ONTARIO – Arbitration – On an application under s. 45(1) of the Arbitration Act, 1991, the Court refused leave to set aside an arbitral award that granted a 50% constructive trust on the basis of good conscience, without a quantified finding of unjust enrichment or any wrongful act. The arbitrator’s imposition of a constructive trust on the basis of good conscience was not an error of law.

ONTARIO – Constructive Trust – Where a trier of fact finds that it is equitable to do so, the imposition of a constructive trust based on good conscience, even where there are no findings of unjust enrichment or wrongful acts, is not precluded. In a shareholder dispute between brothers over the ownership of valuable real estate held by one of the brothers, the arbitrator held that because the real estate was intended by the brothers’ father to be a gift to both sons equally, and because the respective contributions of the brothers were difficult to determine, a constructive trust for 50% of the value on basis of good conscience was equitable. The application judge held that the award was not an error of law and leave to appeal was denied.

Bulut v. Bulut
2025 ONSC 414 (CanLII) (January 20, 2025)
Ontario Superior Court (Jane Dietrich J.)

This was an application under s.45(1) of the Ontario Arbitration Act, 1991, S.O. 1991, c. 17, (“the Act”) for leave to appeal the arbitration award of the Hon. Frank Newbould (“the arbitrator”), which awarded the Respondent Mark Bulut a constructive trust equal to 50% of the shares held by his brother, Steven Bulut, in a corporation that owned a large parcel of commercial real estate in Barrie, Ontario.

Background

Steven and Mark’s father Nick encouraged Steven and Mark to incorporate companies. He also provided initial funding to acquire a 100-acre parcel of farmland in the Township of Innisfil, Ontario. (paras. 1-3) In 2010, the Property was annexed by the City of Barrie. It has since been developed to some extent and is now very valuable, but the value is not mentioned in the decision. (para. 9)

The Bulut family was involved in four other lawsuits with third parties concerning this property. The arbitrator was referred to evidence in some of the other litigation to identify Nick’s intentions as to the division of the property between Steven and Mark. In one of these actions, Nick testified that if Steven sold the property, he would have to give Mark 50% of the sale proceeds. (para. 10) The arbitrator also noted that in all of the other litigation, there was no discussion of Mark’s entitlement other than this statement by Nick. (para.12)

In 2018, when there were discussions about selling the property, Mark participated actively. Steven referred to the property as “our property”. There was no discussion about how the proceeds of an eventual sale would be allocated but it was obvious that both brothers were expecting to benefit from any sale of the property. (para. 13)

The arbitrator made credibility findings against Steven and also found that Steven suffered from medical conditions, which affected the reliability of Steven’s evidence, especially as to Steven’s undocumented allegations that he invested of millions of dollars into the property. (paras. 14-16)

The Arbitrator’s Decision

In his award, the arbitrator outlined the law of unjust enrichment and held that Mark established the grounds for a finding of unjust enrichment, but made finding of quantum or percentage. The arbitrator held that Steven had overstated his role in the development of the property and downplayed his own health issues. The arbitrator also found that Mark’s contribution was causally connected to the property. (para. 33)

However, the arbitrator noted that if he had to guess or make a hunch about Mark’s contribution it would be less than 50%. The arbitrator concluded that the important fact in the case was that the property was a gift to Steven’s corporation “with a string attached to it”, namely, that Mark was to benefit from the property as much as Steven. As a result of this finding, the arbitrator held that “as a matter of good conscience, Mark is entitled to a constructive trust of a 50% interest in the property.” (para. 34)

Issues on the Application

The application judge held that under s. 45(1)(a)-(b) of the Act, the test for leave to appeal required evidence that: a) the matter was of importance to the parties, which was admitted; b) the arbitrator made “an error of law that will significantly affect the rights of the parties”. (paras. 19-21)

Dietrich J. referred to Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 53 for the proposition that “extricable questions of law include legal errors involving the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor.”

The Court also referred to Housen v. Nikolaisen, 2002 SCC 33 at para 36 “where the legal principle is not readily extricable, then the matter is one of ‘mixed law and fact’ and is subject to a more stringent standard. The general rule…is that, where the issue on appeal involves the trial judge’s interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.” Dietrich J. noted that “a question about whether the facts satisfy the legal test is one of mixed fact and law”, as stated in St-Jean v. Mercier, 2002 SCC 15 at para 48. (paras. 22-23)

The Application Judge’s Decision

The application judge relied on the decision of the SCC in Soulos v Korkontzilas, 1997 CanLII 346 at para. 43, where McLachlin J. (as she then was), recast the justification for the remedial constructive trust as being that of “good conscience,” concluding that, “in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation”.

The application judge further referred to McLachlin J. to assist in the definition of “good conscience” as a “common concept unifying the various instances in which a constructive trust may be found” (para 35). Although she acknowledged that “good conscience” has “the disadvantage of being very general.” (para. 29)

Dietrich J. referred to Professional Institute of the Public Service of Canada v. Canada (Attorney General), 2012 SCC 71 at para. 144, where Rothstein J. held that a constructive trust was only available on two grounds, namely wrongful act or unjust enrichment, while noting that in Moore v. Sweet, 2018 SCC 52 at para. 32, where the Court accepted that the constructive trust “is understood primarily as a remedy, which may be imposed at a court’s discretion were good conscience so requires” and at para. 95, where the Court refused to answer the “open question” of whether Soulos “should be interpreted as precluding the availability of a remedial constructive trust beyond cases involving unjust enrichment or wrongful acts like breach of fiduciary duty”. (para. 29)

As a result, the application judge held that it was not an error of law for the arbitrator to base the finding of a constructive trust on good conscience alone. Alternatively, the application judge held that the arbitrator also made a finding of unjust enrichment, and therefore, there was no error of law. (paras. 31-32, 35)

Other Issues

The application judge also refused grant leave to appeal from the arbitrator’s award in respect of the limitation period issue that the arbitrator had dismissed, on the basis that no error of law was found. (paras. 38-44).

Steven also claimed that issue estoppel arising from previous litigation involving this property barred Mark’s claim, even though that matter had not been raised before the arbitrator. The application judge noted that the arbitrator found that in none of the prior litigation was there between Steven and Mark as to their respective rights in the property. Therefore, issue estoppel could not apply to prevent Mark’s claim. (paras. 45-48)

The application for leave to appeal was dismissed.