Constructive Trusts from a Law and Economics Perspective

I Introduction The 'constructive trust' is a court order declaring that the defendant (D) holds a disputed asset on trust for the plaintiff (P). Langbein says that the constructive trust is 'a species of equitable remedy, comparable in function to the injunction or decree of specific performance. The constructive trust is imposed coercively, as a means of correcting wrongdoing or preventing unjust enrichment.'1 By contrast, he goes on to say, '[T]he ordinary private trust is a consensual relationship voluntarily assumed by the trustee.'2 The constructive trust remedy is a proprietary one. It gives P a claim to the disputed asset itself. The alternative is a personal remedy for damages or an account of profits. A personal remedy gives P a money claim against D but nothing more. The difference matters particularly if D is bankrupt, but it is trite law that D's bankruptcy is neither a necessary nor a sufficient condition for granting P constructive trust relief.3 What are the factors that determine the availability of constructive trust relief? Langbein's statement suggests that the constructive trust remedy may serve either a deterrence function or a restitutionary function. The implication is that the deterrence function and the restitutionary function together account for all cases of constructive trust relief. However, as Chambers points out, sometimes the constructive trust serves what he calls a 'perfectionary' function: the court grants the remedy to enforce an express or implied bargain between P and D.4 For example, [End Page 217] constructive trusts are commonly imposed to perfect an agreement for the transfer of an asset by D to P.5 The law and economics literature to date has given the constructive trust scant attention. Langbein analyses the express trust from a law and economics perspective, but he pointedly leaves the constructive trust out of account.6 Levmore discusses the law of restitution from a law and economics perspective, but his focus is on the cause of action and not the choice of remedy.7 This paper aims to fill the gap. Part II below analyses five leading Australian, Canadian, and English cases: Hewett v.Court;8 Soulos v. Korkontzilas;9 Daly v. Sydney Stock Exchange Ltd;10 Chase-Manhattan Bank NA v. Israel-British Bank (London) Ltd;11 and Baumgartner v. Baumgartner.12 The argument, taking Chambers one step further, is that all constructive trusts are perfectionary at heart: in all cases (not some) the function of the remedy is to reproduce the outcome P and D themselves were likely to have agreed on up front if bargaining had been costless. The deterrence and restitutionary functions Langbein identifies are subsidiary to the perfectionary function. Giventhe constructive trust's perfectionary function, it is untrue, or at least an over-simplification, to say that the constructive trust is 'imposed coercively.' As it happens, the constructive trust is subject to more or less the same kind of contractarian analysis that Langbein applies to express trusts and that Easterbrook and Fischel apply to fiduciary relationships at large.13 Part III discusses the bankruptcy aspect, with reference back to the cases discussed in part II. [End Page 218] The paper focuses on Australian, English, and Canadian cases. There are differences in constructive trusts doctrine among the three countries. In Canada, the courts, following the United States lead, have developed the 'remedial' constructive trust to prevent unjust enrichment. The test for unjust enrichment depends on proof of (a) D's enrichment, (b) P's corresponding deprivation, and (c) the absence of a 'juridical justification' for the enrichment.14 The remedy is discretionary in the sense that, even if the case satisfies all three elements of the test, the court will still not necessarily impose the trust. The court may refuse to impose the trust on the ground that there are other remedies available to P 'which make the declaration of the constructive trust unnecessary or inappropriate...

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