Constructive Trusts Part I - Unjust Enrichment

Introduction

Trusts are fiduciary arrangements that allow third parties to hold assets and transfer them to the beneficiaries of the trust. In Canadian common law, the law of trusts can be summarized into three main categories: (1) express trusts; (2) statutory trusts, and (3) trusts by operation of law.

Auteur de l'article: Me Sarah Miles, Avocate

Bergman et Associés

The most prevalent category of trusts in our society is express trusts. Express trusts are intentionally created to benefit a group of persons or an identified person. It can also be created to fulfil a specific purpose; charitable or non-charitable purpose. The settlor must express an intention to create a trust through his/her power of ownership over the property. This tool is commonly used to create family trusts and testamentary trusts.

Statutory trusts arise from federal and provincial legislation. The legislator enacts certain statutes where trusts can arise in a specific situation. To name a few, there is the Construction Lien Act and the Bankruptcy and Insolvency Act.

Trusts by operation of law are used as equitable remedies in contentious matters. This is a useful tool for lawyers who are seeking compensation for their clients in litigious matters. The court can award the remedy of trust in unjust situations. These trusts can be created without the formal requirement of a settlor’s intention. There are two types of trusts that arise by operation of law; (i) resulting trusts, and; (2) constructive trusts.

This article is part one of a three-part series on constructive trusts. This article will discuss constructive trusts for unjust enrichment which only applies in common law jurisdictions.

What is a constructive trust?

 Constructive trusts arise by operation of law. They are equitable remedies used to compensate unjustly deprived persons. Constructive trusts play an important role in the law of restitution.

Over time, the courts have recognized four categories that give rise to constructive trusts. This set of categories is a non-exhaustive list. The four recognized categories are the following:

I.                 Wrongful conduct[1];

II.               Unjust enrichment[2];

III.              Equitable fraud, and;

IV.             Stanger operating as a constructive trustee.

Constructive trust for unjust enrichment

Constructive trusts may be granted in cases of unjust enrichment. First, the plaintiff must establish that there is unjust enrichment. Second, the plaintiff must prove that the proprietary award of a constructive trust is appropriate in the circumstances.

1.     Establishing Unjust Enrichment

The leading decision for unjust enrichment in the context of constructive trusts is Pettkus v. Becker. In this decision, the Supreme Court identified a three-step test to determine if there has been unjust enrichment:[3]

a)     The enrichment of the defendant;

b)     The corresponding deprivation of the plaintiff, and;

c)     The absence of a juristic reason for the enrichment.

The plaintiff has the onus of proving each element of the test, failing which the claim for constructive trust will be dismissed. If the applicant has established unjust enrichment, the burden shifts to the defendant to submit a defence. The test appears to be fairly simple. However, as seen below, the courts have struggled to define the scope of the test.

a)     The enrichment of the defendant

The first criteria is “enrichment of the defendant”. The plaintiff must prove that the defendant was enriched.

What qualifies as an “enrichment”? If the defendant gains a further advance in a mortgage, receives a higher ranking in the priority of creditors or benefits from a new business opportunity, would these situations qualify as an “enrichment” within the meaning of the test?

The term “enrichment” must be interpreted with a straightforward economic approach.[4] Throughout the years, the courts have used “enrichment” and “benefit” interchangeably. In Peel v. Canada, Justice McLachlin states that an enrichment can arise from both positive and negative benefits.

… The most common case involves the positive conferral of a benefit upon the defendant, for example the payment of money. But a benefit may also be “negative” in the sense that the benefit conferred upon the defendant is that he or she was spared an expense which he or she would have been required to undertake, i.e. the discharge of a legal liability.[5]

 Justice McLachlin further states that the enrichment must be tangible:

The word "enrichment" similarly connotes a tangible benefit.  It follows that without a benefit which has "enriched" the defendant and which can be restored to the donor in specie or by money, no recovery lies for unjust enrichment.[6]

The element of tangibility cited by Justice McLachlin has been widely recognized by the courts in recent decisions.[7]

The enrichment must be clear and manifest. There must be a gain of a demonstrable financial benefit or the saving of an inevitable expense.[8] The courts have found that enrichment exists in the following circumstances:

·        Money transferred from plaintiff to the defendant;[9]

·        Accounts receivable and title to segment holders;[10]

·        Valuable savings earned by defendant for years of unpaid labour by the plaintiff on a farm[11].

Therefore, it is not necessary for the enrichment to strictly be a monetary sum. However, the advantage gained by the defendant must be a liquid asset. It cannot simply be an abstract advantage that has no foreseeable economic advantage.

b)     Deprivation

The second criteria is the ‘corresponding deprivation of the plaintiff’. The plaintiff must prove to have suffered a deprivation corresponding to the enrichment gained by the defendant. The criteria of “deprivation” mirrors the criteria of enrichment in nature and extent. The courts have characterized the criteria of enrichment and deprivation as being two sides of the same coin.[12]

c)     Absence juristic reason

The third criteria is ‘absence of a juristic reason for the enrichment’. A juristic reason is an explanation in law for the enrichment of one person to the detriment of another. If the court finds that there is a juristic reason for the enrichment, there will be no unjust enrichment and the court will deny the remedy of constructive trust.

This step of the test is twofold. The plaintiff must prove prima facie the absence of a juristic reason by demonstrating that the enrichment does not fall into one of the established categories. The established categories are the following: a contract, a disposition of law, donative intent, and, other valid common law, equitable or statutory obligations.[13] These categories are non-exhaustive. The courts can develop new categories to address the changing perception of justice.[14]

The prima facie case is rebuttable. The de facto burden of proof will then fall on the defendant. In turn, the defendant must show that the enrichment should be retained for a reason that falls outside the established categories.

Case law has recognized that the defendant could prove that the enrichment was within the reasonable expectations of the parties or is saved by public policy.[15] The defendant could also invoke the defence of mutual conferral of benefits. If this defence succeeds, the plaintiff’s claim will be dismissed in its entirety.[16] The court will be left to decide whether there was a net benefit conferred to the defendant or not.

2.     The Most Appropriate Remedy

Next, the plaintiff must establish that a constructive trust is the most appropriate remedy to redress the unjust enrichment. The courts will always consider granting a monetary award before considering the proprietary award of constructive trusts.[17]

A proprietary award will only be granted if the following two conditions are met. First, the plaintiff must demonstrate a substantial and direct link between his or her contributions and the property in question.[18] Second, the plaintiff has established that a monetary award would be insufficient in the circumstances. This exercise also involves an evaluation of the likeliness to recover such an award and considering whether “there is a reason to grant the plaintiff the additional rights that flow from recognition of property rights”[19]

Conclusion

In sum, if the plaintiff can prove unjust enrichment and the appropriateness of a proprietary award, the constructive trust for unjust enrichment will be granted. As previously outlined, the courts have refined the test for constructive trusts with respect to unjust enrichment. However, certain elements of this test remain ambiguous and leave room for interpretation and further development.    

The next article in this series will explain constructive trusts for wrongful conduct. The final article will be a comparative law piece on constructive trusts in Canadian common law versus Quebec civil law.

The content of this article is not legal advice or a legal opinion. It is intended to provide general information on the subject matter. For more information about your specific circumstance, please contact us at 514-842-9994 or email us at scm@bergmanlawyers.com. You should always consult a lawyers concerning any legal matter.

Bergman & Associates provides a diversified practice, which encompasses the spectrum of corporate, transactional, litigation and regulatory matters.

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[1] Soulos v. Korkontzilas, 1997 CanLII 346 (SCC), [1997] 2 SCR 217,<http://canlii.ca/t/1fr25>.

[2] Pettkus v. Becker, 1980 CanLII 22 (SCC), [1980] 2 SCR 834, <http://canlii.ca/t/1mjvp>.

[3] Pettkus, supra note 2.

[4] Peters v. Swayze, 2017 ONSC 1779 (CanLII), http://canlii.ca/t/h343r, at para. 48.

[5] Peel (Regional Municipality) v. Canada; Peel (Regional Municipality) v. Ontario, 1992 CanLII 21 (SCC), [1992] 3 SCR 762, <http://canlii.ca/t/1fs7k>, at p. 790.

[6] Ibid.

[7] Serbian League of Canada v. Mihalo Stojanovich et al., 2020 ONSC 105 (CanLII), <http://canlii.ca/t/j4rrx>, at para. 37; Kerr v. Baranow, 2011 SCC 10 (CanLII), [2011] 1 SCR 269,<http://canlii.ca/t/2fs3h> at para. 38; Garland v. Consumers' Gas Co., 2004 SCC 25 (CanLII), [2004] 1 SCR 629, <http://canlii.ca/t/1gzjn>, at para. 31; Peters, supra note 2, at paras. 22 and 29.

[8] Peel, supra note 5, at p. 795.

[9] Serbian League, supra note 7.

[10] Stevested Machinery & Engineering Ltd. v. Metso Paper Ltd., 2014 BCCA 91 (CanLII), <http://canlii.ca/t/g634c>.

[11] Sorochan v. Sorochan, 1986 CanLII 23 (SCC), [1986] 2 SCR 38, <http://canlii.ca/t/1fts6>, at para. 11.

[12] Peter v. Beblow, 1993 CanLII 126 (SCC), [1993] 1 S.C.R. 980, at p. 101.

[13] Garland, supra note 7, at para. 44.

[14] Ibid, at para. 43.

[15] Garland, supra note 15, at para. 46.

[16] Peters, supra note 4, at paras. 51-51.

[17] McKay v. Langstaff, 2015 ONSC 5223 (CanLII), <http://canlii.ca/t/glkrx>, at para. 46.

[18] Ibid.

[19] Ibid.