CONSTRUCTIVE TRUSTS AND DISCRETION IN AUSTRALIA: TAKING STOCK.

• Date: 01 April 2021
• Author: Liew, Ying Khai
• Published date: 01 April 2021
• Author: Liew, Ying Khai

CONTENTS I Introduction II Uncertainty in the High Court A The High Court Dicta B Conflicting Messages III Evaluation A Non-Discretionary Constructive Trusts B 'Discretionary' Constructive Trusts 1 Knowing Receipt: No Discretion Exercised 2 The Joint Endeavour Doctrine: Third Party Considerations Not Relevant 3 Proprietary Estoppel: Third Party Considerations Not Relevant 4 Fiduciary Bribes and Secret Commissions: Third Party Considerations Relevant IV Reflections A The Status of the High Court Dicta B 'Institutional' vs 'Remedial' Constructive Trusts 1 Distinction Remains Relevant 2 Distinction Requires Refinement C Rights and Remedies 1 Non-Discretionary Constructive Trusts: Replicative Remedies 2 Constructive Trusts with Inter Partes Discretion: Reflective Remedies 3 Constructive Trusts with Third Party Discretion: Transformative Remedies V Conclusion I INTRODUCTION

It is received wisdom that constructive trusts and judicial discretion come hand in hand. To a certain extent, this must be right: after all, in a different context, it has been said that

'discretion' is a somewhat protean word. It connotes the exercise of judgment in making choices. In a sense, most decisions involve the exercise of discretion ... there can also be discretion even in the hammering of a nail ... (1) In the present context, an obvious example is the court's discretion to award constructive trust on terms (2) to reflect the content of an informal agreement between the parties. (3)

This article focuses on one of the most analytically fundamental and practically significant aspects of that discretion: the discretion whether or not to impose a constructive trust. It is in reference to this aspect of discretion that this article uses the phrase 'remedial discretion'.

In Australia, it is often assumed that remedial discretion is, or ought to be, exercised in every case where a court contemplates imposing a constructive trust, and this always involves taking into account the actual or potential interests of third parties. (4) This assumption manifests itself in two general discourses. On the one hand is the primarily English preoccupation concerning the dichotomy between 'institutional' and 'remedial' constructive trusts, where it is unquestioningly assumed that, unlike English law, Australian law recognises and imposes 'remedial' constructive trusts. (5) On the other hand is the primarily Australian discourse concerning remedies in private law more generally, where constructive trusts are increasingly perceived as being but one in a smorgasbord of options available to remedy a wrong, and which are to be imposed only as a last resort. (6)

That assumption is not entirely without basis: it reflects dicta found in a number of High Court decisions concerning whether--and how--remedial discretion is or ought to be exercised. Worryingly, however, while there is much discussion about whether discretion ought to be exercised, little effort has been spent examining whether those High Court dicta accurately reflect what the reality of the law is in Australia, and, if so, the extent to which the dicta hold true. Without a clear picture of the true state of the law in Australia, it is difficult to imagine how any practical strides can be made by the existing theoretical debates and discourses towards improving the law in a real and tangible way.

The central message of this article is that, in reality, in only a narrow set of circumstances do courts exercise discretion in deciding whether to impose constructive trusts. Within that group, it is useful further to distinguish between cases where judges take into account factors affecting justice inter partes, and those where judges also take third party considerations into account. The latter sort of discretion has, to date, only been exercised systemically in one factual scenario.

The article is structured as follows. Part II begins by recounting the relevant High Court dicta and observes that the conflicting messages they provide have spawned various generalisations and impressions concerning Australian law. Part III evaluates the constructive trusts case law and reveals that the exercise of remedial discretion is, in fact, highly circumscribed. This revelation provides three key points of reflection, discussed in Part IV, concerning the status of the relevant High Court dicta, the relevance of the 'institutional'-'remedial' constructive trust dichotomy, and the relationship between rights and remedies.

II UNCERTAINTY IN THE HIGH COURT

Constructive trusts have been the subject of substantive discussion in the High Court on no fewer than nine occasions in the last 35 years. (7) It is fair to say that the High Court has exercised judicial creativity, introducing novel analyses and approaches to constructive trusts. Unfortunately, those dicta have left the law in a state of uncomfortable uncertainty.

A The High Court Dicta

It is well-known that Muschinski v Dodds ('Muschinski') marked the first major turning point for constructive trusts in Australia for recognising the possibility of imposing 'remedial' constructive trusts. (8) In a significant passage, Deane J said:

[T]he remedial character remains predominant in that the trust itself either represents, or reflects the availability of, equitable relief in the particular circumstances. Indeed, in this country at least, the constructive trust has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date. (9) On the facts of the case, constructive trusts arose for consideration in relation to the 'joint endeavour' doctrine, itself established for the first time in Muschinski. According to Deane J, the doctrine

operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the [doctrine] is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for [them] so to do ... (10) Having found that the doctrine applied to the facts under consideration, Deane J declared that a constructive trust arose over the relevant property. (11) However, drawing upon the discretionary nature of constructive trusts previously elaborated, his Honour held that, '[l]est the legitimate claims of third parties be adversely affected, the constructive trust should be imposed only from the date of publication of reasons for judgment of this Court'. (12)

Six months after Muschinski was decided, the High Court in Daly v The Sydney Stock Exchange Ltd ('Daly') considered and rejected an argument that an errant and insolvent fiduciary held gains previously received (in the form of a loan from its principal) on constructive trust for its principal. (13) Significant reliance was placed upon the reasoning found in the English case of Lister & Co v Stubbs ('Lister'), (14) namely that it would be contrary to principle for the money to be withdrawn from the fiduciary's general creditors, or to require the fiduciary to account for any profits made with the money. (15) Muschinski was not once cited in Daly, nor did the High Court in Daly even consider the possibility of exercising remedial discretion.

A year and a half on, in Baumgartner v Baumgartner ('Baumgartner'), the High Court approved and applied both the joint endeavour doctrine and the approach to constructive trusts propounded by Deane J in Muschinski. (16) However, the discretion actually exercised was relatively circumspect, being limited simply to adjusting the parties' respective beneficial interests in the property in order to reflect 'the disparity between the worth of their individual contributions either financially or in kind'. (17) There was an absence of any discussion as to how third party considerations would affect the exercise of discretion. Neither did the Court forestall any potential prejudice to third parties by imposing a 'date of judgment' constructive trust.

Barely six months later, however, Muschinski was again overlooked in Bahr v Nicolay [No 2] ('Bahr'). (18) By way of a bare majority, the High Court held that one who purchased land subject to recognising a third party's pre-existing right would be bound by a constructive trust to the extent of the third party's interest. (19) The possibility of exercising remedial discretion was not considered.

It was only a decade later that constructive trusts featured again in the High Court, but its return was accompanied with renewed vigour in favour of the exercise of discretion. In Bathurst City Council v PWC Properties Pty Ltd ('Bathurst'), the High Court rejected the possibility of imposing a charitable 'remedial' constructive trust. (20) However, the Court then went on to say in obiter:

In any event, before the court imposes a constructive trust as a remedy, it should first decide whether, having regard to the issues in the litigation, there are other means available to quell the controversy. 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...