A trust arises by operation of law where it would be unconscionable for a person who holds an asset to deny the beneficial interest of another person.

Viewed in its modern context, the constructive trust can properly be described as a remedial interest which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of the property to the extent that such retention or assertion would be contrary to equitable principle.  

Can a gift fall within the principles of constructive trust?

A gift is not a business transaction. Further, if the donor of the gift is of weak will or of poor mentality, a court of equity will set aside the gift unless it is shown that the donor understood the substance of what he/she was doing.

A court of equity and therefore the Family Court, can set aside a transaction and cancel a document on various grounds, such as fraud, undue influence, mistake, lunacy, duress, non-disclosure of material facts when there is a duty to disclose, abuse of confidential relationship, or, in some cases, failure to show that there has been no such abuse.

It should not be overlooked that to sign a document known and intended to affect legal relations is an act that itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it.

When a document containing contractual terms is signed, then, in the absence of fraud or misrepresentation, the party signing it is bound, and it is wholly immaterial whether he/she has read the document or not.

Where a person signs a document knowing that it is a legal document relating to an interest in the property, he/she generally is bound by the act of signature. Legal instruments of various kinds take their efficacy from signature or execution. Such instruments are often signed by people who have not read and understood all their terms, but, who are nevertheless, committed to those terms by the act of signature or execution. It is that commitment that enables third parties to assume the legal efficacy of the instrument. To undermine that assumption would cause serious mischief.

Setting aside a legal document for constructive trust

  1. legal documentA court will set aside a transaction where the person entering into it was under a special disadvantage that was known or ought to have been known to the other party.
  2. Whenever one party by reason of some condition of circumstance is placed at a special disadvantage and unfair or unconscientious advantage is then taken of the opportunity thereby created in circumstances where the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.
  3. Where a party takes surreptitious advantage of the weakness or necessity of another party (loss alone is insufficient). There must be a scrutiny of the exact relations between the parties to determine the real justice of the case.
  4. Where not being “fully informed” is sufficient to meet the standard of special disadvantage. The apparent lack of benefit is, of itself, insufficient to establish unconscionability.
  5. In any case where a transaction is sought to be impugned by the operation of vitiating factors such as duress, undue influence, or unconscionable conduct. In such cases it is necessary to conduct a close consideration of the facts in order to determine whether a claim to relief has been established.
  6. Where the arrangement was a sham.

Relevance in Family Law

The relevance of the sham doctrine, and the difference between it and normal processes of construction, lies in the fact that it justifies ignoring (as opposed to construing) the usual primary material regarding that transaction, and focusing attention instead on all other material factors which indicate the arrangement that the parties in fact intended.

The difficult and debatable philosophic questions of the meaning and relationship of reality, substance, and form are generally resolved by asking, “did the parties who entered into the ostensible transaction mean it to be, in truth, their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front concealing their real transaction.”

The sham doctrine is a relatively rare doctrine in the law where legal meaning is given to a document by reference to a subjective intention. Other examples are a plea of non-est factum at law and a claim for rectification in equity. All these doctrines must necessarily be kept within narrow limits as they subtract from the objective theory of contractual obligation, and if unchecked, would cause “serious mischief”. Because a finding of sham requires a finding of an intent to deceive, considerations require a cautious approach.

There is a strong and natural presumption against holding a provision or a document a sham. A Court will only look behind a transaction’s ostensible validity if there is a good reason to do so.

Frequently Asked Questions

What is a Constructive Trust in Australia?

Constructive trust is a legal concept that arises in family law to resolve disputes. It is an equitable remedy imposed by a court of law to prevent one party from unjustly enriching themselves at the expense of another. It is used to protect family interests and ensure fairness in family law disputes.

What is an Institutional Constructive Trust?

An institutional constructive trust is a trust created by a court to protect assets of an institution, such as a university or hospital. It ensures that the assets are used in a manner that is consistent with the institution’s purpose and goals.

How to Create a Constructive Trust?

Constructive trust is created by a court order. The court will designate a trustee to oversee the trust, who will be responsible for ensuring that the property is used in accordance with the court’s order. The court can also impose restrictions on how the trust can be used, such as who can benefit from the trust and how the assets can be distributed.

How to Prove a Constructive Trust?

In order to prove a constructive trust, the party seeking to establish the trust must demonstrate that the other party was unjustly enriched at the expense of the party seeking to establish the trust. This often requires evidence such as documents, emails, bank records, and other forms of proof. It is important to note that a constructive trust is not always easy to prove, as the burden of proof is on the party seeking to establish the trust.

What are the common intention constructive trust in Australia ?

Common intention constructive trusts in Australia are trusts that arise where the parties to a transaction have intentions to share the benefits of the transaction, and those intentions are not reflected in the legal documents. Such trusts may arise, for example, in cases of joint venture arrangements, partnerships, or family arrangements. In such cases, the courts may look to the parties’ intentions to find that a constructive trust exists, such that the parties’ interests are reflected in the transaction.

What is the remedial constructive trust in Australia ?

A remedial constructive trust in Australia is a trust imposed by a court in order to remedy a wrong or injustice. This type of trust is imposed where a person holds property for another person which was acquired in circumstances where it would be unjust for the holder of the property to retain it. In such cases, the court will impose a constructive trust on the property, and the property will be held on trust for the benefit of the rightful owner.

What is joint endeavour constructive trust in Australia ?

A joint endeavour constructive trust in Australia is a trust created by a court when two or more people have entered into an agreement to jointly pursue a common goal. The court will impose a constructive trust in order to ensure that the parties’ interests are adequately protected and that the parties’ intentions are reflected in the transaction. The benefit of the trust is shared equally between the parties, according to the agreement.

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