The debate over a possible expansion of the constructive trust remedy is alive and well after an Ontario Superior Court judge declined to overturn an arbitrator’s decision in a property dispute between two brothers.
Ever since the Supreme Court of Canada’s landmark 1997 decision in Soulos v. Korkontzilas, legal experts have been divided on the proper function of the constructive trust and whether its use should be confined to situations involving either wrongful acts or unjust enrichment.
When the subject returned to the nation’s top court two decades later in the case of Moore v. Sweet, the majority disposed of the appeal on other grounds and steered clear of the “open questions” regarding constructive trusts, concluding that these were “best left for another day.”
In the years since, constructive trust caselaw has been sparse, but Justice Jane Dietrich has made a welcome addition to the jurisprudence with her recent decision in Bulut v. Bulut.
The facts
In the 1990s, Steven and Mark — the two brothers in the case — were encouraged to incorporate their own companies by their father, who also provided each with initial funding. Steven’s company purchased the 100-acre property at the heart of the dispute when it was still farmland, but its value grew significantly after it was developed and annexed by the city of Barrie.
Over the years, relations between the brothers soured, and by 2024, Steven had removed Mark as a director of his company, and the pair were locked in arbitration over the ownership of the real estate in it.
Following an eight-day hearing, the arbitrator wrote that Mark was entitled “in equity as a matter of good conscience” to a constructive trust of 50 per cent interest in the property, finding that Steven had overstated his role in the land’s development. The arbitrator also placed heavy emphasis on the father’s testimony during related court proceedings, in which he said that one-half of everything he had provided to Steven belonged to Mark.
Steven then sought leave from the Superior Court to appeal the arbitral award.
The results
At the Superior Court, Steven argued that the arbitrator had erred by awarding his brother a constructive trust on the basis of good conscience alone, claiming that a proper interpretation of Soulos limits the application of a constructive trust to two situations: where there is a wrongful act or unjust enrichment.
The arbitrator found neither, and so was precluded from imposing a constructive trust, Steven reasoned.
However, Justice Dietrich was not convinced by Steven’s characterization of the issue, referring to the “open questions” around constructive trusts mentioned by the Supreme Court in its later ruling in Moore v. Sweet.
“I am not persuaded that if the Arbitrator had in fact based his finding of a constructive trust on good conscience alone, that such would amount to an error of law,” she wrote.
In any case, the judge added that she was satisfied the arbitrator had made a finding of unjust enrichment that was sufficient to impose a constructive trust, even if he did not state it explicitly.
“When the Award is read in its entirety, the Arbitrator was also satisfied that the elements of unjust enrichment had been made out,” Justice Dietrich’s decision reads.
Before confirming her decision to dismiss Steven’s application for leave to appeal, the judge also rejected his argument that Mark’s claim was statute-barred. The arbitrator had made no error in law by setting the date of discovery in August 2022, when Steven threatened legal action and began the process of ending Mark’s involvement in his company, Justice Dietrich concluded.
The lessons
We don’t see much case law on important legal concepts such as constructive trusts, so it’s always valuable to get a judge’s (or an arbitrator’s) view on the state of the law.
The Supreme Court may revisit constructive trusts to resolve the outstanding question of whether the remedy is precluded beyond cases of unjust enrichment or wrongful acts. But in the meantime, the takeaway for litigants is that the constructive trusts may be imposed based on good conscience alone.
The fact that so many commercial matters end up being settled behind closed doors in arbitration helps explain the relative lack of public decisions on issues like this one. But it’s not just the privacy of the process that attracts parties to alternative dispute resolution, and this case will also be encouraging for reinforcing the finality of arbitral decisions.