Constructive Trusts Part II - Wrongful Conduct

Introduction

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

Auteur de l'article: Me Sarah Miles, Avocate

Bergman et Associés

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

1. Wrongful conduct;[1]

2. Unjust enrichment;[2]

3. Equitable fraud, and;

4. Stranger operating as a constructive trustee.

This article is part two of a three-part series on constructive trusts. The topic of this article is constructive trusts for wrongful conduct. Should you wish to know more about constructive trusts for unjust enrichment, please refer back to Constructive Trusts Part I: Unjust Enrichment.[3]

Constructive Trusts for Wrongful Conduct

The court can impose a constructive trust if a party has been a victim of wrongful conduct which subsequently led to the deprivation of their rights in a property. What qualifies as wrongful conduct? Common law has developed three categories of wrongful conduct:

1.     Breach of a fiduciary duty;

2.     Breach of confidence;[4]

3.     Preventing a criminal from retaining benefits from criminal activities.[5]

 The breach of a fiduciary duty will be the topic of discussion in the present article.

Breach of Fiduciary Duty

In order to receive a constructive trust for breach of a fiduciary duty, the claimant must establish (1) the existence of a fiduciary relationship; (2) a breach of a fiduciary duty, and; (3) the appropriate remedy is a constructive trust.

(1)   Existence of Fiduciary Relationship

A fiduciary relationship is where a party is required to look after the best interests of another. The fiduciary must respect their duties of loyalty, good faith and avoidance of a conflict of interest. They must conduct themselves with the utmost loyalty and avoid any situation of conflict of interest and avoid profiting from his/her position.

The standard fiduciary categories are: trustee and beneficiary, agent and principal; director and company, and partner and co-partner. Over time, the categories have extended to solicitor-client and parent-child relationships.

The above-mentioned relationships are assumed to be fiduciary relationships. As stated by the Honourable Justice Donald Lee, this presumption is rebuttable since it is the nature of the relationship and not the specific category of actor involved that gives rise to the fiduciary duty.[6]

In order to determine whether a relationship is in fact a fiduciary relationship, the courts have identified a three-part test that identifies the characteristics found in a fiduciary relationship:

a)     The fiduciary has scope for the exercise of some discretion of power;

b)     The fiduciary can unilaterally exercise that power or discretion as to affect the beneficiary’s legal or practical interests, and;

c)     The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.[7]

The two first characteristics of a fiduciary relationship are self-explanatory. However, it is the element of “vulnerability” that has caused much debate at different levels of the court. The element of vulnerability arises from the inability of a party to prevent the injurious exercise of the power or discretion of the fiduciary, leaving that party at the hands of the fiduciary.

In Lac Mineral Ltd. v. International Corona Resources Ltd., Justice Sopinka states that vulnerability is indispensable in determining the existence of a fiduciary duty.[8] In Hodginkson v. Simms, Justice LaForest downplays the importance of said criteria:

... I wish to emphasize from the outset, then, that the concept of vulnerability is not the hallmark of fiduciary relationship though it is an important indicium of its existence. Vulnerability is common to many relationships in which the law will intervene to protect one of the parties.  It is, in fact, the “golden thread” that unites such related causes of action as breach of fiduciary duty, undue influence, unconscionability and negligent misrepresentation.[9]

In a more recent decision, the Honourable Madam Justice Garson seems to suggest that “vulnerability” is imperative in determining whether or not the remedy of constructive trusts will be awarded:

[120]   To create special relationships or fiduciary duties it is generally necessary that the aggrieved party be in some way vulnerable to the breach of an equitable obligation owed to the plaintiff … In my view that vulnerability is necessary for the imposition of a constructive trust based on wrongful conduct and does not exist in the circumstances of this case.[10]

There has been much controversy surrounding the criteria of “vulnerability”. The courts have not taken a clear position on whether or not vulnerability is a determining factor, however it has been established that it is necessary to conclude that a fiduciary relationship exists. There must be some sort of physical or psychological dependency which gives rise to a fiduciary duty.

(2)   Breach of a Fiduciary Duty

Secondly, the plaintiff must prove that there has been a breach of a fiduciary duty. Fiduciary relationships entail trust and confidence. The fiduciary must act in the best interests of the beneficiaries of the relationship. As a guideline, the standard duties of a fiduciary include the duty of loyalty, the duty of good faith and the duty to avoid conflict of interests.

If the claimant successfully proves that a fiduciary duty has been breached, the defendant will have the opportunity to respond.

(3)   The Appropriate Remedy

Lastly, the court must be convinced that the constructive trust is the most appropriate remedy.[11] In assessing the appropriateness of the remedy, the courts will consider the rules of natural justice and equity to address the public concern of maintaining the integrity of fiduciary relationships.

The onus is on the plaintiff to prove that a constructive trust is the most appropriate restitutionary remedy. Constructive trusts grant additional rights arising from the recognition of a right in property. There must be a legitimate reason for seeking this proprietary remedy. The moral quality of the defendant, the objective of deterrence of disloyalty and full compensation of the plaintiff are factors that will assist the court in determining the award.

Conclusion

To summarize, a constructive trust will be awarded if the plaintiff convinces the court of the existence of a fiduciary relationship, a breach of a fiduciary duty and the appropriateness of a proprietary award.

The final article of the series will be a comparative law piece on constructive trusts under the common law system in Canada versus the civil law system in Quebec.

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] Miles, Sarah. Constructive Trusts Part I : Unjust Enrichment, November 18th, 2020, https://edoctrine.caij.qc.ca/publications-cabinets/bergman/2020/p100000/en/ifd2e9eb6-e60e-4f6b-bc67-b0ccebb59045/

[4] Lac Minerals Ltd. c. International Corona Resources Ltd., 1989 CanLII 34 (CSC), [1989] 2 RCS 574, <https://canlii.ca/t/1ft3v>

[5] Brissette Estate v. Westbury Life Insurance Co., [1992] 3 RCS 87.

[6] Alwest Properties Ltd. v. Roppelt, 1998 ABQB 1027, par. 4.

[7] Ibid, par.6.

[8] Ibid, supra note 4, p.599

[9] Hodgkinson v. Simms, 1994 CanLII 70 (SCC), p. 405.

[10]  BMF Trading v. Abraxis Holdings Ltd., 2002 BCSC 590 (CanLII), <https://canlii.ca/t/5hw0>, par. 120

[11] Ibid, supra note 10, par. 122