Actions for recovery of land: the Court of Appeal on constructive trusts and limitation periods

Where seeking to recover land on the basis of a constructive trust arising from proprietary estoppel, when does that constructive trust arise? Does it arise when a court makes a declaration to its effect, or when the relevant cause of action accrues? And when should the court consider a lesser remedy instead of declaring a trust?

McNab v Graham [2017] VSCA 352

The facts

The applicants on appeal were the executors and trustees of the estate of Colin Wilbur Turner, and the defendants in a County Court proceeding. Mr Turner died in November 1997. Pursuant to his Will executed in May 1994, he granted a life interest in property he owned to the Grahams, the respondents. The respondents claimed this was contrary to representations made by Mr Turner while living that on his death he would leave the property to the Grahams; they were expecting title to the property.

In September 2015, the Grahams commenced proceedings in the County Court seeking a declaration that the executors held the property on trust for them. Relevant to that proceeding, s 8 of the Limitation of Actions Act 1958 (Vic) (Act) provides that no action to recover land can be brought after the expiration of 15 years from the time the cause of action accrued. Section 22 of the Act provides that no action may be brought in respect of any claim to the personal estate, or any share thereof, of a deceased person after the expiration of 15 years from the date when the right giving rise to that claim accrued.  As an exception, s 21(1)(b) provides that no limitation period under the Act applies to an action by a beneficiary under a trust for the recovery of trust property from the trustee.

Given the Grahams’ situation, unless the County Court proceeding were considered an action for recovery of trust property for the purposes of s 21(1)(b) then either of the 15-year limitation periods would apply to bar their County Court proceeding.

At trial, the County Court judge held that no period of limitation applied to the Grahams’ proceeding, by reason of s 21(1)(b) of the Act. Being satisfied that the requirements for proprietary estoppel had been made out, the judge declared that the land was held on constructive trust for the Grahams and ordered that steps be taken to effect its transfer. The executors sought leave to appeal that decision to the Court of Appeal.

The decision on appeal

The Court of Appeal granted leave to appeal but dismissed the appeal. In doing so, aside from issues about whether or not the primary judge made inconsistent findings (the Court found that the judge had not), the Court responded to the two key issues on appeal. Those were:

1. Whether the exception in s 21(1)(b) for the recovery of trust property applies to a proceeding where that claim seeks a constructive trust arising from proprietary estoppel.
2. Whether the primary judge, before declaring a constructive trust, was obliged to consider whether a lesser remedy would have sufficed for the Grahams.

Tate JA, with Santamaria JA and Keogh AJA agreeing, gave the Court’s reasons on appeal.

Was the action exempt from any statutory limitation period?

Addressing the limitation period issue and, necessarily, the question of the timing of the creation of the constructive trust, Tate JA held that at least in circumstances of proprietary estoppel a constructive trust arises when the cause of action accrues, that is, when the facts which give rise to it occur, rather than when a court declares the trust. Her Honour stated, referring to the decision of Ward J in Varma v Varma [2010] NSWSC 786; (2010) 6 ASTLR 152, 259 [507]:

In my view, a constructive trust based upon the principles of proprietary estoppel arises independently of any declaration of a court; it is ‘treated as coming into existence at the time of the conduct which gives rise to the trust’. Applying that principle to the circumstances of this case, the relevant property was impressed with a constructive trust from the time when there was reliance upon the promise which rendered it unconscionable for the owner of the land to resile from that promise.

In the Grahams’ case, this meant that the constructive trust arose before the County Court proceeding commenced. That being the case, the County Court proceeding was a proceeding for the recovery of trust property to which no period of limitation applies pursuant to s 21(1)(b) of the Act. Tate JA noted that for the purposes of s 21(1)(b) the terms ‘trust’ and ‘trustee’ are defined in s 3(1) of the Act as having ‘the same meaning respectively as in the Trustee Act 1958’ so as to include implied and constructive trusts. (Section 3(1) of the Trustee Act 1958 (Vic) provides that ‘the expressions “trust” and “trustee” extend to implied and constructive trusts and to cases where the trustee has a beneficial interest in the trust property …’.)

In reaching a view on the timing of the creation of a constructive trust, Tate JA discussed at some length the jurisprudence regarding constructive trusts, including the apparent distinction between the constructive trust in an ‘institutional’ sense (that is, where a constructive trust responds to an interest in land created by virtue of estoppel), and in the ‘remedial’ sense (being where a constructive trust is granted by a court in response to personal, fault-based liability, such as where there is a breach of fiduciary duty). While the Court’s decision in McNab v Graham settles the law in relation to the creation of a constructive trust in the former circumstance, it arguably leaves that question unanswered in the latter. The former was the type that was relevant to the Grahams’ case. Indeed, Tate JA stated (at [102], emphasis added):

There is considerable authority for the proposition that, where detrimental reliance upon a promise gives rise to a constructive trust, in the context of an estoppel, the constructive trust comes into existence before a court makes any order.

Should the primary judge, in formulating a remedy for proprietary estoppel, have considered a lesser remedy than a constructive trust?

Turning to the other main issue on appeal, Tate JA held that the circumstances of the case did not require the County Court judge to investigate whether a lesser form of relief would satisfy the equity raised. This is often the case and needs to be considered: Giumelli v Giumelli (1999) 196 CLR 101.  In the Grahams’ case, the remedy of a constructive trust truly reflected the detriment suffered by the Grahams and the value of the promise made by Mr Turner in his lifetime. Her Honour was of the view that the Grahams, in reliance on Mr Turner’s representation, suffered detriment ‘of a kind and extent that involve[d] life-changing decisions … of a profoundly personal nature … beyond the measure of money’, paraphrasing Nettle JA in Donis v Donis (2007) 19 VR 577, 589 [34]. On the facts, the Grahams had moved into the property in question in 1974 and continued to live there, paying rent (albeit modest) and looking after Mr Turner and his wife in their later years.

In forming a view about the appropriateness of a constructive trust as a remedy for the Grahams, her Honour also considered the impact on third parties when ordering a constructive trust. On the facts, the Freemasons/Epworth Hospital was a remainderman under Mr Turner’s Will and a mere ‘volunteer’. Her Honour held that whatever beneficial interest the Hospital had to Mr Turner’s estate was subject to the constructive trust in favour of the Grahams, that the Hospital was a volunteer to whom equity provided no assistance, and that declaring a constructive trust would not be so harsh on the Hospital as to merit consideration of some other remedy.

Conclusion

For the purposes of determining the application of statutory limitation periods for proprietary actions, the Court of Appeal in McNab v Graham has helped to clarify the law on proprietary estoppel and the associated remedy of a constructive trust. It is clear that, at least in circumstances of proprietary estoppel, a constructive trust arises at the time the cause of action accrues.

The Court’s decision is also authority for the proposition that, in circumstances involving significant detrimental reliance on a property-based promise and where third parties would not be harshly affected, a court in formulating a remedy is not obliged to investigate something less than a constructive trust.