadvantage, and so found that the conduct of the bank was unconscionable. Mason J observed that unconscionable conduct refers to a situation in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage.

The Court took into consideration the special disadvantage suffered by the Amadio’s as a result of their minimal ability to speak English, lack of formal education and business experience, and old age. This special disadvantage, in conjunction with the failure of the bank to disclose the facts necessary for the Amadios to make their own informed judgment about the transaction, was held to amount to unconscionable conduct. Ultimately, the Court held that the Amadios would not have signed the documents had they been aware of the effect of the terms they were agreeing to.

When considering an allegation of unconscionable conduct, the Court will focus on the bargaining power of the parties, in particular that of the stronger party, and their conduct. The onus of proof will be upon the stronger party to show that the transaction was fair, just and reasonable. If the stronger party is unable to prove that the transaction was fair, just and reasonable, their conduct may be held to have been unconscionable and the transaction set aside. If legal title to property has passed to the defendant pursuant to that transaction, the Court will usually hold that the defendant holds it on constructive trust for the plaintiff.

THIRD PARTIES (The rule in Barnes v Addy)

A third party who receives property knowing that the property was acquired in breach of a fiduciary duty or trust or has dishonestly participated in fraudulent design that involves a breach of trust or fiduciary duty, will be liable to account for that property. The remedy is often in the form of a constructive trust.

In Barnes v Addy (1874) 30 LT 4; 144 ER 643, Henry Barnes appointed William Crush, John Lugar and John Addy to be testators and executors of his will. Some of Henry Barnes’s money was to be invested and some used as an annuity for his widow and children. The sole remaining trustee, John Addy, appointed another trustee, against the advice of his solicitor. The Court of Chancery held that the solicitor was not liable for loss because no funds passed their hands and there was no fraudulent action by the solicitors.

In Barnes v Addy, Lord Selborne LC referred to two limbs upon which third parties to a trust become constructive trustees. The first limb is ‘knowing receipt’. This occurs where the third party received property from a fiduciary knowing that it was acquired in breach of duty of the fiduciary. The second limb is ‘knowing assistance’. This occurs when the third party knowingly assists a fiduciary to breach their duty.

What is knowledge?

Both limbs in Barnes v Addy require the third party to have knowledge. In Baden Delvaux v Societe General pour Favouriser le Development du Commerce et de l’Industrie en France SA [1992] 4 All ER 161, Gibson J (at 235) identified five categories of knowledge on the part of the third party that are relevant to the decision to impose a constructive trust. These were:

  1. Actual knowledge;
  2. Wilfully shutting one’s eyes to the obvious, sometimes called Nelsonian knowledge.  In Nelson v Larholt [1947] 2 All ER 751, a bookmaker was accepting cheques from a punter who was also an executor of an estate. The cheques used by the punter to pay his debts were printed with the name of the estate (using estate to pay his debts). The bookmaker was liable as constructive trustee for the estate because of what a reasonable person would know from the facts. The bookmaker should have known the cheques were not the punters personal cheques. This is behaviour which amounts to wilfully shutting one’s eyes;
  3. Wilfully and recklessly failing to make the inquiries that an honest and reasonable person would make;
  4. Having knowledge of circumstances which would indicate the facts to an honest and reasonable person;
  5. Having knowledge of circumstances which would cause an honest and reasonable person to make inquiries.

Despite articulation of these five categories of knowledge, in Farah Constructions v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89; the High Court referred to Consul Development Pty Limited v DPC Estates Pty Limited (1975) 132 CLR  373, and held that only the first four categories of knowledge were sufficient for accessorial liability. The further category in Baden (facts which would put an honest and reasonable person on enquiry) should not be taken to be sufficient knowledge in Australia.

Knowing Receipt

Under the first limb in Barnes v Addy, there must be knowledge that the property was acquired in breach of trust or a fiduciary duty. The plaintiff/beneficiary must prove that:

  1. The third party received trust property or that subject to a fiduciary duty;
  2. The third party knew (using one of the first four categories from Baden) that it was trust property in breach of trust or fiduciary duty;
  3. The third party knew of the circumstances which made the transfer of the trust property in breach of trust or fiduciary duty.

The Bell Group (In liq) v Westpac Banking Corporation (No 9) (2008) WASC 239 concerned the Bell Group of companies, owned by Allan Bond. The Bell Group was going into liquidation and the directors made an arrangement with Westpac Bank about the structure of loans owed by the group to the bank. The reorganisation of loans was unfavourable to the companies. The Bank knew that no director of the companies would have agreed to the restructure if they had been acting in the interests of shareholders. The directors of the Bell Group had a fiduciary duty to the company and shareholders in attempting the restructure and accepting the loans for the company. The liquidators alleged that the directors were in breach of that fiduciary duty by undertaking the restructure. The liquidators brought a claim against the bank based on the rule in Barnes v Addy. The Court held that Westpac was liable under the knowing receipt limb because it had required a restructuring of the loans to the company on much harsher terms than the previous security arrangements. Westpac knew that the directors would be in breach of their fiduciary duty by agreeing to grant the securities, but called in the securities when the company went into liquidation.

Knowing Assistance

The elements that must be satisfied in order to establish liability under the second limb of Barnes v Addy are:

  1. There must be a fiduciary or a trustee;
  2. Who develops a fraudulent or dishonest plan or scheme which will result in a breach of duty;
  3. The scheme must be developed with the assistance of a third party;
  4. Who must know that they are assisting a fiduciary to breach their duty.

The two leading Australian cases on knowing assistance are Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 and Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89.

In Consul Developments Pty Ltd a solicitor (Walton) controlled a number of companies engaged in the purchase, development and sale of land, including the company DPC. Grey was the manager of these companies and was precluded by his service agreement from dealing in real estate on his own account. Grey’s duties included finding suitable properties for purchase by the companies. Walton employed Clewes in his legal practice as a clerk. Clewes ran a family company (Consul) which was also engaged in property development. Grey and Clewes entered into an arrangement that Consul should purchase properties that Grey found and that Grey and Consul should share the profits on sale. Grey had told Clewes that DPC was not interested in the projects for lack of finance. The plaintiff argued that the properties purchased by Consul were held on constructive trust for the plaintiff (DPC) and that there was constructive notice sufficient to attract the liability of a third party (Consul) on a Barnes v Addy basis.

The High Court found Grey liable by virtue of his breach of fiduciary duty, but held that Consul was not liable as a third party. In order to attract liability for knowing receipt, the High Court held, the third party must have knowledge corresponding to the first three Baden categories, while for knowing assistance, any of the first four categories would be sufficient.

In Farah Constructions, Farah Constructions was controlled by Farah “George” Elias (a real estate developer) and Say-Dee was controlled by a businesswomen Sadie Elias (no relation to Mr Elias) and Dalida Dagher. The two companies entered into a joint venture in 1998 to buy and redevelop No 11 Deane Street, Burwood. Say-Dee contributed $225,000, plus stamp duty, while the rest of the $630,000 price was borrowed. The four run-down units at No 11 Deane Street were refurbished and rented out, prior to a planned demolition. Farah submitted a development application (DA) to Burwood Council for a combined commercial-residential project. The Council rejected it as it was too big for an 11-metre-wide site with no room for parking.

In those circumstances, the development would require amalgamation with adjacent blocks to be feasible. Mr Elias, his wife Margaret, and teenage daughters Sarah and Jade each bought one of the four units at No 15 Deane Street and one of the four at No 20 George Street (which backed on to No 15). Mr Elias’ company Lesmint bought No 13 Deane Street. Mr Elias gave evidence that he had invited Ms Dagher and Ms Elias to join in the purchases of Nos 13 and 15 but they declined for financial reasons. He offered to buy Say-Dee’s interest in No 11. Say-Dee declined and relations deteriorated. Problems spiralled, with the project having stalled, rents not meeting mortgage repayments, all three principals in financial difficulty. Ms Elias was diagnosed with cancer. In March 2003, Farah filed a summons against Say-Dee seeking an order that a trustee be appointed over No 11 and that it be sold. Say-Dee filed a cross-claim that the Elias’s, Farah and Lesmint held their interests in Nos 13 and 15 on constructive trust for the partnership between Say-Dee and Farah.

At first instance, Palmer J gave judgment for the Farah group, made orders for the sale of No 11, and dismissed the cross-claim. He accepted the evidence of Mr Elias that he had invited Ms Dagher and Ms Elias to join in the purchase of Nos 13 and 15. The Court of Appeal overturned Palmer J’s finding about Mr Elias’s invitation to Ms Dagher and Ms Elias. It also found that Farah’s fiduciary duties to Say-Dee were wider than Palmer J had considered them to be and that Farah breached those duties by failing to tell Say-Dee about the opportunity. The Court of Appeal also held that the Council regarded the acquisition of Nos 13 and 15 and their amalgamation with No 11 as essential if No 11 were to be redeveloped to its full potential. The Court of Appeal declared that Mrs Elias and her daughters held their units in Nos 13 and 15 on constructive trust in favour of the Farah-Say-Dee partnership, and appointed receivers to obtain development consent and sell all their blocks together.

Farah appealed to the High Court which unanimously allowed the appeal and restored Palmer J’s orders. It accepted that Say-Dee was aware the Council had rejected the DA and that the problem might be overcome by developing No 11 with adjoining land, and that Mr Elias had invited Ms Dagher and Ms Elias to participate in acquiring Nos 13 and 15 but they had declined. Farah had a fiduciary duty to tell Say-Dee information about the Council’s view and the opportunities to buy Nos 13 and 15. Farah fulfilled its obligation of disclosure about the Council’s attitude and the Say-Dee principals had enough business experience to give informed consent to Mr Elias pursuing the purchase of Nos 13 and 15, which it did. Say-Dee’s unwillingness to participate in a larger development was not a barrier to Farah proceeding on its own behalf. The Court rejected the grounds on which Mrs Elias and her daughters could have been made constructive trustees on behalf of Say-Dee and held that they were not liable to Say-Dee in any way.

Generally, where accessorial liability is established, the Court is concerned give a remedy that is adequate. Issues of increase in value of property and insolvency abound. Regularly, a constructive trust is the minimum equity to give the plaintiff adequate redress for the breach.


Resulting trusts distinguished

With a presumed resulting trust, equity seeks to give effect to the presumption that the parties intended the legal interest in the property to reflect their payments or contributions to that property.  The idea that beneficial ownership is prima facie commensurate with legal title may be displaced by a presumption or finding that it was the grantor’s intention that the beneficial interest should be different to a legal interest.

So, if the purchase money is provided by two or more persons jointly and the property is put into the name of one only, any absence of a relationship giving rise to a presumption of advancement, there is presumed to be a resulting trust in favour of the other contributors: Calverley v Green (1984) 155 CLR 242.  What must be established is an intention, at the time the property is acquired, on the part of the purchasers to create a trust (or to not hold the property beneficially).

Generally, a property will be held on trust where one party to the relationship has made financial or non-financial contributions to the property owned by the other party to the relationship. This is best described as an express or resulting trust. In Allen v Snyder [1977] 2 NSWLR 685, the New South Wales Court of Appeal held that a resulting trust was not established by the fact of a contribution to the acquisition or improvement of property by one partner to a de facto relationship, unless there was evidence of a subjective intention common to both parties that the contribution would give rise to a beneficial interest in the property. The three elements needed to prove common intention are:

  1. There must be a domestic relationship. A domestic relationship is one where there is a sharing of living arrangements and the sharing of domestic duties: Hohol v Hohol [1981] VicRp 24; [1981] VR 221; [1980] FLC 90-824; (1980) 6 Fam LR 49.
  2. There must be a common intention. This requires both parties to have a common intention that the disputed property would have a beneficial interest to both parties.
  3. The detriment caused to the plaintiff is a real detriment.

The reason that constructive trusts have a role to play in domestic relationships is that it is often not the case that the parties had a common intention that the equitable title reflect the contributions.

Absence of intention – constructive trusts

Pursuant to the Property (Relationships) Act 1984 (NSW), equity will decide the settlement of property when a relationship breaks down, including same sex and de facto couples. The result is that the discussion of relationship constructive trust cases is largely historical, but there have been applications of this line of authority in other contexts: Carson v Wood (1994) 34 NSWLR 9.

In Muschinski v Dodds [1986] 160 CLR 583 the partner who had contributed more to the purchase price had previously shown a clear intention to give the defendant a half interest in the property, so a resulting trust was not available. According to Deane J (Mason J concurring) the constructive trust arose where the substratum of a joint relationship or endeavour is removed without attributable blame. That reasoning was later endorsed in Baumgartner.

Mrs Muschinski paid the whole of the purchase price of a property which was registered in the name of her and her then partner Mr. Dodds, as tenants in common in equal shares. The parties agreed that Dodds would renovate a cottage on the land and pay for a pre-fabricated house to be erected on the land. They separated before the cottage was renovated or the pre-fabricated house was acquired.

The parties agreed that Mrs Muschinski had contributed $25,259.45 to the purchase and improvement of the property and Mr. Dodds had contributed $2,549.77 towards improvements. At trial, Mrs Muschinski argued that her conferral of any legal or beneficial interest on Dodds was conditional upon his assuming financial responsibility for, and constructing, a dwelling on the land, which he had not done. Waddell J dismissed her claim, holding that it had not been her intention to subject Mr Dodds’ interest to any condition, that the presumption of a resulting trust had been rebutted and that Mr Dodds had obtained a beneficial one half interest in the property. The Court of Appeal dismissed her appeal and she appealed to the High Court.

The High Court held that the presumption of a resulting trust arising out of Muschinski having paid the whole of the purchase price was rebutted due to their intention to further improve the property at Dodds expense. It was held that the parties held their respective legal interests as tenants in common upon trust, after payment of any joint debts incurred in the improvement of the property, to repay their respective contributions and the balance to both in equal shares. Mrs Muschinski was accordingly entitled to recover from Dodds one half of the purchase price paid by her. Gibbs CJ held that the parties were jointly and severally liable to pay the purchase price, and Mrs Muschinski having paid the whole of it was entitled to contribution for one half from Mr Dodds. Mason and Deane JJ held that it was unconscionable after the failure of their joint venture for Mr. Dodds to assert his legal entitlement without recognising Mrs Muschinski’s payment.

In Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137, a couple had lived in a de facto relationship for a number of years. Initially they had lived in a unit owned by the man. They later sold the unit and used the proceeds of sale to purchase a house. The balance of the purchase price was supplied by a building society and, because the building society would not lend to de facto couples, title to the property was placed in the man’s name. When the relationship broke down, the woman claimed that the man held the property on constructive trust for her.

In Baumgartner, the de facto couple pooled their income to meet household expenses and make mortgage repayments. The man, in whose name the title was registered, asserted full beneficial ownership. Mason CJ, Wilson and Deane JJ held that the general equitable principle which restores a party’s contributions which he or she made to a joint endeavour which fails arises if uneven contributions have been made where it was not intended that the other party should enjoy the windfall. The issue in such cases is whether the claimant would have intended the defendant to enjoy the contributions she had made had they contemplated the relationship would end as it did.

The High Court held that the appellant husband contributed 55 per cent of the common pool of their earnings whilst the respondent wife contributed 45 per cent. At first instance, the Court found that there was no evidence of a common intention, but this was overturned by the High Court. [I don’t think so] The High Court found that because the parties’ had pooled their funds to pay their living expenses, was sufficient evidence of a common intention to share the tasks of providing for themselves and their child. Thus, the interest of the parties in the property was to be held by the man in the proportion in which the contributions had been made, less the initial contribution of the proceeds from the sale of the unit by the man. It was agreed that the circumstances of the case gave rise to a constructive trust. [wrong]


Mutual wills are wills formed by two people who agree by contract that each person will not alter their will without the consent of the other, even after the death of the first person. Courts will give effect to such agreements by imposing a constructive trust.

Such a situation may arise where, for example, a husband promises that if he survives his wife then he will leave his estate to a designated third party. The wife in response to this promise then promises to make a will leaving her estate to her husband and vice versa. If the husband survives the wife and takes her estate but the changes in his will favour other beneficiaries, then equity will compel these beneficiaries to hold their gift on a constructive trust for those designated to benefit under the mutual will agreement. The equity arises as a result of the husband allowing his wife to die with the belief the agreement will be fulfilled.

Mutual Wills are commonly used in second marriage circumstances: Birmingham v Renfrew (1937) 57 CLR 666. There must be clear and satisfactory evidence of the agreement to create a mutual will: Walters v Olins [2009] Ch 212 at [36].

In Birmingham, the plaintiffs, who were the respondents on appeal, were relatives of the late Grace Alexandra Russell, whose husband was Joseph Garrett Russell. The defendants, the appellants, are relatives or friends of the husband. The executor of the husband's will is also a defendant. The plaintiffs claimed specific performance and other remedies in relation to an agreement which they allege was made between the husband and the wife.

The wife came into a very substantial amount of property under the will of an uncle. The husband had no property. The learned trial judge (Gavan Duffy J) found that an agreement was made between the husband and the wife that after giving certain legacies, she would leave the residue to her husband, he in turn promising that he would leave his property to those relatives and that he would not alter the will so leaving it. Wills in the agreed terms were made and the wife died. The husband subsequently made a different will under which the appellants took substantial benefit and under which the wife's relatives respectively took a much smaller interest than under the will made pursuant to the agreement. His last will was made in breach of the agreement but it was nevertheless effective as a will.

On appeal to the High Court, Dixon J said:

It has long been established that a contract between persons to make corresponding wills gives rise to equitable obligations when one acts on the faith of such an agreement and dies leaving his will unrevoked so that the other takes property under its dispositions. It operates to impose upon the survivor an obligation regarded as specifically enforceable. It is true that he cannot be compelled to make and leave unrevoked a testamentary document and if he dies leaving a last will containing provisions inconsistent with his agreement it is nevertheless valid as a testamentary act. But the doctrines of equity attach the obligation to the property. The effect is, I think, that the survivor becomes a constructive trustee and the terms of the trust are those of the will which he undertook would be his last will.

The mutual will agreement need not be constituted in a formal written document. It may arise from discussions between family members: Albrow v Cunningham [2000] NSWSC 103. However, those who undertake to establish such an agreement assume a heavy burden of proof: Birmingham v Renfrew (1937) 57 CLR 666 per Latham CJ at 674.


Tracing is a process by which a claimant who has been deprived of property (the original property) seeks to assert legal or equitable title to other property (the target property) because the target property has, in some way, been acquired from exploitation of original property. The process involves establishing an unbroken chain of transfer and transformation from the original property to the target property. If this process is successful, the claimant can claim property rights in the target property and enlist an appropriate remedy to recover it.[1]

In Foskett v McKeown [2001] 1 AC 102 at 128; [2000] UKHL 29; [2000] 3 All ER 97, Lord Millet said:

Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim.

In Re Sutherland French Caledonia Travel Service Pty Ltd (In liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361, Campbell J said at [62]:

Tracing is the means by which the court identifies what property of the trust the trustee still retains, for the purpose of the court crafting orders which aim to make the trustee perform his obligation.

His Honour went on to say at [153]:

To be able to trace through a mixed bank account, it is necessary for a beneficiary to be able to say that he has an equitable right of property in some asset which the trustee holds.

A person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not party, cannot knowingly seek to retain those proceeds or that advantage, without, in effect, becoming a party to that fraud and liable accordingly: Black v S Freedman & Company, per Griffith CJ (at 109) and later approved in Heperu Pty Ltd and Others v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230 at [92].

Tracing deals with three problems:

  1. Exchange substitutes: Where the defendant converts the plaintiffs value into another form
  2. Mixing: Where the defendant intermingles the plaintiff’s money with other funds; and
  3. Accrual in value: Where the defendant applies the plaintiff’s property in such a way as to increase its value.

Tracing is not useful when the property has been dissipated by the person involved in the breach. For instance, if the defendant loses trust property at the races, tracing will not be available since the tracing chain was broken by the property’s dissipation.  In such a case, personal liability would still attach to the defendant and remedies such as equitable compensation will be available.


Equitable interests in property that are protected by a constructive trust may compete with other interests in the same property. Priorities refer to the principles that apply to the resolution of disputes between parties who have competing interests in property. In resolving any priority dispute, it is imperative that one identifies:

  1. The nature of the competing proprietary interests (whether it is legal or equitable)
  2. The point of time at which the interests were acquired/created.

Priority is, of course, given to the legal interest which was created first. Where there is a competition between equitable claims/interest, it must be determined which of them is the “better equity”.  Where the equities are otherwise equal, priority in time of creation is considered to give the better equity: see Latec Investments v Hotel Terrigal Pty Ltd (in liq) (1956) 113 CLR 265, applied by Mason and Deane JJ in Heid v Reliance Finance Corp Pty Ltd (1983) 154 CLR 326.

In assessing where the “better equity” resides, a Court must have reference to:

  1. The nature and condition of the respective equitable interest;
  2. The circumstances and manner of acquisition of these interests; and
  3. The whole conduct of the parties.

Postponing Conduct

Priority may be given to a later interest if the holder of the earlier interest has:

  1. Given to a third party the indicia of absolute ownership;
  2. Failed to register or otherwise protect their own interest; and
  3. Placed the new title holder in a position to register transfer of title, thus enabling them to hold out to the whole world that he hold the title free of any other interest.

Therefore, the holder of any subsequently created interest, such as a mortgage or charge, will have priority over the first (unprotected) interest. At a practical level, the fact that the imposition of a constructive trust may adversely affect another person’s interest will be a significant factor in the discretion to make, or modify, the order.  A constructive trust will be treated as coming into existence at the time of the conduct which gives rise to the trust (Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120; Re Sharpe; Ex parte Trustee of the Bankrupt's Property v Sharpe [1980] 1 WLR 219 per Browne-Williamson J at [225]; Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 per Gleeson CJ, McHugh, Gummow and Callinan JJ at [122]). While the Court can treat the trust as arising at the date of publication of the reasons for judgment (as Deane J proposed in Muschinski v Dodds at 623), that may result in another party prevailing over plaintiff in a priorities dispute.

In Parsons v McBain (2001) 109 FCR 120, the Full Court of the Federal Court held that the considerations in favour of a constructive trust may be displaced by factors which cause the equitable interest to be postponed to later equitable interests. In those circumstances, the imposition of a remedial constructive trust may not be the appropriate remedy.

An equitable charge or lien may be an appropriate remedy rather than the proprietary interest that ordinarily goes with a constructive trust. This is particularly the case where the imposition of a trust may give the claimant a beneficial proprietary interest resulting in an unfair priority over other equally deserving creditors: Bathurst City Council v PWC Properties Pty Limited (1998) 195 CLR 566 at 585.

Those cases serve as a reminder that the discretionary equitable remedy of constructive trust will be moulded to fit the circumstances and to effect the minimum interference with the rights of the defendant and third parties.