Fiduciaries must account for their handling of trust properties to the trust beneficiaries, and are not allowed to profit from being a fiduciary other than being paid reasonable fees for services rendered.
Equity compels a fiduciary to hold and manage trust property on the terms of the express trust by imposing a trust obligation upon it in favour of the trust beneficiaries.
The typical example of this constructive trust is found as far back as 1726 in the English decision of Keech v. Sandford , 20 E.R. 223, that is authority for the principle that a trustee may not make a profit for himself through his trusteeship. This decision has been adopted many times in Canada.
It is a fundamental duty of a trustee that he not permit his personal interest to conflict with his duty as trustee. This duty extends to any profits which the court may consider to be acquired improperly.
The principle of profiteeship encumbrances any gains made personally by the fiduciary and the law will then impose a constructive trust on the asset on the terms of the express trust, all of which depends on the facts of the particular case.
If the profit remains in the same form in which it was held by the fiduciary, then the beneficiaries can recover it in the same form or trace it into any other form into which it was converted by the trustee. The beneficiaries are entitled to argue that the property in dispute was always theirs and never the trustee/fiduciaries, and if they can identify it among the assets in the trustee’s name, or in mixed funds, they are entitled to recover it.
The nature of the fiduciary relationship arises from the placing of trust and confidence by the claimant in the fiduciary and equity will impose express trust obligations upon the fiduciary who abuses that trust and confidence. Once equity imposes the trust provisions, the fiduciary will become a constructive trustee of the assets.
The rule against profits is a strict one, which is designed to ensure that the fiduciary acts, as equity requires, from the purest motives – the fiduciary must be motivated only by the best interest of his beneficiary.
The Supreme Court of Canada in Soulos v Korkontzilas (1997) 2 SCR 217 held that to establish a constructive trust to be imposed upon a wrongful gain, four conditions must generally be satisfied:
- The defendant must of been under an equitable obligation- an obligation of the type that courts of equity have enforced in relation to the activities, giving rise to the assets in his hands;
- The assets in the hands of the fiduciary must be shown to have resulted from deemed or actual agency activities of the fiduciary in breach of his equitable obligation to the plaintiff/owner;
- The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties;
- There must be no factors which would render imposition of a constructive trust unjust in all of the circumstances of the case- for example, the interests of intervening creditors must be protected.
The imposition of constructive trusts in breach of fiduciary obligations have included cases that vary from the crown acquiring land from first nations people in breach of its fiduciary obligations to them, to commercial cases in which one Corporation owes a fiduciary duty to another; to information where the fiduciary has acquired information that is used to acquire a personal gain.