Guernsey: The Remedial Constructive Trust: A New Proprietary Remedy?

Last Updated: 17 April 2013
Article by Appleby  

In the Guernsey case of IKEA Limited & IKEA Wholesale Limited v Hauxwell-Smith and others (10/2012), IKEA was found to have been the victim of serious procurement irregularities involving Mr and Mrs Hauxwell-Smith between 1998 and 2000. Judge Finch did not explain the precise facts relating to these serious procedural irregularities in his judgment. However, large sums were paid over as a result of these activities through a web of entities and IKEA subsequently traced and recovered the bulk of these sums, namely £12.7 million, in Liechtenstein.

In Guernsey, IKEA sought inter alia to recover sums of £56,000 and £90,000 (the "Funds"), which were held in Guernsey by a local bank and Guernsey Advocates respectively in accordance with freezing orders made in earlier proceedings. IKEA applied for repayment of the Funds and alleged that they were the proceeds of the procedural irregularities and subject to a constructive trust entitling IKEA to a proprietary claim to the Funds.

Proprietary Claim

Judge Finch inter alia granted IKEA's application and ordered the repayment of the Funds. As to IKEA's claim that they were beneficiaries under constructive trusts in respect of the Funds, Judge Finch held at paragraphs 5-6:

"... where acts lead to profit and are illegal under established legal principle, equity puts any property acquired thereby into a constructive trust. A constructive trust is frequently based on disloyalty or unconscionable conduct. The courts therefore use the concept to compel the person who has obtained property to transfer it to the applicant or Plaintiff. Unconscionable conduct can be seen where someone takes unconscionable advantage of another person. All this is important because it demonstrates that it is not necessary to have a specific allegation of fraud to bring about a constructive trust. "Judge Finch stated that there "is no need to go further into the concept of constructive trusts" and held that the Funds were subject to a constructive trust as Mr Hauxwell-Smith bribed senior staff at IKEA and obtained monies from IKEA in an unconscionable way. Although Mr Hauxwell-Smith had already pleaded guilty to 18 counts of corruption relating to the bribery of senior managers of IKEA, Judge Finch stressed that he was making no findings of fraud and it was not necessary for him to do so. In order to find a constructive trust, all that was required was unconscionable conduct.

The Judge accepted IKEA's submission that this was an English trust but stated that if it had been a Guernsey trust then the same principles would have applied.

It has been suggested by other commentators that IKEA recognises the existence of a new proprietary remedy in Guernsey known as the remedial constructive trust. However, for the reasons set out below, it is doubtful whether it is possible to reach such a conclusion from the IKEA decision.

Judicial Remedy

A remedial constructive trust 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. An institutional constructive trust arises by operation of law as from the date of the circumstances which gave rise to it and the court merely declares that such a trust has arisen in the past.

In England, the courts have refused to recognise this remedial constructive trust and only the institutional constructive trust is presently recognised as valid in English law. However, the remedial constructive trust is a remedy available in several other jurisdictions and the United States. In general, the criterion for the remedial constructive trust in those countries is unconscionable conduct. This is often criticised in England as being too vague a concept, dependent upon the Court's subjective assessment of any particular case.

Subjective Assessment

In IKEA, the Court did not make any specific reference to a remedial or an institutional constructive trust, being content to refer to "constructive trust" in generic terms. Instead, the Court outlined that a constructive trust is frequently based on disloyalty or unconscionable conduct and stated that there was "no need to go further into the concept of constructive trusts". Arguably, this suggests that the Court was imposing a remedial constructive trust as a new remedy in Guernsey law.

However, there remains a great deal of uncertainty surrounding the basis of the Court's decision in IKEA. For example, the Court did not set out the precise factual basis of IKEA's claims to the Funds or explain precisely how the Respondents profited from the procedural irregularities at the expense of IKEA. As a result, it is uncertain whether a constructive trust was justified on institutional constructive trust principles.

Further, the Court appeared to rely on little authority in reaching its decision as to whether the Funds were subject to a constructive trust. The Court only referred to the English Court of Appeal decision of Paragon Finance plc v Thakerar & Co [1999] 1 All ER 400, which does not appear to support the remedial constructive trust. Additionally, the Jersey case of Esteem Settlement [2003] JLR 188 was not referred to in IKEA. In Esteem Settlement, the Royal Court of Jersey was of the view that the remedial constructive trust was not a remedy available in Jersey law, as title and proprietary rights had always been too strongly respected in the customary law of Jersey. This argument is equally applicable to whether a remedial constructive trust ought to be available under Guernsey law.

Discretionary Nature

Any recognition of remedial constructive trusts in Guernsey law could lead to far-reaching consequences. The element of subjectivity, retrospective effect and discretionary nature of remedial constructive trusts are seen as undermining the certainty of property rights and interfering with the interests of third parties.

Further, in the event of the wrongdoer's insolvency, a plaintiff holder of a proprietary right established by way of a remedial constructive trust would appear to gain priority over other unsecured creditors of the wrongdoer. Accordingly, further guidance from the courts is desirable in order to clarify, consider and develop the law of constructive trusts in Guernsey.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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