Scott and Associates Engineering Ltd v Finavera Renewables Inc: An Illustration of Constructive Trusts and Unjust Enrichment

In Scott & Associates Engineering Ltd v Finavera Renewables Inc, 2015 ABCA 51, the Alberta Court of Appeal (“ABCA”) applied the doctrine of constructive trusts to an unjust enrichment that arose through a commercial dispute. The decision upheld the lower court’s determination that the appellant, Scott & Associates Engineering Ltd., could not receive such a remedy. In doing so, the ABCA refused to accept a liberal interpretation of the doctrine of constructive trusts.

Facts

Scott & Associates Engineering Ltd. (“Scott”) was the sole bidder on a business opportunity to purchase two properties, yet the company did not possess adequate capital to complete the transaction. Eventually, Scott and Fianvera Renewables Inc. (“Finavera”) agreed to work in good faith towards forming a partnership to develop the assets once Finavera acquired them.

Finavera acquired the assets. The partnership never materialized, but Finavera did offer to pay Scott $600,000 for introducing Finavera to the opportunity. Scott accepted that offer. After a dispute between the parties, Finavera refused to pay Scott.

Finavera eventually sold the assets. In this motion, Scott sought to establish a constructive trust on %10 of the net profits generated by the assets.

Trial Decision

The trial judge found that Finavera had been unjustly enriched by the efforts of Scott.

However, on the question of remedy, the lower court decided not to impose a constructive trust. While Scott was entitled to a judgment for the $600,000, imposing a constructive trust would be improper since Scott “had not contributed to the value of the properties in respect of which the trust was sought to be imposed” (para 15).

A monetary award, however, was of little use to Scott since Finavera was on the brink of insolvency. Scott appealed to the ABCA.

The Appeal

Scott made several arguments that, in sum, called for a wide application of the constructive trust doctrine:

1. That the “trial judge erred in law by failing to consider the sufficiency and enforceability of a monetary judgment and the moral quality of Finavera’s conduct” (para 18); and
2. That “the trial judge erred in holding that a right to property is a perquisite to a declaration of a constructive trust” (ibid).

The ABCA rejected these propositions.

The Presence of a Proprietary Interest

The ABCA recognized that a constructive trust is an available remedy, in the context of an unjust enrichment, “when monetary damages are inadequate and when there is a direct link between the contribution which founds the action and the property in which the constructive trust is claimed ….” (para 23).

Finavera’s insolvency clearly made monetary damages problematic. But this fact did not change the nature of Scott’s relationship to the properties. Scott was little more than a finder of a business opportunity. A constructive trust could not be predicated on such a relationship, on these facts, because “finding and investigating the properties and the opportunities they presented did not improve or add value to them” (ibid).

Scott was owed an award, but the absence of any sort of proprietary interest frustrated the constructive trust argument.

Moral Quality of Conduct

Under this component of the appeal, Scott attempted to assert that “moral culpability is a factor in determining whether a constructive trust is available” (para 27). Importantly, Scott’s claim was predicated on the unjust enrichment Finavera received at the expense of Scott. It was not predicated on any breach of a duty, a confidence, or a contract.

The ABCA felt that on these facts, “it is doubtful that moral culpability … becomes a factor” when assessing the availability of a constructive trust (para 28).

Relevance of Finavera’s Insolvency

There was a common thread that ran through Scott’s argument: a constructive trust was warranted because Finavera was insolvent and would be unable to pay the judgment damages. This fact, however, worked against Scott’s claim.

The ABCA felt that Scott was now claiming a proprietary interest, after agreeing to a monetary payment earlier, because “Scott [was] concerned that a constructive trust might be the only remedial response that would ensure [an enforceable] judgment” (para 35). Scott was, in essence, seeking priority over Finavera’s other creditors. The ABCA stated that effectively awarding Scott priority was undesirable because, in these circumstances, such a result would “impact well-established solvency schemes” (ibid).

Conclusion

In essence, the ABCA made three general holdings regarding the use of constructive trusts to remedy an unjust enrichment:

1. The Court of Appeal reiterated that such a claim requires a certain degree of connection between the claimant and the asset which is to be the subject of the trust;
2. It is doubtful that moral culpability, in a strict instance of unjust enrichment, is a relevant factor when establishing the need for the remedy; and
3. A defendant’s inability to pay, due to an insolvency, will not necessarily work in the favor of the claimant.

While these answers make sense, Scott’s arguments are also logical. This decision considers the remedy that can be used to ameliorate an unjust enrichment. The body of law known as unjust enrichment is predicated on the general moral premise that it is unfair to allow one party to keep a benefit at the expense of another (Peter D Maddaugh and John D McCamus, The Law of Restitution: 2014 Student Edition, (Toronto: Thompson Reuters, 2014) at 3-1 – 3-3).

In this sense, one can see why Scott put forth those arguments. Without a constructive trust, Finavera would essentially be able to use Scott’s money to pay its creditors. This result is contrary to the animating principle of unjust enrichment since, practically speaking, it allows Finavera to benefit from assets it would not enjoy without Scott’s expense. Scott appealed to the fairness of the situation to try and circumvent the technical requirements of the doctrine. In other words, Scott appealed to justice instead of the form of the law.

Unfortunately for Scott, form frustrated its claim. A constructive trust will only be awarded in lieu of a monetary award for an unjust enrichment in special circumstances. And those circumstances must amount to more than the other party’s insolvency. While insolvency makes such a remedy practically necessary, it is not legally sufficient. To hold otherwise, as the ABCA implied, would create considerable confusion in Canada’s law.