Constructive Trust Imposed in Absence of Unjust Enrichment

Canadian courts have developed the remedial constructive trust to prevent unjust enrichment. Pursuant to seminal cases such as Pettkus v. Becker, [1980] 2 S.C.R. 834, it is firmly established that a constructive trust may be imposed (even in the absence of wrongful conduct on the part of the defendant such as breach of fiduciary duty), where three elements are present: (1) the enrichment of the defendant; (2) the corresponding deprivation of the plaintiff; and (3) the absence of a juristic reason for the enrichment.

The Supreme Court of Canada’s subsequent decision in Soulos v. Korkontzilas, [1997] 2 S.C.R. 217 is significant because the Court concluded that even where there is no unjust enrichment in the traditional sense, on some occasions “good conscience” requires the imposition of a constructive trust to address wrongful conduct.

Facts in Soulos

In Soulos, a real estate agent bought for himself a property for which he had been negotiating on behalf of his client. The agent paid fair market value for the property. By the time the client discovered this and sued, the value of the property had declined. Thus it could not be said that the agent had been “enriched”. Despite the decrease in property value, the client maintained his desire to own the property.

Legal issue: Constructive trust without unjust enrichment?

The question for the court was whether the agent could be required to return the property to his client despite the fact that the client could show no loss. This raised the legal issue of whether a constructive trust over property may be imposed in the absence of unjust enrichment of the defendant and corresponding deprivation of the plaintiff.

Supreme Court of Canada adopts broad approach to constructive trusts

At trial, the judge found that the agent had breached his fiduciary duty to his client, but held that a constructive trust was not an appropriate remedy because the agent had not been “enriched”. The majority of the Ontario Court of Appeal ordered that the property be conveyed to the plaintiff nevertheless, and a further appeal was dismissed by the Supreme Court of Canada, who summarized the issue as follows:

13    The difference between the trial judge and the majority in the Court of Appeal may be summarized as follows. The trial judge took the view that in the absence of established loss, Mr. Soulos had no action. To grant the remedy of constructive trust in the absence of loss would be “simply disproportionate and inappropriate”, in his view. The majority in the Court of Appeal, by contrast, took a broader view of when a constructive trust could apply. It held that a constructive trust requiring reconveyance of the property could arise in the absence of an established loss in order to condemn the agent’s improper act and maintain the bond of trust underlying the real estate industry and hence the “integrity of the laws” which a court of equity supervises.

14     The appeal thus presents two different views of the function and ambit of the constructive trust. One view sees the constructive trust exclusively as a remedy for clearly established loss. On this view, a constructive trust can arise only where there has been “enrichment” of the defendant and corresponding “deprivation” of the plaintiff. The other view, while not denying that the constructive trust may appropriately apply to prevent unjust enrichment, does not confine it to that role. On this view, the constructive trust may apply absent an established loss to condemn a wrongful act and maintain the integrity of the relationships of trust which underlie many of our industries and institutions.

15     It is my view that the second, broader approach to constructive trust should prevail.

Following the Supreme Court’s decision in Soulos, a constructive trust may be imposed even in the absence of unjust enrichment. The constructive trust is an “ancient and eclectic institution” imposed by law not only to remedy unjust enrichment, but to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in “good conscience” they should not be permitted to retain. The constructive trust imposed for breach of fiduciary relationship serves not only to do the justice between the parties that good conscience requires, but to hold fiduciaries and people in positions of trust to the high standards of trust and probity that commercial and other social institutions require if they are to function effectively.

Good conscience as the unifying concept underlying constructive trusts

“Good conscience” has a sound basis in equity and is wide enough to encompass constructive trusts where the defendant has not been unjustly enriched or where the plaintiff has not suffered a loss. Per McLachlin J. for the majority in Soulos:

43    I conclude that in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation. While cases often involve both a wrongful act and unjust enrichment, constructive trusts may be imposed on either ground: where there is a wrongful act but no unjust enrichment and corresponding deprivation; or where there is an unconscionable unjust enrichment in the absence of a wrongful act, as in Pettkus v. Becker, supra. Within these two broad categories, there is room for the law of constructive trust to develop and for greater precision to be attained, as time and experience may dictate.

A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him or her into a trustee.

Take home point on constructive trusts, unjust enrichment, and good conscience

Following the clear statement of the majority of the Supreme Court of Canada in Soulos v. Korkontzilas, the constructive trust may be imposed not only to remedy unjust enrichment, but to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in good conscience they should not be permitted to retain.