BC Court of Appeal Clarifies Law concerning Constructive Trust as a Remedy


With the evolving complexity of fraudulent schemes, justice requires flexible remedies for victims to address novel situations. The recent British Columbia Court of Appeal decision in BNSF Railway Co. v. Teck Metals Ltd., 2016 BCCA 350, although not a fraud case, provides guidance for victims and legal practitioners as to one of the tools often used to recover unlawfully taken property – the constructive trust.

A constructive trust comes into being when a person is required by law to hold specific property for the benefit of another person, forcing the person holding the property to become a constructive trustee for the benefit of the other person (the beneficiary).[1] The beneficiary of the constructive trust therefore has a proprietary right to the specific property that is the subject of the constructive trust.

This can be critical in situations where, when a fraudulent scheme is unraveled, the wrongdoer is entitled to certain protections from creditors, such as under bankruptcy legislation.  Where the wrongdoer, or fraudster, is a constructive trustee, the victim of the fraud may, despite the creditor protection regime, be entitled to a higher priority than if the victim had just a monetary claim.

In the BNSF case, the plaintiff railway (“BNSF”) claimed it had mistakenly paid about $18 million to BC Rail Ltd. (“BCR”) and Canadian National Railway Company (“CN”) for rail transport fees. BNSF’s pleading asserted, amongst other things, that BCR and CN held the mistakenly paid funds as constructive trustees for BNSF. In the court below, BNSF’s constructive trust claim was struck out on a preliminary basis as being “bound to fail”.

The Court of Appeal reversed the decision. In doing so, it confirmed that constructive trusts (whether remedial or substantive) may arise in Canada in circumstances that extend beyond the two types of situations where they are typically found to exist: (1) where there has been a fiduciary breach and (2) in cases of unjust enrichment.  These circumstances were described as existing where “good conscience” requires the finding of a constructive trust.

The mistaken payments alleged to have been made by BNSF, if proven, were determined to fall within the realm of circumstances where it would be against good conscience for the recipients to retain the mistakenly paid funds. Therefore, a substantive constructive trust was potentially available to BNSF and it could not be said that the claim was bound to fail.

The Court of Appeal also made it clear that courts have the discretion to determine when a constructive trust of any sort arises, be it at the time of the alleged misconduct or mistaken payment or at the time when relief is ordered against a defendant. The Court also found that, with respect to any kind of constructive trust, a plaintiff must identify the property which the plaintiff contributed to and must demonstrate that a monetary award would be insufficient.

[1] Donovan W.M. Waters, Waters’ Law of Trusts in Canada, (Carswell: Toronto, 2012) 4th ed. at page 478.