Will the real constructive trustee please stand up?

It is important to distinguish between constructive trustees who are really trustees (who received property on the express understanding that they would hold it as trustees) and people who are made liable to account as if they were constructive trustees. This distinction is important because, for example, there is no limitation period in England for recovery of trust property from real constructive trustees but the Limitation Act does apply to actions against those liable to account as if they were constructive trustees.

In Paragon Finance plc v D B Thakerar & Co ([1999] 1 All ER 400) Paragon provided mortgage finance to a number of borrowers in connection with the purchase of residential accommodation. The homes were being acquired by sub-sales and the prices paid on the sub-sales were substantially higher than those being paid by the intermediate vendor. This allowed the ultimate purchasers to borrow more than the properties were worth. The borrowers defaulted. Paragon brought possession proceedings and also actions against the solicitors who had acted for them alleging breach of contract, negligence and breach of fiduciary duty. After the limitation period had expired they sought to alter their pleadings to add claims of fraud, conspiracy to defraud, fraudulent breach of trust and intentional breach of fiduciary duty.

The Court of Appeal decided that these were new claims and so it became important to decide whether the Limitation Act applied to them. It does not apply to claims for breach of trust (in the absence of laches and acquiesence). The question was whether the solicitors could be treated as trustees for the purposes of the Limitation Act. The Court of Appeal (Millett L.J. giving the principal and very well-known judgment) held that they were not true constructive trustees since the claim against them was not based on their breach of an understanding (formed before they received the money) that they would hold it on trust for Paragon. Rather, the claims sought to be added would make them account as if they were constructive trustees. Thus, the limitation period did apply and the new claims would have to have been brought within the limitation period.


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