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Good Conscience and the Imposition of a Constructive Trust

October 8, 2021

Ontario

,

Canada

Issue

In what circumstances will the court order a constructive trust due to injust enrichment?

Conclusion

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. (Soulos v. Korkontzilas)

The situations which the judge may consider in deciding whether good conscience requires imposition of a constructive trust may be seen as falling into two general categories. The first category concerns property obtained by a wrongful act of the defendant, notably breach of fiduciary obligation or breach of duty of loyalty. The second category concerns situations where the defendant has not acted wrongfully in obtaining the property, but where he would be unjustly enriched to the plaintiff’s detriment by being permitted to keep the property for himself. The two categories are not mutually exclusive. Often wrongful acquisition of property will be associated with unjust enrichment, and vice versa. However, either situation alone may be sufficient to justify imposition of a constructive trust. (Soulos v. Korkontzilas)

In order to succeed on an unjust enrichment claim the plaintiff must prove three elements:

(a) that the defendant was enriched;

(b) that the plaintiff suffered a corresponding deprivation; and

(c) that the defendant’s enrichment and the plaintiff’s corresponding deprivation occurred in the absence of a juristic reason - i.e. that it cannot be justified by a valid contractual or statutory obligation, was not the result of a gift, or has no other legal or equitable basis.

In order to find that the enrichment/deprivation was without juristic reason, the plaintiff must first establish that their deprivation was not justified by any of the established categories (being the intention to make a gift, the existence of a contract, the disposition of law, and/or other valid common law, equitable or statutory obligations) and, if the prima facie case is established, the defendant may show there is some residual reason to deny recovery. (Intermarket Cam Limited v. Weiss)

In rebutting a claim on unjust enrichment, a prima facie case is rebuttable, where the defendant can show that there is another reason to deny recovery. This stage of the analysis thus provides for a category of residual defence in which courts can look to all of the circumstances of the transaction in order to determine whether there is another reason to deny recovery. As part of the defendant's attempt to rebut, courts should have regard to two factors: the reasonable expectations of the parties and public policy considerations. It may be that when these factors are considered, the court will find that a new category of juristic reason is established. In other cases, a consideration of these factors will suggest that there was a juristic reason in the particular circumstance of a case but which does not give rise to a new category of juristic reason that should be applied in other factual circumstances. (Intermarket Cam Limited v. Weiss)

For a constructive trust to arise, the plaintiff must establish a direct link to the property, which is the subject of the trust by reason of the plaintiff’s contribution. A constructive trust is to be found only where monetary compensation is inadequate and there must be a link between the services rendered/wrongful conduct etc. and the property in which the trust is claimed. Thus, it is clear that a simple plea of unjust enrichment does not create a tenable plea for a constructive trust remedy. (Sutton Group Professional Realty Inc. v. Stone)

As to the nature of the link required between the contribution and the property, the Supreme Court has consistently held that the plaintiff must demonstrate a “sufficiently substantial and direct” link, a “causal connection” or a “nexus” between the plaintiff’s contributions and the property which is the subject matter of the trust. A minor or indirect contribution will not suffice. The direct connection has been emphasized in the commercial context in various appellate courts. In particular, a constructive trust will not be imposed unless the plaintiff can point to property in the hands of the defendant that is identifiable as the property, or its proceeds, that was transferred by or obtained from the plaintiff without a juristic reason, or that the defendant could not otherwise retain in good conscience. That is, the constructive trust attaches to specific assets of the defendant that represent the enrichment; it is not a charge on the defendant’s general assets for the amount of the plaintiff’s claim. (306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services))

Section 4 of the Real Property Limitations Act creates a ten-year limitation period for an action to “recover” land. The words “action to recover any land” in s.4 of are not limited to claims for possession of land or to regain something a plaintiff has lost. Rather, “to recover any land” means simply “to obtain any land by judgment of the Court” and thus these words also encompass claims for a declaration in respect of land and claims to the ownership of land advanced by way of resulting or constructive trust. (Waterstone Properties Corporation v. Caledon (Town))

A party cannot seek equitable relief if that party has violated the principle of good faith. The test of “clean hands” must be established on the particular facts of each case. Only conduct that is immediately and necessarily related to the claim in question will bar a claim in equity. (Warren v. Gilbert)

Law

In Soulos v. Korkontzilas, [1997] 2 SCR 217, 1997 CanLII 346 (SCC), the Supreme Court explained when a constructive trust will be imposed:

[36] The situations which the judge may consider in deciding whether good conscience requires imposition of a constructive trust may be seen as falling into two general categories. The first category concerns property obtained by a wrongful act of the defendant, notably breach of fiduciary obligation or breach of duty of loyalty. The traditional English institutional trusts largely fall under but may not exhaust (at least in Canada) this category. The second category concerns situations where the defendant has not acted wrongfully in obtaining the property, but where he would be unjustly enriched to the plaintiff’s detriment by being permitted to keep the property for himself. The two categories are not mutually exclusive. Often wrongful acquisition of property will be associated with unjust enrichment, and vice versa. However, either situation alone may be sufficient to justify imposition of a constructive trust.

[...]

[39] Canadian courts also recognize the availability of constructive trusts for both wrongful acquisition of property and unjust enrichment. Applying the English law, they have long found constructive trusts as a consequence of wrongful acquisition of property, for example by fraud or breach of fiduciary duty. More recently, Canadian courts have recognized the availability of the American-style remedial constructive trust in cases of unjust enrichment: Pettkus v. Becker, supra. However, since Pettkus v. Becker Canadian courts have continued to find constructive trusts where property has been wrongfully acquired, even in the absence of unjust enrichment. While such cases appear infrequently since few choose to litigate absent pecuniary loss, they are not rare.

[...]

[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.

In Intermarket Cam Limited v. Weiss, 2021 ONSC 4445 (CanLII), the Court set out the test for unjust enrichment and reviewed categories of juristic reasons that have been recognized to bar a claim for unjust enrichment. The Court also demonstrated how a defendant may rebut a prima facie case of unjust enrichment:

[42] Canadian law recognizes restitution as a remedy for unjust enrichment in “circumstances where justice and fairness require one party to restore a benefit to another”.[6] In order to succeed on an unjust enrichment claim the plaintiff must prove three elements:

(a) that the defendant was enriched;

(b) that the plaintiff suffered a corresponding deprivation; and

(c) that the defendant’s enrichment and the plaintiff’s corresponding deprivation occurred in the absence of a juristic reason - i.e. that it cannot be justified by a valid contractual or statutory obligation, was not the result of a gift, or has no other legal or equitable basis.[7]

[43] In order to find that the enrichment/deprivation was without juristic reason, the plaintiff must first establish that their deprivation was not justified by any of the established categories (being the intention to make a gift, the existence of a contract, the disposition of law, and/or other valid common law, equitable or statutory obligations) and, if the prima facie case is established, the defendant may show there is some residual reason to deny recovery[8].

[44] In rebutting a claim on unjust enrichment, a prima facie case is rebuttable, where the defendant can show that there is another reason to deny recovery…[This] stage of the analysis thus provides for a category of residual defence in which courts can look to all of the circumstances of the transaction in order to determine whether there is another reason to deny recovery. As part of the defendant's attempt to rebut, courts should have regard to two factors: the reasonable expectations of the parties and public policy considerations. It may be that when these factors are considered, the court will find that a new category of juristic reason is established. In other cases, a consideration of these factors will suggest that there was a juristic reason in the particular circumstance of a case but which does not give rise to a new category of juristic reason that should be applied in other factual circumstances.[9]

In Sutton Group Professional Realty Inc. v. Stone, 2010 ONSC 4040 (CanLII), the Court explained that a constructive trust is to be found only where monetary compensation is inadequate. The plaintiff must also establish a direct link to the property:

[7] However, I also accept the argument of the appellant that a constructive trust can also be based on unjust enrichment. Indeed, McLachlin J. said in Soulos (at para. 45) that the prerequisites for constructive trust based on unjust enrichment had been developed by the Supreme Court of Canada in Pettkus v. Baker, 1980 CanLII 22 (SCC), [1980] 2 S.C.R. 834.

[8] The Supreme Court further discussed constructive trust based on unjust enrichment in Peter v. Beblow, 1993 CanLII 126 (SCC), [1993] 1 S.C.R. 980. After a finding of unjust enrichment, a court must determine whether the proprietary remedy of a constructive trust is appropriate. In making that determination, the claimant must show a nexus between the deprivation suffered and the property in question. As the Court stated in Peter at para. 25:

… for a constructive trust to arise, the plaintiff must establish a direct link to the property, which is the subject of the trust by reason of the plaintiff’s contribution.

The Court made it clear that a constructive trust is to be found only where “monetary compensation is inadequate and there must be a link between the services rendered and the property in which the trust is claimed” (at para. 29).

[9] Thus, it is clear that a simple plea of unjust enrichment does not create a tenable plea for a constructive trust remedy.

[10] In the present case, the appellant seeks a constructive trust over part of the proceeds of sale of the land, but does not plead any facts to support a nexus between services which it rendered and the property in which the trust is claimed – that is, sale proceeds provided by the purchaser.

[11] As the Master observed at para. 17 of his endorsement, the relationship of a vendor and a real estate agent who is seeking to be paid commission is that of debtor and creditor. It is not a trust relationship.

[12] I reach the same conclusion as the Master: there is no tenable claim based on constructive trust, as pleaded, even if the constructive trust claim is based on unjust enrichment. The pleadings do not set out facts on which a court could conclude that a monetary remedy would be inadequate and a constructive trust should be found over part of the sales proceeds.

In 306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548 (CanLII), the Court of Appeal emphasized the close link to the property necessary for a constructive trust:

[24] Because a constructive trust is a proprietary remedy, it carries with it certain benefits that do not attach to personal remedies. Those benefits include the removal of the property from the estate of the bankrupt, effectively trumping the priority scheme under the bankruptcy legislation: Peter D. Maddaugh and John D. McCamus, The Law of Restitution, loose-leaf edition (Toronto: Canada Law Book, 2013), at para. 5:200.

[25] In Lac Minerals, at p. 678, La Forest J. connected the appropriateness of granting the remedy of a constructive trust to the unique benefits that flowed from that remedy:

The constructive trust awards a right in property, but that right can only arise once a right to relief has been established. In the vast majority of cases a constructive trust will not be the appropriate remedy. … [A] constructive trust should only be awarded if there is reason to grant to the plaintiff the additional rights that flow from recognition of a right of property. Among the most important of these will be that it is appropriate that the plaintiff receive the priority accorded to the holder of a right of property in a bankruptcy. [Emphasis added.]

[26] The very nature of the constructive trust remedy demands a close link between the property over which the constructive trust is sought and the improper benefit bestowed on the defendant or the corresponding detriment suffered by the plaintiff. Absent that close and direct connection, I see no basis, regardless of the nature of the restitutionary claim, for granting a remedy that gives the plaintiff important property-related rights over specific property. A constructive trust remedy only makes sense where the property that becomes the subject of the trust is closely connected to the loss suffered by the plaintiff and/or the benefit gained by the defendant. Professor Paciocco, at p. 333, explains the need for the connection:

So long as the constructive trust is a remedy attaching to particular property and creating rights to that property in the plaintiff, it would be arbitrary to select simply a particular item of property and impose upon it a constructive trust. Why that property and not other property? There is an undeniable allure in ensuring that a plaintiff who is given a claim to particular property as a matter of remedy, [has] a claim as a matter of fact.

[27] Professor Paciocco goes on to argue that the requirement of a close connection between the property over which the trust is sought and the product of the unjust enrichment is particularly strong in the commercial context. He observes, at p. 333:

In the commercial context where there should be a hesitance to award proprietary relief, a purer tracing process is justifiable. This approach accurately describes the prevailing trend in Canadian case law.

[28] Professor Paciocco’s observations made in 1989 are borne out by the subsequent case law. In Peter, at p. 995, McLachlin J. said:

The constructive trust, based on analogy to the formal trust of traditional equity, is a proprietary concept. The plaintiff is found to have an interest in the property. A finding that a plaintiff is entitled to a remedy for unjust enrichment does not imply that there is a constructive trust. As I wrote in Rawluk, supra, for a constructive trust to arise, the plaintiff must establish a direct link to the property which is the subject of the trust by reason of the plaintiff’s contribution.[3] [Emphasis added.]

[29] The requirement of the direct connection described in Peter, has been reaffirmed and emphasized in Kerr, at para. 51:

As to the nature of the link required between the contribution and the property, the Court has consistently held that the plaintiff must demonstrate a “sufficiently substantial and direct” link, a “causal connection” or a “nexus” between the plaintiff’s contributions and the property which is the subject matter of the trust … A minor or indirect contribution will not suffice.

[30] The direct connection described in Peter, and again in Kerr, has been emphasized in the commercial context in various appellate courts: e.g. Ontario v. NRS Mississauga Inc.; Creditfinance Securities Ltd. (Re), 2011 ONCA 160, 277 O.A.C. 377, at para. 43; Ladner v. Wolfson, 2011 BCCA 370, 24 B.C.L.R. (5th) 43, at paras. 49-53, leave to appeal to S.C.C. refused, [2011] S.C.C.A. No. 475; Michelin Tires (Canada) Ltd. v. Canada, 2001 FCA 145, [2001] 3 F.C. 552, leave to appeal to S.C.C. refused, [2001] S.C.C.A. No. 367. The comment in Michelin Tires, at para. 19, is particularly apropos to the circumstances of this case:

In particular, a constructive trust will not be imposed unless the plaintiff can point to property in the hands of the defendant that is identifiable as the property, or its proceeds, that was transferred by or obtained from the plaintiff without a juristic reason, or that the defendant could not otherwise retain in good conscience. That is, the constructive trust attaches to specific assets of the defendant that represent the enrichment; it is not a charge on the defendant’s general assets for the amount of the plaintiff’s claim. [Emphasis added.]

In Warren v. Gilbert, 2006 CanLII 16488 (ON SC), the Court stated that a party cannot seek equitable relief, like a constructive trust, if that party has "unclean hands":

[43] Mr. Gilbert submits that, as Ms. Warren is seeking “equitable relief” in terms of requesting a declaration of a resulting trust or, in the alternative, a finding that Mr. Gilbert was unjustly enriched and ordering a constructive trust, the court should exercise its discretion and not grant the relief as Ms. Warren comes to court with “unclean hands”.

[44] A party cannot seek equitable relief if that party has violated the principle of good faith. The test of “clean hands” must be established on the particular facts of each case. Only conduct that is immediately and necessarily related to the claim in question will bar a claim in equity. (See: Taylor v. Guindon[2], para.48 and authorities cited therein)

Pursuant to the Court of Appeal Waterstone Properties Corporation v. Caledon (Town), 2017 ONCA 623 (CanLII), the Court discussed the application of s. 4 of the Real Property Limitations Act, RSO 1990, c L.15 to claims against land:

[31] I agree that the Town’s claim to the Parkette is subject to the ten-year limitation period under s. 4 of the RPLA. Section 4 creates a ten-year limitation period for an action to “recover” land. It provides as follows:

No person shall make an entry or distress, or bring an action to recover any land or rent, but within ten years next after the time at which the right to make such entry or distress, or to bring such action, first accrued to some person through whom the person making or bringing it claims, or if the right did not accrue to any person through whom that person claims, then within ten years next after the time at which the right to make such entry or distress, or to bring such action, first accrued to the person making or bringing it. [Emphasis added.]

[32] The words “action to recover any land” in s. 4 of the RPLA are not limited to claims for possession of land or to regain something a plaintiff has lost. Rather, “to recover any land” means simply “to obtain any land by judgment of the Court” and thus these words also encompass claims for a declaration in respect of land and claims to the ownership of land advanced by way of resulting or constructive trust: Hartman Estate v. Hartfam Holdings Ltd., 2006 CanLII 266 (ON CA), [2006] O.J. No. 69, at para. 56; McConnell v. Huxtable, 2014 ONCA 86, 118 O.R. (3d) 561, at paras. 38-39.

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