Legal Blog

Trust

A constructive trust is a remedy that can arise from a successful claim for unjust enrichment. The concept of unjust enrichment has made its way to the Supreme Court of Canada on several occasions, most recently in Moore v. Sweet 2018 SCC 52.

Context

Husband and wife were separating and ultimately divorced. They made an oral deal in early 2000 about one aspect of their financial relationship: wife would pay the premiums of husband’s $250,000 insurance policy and remain designated as the sole beneficiary. Wife was true to her word and paid the annual premiums for the next 13 years (about $7,000 in total) until husband died.

Husband was not true to his word (men, you just can’t trust ’em). Within about 6 months after making his deal with wife, husband began cohabiting with another woman (call her Risa) and continued to do so until husband died. Within 9 months after making his deal with wife, husband, who seemingly had a short memory, executed a change of beneficiary, designating Risa as the irrevocable beneficiary under his insurance policy. Risa testified that husband did so because he did not want her to worry about how she would pay the rent or buy medications. Both very commendable reasons were it not for his deal with wife.

Husband did not advise wife of the change in beneficiary: not when the deed was done, nor when the parties entered into a formal separation agreement in 2002, nor when the couple finalised their divorce in 2003.

When husband died, Risa claimed the proceeds as the beneficiary under the policy. Obviously, husband breached his contract with wife, who had a slam-dunk claim against husband’s estate. But, husband’s estate had no assets. Wife’s only chance of recovery lay with the insurance policy.

The application judge held that the proceeds of the policy were impressed with a constructive trust in favour of wife, the Ontario Court of Appeal reversed, and the matter went to the Supreme Court of Canada.

Constructive Trust

A constructive trust is “a vehicle of equity through which one person is required by operation of law – regardless of any intention – to hold certain property for the benefit of another.” It is recognised as a remedy for wrongful acts, such as fraud and breach of duty of loyalty, and for unjust enrichment. In each case, the constructive trust must have an equitable basis.

In Moore, the basis for the constructive trust claim could only be unjust enrichment. The other equitable branch did not apply.

Unjust Enrichment

The doctrine of unjust enrichment applies when a defendant receives a benefit from a plaintiff in circumstances where it would be “against all conscience” for the defendant to retain that benefit. In short, a defendant must be enriched, a plaintiff must have a corresponding deprivation, and there must be no juristic reason for the enrichment.

Corresponding

In Moore, the first battle related to the 2^nd category. The parties agreed that Risa was enriched to the full extent of the insurance proceeds; the question was whether wife suffered a corresponding deprivation. Corresponding deprivation means that something of value, a tangible benefit, had to have been passed from the plaintiff to the defendant. Did the transaction that enriched Risa cause wife’s deprivation such that Risa was enriched at wife’s expense?

The majority (7) first noted that the measure of a plaintiff’s deprivation is not limited to the plaintiff’s out-of-pocket expenditures or to a benefit taken directly from her. The concept of loss captures a benefit that was never in the plaintiff’s possession, but that would have accrued to her had it not been received by the defendant instead. Further, a corresponding deprivation does not require that the plaintiff directly confer the disputed benefit on the defendant.

The majority held that wife was deprived of the right to receive the policy proceeds and that the necessary “correspondence” existed between this deprivation and Risa’s gain. That wife only paid $7,000 in premiums was irrelevant because she paid those premiums in exchange for the right to receive the policy proceeds on death. Accordingly, what she lost was not what she paid in premiums, but instead the policy proceeds in full.

The minority (2) held that there was no corresponding deprivation because a plaintiff cannot claim unjust enrichment, to protect her own contractual expectations, against another innocent third party.

The majority felt that a distinction between expectations based on a contractual obligation and expectations based on a breach of an equitable duty was artificial. Wife’s loss might have been a contractual loss, but was still nothing less than the right to receive the entirety of the insurance proceeds. From that perspective, Risa’s enrichment came at wife’s expense. Risa received the benefit that otherwise would have accrued to wife and thus the gain corresponded to the loss.

The majority noted that the insolvency of husband’s estate simply meant that wife would be unable to recover the value of the loss by bringing an action against the estate for breach of contract, but it did not affect her ability to bring an unjust enrichment claim against Risa. A contractual claim against one defendant does not preclude the plaintiff from advancing her case by asserting a separate cause of action against another.

Juristic Reason

Once a plaintiff has established a loss and corresponding gain, the plaintiff must show that there is no justification in law or equity (a juristic reason) for the defendant’s enrichment at the plaintiff’s expense. This analysis has two stages.

First, the plaintiff must demonstrate that the gain and loss cannot be justified based on any established categories of juristic reasons: a contract, a disposition of law, a donative intent (i.e. a gift), and other valid common law, equitable, or statutory obligations. If any of the categories apply, the plaintiff cannot succeed because the defendant was justified in retaining the disputed benefit. For example, nothing is the matter with a defendant retaining a gift or retaining her rights under a contract.

The minority held that there was a juristic reason; the Insurance Act allows a policy owner to designate a beneficiary irrevocably and this is exactly what husband did for Risa. The majority rejected this argument by considering the Act’s purpose: it merely enables someone to make an irrevocable designation. The Act required the insurer to pay Risa; it did not give Risa a right to keep the proceeds as against wife.

The statutory exclusion’s real purpose is to ensure that a person’s gain arising by virtue of a statute is not reversed by way of the concept of unjust enrichment. For example, a disappointed construction lien claimant who loses its priority over land to the Crown because of the provisions in the Excise Tax Act has no claim for unjust enrichment.

Second, if the plaintiff passes the first hurdle, the defendant, to be successful, must demonstrate that there is some residual reason to deny recovery. In this analysis, the court may have regard to the parties’ reasonable expectations and public policy.

The majority noted that both parties reasonably expected to receive the proceeds from the life insurance policy, wife because of a contract and Risa because of a valid designation as an irrevocable beneficiary. The majority held that the residual considerations favoured wife, given that her contributions towards payment of the premiums actually kept the policy alive. Further, it would be “bad policy” to ignore that husband had effectively tricked wife into paying the premiums to benefit another person of his choosing.

Remedy

If a plaintiff is using unjust enrichment as an equitable basis for a constructive trust, the plaintiff must establish that a monetary award is insufficient and that there is a link between the plaintiff’s contributions and the disputed property. Normally a court orders a monetary payment; in this case, the majority declared a trust over the insurance proceeds, which had already been paid into court.

 

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Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.