De Bruyne v De Bruyne & Ors

A transferee who obtains property on the basis of an assurance that it will be held for third-party beneficiaries may become a constructive trustee. The decisive question is whether the circumstances of acquisition make it unconscionable for the transferee to deny the agreed beneficial interests.

This principle does not require the beneficiaries to have participated in the agreement or relied on it to their detriment. Those requirements belong to the distinct context of common intention constructive trusts. English law does not permit a court to impose a remedial constructive trust merely to correct the resulting injustice.

In ancillary relief proceedings following divorce, the wife included assets derived from shares formerly held by a family discretionary trust. The husband had procured the appointment of those shares to himself after assuring family members that they would be held for his five children. The shares were transferred to the wife as his nominee and were later sold.

His Honour Judge O’Brien held that the remaining assets were subject to a constructive trust for the children. He also held that a settlement of earlier New York proceedings compromised the two eldest children’s entire claims, leaving only the younger children’s 60% interest in issue.

The wife appealed against the constructive trust ruling. The husband and two eldest children sought permission to cross-appeal on the scope of the compromise. The central questions were whether the circumstances of the appointment created a constructive trust and whether the compromise extended to claims concerning English assets.

1. The wife’s appeal was dismissed unanimously. The husband acquired the shares subject to a constructive trust for the children. Permission to cross-appeal on the compromise issue was granted, but that cross-appeal was dismissed.

2. Patten LJ held that equity may require a transferee to observe the terms upon which property was acquired where denying those terms would be unconscionable. The principle is illustrated by secret trusts, mutual wills and inter vivos transfers. It does not depend upon detrimental reliance by the intended beneficiary, who may be unaware of the arrangement.

3. The common intention constructive trust analysis associated with Lloyds Bank plc v Rossett [1991] 1 AC 107 was ill-suited to the case. The children, some of whom were very young, could not realistically be treated as parties to a shared intention with their father. Detrimental reliance performs a particular role in disputes between cohabitants by linking the claimant’s conduct to an agreement that beneficial ownership will be shared. It is not an indispensable element of every constructive trust arising from the circumstances of a transfer.

4. The husband procured the appointment by agreeing that the shares would be held for the children. The grandparents consented on that footing, and the trustee exercised the power of appointment to implement the family agreement. The direct appointment to the husband resulted from legal advice and did not alter the agreed beneficial destination. It was therefore unconscionable for him to treat the shares as his own. The children’s inability to participate in the agreement was irrelevant.

5. The county court was wrong to rely alternatively upon a remedial constructive trust. Such a remedy was not permissible under English law, consistently with Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 and Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391. That error did not affect the result because an institutional constructive trust arose when the shares were appointed.

6. The New York settlement compromised the two eldest children’s entire personal claims against the husband and wife. Its language was not confined to assets within New York or to assets against which a judgment could be executed. The inability to enforce a New York judgment directly under the Foreign Judgments (Reciprocal Enforcement) Act 1933 did not justify restricting the agreement.

1. Court of Appeal (Civil Division): In [2010] EWCA Civ 519, unanimously dismissed the wife’s appeal against the constructive trust ruling. It granted permission to cross-appeal on the compromise issue but dismissed that cross-appeal.

2. Cambridge County Court: His Honour Judge O’Brien held that the two eldest children’s claims had been fully compromised and that the younger children were beneficially entitled to 60% of the disputed assets under a constructive trust.