What happens when members of a successful family business fall out and can no longer work together?
It is often the case in family businesses that one person will own the assets. But other family members who have worked in the business, or given up alternative careers for example, may have valid claims to a share of those assets. The answer to this problem often lies in the imposition of a ‘constructive trust’.
A constructive trust is a trust imposed by law. Unlike an express trust, there is no settlor and no requirement that there be trust instrument in writing.
The circumstances where such a trust may be appropriate are not limited to family businesses. Business partners in commercial undertakings can also seek relief through the imposition of constructive trusts when things go wrong.1
There are two types of constructive trust that may be relevant – ‘joint endeavour’ and ‘common intention’.
Joint endeavour constructive trusts
A ‘joint endeavour’ constructive trust operates to protect a party who has contributed to a joint relationship or endeavour, which breaks down, and the other party tries to assert ownership over all the assets. Equity intervenes where it would be unconscionable for the other party to retain the assets.2
To establish a joint endeavour constructive trust it is necessary to show:3
- First, there is a joint relationship or endeavour in which expenditure is shared for the common benefit in the course of and for the purposes of which an asset is acquired. The scope of the joint venture may change from time to time.
- Secondly, the substratum of that joint relationship or endeavour must have been removed or the joint endeavour prematurely terminated “without attributable blame”. The courts have interpreted this to mean that the situation between members of the joint endeavour is “intolerable”.4
- Thirdly, there must be the requisite element of unconscionability. It is not enough to show that the situation is vaguely unfair or unjust. For example, it might be unconscionable for the party who ends up, at the end of the relationship, to keep the assets if it knew that those assets were being built up as part of the joint endeavour.
The court may consider the position of third parties and how they may be affected in determining whether or not it is appropriate to impose such a trust.5 The court may, for example, decide to impose an equitable remedy, such as monetary compensation, instead of a constructive trust.6
Common intention constructive trusts
Although there is some debate as to whether ‘common intention’ constructive trusts are really just a species of estoppel, recent cases continue to treat them as a separate and independent cause of action. But a pleading of estoppel might be appropriate as an alternative.7
The elements which must be established are as follows:
- First, there is an actual or inferred common intention of the parties as to their beneficial interest in property. The intention may arise even after the property is acquired.
- Secondly, there has been detrimental reliance on that common intention by the claimant. This can be any material disadvantage.
- Thirdly, it would be an equitable fraud on the claimant to deny his or her interest in the property. There is no separate requirement of unconscionability (unlike joint endeavour constructive trusts); rather the court undertakes an assessment of whether, as part of a broad inquiry, a departure from the common intention is contrary to equitable principle.
Equity intervenes in such cases to prevent the legal owner of property from denying the plaintiff’s interest in it.
A common intention constructive trust is said to be ‘institutional’ in nature. It comes into being at the point in time when the relevant facts which establish the trust happen and creates substantive rights; it is not merely a remedy.8
Some practical advice for practitioners
Often family businesses or commercial enterprises raising these issues will be part of a complex structure involving trusts and companies. In such circumstances, it will be necessary to consider issues such as:
- Have the business partners provided for what is to occur on a break-up? This must be considered in the context of how the business now operates as opposed to what may have been the plan many years ago.9 If they have expressly provided for the occurrence, there may be no room for a constructive trust.
- Who in fact holds title to the property? The common intention must relate to property to which the defendant holds title, and not a third party.10
- What effect would a constructive trust have on third parties? Is there an alternative remedy that may be more appropriate?
- When did the issues giving rise to the cause of action occur? It will be important to bear in mind possible limitation periods and the equitable doctrine of laches.11
Gathering the facts will often be a difficult and time-consuming process as promises, intentions and/or the alleged detriment may have occurred over many years.
Clients may wish to explore options for lodging a caveat.12 Further, it may be necessary to seek urgent relief to protect a beneficiary’s interest or to obtain evidence from certain individuals.
Remember that parties to these disputes will often remain in contact, or may continue working in the business, so advice on taking care in interactions may be prudent.
Constructive trusts offer a powerful tool for plaintiffs who may consider they are disadvantaged by property holders retaining assets after businesses and relationships fall apart.
Alexander McKinnon is a Brisbane barrister and member of 16 Quay Central Chambers. He has a commercial practice and has recently acted in proceedings involving constructive trusts.
Footnotes
1 Muschinski v Dodds (1985) 160 CLR 583 at 616-17; Nathan v Williams [2020] QCA 138 at [25].
2 Re Wollumbin Horizons Pty Ltd (in liq) (No.3); Staatz v Berry (2019) 138 ACSR 231 at [149] (Derrington J).
3 Muschinski v Dodds (1985) 160 CLR 583; Baumgartner v Baumgartner (1987) 164 CLR 137.
4 See Dean v Aylward [2017] NSWSC 972 at [48].
5 Muschinski v Dodds (1985) 160 CLR 583 at 615 and 623 (Deane J).
6 For example, Giumelli v Giumelli (1999) 196 CLR 101.
7 Remember that UCPR r150(1)(e) requires estoppel to be specifically pleaded.
8 Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc. [2018] VSC 413 at [405].
9 Nathan v Williams [2020] QCA 138; West v Mead [2003] NSWSC 161 at [63].
10 Ford and Lee, Law of Trusts, Thomson Reuters 2012, at [22.4280].
11 For example, Limitation of Actions Act 1974 (Qld), ss27 and 43; cf. Port Ballidu Pty Ltd v Frews Lawyers [2017] QSC 019.
12 As to constructive trusts giving rise to a caveatable interest, see Surfers Paradise Investments Pty Ltd v United Investments Pty Ltd [1997] QSC 179.
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