Constructive Trusts and Unjust Enrichment: In Search of Principle

Court of Appeal rules that constructive trust may be imposed to reverse unjust enrichment.


In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, Lord Goff of Chieveley, regarded as the father of the modern English law of restitution, prophetically observed of the tension between the law of restitution and the law of equity and trusts:-

Ever since the law of restitution began, about the middle of this century, to be studied in depth, the role of equitable proprietary claims in the law of restitution has been found to be a matter of great difficulty. The legitimate ambition of restitution lawyers has been to establish a coherent law of restitution, founded upon the principle of unjust enrichment; and since certain equitable institutions, notably the constructive trust and the resulting trust, have been perceived to have the function of reversing unjust enrichment, they have sought to embrace those institutions within the law of restitution, if necessary moulding them to make them fit for that purpose. Equity lawyers, on the other hand, have displayed anxiety that in this process the equitable principles underlying these institutions may become illegitimately distorted; and though equity lawyers in this country are nowadays much more sympathetic than they have been in the past towards the need to develop a coherent law of restitution, and to identify the proper role of the trust within that rubric of the law, they remain concerned that the trust concept should not be distorted, and also that the practical consequences of its imposition should be fully appreciated. There is therefore some tension between the aims and perceptions of these two groups of lawyers …

The recent Court of Appeal decision in Tudingan Timur Sdn Bhd v Che Mat Bin Padali (Civil Appeal No. A-02-1613-2011, 19 September 2013) at once demonstrates the wisdom of Lord Goff’s counsel, and the real difficulties which arise as a result of a failure to take heed of the same.

In Tudungan Timur, the plaintiff and one Batu Sentosa Sdn Bhd entered into a joint venture to extract timber, and deposited RM200,000 with the Public Works Department (JKR) for the use of an access road. After the works were completed, the defendant, who was an employee of Batu Sentosa Sdn Bhd, requested JKR to return and the said RM200,000 into his personal bank account. This appears to have been supported by one of the plaintiff’s director, who subsequently passed away. The plaintiff then commenced proceedings to recover the said sum of RM200,000 from the defendant. The defendant admitted that he had received the RM200,000, but contended that the money had been returned to the plaintiff’s director.

The High Court dismissed the plaintiff’s claim. The Court of Appeal, however, allowed the plaintiff’s appeal, holding that the defendant had failed to adduce cogent evidence to prove that he had repaid the money to the plaintiff through its director, and that the defendant should have returned the money to the plaintiff and not to its director, as the money belonged to the plaintiff which was a separate legal entity.

However, the Court of Appeal went on to observe:-

“… [I]n the circumstances of the case, the defendant had received the said sum from JKR Perak as a constructive trustee for the benefit of the plaintiff …

In our opinion, the defendant having not paid the said sum to the plaintiff, would be unjustly enriched. Whenever there is a clear implication of unjust enrichment, the Court should apply a constructive trust to satisfy the demands of justice and good conscience. This was the decision of this Court in the case of Tay Choo Foo v Tengku Mohd Saad Tengku Mansur & Ors [2009] 2 CLJ 363 …

It should be noted that a constructive trust is not a right to recover on a debt owing; it creates a right to recover property wrongfully held. Therefore, a trust will follow property through all changes in its state and form so long as such property, its product, or its proceeds are capable of identification.

This is a very controversial decision. In reality, in Tudungan Timur the plaintiff’s claim against the defendant could only have been a claim for restitution on the ground that to allow the defendant to retain the money would result in his unjust enrichment at the plaintiff’s expense. It is well-established that such a restitutionary claim at common law is a personal and not a proprietary claim: Lipkin Gorman v Karpnale [1991] 2 AC 548, HL.

To overcome this obstacle, the Court of Appeal in both Tay Choo Foo and Tudungan Timur purported to rely on American decisions to support its conclusion that constructive trusts are imposed to reverse unjust enrichment, thereby giving rise to proprietary rights. However, reliance on American law on this point is extremely misplaced and dangerous. This is because unlike English and Malaysian law which only recognise institutional constructive trusts, American law recognises the broader concept of a remedial constructive trust. As Lord Browne-Wilkinson explained in the Westdeutsche case:-


English law has for the most part only recognised an institutional constructive trust … In the present context, that distinction is of fundamental importance. Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such trust having arisen (including the possibly unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not under a discretion. A remedial constructive trust, as I understand it, is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court.

The constructive trust doctrine has always been understood and accepted by Malaysian courts as being a doctrine firmly governed by the English law of equity and trusts. Constructive trusts are imposed on a principled and not arbitrary basis, and are only imposed in certain circumstances,  for example where there has been transfer of property in breach of trust or fiduciary duties. More importantly, they are not imposed simply because the court takes the view, without more, that the recipient of money would be “unjustly enriched”. Even for supporters of the law of unjust enrichment, this is arguably one step too far. In the Westdeutsche case itself, the House of Lords expressly rejected the possibility of English courts recognising a proprietary restitutionary claim by way of imposing of constructive trusts in cases where unjust enrichment was established.

The decision of the Court of Appeal in Tudungan Timur is problematic and liable to cause confusion. Many questions have been left unanswered. For example, is the test for the imposition of a constructive trust now simply whether or not a defendant has been unjustly enriched at the plaintiff’s expense? Are all claims for unjust enrichment now proprietary claims capable of being enforced by way of constructive trusts?  Would a claim for constructive trust be defeated by defences available under the law of restitution such as change of position?  How are third party rights to be protected? For example, if the defendant in Tudungan Timur became bankrupt, on what basis would it be fair and just for the plaintiff to be given an equitable interest which would rank ahead of the defendant’s unsecured creditors? How can the courts reconcile the principles of equity and trust and the principles of the law of restitution in deciding whether or not to impose a constructive trust?

The Federal Court will have to address these questions sooner or later, and it is hoped that the law will not be allowed to further deviate from its correct path, to prevent the doctrine of constructive trust from being irreversibly distorted.