A constructive trust is an equitable remedy imposed at the discretion of a court. It benefits a party that has been wrongfully deprived of its rights due to another person obtaining or holding a legal property right that it should not possess and has thereby been unjustly enriched at the cost of the claimants. It is an implied trust created by conduct.
In the recent case of The Serious Fraud Office & anor v Litigation Capital Limited & ors1 ("SFO") the English High Court, in the absence of any binding Jersey authority on the point, considered an important issue of Jersey Law: whether and, if so, in what circumstances, a constructive trust can arise over Jersey immovable (real) property. Although the subject of debate in Jersey for some time, the issue had not previously been addressed, definitively at least, by the Jersey Courts. The High Court in England has now determined that it cannot.
Although English decisions are not legally binding in either Jersey or the Bailiwick of Guernsey they are likely to carry considerable weight and will often be regarded as "persuasive". In this Briefing Note we consider the recent findings of the English High Court in SFO in relation to constructive trusts of immovable property under Jersey law and what impact, if any, this may have on the question of whether and, if so when, constructive trusts of Guernsey situated immovable property can arise.
The SFO case
One of the issues in dispute between the parties in SFO concerned the ownership of four Jersey situated properties and specifically, whether those properties belonged beneficially to a certain individual, who had been declared en désastre (bankrupt) in Jersey, or whether they were held by that individual on constructive trust for one or more of the other parties.
The Viscount of Jersey, as administrator of the en désastre estate of the individual, was one of the parties to the proceedings and filed expert legal evidence as to Jersey law from a Jersey Advocate. The expert opined that Jersey law did not recognise trusts over Jersey immovable property including any type of constructive trust. In support of that opinion, the expert relied on various provisions of the Trusts (Jersey) Law 1984 ("TJL") and to two decisions of the Jersey Royal Court: In Re Esteem Settlement and Flynn v Reid2 .
In reaching his decision, Foxton J accepted the expert evidence and concluded that:
- Jersey law relating to immovable property was very different to English law;
- It was common ground between the parties that Article 11(2)(a)(iii)3 of the TJL expressly prohibited express trusts over Jersey real property and that Jersey law (Flynn v Reid) did not recognise a common intention constructive trust of Jersey real property;
- The separation of title to real property into legal and equitable interests was not recognised in Jersey customary law as confirmed by the Court in Flynn v Reid. The recognition of a division of title in respect of movable property into legal and equitable interests in In Re Esteem had represented a significant development in Jersey law. The recognition of separate legal estates in real property would represent a further significant step for Jersey land law and should be introduced by legislation as the Court in Flynn v Reid had observed;
- In Flynn v Reid the Court had acknowledged the difficulties that would flow from the development of Jersey law in the direction of recognising equitable interests over Jersey immovable property;
- The argument advanced on behalf of two of the parties that Article 33 of the TJL provided for constructive trusts of immovable property, contrary to the expert's evidence, found little support in the TJL itself and their argument that Jersey law recognised equitable interests in Jersey land in some types of constructive trust, but not in express trusts, or in cases of trustee fraud, but not in express trusts, or in cases of trustee fraud but not in other types of breaches of trust gives rise to "formidable difficulties of delineation";
- The prohibition of express trusts of immovable property by Article 11(2)(a)(iii) of the TJL extended to any type of constructive trusts; and
- In In Re Esteem Birt. B had expressed an obiter view that Art 11(2)(a) of the TJL did not apply to a case of constructive trust where proceeds of fraud had been invested by a trustee in Jersey immovable property for his own benefit. In Flynn v Reid, the Jersey Court had declined to decide whether a constructive trust could ever arise in the case of trustee fraud as it was not necessary. Foxton J noted that Jersey law did not leave victims of fraud without remedy; it provided personal (as distinct from proprietary) remedies for victims of fraud where the misappropriated assets had been used to acquire real property. Many other legal systems including those of other major finance centres did no more than that.
The legislative provisions of the TJL and the Trusts (Guernsey) Law, 2007 ("TGL") in relation to the creation and validity of a trust are quite distinct and different.
By contrast to the findings of Foxton J summarised above, section 6(3) of the TGL specifically envisages the creation of express trusts of real property situated in Guernsey: "A trust of real property situated in Guernsey may be created only by an instrument in writing".
Further, in relation to real property and constructive trusts, section 6(4) of the TGL goes on to say that:
"Nothing in subsection (3) -
(a) applies in relation to a trust of real property created before the commencement of this Law, or
(b) affects the creation or operation of.constructive trusts."
The TGL, therefore explicitly recognises that a constructive trust of Guernsey situated real property can arise. In such circumstances, it is difficult to see how a Court, faced with the same factual matrix as that before the English Court in SFO and, having been asked to consider the same issue, would find that a constructive trust could not (in appropriate factual circumstances) arise over Guernsey immoveable property. Conclusion The English High Court held in SFO that Jersey law does not recognise a constructive trust of Jersey immovable property and it seems likely that the judgment will be given substantial weight by the Jersey Court when the issue comes before it. However, in light of the distinct legislative regimes in Jersey and Guernsey, that decision is highly unlikely to impact on the position in Guernsey where it seems clear that, under Guernsey law, a constructive trust can arise over Guernsey immovable property.
The English High Court held in SFO that Jersey law does not recognise a constructive trust of Jersey immovable property and it seems likely that the judgment will be given substantial weight by the Jersey Court when the issue comes before it. However, in light of the distinct legislative regimes in Jersey and Guernsey, that decision is highly unlikely to impact on the position in Guernsey where it seems clear that, under Guernsey law, a constructive trust can arise over Guernsey immovable property.
1.  EWHC 1272 (Comm)
2.  JLR 53 and  (1) JLR 370 respectively
3. "(2) Subject to Article 12. a trust shall be invalid.to the extent that.it purports to apply directly to immovable property situated in Jersey."
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.