TY - JOUR
AU - Bayliss, Sarah
AB - Abstract This article examines whether the Hague Trusts Convention has been successful in unifying conflict of laws principles relating to trusts internationally and striking the correct balance between the rights of beneficiaries and third parties. Introduction 1. This article examines the relationship between conflict of laws principles and the proper law of trusts in light of two recent cases, Akers v Samba English Court of Appeal [2014] EWCA Civ 1516; [2014] EWHC 540 (Ch) English High Court; ( Akers ) and Investec Trust (Guernsey) Ltd v Glenalla Properties Ltd Guernsey Court of Appeal 27/06/14 and (38/2013) Guernsey Royal Court ( Glenalla ) and attempts to answer two questions: 1.1 Whether the Hague Convention on the Law Applicable to Trusts and their Recognition 1985 (the Hague Trusts Convention ) has unified the conflict principles relating to trusts internationally sufficiently to enable settlors, trustees, and beneficiaries reliably to order their affairs on the basis of a reasonably cohesive set of legal principles (the Consistency Question ); and 1.2 Whether the provisions and application of the Hague Trusts Convention, where it has been adopted, strike the correct balance between proprietary and other rights arising in relation to trusts, on the one hand, and other rights, for example, those of third parties, on the other (the Balance of Interests Question ). The Consistency Question 2. Predictability as to what will be the proper law of the trust and the identity of the court with jurisdiction to hear claims relating to it will be a matter of high importance to those involved with the trust. 3. That highly desirable predictability is impossible without: 3.1 a uniform set of rules by which to determine issues of proper law and jurisdiction; and 3.2 a principled and consistent application of those rules across jurisdictions that recognise trusts. 4. The aim of the Hague Trusts Convention is to bring about some degree at least of uniformity and consistency in respect of the treatment of trusts in private international law. Jonathan Harris in his article ‘The Trust in Private International Law’ 1 describes the challenge: Amongst all the areas of private international law, that which relates to trusts is unique. Partly, this is because of the fundamental importance of the trust in many legal systems, principally those of the common law, and its total absence from the domestic law of most civil law States. Such a schism makes conflict of laws problems inevitable. Of course, many of the most acute problems are faced by non-trust States, who may come into contact with the trust in an international context and be asked to recognise, and give some meaningful effect to, it in their jurisdictions. Trust states tend to be very keen to secure the recognition of local trusts abroad. Increasingly, the international trusts world is a market place, where trust jurisdictions, particularly those offshore, compete to develop rules which are highly pragmatic and protective of the settlor’s autonomy. However, the effectiveness of such rules would be very much compromised if their trusts were to be without effect in non-trust States, especially as it is not easy to predict whether trust assets might subsequently become located in a non-trust State. 5. The difficult task faced by those drafting and promulgating the Hague Trusts Convention was to draft provisions acceptable to both states that have trusts as part of their national law (‘trust states’) and states that do not (‘non-trust states’). There was naturally a tension between what was acceptable to trust states on the one hand and civilian non-trust states on the other. David Hayton 2 in his article, ‘International Recognition of Trusts’ 3 noted: … the Convention has much scope to become a very significant force for developing the use of trusts or trust-like concepts in civilian jurisdictions in Europe. However, to attain ratification of the Convention by such jurisdictions, most of those involved in developing the Convention emphasised the superficial narrow scope of the Convention. 6. Has the Hague Trusts Convention resulted in a consistent and principled application of a uniform set of rules relating to trusts in private international law? Consistent and principled application of a uniform set of rules? 7. Jonathan Harris has expressed positive views about what the Hague Trusts Convention has achieved 4 : The Hague Trusts Convention was a breakthrough initiative, unlike any attempted before or since at the Hague. It tackled both choice of law rules and the recognition of an institution with which many, if not most, of its Member States were unfamiliar. In England, where the ambit of the Convention has been extended, it is the dominant instrument concerning choice of law for trusts and is applicable to most express trusts and also the majority of constructive, resulting, and statutory trusts. The choice of law rules are highly pragmatic; they emphasise the ‘obligation characteristic’ of the trust, so that they have more in common with the choice of law rules of contract law than those for ‘ordinary’ property transfers. The recognition rules of the Convention facilitate recognition in both trust and non-trust States of trusts otherwise incompatible with that State’s domestic law. 8. It is certainly the case that, having been adopted in a number of jurisdictions, including some that do not have the trust concept as part of their national law but are prepared to recognise trusts internationally, the Hague Convention gives a measure of consistency to conflict rules as they relate to trusts. 9. There is also some measure of support for the proposition that the provisions of Article 7 of the Hague Trusts Convention setting out the test to ascertain the proper law of a trust where there has been no express or implied choice of law is similar to the English common law test. Article 7 provides: Where no applicable law has been chosen, a trust shall be governed by the law with which it is most closely connected; In ascertaining the law with which a trust is most closely connected reference shall be made in particular to – the place of administration of the trust designated by the settlor; the situs of the assets of the trust; the place or residence or business of the trust; the objects of the trust and the places where they are to be fulfilled. 10. The English common law test is set out in Chellaram v Chellaram (No 1) [1985] Ch 409 at 425. The proper law of a trust will be: in the absence of an express or implied selection of the proper law by the settlor, the system of law with which the trust has its closest and most real connection. 11. In Chellaram v Chellaram (No 2) [2002] EWHC 632 at 166, Mr Justice Lawrence Collins, as he was then: ‘doubt[ed] whether there was any significant difference between Article 7 and the likely approach at common law’. 12. The fact that a number of jurisdictions, particularly offshore, have legal systems that are based on English common law means that some uniformity may be achieved between jurisdictions to the extent that common law trust states and Convention states apply similar tests to ascertain the proper law of a trust. 13. However, there is no authority for the proposition that the Article 7 and common law tests are identical; Mr Justice Lawrence Collins merely ‘doubted’ that there was a ‘significant difference’ and that remark was obiter. 14. One potentially significant difference between the two tests is that the specific provision in Article 7 of matters that are to be considered ‘in particular’ in ascertaining the proper law results in emphasising certain factors over others in a way that the common law test does not. Thus there is a principled basis for arguing that the tests are different and a different result may be achieved depending which test is applied. If that is right, the two tests lead more to inconsistency, rather than uniformity, in conflict rules relating to trusts. 15. The state of affairs set out above far from represents a consistent and principled application internationally of a uniform set of rules: that remains more a matter of aspiration than reality. There are (at least) four reasons why that is (perhaps inevitably) so: 15.1 Accession to the Hague Trusts Convention is not intended to, and does not, result in a state lacking the trust concept (‘non-trust states’) introducing the concept into its domestic law. 15.2 The application of the Hague Trusts Convention is patchy both geographically (in the sense of what states have, or have not, adopted it) and substantively inconsistent in that, where it has been adopted, it has not been enacted in consistent terms. 15.3 Several of the Convention’s articles restrict the international recognition of trusts rather than promote it. 15.4 Issues relating to the ‘characterisation’ of disputes involving trusts may result in the proper law of the trust not applying to the determination of the dispute in which the settlor, trustee, or beneficiary is involved. There is an important distinction between ‘trust disputes’ where the law governing the dispute will be the proper law of the trust and disputes which involve trusts but are properly characterised as falling into another legal category, such as the law relating to the transfer of property, to which different conflict rules might apply such as the law of the jurisdiction in which the property is situated. A tendency to characterise disputes under legal categories other than trust disputes such that the proper law of the trust will not be the law governing the dispute, as might be expected from non-trust states, is likely to have the effect of according recognition and effect to less, rather than more, trusts. In addition, different approaches to the characterisation issue in different states necessarily leads to inconsistency in the application of conflicts rules. Hague Trusts Convention does not introduce trusts into the law of non-trust states 16. David Hayton 5 describes the purpose of the Hague Trusts Convention as follows: The Convention does not introduce the Anglo-American trust concept into the domestic law of countries lacking the concept (‘non-trust countries’). There is no question of such countries having to introduce new property concepts, like equitable interests, into their domestic law, and so having to recognise a beneficiary under a trust as having an equitable proprietary right in property enabling him to claim such property or its traceable equivalent from all but a bona fide purchaser of the property … The Convention does make non-trust countries, like trust countries, recognise trusts of property as a matter of private international law (subject to significant safeguards). It sets out common private international law rules on the law applicable to trusts and then goes on pragmatically to emphasise the consequences of recognising a trust created under the applicable law. In implementing the Convention this should lead countries to provide expressly, as did the Netherlands, for the trustee of a foreign trust to own the trust fund as a separate fund immune from the claims of his creditors, spouse and heirs which relate only to his private patrimony. Of course, the Convention, being a private international law convention, does not affect the domestic trust law of trust countries. Thus, the extent to which the applicable law can be expressly or impliedly changed and the distinction between matters of validity and matters of administration may vary according to the appropriate applicable law because one country’s domestic trust rules may vary from such rules of another country. 17. The Hague Trusts Convention is not intended to provide for the introduction of the trust concept into the domestic law of non-trust states, let alone to bring any uniformity to those laws—that would have been impossible. However, David Hayton and Jonathan Harris have both expressed the hope that the Convention may encourage non-trust states to adopt the trust concept in national law in time 6 but, for the time being, there can only ever be partial uniformity of rules relating to trusts in private international law and consistency in their application while the world is divided into trust and non-trust states and the domestic laws of the trust states are inconsistent as between themselves. Patchy and inconsistent application 18. Much of the world has not adopted the Hague Trusts Convention—there are 15 signatories. 7 19. Of those signatories, the USA, France, and Cyprus have not enacted the Convention in national law at all. 20. In addition, Article 29 of the Hague Trusts Convention provides that where a Convention state has two or more territorial units in which different systems of law are applicable, it may declare that the Convention shall extend to all or only to some of them. By way of example, when Canada first acceded to the Convention, it extended only to Alberta, British Columbia, New Brunswick, Newfoundland, and Prince Edward Island. Canada later extended the reach of the Convention to Saskatchewan and Nova Scotia. 21. Further, the 11 signatories that have enacted the convention in national law 8 have not all legislated in the same terms. This limits the degree of uniformity achieved by the Convention. There are two Articles in particular that are the subject of patchy application across states that have adopted the Convention. Article 20 21.1 By Article 3: ‘The Convention applies only to trusts created voluntarily and evidenced in writing’. Article 20 provides: Any Contracting State may, at any time, declare that the provisions of the Convention will be extended to trusts declared by judicial decisions. Some Contracting States, including the UK, 9 have extended the provisions to cover trusts arising by judicial decision, others have not. 21.2 The UK and territories to which the UK legislation is extended have extended the provisions of the Hague Trusts Convention even further by providing in sub-section 1(2) of the Recognition of Trusts Act 1987 that the Convention is to have effect: not only in relation to the trusts described in Articles 2 and 3 of the Convention but also in relation to any other trusts of property arising under the law of any part of the United Kingdom or by virtue of a judicial decision whether in the United Kingdom or elsewhere (Emphasis supplied) . 21.3 This means that in the UK the provisions of the Hague Trusts Convention extend both to statutory trusts (for example the statutory trust of client money imposed on financial services professionals by rules made under the Financial Services and Markets Act (2000)) and, in appropriate circumstances, to trusts imposed by foreign judgments. 21.4 As a result of the split between states that have adopted Article 20 and states that have not, constructive, resulting and statutory trusts do not receive consistent recognition. Article 16 21.5 Article 16 provides: The Convention does not prevent the application of those provisions of the law of the forum which must be applied even to international situations, irrespective of rules of conflict of laws. If another State has a sufficiently close connection with a case then, in exceptional circumstances, effect may also be given to rules of that State which have the same character as mentioned in the preceding paragraph… 21.6 Some states, including the UK and territories to which the UK legislation is extended, 10 but not others, have declared that they will not apply the restrictive second paragraph of Article 16. 22. The variable adoption of these Articles further reduces the consistency with which conflict of laws rules are applied to trusts and gives states an opportunity to restrict the effect of the Hague Trusts Convention. 23. Finally, some trust states, most notably the USA and Cayman, have elected to remain outside the ambit of the Hague Trusts Convention altogether. Jonathan Harris 11 has some pertinent thoughts as to the reasoning behind that decision: In the United States and offshore, the feeling in some quarters is that the Convention is nowhere near radical enough; that it is insufficiently protective of the settlor’s autonomy, contains too many derogations and that it does not do enough to protect ‘local’ trusts from the claims of forced heirs. For some, the future for the private international law of trusts is extremely bold and pragmatic and gives full emphasis to the ‘obligation’ characteristic of the trust. In many offshore jurisdictions, English concern about subjecting a settlor’s capacity to the law chosen by him to govern the trust is rejected. That law is used, even if capacity rules are traditionally thought to have a mandatory character, so that they cannot be freely evaded. It is common to provide that a trust governed by the local law will be valid if the settlor had capacity by the local law and that no other law may undermine that capacity. … In this world where the settlor’s autonomy is paramount, a State’s private international law rules have to be ‘competitive’. States such as the Cayman Islands do not want the strait-jacket of the Hague Trusts Convention and have snubbed it. 24. The restrictive nature of the Hague Trusts Convention, a matter to which we return below, has made it unattractive to some trusts states. That does nothing to assist the consistency of international rules relating to the recognition of trusts. Several Convention articles restrict, rather than promote, international recognition of trusts 25. The following articles further narrow the reach of the Hague Trusts Convention. Article 4 25.1 Article 4 provides that: the Convention does not apply to preliminary issues relating to the validity of wills or of other acts by virtue of which assets are transferred to the trustee. 25.2 Any issue relating to the settlor’s capacity to place property into trust or create a trust by the transfer of property is thus outside the Hague Trusts Convention. The constitution of the trust has been described as the ‘rocket launcher’ question with the fully constituted trust ‘the rocket’. This is a significant lacuna in the provision of the Convention which will not come into consideration at all unless the pre-conditions for the formation of a trust are satisfied. Article 13 25.3 Article 13 provides that where significant elements of the trust, such as the situs of assets or habitual residence of the settlor and beneficiaries are more closely connected with a non-trust country, the court has a discretion to refuse to recognise the trust. 25.4 It is a restrictive provision which sits uneasily with UK common law principles and the UK has not adopted it. States that have adopted it have a further means of declining to recognise trusts. Articles 15, 16, and 18 25.5 David Hayton describes Articles 15, 16, and 18 as: dramatically restrict[ing] the scope for the application of the law applicable to the trust. They represent hurdles that the trust must surmount. 12 25.6 Article 15 is designed to ensure the application of the domestic mandatory rules of a state whose law is applicable according to the private international law rules of the forum, irrespective of the law applicable to the trust. It provides that where a court’s conflict rules apply laws that: ‘cannot be derogated from by voluntary act’ those rules are to be applicable whatever the proper law of the trust. 25.7 Article 15 mentions, in particular, succession, divorce, transfer of title to property, and bankruptcy as areas in relation to which a state may have such mandatory rules. 25.8 The Convention upholds that state’s obligation 13 to apply to such matters a different law such as the law of succession, the law of the situs of an asset or the law of the forum even if that undoes the effect of creating a trust. 25.9 As noted above, the first paragraph of Article 16 provides: The Convention does not prevent the application of those provisions of the law of the forum which must be applied even to international situations, irrespective of rules of conflict of laws. 25.10 This provision is mandatory. The Overbeck Official Report on the Hague Trusts Convention at paragraph 150 states: The first paragraph of Article 16 provides that the forum’s laws of immediate application will override the other provisions of the Convention. 25.11 The second paragraph of Article 16 provides: If another State has a sufficiently close connection with a case then, in exceptional circumstances, effect may also be given to rules of that State which have the same character as mentioned in the preceding paragraph … 25.12 The following comments by David Hayton 14 explain why the broad and uncertain scope of this provision has made it unattractive to some states: Article 16’s second paragraph gives the court a discretion, to be exercised only in exceptional circumstances, to apply the ‘international’ mandatory provisions of some country whose law is neither the lex fori nor the applicable law of the trust, so long as this country has ‘a sufficiently close connection with a case’. This will protect a trustee if sued for breach of trust by a beneficiary for not transferring to the beneficiary some asset the beneficiary would be entitled to but for the law of State X preventing the export of such asset. Since a Court of Equity will do nothing in vain and will not require a person to do an act that is illegal where it is to be done, so that sufficient defined protection exists, there seems no need for a common law country to adopt this paragraph of worryingly indefinite ambit. 25.13 While that may be good news for the trustee in question, it is also the case that those states that have adopted the second paragraph of Article 16 have a further means of declining to recognise the provisions of trusts. 25.14 Articles 15 and 16 give a state’s courts extensive means to oust the application of the proper law of the trust. A yet further means to do so, this time on policy grounds, is given by Article 18 which provides that: The provisions of the Convention may be disregarded where their application would be manifestly contrary to public policy. 25.15 David Hayton notes 15 that this is a standard provision in Hague conventions. So it may be but the fact that a state can, ultimately, simply decline to apply the Hague Trusts Convention in a particular matter on policy grounds is manifestly inconsistent achieving predictability in respect of the application of rules relating to the recognition of trusts. 25.16 Against this, David Hayton points out 16 that: Use of ‘manifestly’ indicates that public policy should only be resorted to in extreme cases. It should be rare, indeed, for the lex fori to deny effect to a foreign rule of law, declared applicable pursuant to the forum’s choice of law rules, on the ground that the foreign law is repugnant to some fundamental polity of the forum. 26. It is perhaps unsurprising in the light of broad scope of the restrictive provisions contained in the Hague Trusts Convention that some have found that it: ‘is insufficiently protective of the settlor’s autonomy, contains too many derogations and that it does not do enough to protect ‘local’ trusts from the claims of forced heirs’, as noted by Jonathan Harris above. The problem of ‘characterisation’ 27. This is the distinction between ‘trust disputes’ and disputes which involve trusts but are properly to be characterised under another legal category, such as the law relating to the transfer of property, to which different conflict rules might apply. 28. A tendency to characterise disputes under legal categories other than trust disputes will thus have the effect of limiting, rather than extending, recognition of trusts. In addition, different approaches to the characterization issue in different states will lead to further inconsistencies in relation to when the conflict rules of the forum result in the recognition of trusts and when they do not. Many cases involving disputes about trusts will fall into more than one legal category. 29. The proper approach to the characterization issue so far as UK law is concerned is set out in two cases: Macmillan Inc v Bishopsgate Investment Trust Plc [1996] 1 WLR 387 (CA) and Raiffeisen Zentralbank Osterreich AG v Five Star Trading LLC [2001] QB 825 (CA). 30. In Macmillan at 407, Auld LJ stated as follows: … characterisation or classification is governed by the lex fori. But characterisation or classification of what? It follows from what I have said that the proper approach is to look beyond the formulation of the claim and to identify according to the lex fori the true issue or issues thrown up by the claim and defence. This requires a parallel exercise in classification of the relevant rules of law. 31. At 391 Staughton LJ identified a three stage process to be followed: In finding the lex causae there are three stages. First, it is necessary to characterise the issue that is before the court. Is it for example about the formal validity of a marriage? Or intestate succession to moveable property? Or interpretation of a contact? The second stage is to select the rule of conflict of laws [of the lex fori] which lays down a connecting factor for the issue in question. Thus the formal validity of a marriage is to be determined, for the most part, by the law of the place where it is celebrated; intestate succession to moveable property, by the law of the place where the deceased was domiciled when he died; and the interpretation of a contract, by what is described as its proper law. Thirdly, it is necessary to identify the system of law which is tied by the connecting factor found in stage two to the issue characterised in stage one. Sometimes this will present little difficulty, though I suppose that even a marriage may now be celebrated on an international video link. The choice of the proper law of a contract, on the other hand, may be controversial. 32. In Raiffeisen , Mance LJ commented on the proper application of the three stage test. At 27 he stated: While it is convenient to identify this three-stage process, it does not follow that courts, at the first stage, can or should ignore the effect at the second stage of characterising an issue in a particular way. Their overall aim is to identify the most appropriate law to govern a particular issue. The classes or categories of issue which the law recognises at the first stage are man-made, not natural. They have no inherent value, beyond their purpose in assisting to select the most appropriate law. A mechanistic application, without regard to the consequences, would conflict with the purposes for which they were conceived. 33. Mance LJ’s comments emphasise the importance of a flexible application of the test to produce a just result in line with principle. 34. The facts of a dispute relating to a trust often fall into more than one legal category. For example, a dispute between an investor and the party providing the investment where the investment is structured as a trust and the provider is the trustee might be characterised as a dispute concerning a breach of a trust or a contract dispute or a dispute about property rights in the investment itself. 35. It follows that the proper characterisation of the legal subject matter of the issue in dispute (lex causae/governing law) may lead a court to conclude that, even though it is a dispute involving a trust, it is not properly to be categorised as a trust dispute within the scope of the Hague Trusts Convention. The proper law of the trust will not govern the dispute. Where the court decides that the law governing the contract or the law of the situs of the investment governs the dispute instead, and that law is the law of a non-trust state whose mandatory rules result in the trust not being recognised, the interests of the beneficiary investor may well be defeated. Conclusion on the consistency question 36. So, has the Hague Trusts Convention improved matters? On one view it has. It could be said that there is a level of cohesion across Convention states and common law trust states as a result of the Convention that was not there before. 37. However, the Convention does not introduce trusts into the law of non-trust states and it has not been particularly widely adopted. Where it has been adopted it has not been enacted in consistent terms from state to state and so, in many respects, the Convention has made an already complex picture even more complicated. In addition, many of its provisions are highly restrictive and apt to limit, rather than enhance, the recognition of trusts internationally. Further, Convention states are accorded multiple opportunities to defeat the efficacy of a trust by the terms of the Hague Trusts Convention itself or by using the classification question to frame the dispute in non-trust terms in order to apply a different governing law to the dispute. If that were not enough, none of these matters apply consistently from state to state. 38. In the light of this complex and variable patchwork of provisions, derogations and ‘get-out clauses’ it cannot reasonably be said that settlors, trustees, and beneficiaries can reliably order their affairs on the basis of a reasonably cohesive set of principles relating to the recognition of trusts internationally. The balance of interests question 39. Our second question is whether or not the provisions and application of the Hague Trusts Convention, where it has been adopted, strike the correct balance between proprietary and other interests arising in relation to trusts, on the one hand, and third party rights on the other. 40. In a dispute concerning the rights and interests of parties involved with a trust, the determination of the proper law question may also be determinative of the governing law of the dispute. In those circumstances, it is to be hoped that the relevant conflict rules of the forum will provide that the law governing the dispute will be the proper law of the trust. That will undoubtedly be the desired result so far as settlors, trustees and, usually, beneficiaries are concerned. Indeed, a cautious and well-informed settlor would be forgiven for thinking that the well drafted proper law and jurisdiction clause included in his settlement had achieved precisely that result. Unfortunately, that may not be the case. 41. We have already described the manner in which the terms the Hague Trusts Convention may be used to defeat trust interests rather than uphold them. Although those interested in trusts may be relatively well safeguarded by the provisions of Articles 6–10 in the case of disputes concerning the administration of trusts, they are likely to be exposed to much greater risk that the trust interests will not be upheld in (i) disputes with third parties where the central issue may be characterised as a matter of property law, succession or contract leading to the governing law of the dispute being other than the proper law of the trust and (ii) disputes relating to ‘rocket launcher’ questions about the constitution of a trust. 42. In these cases it may well be felt that the Hague Trusts Convention does not strike the right balance between proprietary and other interests arising in relation to trusts, on the one hand, and third party rights, on the other. Just such a problem arose in Akers , a case concerning whether a trust had been validly constituted and, if it had, what was its proper law and the governing law of the dispute. 43. The Defendant ( Samba ) applied for a stay of the claimant joint liquidators’ of Saad Investments Company Limited ( SICL and the Joint Liquidators ) claim under section 127 of the UK Insolvency Act 1986 on the basis that the courts of the kingdom of Saudi Arabia were clearly and distinctly more appropriate for the determination of the claim than the courts of the UK. 44. The Joint Liquidators claimed for a declaration that the transfer of shares in five Saudi Arabian Companies (the Disputed Shares ) by Mr Al-Sanea to Samba was a void disposition of SICL’s property under section 127 since it was made after the date of the companies’ liquidation. 45. The Joint Liquidators said that the trusts arose as a result of seven transactions between SICL and Mr Al Sanea which had taken place between 1998 and 2008. They contended that the Disputed Shares were held by Mr Al Sanea on trusts for SICL, the proper law of which was the law of the Cayman Islands, where SICL was based. 46. Samba, on the other hand, contended that the seven transactions were governed by the laws of Bahrain/Saudi Arabia and that no separate beneficial interests and consequently no such trusts were recognised under their laws. Accordingly, Samba contended, SICL did not have proprietary rights in the shares when they were transferred. 47. The seven transactions were similar in character. By various sale agreements, Mr Al-Sanea sold the Disputed Shares to SICL and agreed to hold the legal title of those shares as nominee for SICL. Six of the seven transactions were effected by a combination of sale agreements and separate declarations of trust by which Mr Al Sanea agreed to hold the shares as nominee for SICL. Those declarations of trust do not appear to have contained choice of law provisions. 48. Both sides produced expert evidence in the form of written reports. The Chancellor noted that the experts were not in agreement in respect of a number of points but it was common ground that: 48.1 The ownership of, and security interests in, Saudi Arabian public companies traded on Tadawul must be registered with the SDC. 48.2 The law of Saudi Arabia does not recognise trusts, that is to say an arrangement under which there is a division between legal and beneficial ownership. 48.3 There are restrictions under the law of Saudi Arabia on the engagement of non-Saudis in economic activities in Saudi Arabia. There are ‘cover up’ laws which make it a criminal offence in certain circumstances to conceal arrangements which are in breach of those restrictions. 48.4 The courts of Saudi Arabia do not apply foreign law. 48.5 There is no material difference between the law of Bahrain and the law of Saudi Arabia in respect of the above matters. 49. The Chancellor granted Samba’s application for a stay on the ground that the courts of Saudi Arabia were clearly and distinctly a more appropriate forum for the determination of the dispute. His reasoning was as follows: 49.1  In order for the Joint Liquidators to be entitled to the declaration sought, they must establish a proprietary interest in the Disputed Shares at the date they were transferred to Samba. 49.2 The first question, in those circumstances, was to decide what law governed whether or not, at the date of the transfer of the Disputed Shares to Samba, SICL had a proprietary interest in them. The Chancellor characterised the dispute as one relating to the transfer of title to property (to which the law of the situs of the property would logically be applied), rather than a trust dispute (or a dispute relating to the constitution of a trust). Alternatively, insofar as the Chancellor characterised the dispute as a trust dispute (or a dispute relating to the creation of a trust), he decided that the proper law of the trust was the law of the situs of the trust assets—ie the Disputed Shares in Saudi Arabia. 49.3 The Chancellor noted that under common law principles the ownership of shares is determined by the law of the place where the shares are situated, which is where the company is incorporated. 17 In this case that was Saudi Arabia. Thus he determined that Saudi Arabian law was the governing law of the dispute. 49.4 The Chancellor held that the effect of Article 15 of the Hague Trusts Convention was that the relevant law (Saudi law) designated by the conflict rules of the forum (the English court) contained mandatory provisions relating to the transfer of title to property, namely that no non-Saudi was permitted to own shares in Saudi companies. The effect of that mandatory provision excluded the recognition in Saudi law of the interest in the shares contended for by the Joint Liquidators and/or resulted in SICL having no interest in the Disputed Shares. 49.5 The Chancellor held that the Joint Liquidators’ contention that Article 15(d) was irrelevant (because the declarations of trust involved the creation of the beneficial interest in the Disputed Shares and not the transfer to SICL of a pre-existing beneficial interest in the Disputed Shares) was wrong. 49.6 Even if, contrary to his decision about that, the case was a trust dispute or a dispute about the creation of an equitable interest rather than a transfer of property, the Chancellor held that the consequences would be the same because the law applicable under Article 7 would not be that of the Cayman Islands, as contended for by the Joint Liquidators, but the law of Saudi Arabia. 49.7 He reasoned that Article 8 of the Hague Trusts Convention provided that the law specified in Article 6 or Article 7 was to govern the validity of a trust, its construction, its effects and its administration. 49.8 Article 6 (express/implied choice of law) was not determinative in the instant case because that law pointed to Saudi Arabia and the second paragraph of Article 6 provided that where the settlor’s choice of law does not provide for trusts, the choice shall not be effective and the law specified in Article 7 shall apply. 49.9 Having regard to the four matters to which Article 7 required him to make particular reference: a. the place of administration of the trust designated by the settlor; b. the situs of the assets of the trust; c. the place or residence or business of the trust; d. the objects of the trust and the places where they are to be fulfilled’ the Chancellor held that: 49.9.1 There was no express designation of any place as the place of administration of the trusts. The administration of SICL, the beneficiary under the trusts, was carried out in practice in Geneva. The benefits and obligations of ownership of the Disputed Shares were enjoyed and suffered by the legal owner, Mr Al-Sanea, in Saudi Arabia where he was resident, the companies were incorporated and he was registered as owner of the shares. 49.9.2 The situs of the shares was Saudi Arabia. 49.9.3 The trustee was Mr Al-Sanea who was resident and domiciled in Saudi Arabia. 49.9.4 The beneficiary of the trusts was SICL, incorporated in Cayman. The wider purpose of the trusts was to circumvent the restrictions on share ownership in Saudi Arabia. 49.9.5 The closest connection to the seven transactions for the purposes of Article 7 was with the law of Saudi Arabia and not the law of Cayman. 50. The effect of the Chancellor’s reasoning was to conclude that it is impossible to create an equitable interest in property located in a territory or under a system of rules that does not recognise equitable interests. The law of the situs of the asset in those circumstances simply prevents any interest being passed to the beneficiaries at all and, in circumstances where the trust would only be constituted if that property right is created in the beneficiaries, it follows that no trust is constituted. It followed that the Joint Liquidators had no interest in the Disputed Shares. 51. SICL’s appeal in Akers was heard on 4–6 December 2014. Argument before the Court of Appeal proceeded on a very different basis to that before the Chancellor. The court considered six questions: 51.1 Even assuming the governing law of the trusts was Cayman Islands law, whether the effect of Article 4 was to exclude the application of the Convention to the purported transfers of the beneficial interest in the Disputed Shares from Mr Al-Sanea to SICL under the declarations of trust so that English conflicts rules applied Saudi Arabian law to them as the lex situs and SICL obtained no proprietary interest under them. 51.2 Whether, even if Article 4 did not achieve that result, Article 15 did so because it required the application to ‘the transfer[s] of title to property’ of mandatory rules of Saudi Arabian law, the law designated by English conflicts rules as the lex situs of the purported transfers of the beneficial interest in the Disputed Shares from Mr Al-Sanea to SICL under the relevant declarations of trust. 51.3 Whether it was right to form a final view on the applicability of Article 15 on the stay application. 51.4 Whether the application or Articles 6 and 7 anyway resulted in Saudi Arabian law being the governing law of the declarations of trust. 51.5 Whether it was right to form a final view on the governing law of the declarations of trust on the stay application. 51.6 Whether, even if Articles 6 and 7 applied Saudi Arabian law to the trusts, Article 5 dis-applied the Convention so that common law rules would (i) have respected the express or implied choice of Saudi Arabian law, and would (ii) anyway have applied Saudi Arabian law as the law with which the trusts had their closest and most real connection. 52. Vos LJ, giving the judgment of the Court of Appeal, noted that the case raised: important questions as to the law applicable to and the validity of trusts which purport to comprise shares registered in civil law countries, whose laws do not themselves recognise either the trust concept or the division of a legal and beneficial interest. 53. As to the first question and the application of Article 4, the relevant question was ‘when the Convention kicks in’. The Court of Appeal noted the wording of Article 4 excludes the application of the Convention only in relation to: ‘acts by virtue of which assets are transferred to the trustee’. This was to be contrasted with Articles 6–8 whereby the law chosen by the settlor is to ‘govern the validity of the trust, its construction, its effects and the administration of the trust’. 54. Vos LJ referred to the distinction drawn by Jonathan Harris in his article, ‘Launching the Rocket – capacity and the creation of inter vivos trans-national trusts’ 18 between the capacity to alienate property (governed by the lex situs) and the capacity to create the trust structure (governed by the law of the trust) and referred to the following passage: There will then be a second question as to whether the settlor, who has capacity to alienate property according to the lex situs, has capacity to create the trust structure with that property … the interest of the lex situs can sensibly be confined to the question whether the settlor can dispose of his property at all. Once he is able to do so, it should not be that law’s concern whether he makes an outright transfer of the property or transfers on trust … The restrictions upon a settlor seem legitimately targeted at the question whether he may dispose of property at all, not whether he may dispose thereof on trust. 55. At paragraph 51 the Court of Appeal stated: We have no difficulty in accepting the dictum of Lord Hodge in Rangers 19 as explained in the latest view of Professors Hayton and Harris when they opine that the lex situs must govern whether the trustee has the capacity to alienate the property at all. It would, as they say, make no sense to hold that a trust could be created by a person who owned inalienable property. But in our judgment, once it is clear that the trust property can be alienated in some form according to the lex situs, that law cannot govern the trust or its validity or effects. All that must be a matter for the law identified by Chapter II of the Convention. 56. The declarations of trust by Mr Al-Sanea could not sensibly be described as ‘act[s] by virtue of which assets are transferred to the trustee’ since Mr Al-Sanea always owned the shares in question and was merely declaring that he now held them beneficially for SICL. 57. The Court of Appeal stated that the Chancellor had come to the wrong conclusion in relation to the alienability of the shares because of the way the argument had been addressed to him. The question ought not to have been whether English conflict rules would generally require the ownership of shares to be determined by the lex situs, but the more specific one of whether the alienation of the equitable interests under the declarations of trust/trusts was excluded from the provisions of the Convention by Article 4. The Court of Appeal held that that it was not. Vos LJ concluded, at paragraph 55: Provided that the property that is made the subject of a trust can be alienated at all under the lex situs, questions as to the validity and effect of placing such assets in trust, even though assets are shares in a civil law jurisdiction, can be determined by the governing law of the trust. 58. As to issues 2 and 3, the Court of Appeal decided that whether or not mandatory rules of Saudi Arabian law had to be applied to the purported transfers of the beneficial interests in the Shares under the declarations of trust ought not to have been decided on a stay application. Article 15 needed to be considered in context. Its objective was: … to preserve the application of mandatory rules of the lex situs as distinct from the law governing the trust. In other words, the law of the trust is not to override the non-derogable rights of, for example, a wife or a child entitled to an inheritance. Equally, the law of the trust is not to override the mandatory rules of the lex situs concerning ‘transfers of title to property’. Thus, if there were formal requirements for conveyancing of real property, the law of the trust could not be used to say that such formalities did not need to be complied with in order to transfer property situated in a country with such mandatory rules. 59. As noted above, the Chancellor had decided that the effect of Article 15 was that a mandatory provision of Saudi law to the effect that no non-Saudi was permitted to own shares in Saudi companies excluded the recognition in Saudi law of the interest in the shares contended for by the Joint Liquidators and/or resulted in SICL having no interest in the Disputed Shares. The Court of Appeal, at paragraphs 63–66 considered that, and other, allegedly ‘mandatory’ rules relied upon by Samba and stated as follows: The problem with these arguments is that they require a detailed and specific understanding of Saudi Arabian law that was never explored before the Chancellor. We cannot imagine how such questions could have been determined without cross-examination of the expert witnesses. 60. The Court of Appeal reached a similar conclusion on issues 4 and 5. The application of Articles 6 and 7 would not inevitably result in the application of Saudi Arabian law to each of the declarations of trust. The applicable law under Articles 6 and 7 was to be determined in the light of ‘the circumstances of the case’ and could not sensibly be determined in the absence of full evidence and cross-examination as to the circumstances in which the transactions came about. 61. As to issue 6, the Chancellor had not considered the operation of Article 5 which excludes the application of the Convention ‘to the extent that the law specified by Chapter II does not provided for trust or the category of trusts involved’. Samba contended that the Chancellor should have decided that as the applicable law under Articles 6 and 7 was Saudi Arabian law and that law did not recognise trusts, the Chancellor should have gone on to decide that the applicable law under the common law rules was Saudi Arabian law as the law with which the trusts have their closest and most real connection. The Court of Appeal held to the contrary. This too, was a matter that, if it arose as all, was better decided at a full evidential hearing. 62. The Joint Liquidators’ appeal was accordingly allowed by the Court of Appeal but that is not the end of the matter: Samba has been given permission to appeal to the Supreme Court and the appeal is expected to be heard in April 2016. A further word on characterization … 63. In Glenalla the former trustees of a Jersey trust known as the Tchenguiz Discretionary Trust (the Former Trustees and TDT ) sought directions from the Royal Court of Guernsey in respect of whether they had become personally liable for repayments alleged to be due under certain loan agreements (as novated) between the former trustees. One of the issues in the proceedings was whether the Former Trustees were entitled to rely on article 32 of the Trusts (Jersey) Law 1984, a provision exonerating trustees from personal liability for actions taken in their capacity as trustee. The Former Trustees were Guernsey corporations based in Guernsey. 64. The loans were sought to be enforced by the counterparties to the novated loan agreements, companies based in the BVI. The novation agreements were expressed to be governed by English law but it was contended that the relevant governing law was that of the original loan agreements – Guernsey law. Lieutenant Bailiff Sir John Chadwick decided that whatever might be the proper law of the contracts between the Former Trustees and the BVI companies, it was not Jersey law. 65. Article 32 provides that where a trust is a party to any transaction or matter affecting the trust and the other party knows that the trustee is acting as a trustee, any claim by the other party shall be against the trustee as trustee and shall extend only to the trust property. The article falls within Part II of the Trusts (Jersey) Law (Provisions applicable only to a Jersey trust). 66. The Lieutenant Bailiff concluded that the Former Trustees could not rely on Article 32. His reasoning, at 186-187 and 190 was as follows: 186 I am content to assume (but, again, without finding it necessary to decide) that, in proceedings brought in Jersey by a third party against the trustee of a Jersey trust, article 32 of the Trusts (Jersey) Law would be held to apply whatever the lex causae (or proper law) of the transaction to which the trustee and the third party were parties, unless (perhaps) the terms of the transaction expressly provided to the contrary; notwithstanding that article 32 - unlike the comparable provision in the Trusts (Guernsey) Law (section 42) – does not so provide in terms (see section 42(4) of the Trusts (Guernsey) Law). So I assume that, if these proceedings had been brought by the BVI Companies in the Jersey Courts, the former trustees would have been entitled to rely on article 32 of the Trusts (Jersey) Law – and, in particular on the protection from personal liability which article 32(1)(a) affords – notwithstanding that, as I have held, the proper law of the transactions which give rise to the claims of the BVI Companies is not the law of Jersey. But that is not this case. I am content to assume, also, that if, in proceedings brought in Guernsey by a third party against the trustee of a Jersey trust, the proper law of the transaction to which the trustee and the third party were parties were the law of Jersey, this Court would hold that the trustee was entitled to rely on article 32 of the Trusts (Jersey) Law. But, again, that is not this case. And, of course, if the trust were a Guernsey trust, this Court would hold that the trustee was entitled to rely on section 42 of the Trusts (Guernsey) Law. But neither is that the position in this case. The question, in the present case, is whether in proceedings brought in Guernsey by a third party against the trustee, or former trustee, of a Jersey trust to enforce claims which arise under transactions the proper law of which is said to be the law of Guernsey, this Court should hold that the trustee is entitled to rely on article 32 of the Trusts (Jersey) Law. 187. The answer to that question turns, as it seems to me, on whether section 65 of the Trusts (Guernsey) Law requires this Court to apply article 32 of the Trusts (Jersey) Law to the claims brought by the BVI Companies against the former trustees; and that, in my view, turns on whether the enforcement of those claims can be said to be the enforcement of the trusts of the TDT. In my judgment, the answer to those questions is “No”. I am not persuaded that, in seeking to enforce their claims in relation to the Glenalla loan, the Thorson loan and the Oscatello loan against the former trustees, the BVI Companies can properly be said to seeking to enforce the trusts of the TDT. The claims do not arise under the trusts of the TDT: they are claims brought by third parties who are not settlors, trustees or beneficiaries of, or otherwise interested in, the TDT. The fact that the shares of the BVI Companies were owned, directly or indirectly, by the former trustees as trustees of the TDT is, in my view, irrelevant in this context … 190. I should, perhaps, add that the question whether the former trustees are entitled to rely on article 32 of the Trusts (Jersey) Law arises because they - being Guernsey corporations, based in Guernsey, but trustees of a Jersey trust - have chosen to carry out the administration of that trust in Guernsey; and, in the course of so doing, have entered into transactions of which the proper law – as they contend and I have been content to assume - is the law of Guernsey (and, on any view, is not the law of Jersey). No doubt there were good reasons for that choice; but, having made the choice, the former trustees have denied themselves the protection from personal liability which would have been afforded by article 32(1)(a) of the Trusts (Jersey) Law if they had insisted (as, no doubt, they could have done) that the transactions were effected by agreements in writing which contained a term that the proper law of the transactions was the law of Jersey. 67. This was not a trust dispute governed by Jersey Law, it was a hostile dispute with a third party. The proper law of the contracts under which the Former Trustees were sued and, accordingly, the law governing the dispute was the law of Guernsey not Jersey according to the Former Trustees. The Lieutenant Bailiff concluded that an exonerating provision from a law not connected with either the forum or the law governing the dispute could not be applicable in these circumstances. 68. The Guernsey Court of Appeal disagreed. The court noted that a trust is not a separate legal person or an inanimate object but a dynamic relationship which exists when a person holds or has vested in him, or is deemed to have vested in him, property which does not form part of his own estate, and does so for the benefit of another person. The Trusts (Guernsey) Law 2007 enforced that relationship in respect of domestic and foreign trusts alike: 62. It is over this whole dynamic relationship that the Royal Court is given jurisdiction in respect of a Guernsey trust: Section 4(1)(a). The Royal Court is also given jurisdiction ‘in respect of any other trust’ where the trustee is resident in Guernsey … : Section 4(1)(b) … 63. It is against that background, in our opinion that one approaches the proper interpretation of Parts III and IV of the statute. It seems to us, therefore, that Section 65, in directing the courts of this jurisdiction to look to the proper law of the trust in respect of its governance, refers to a wide range of matters by which a legal system permits the recognition of an enforceable relationship of trust, in the sense of having control of property in which others have a beneficial interest, and regulates that relationship through the identification of powers, duties and potential liabilities. 69. The proper characterisation of the claim before the court was to be seen in terms of two related issues. First, whether a contractual obligation in a particular sum was binding on a particular person. Second, whether, albeit a binding obligation in a particular sum existed, the liability of the obligant was in some way restricted by virtue of the status of the obligant under its domestic law. 70. By analogy with the rule that the law of the place of a company’s incorporation determined the extent of an individual member’s liability for the debts and liabilities of a company and the extent of a partner’s liability for the debts of a partnership, the law of the place of a trust company’s incorporation should determine the extent of the trustee’s liability for the debts of a trust. 71. Article 32(1)(a) of the Trusts (Jersey) Law made provision to limit a trustee’s liability to the extent of the trust assets in circumstances where the counter party to an agreement with the trustee knew that it was acting in a representative capacity. 72. Section 69 of the Trusts (Guernsey) Law enabled the Royal court to make an order in respect of the administration of a trust, including a foreign trust, in respect of a trustee, in respect of any person connected with a trust and in respect of any trust property. 73. The Former Trustees fell within the ambit of section 69 and the Guernsey court would use its power thereunder to recognise, as a matter of private international law, the applicability of Article 32 in the determination of the present dispute between the parties, presumably on the basis that it was a Jersey trust. In further judgments handed down in Glenalla on 29 October 2014 and 10 August 2015 the Court of Appeal confirmed that the Former Trustees were entitled to rely upon Article 32 and that their liability was limited to the trust assets. 74.  Glenalla is a curious case. It might be said that the Guernsey Court of Appeal was obliged to stretch conflicts of laws principles somewhat in order to ‘import’ Article 32 for the purposes of enabling the Former Trustees to rely upon it. Conclusion on the balance of interests question 75. Do the provisions and application of the Hague Trusts Convention, where it has been adopted, strike the correct balance between proprietary and other rights arising in relation to trusts on the one hand and other rights, for example, those of third parties on the other? 76. We think not. There are so many opportunities within the terms of the Convention to restrict its operation so as to decline to recognise trusts it is hard to see how proprietary and other rights arising in relation to trusts are to be given a fair chance. The position is worsened by the fact that an essential element of a trust is the existence of trust assets. That makes it all too easy to characterise trust claims as claims about property such that the law of the situs of the property becomes the governing law of the dispute in preference to the proper law of the trust. This appears likely to continue to be a significant problem where trust assets are held in non-trust states. And finally … 77. David Hayton has said 20 : The Convention is a flexible, facilitative convention enabling a foreign forum to go a long way towards recognising trusts as such or only a little way. As non-trust countries acquire greater experience and understanding of the trust they can be expected to go further and further towards recognising trusts as such, though, of course, one cannot expect settlors to be allowed to use trusts to evade their obligations towards their heirs, creditors or spouses. 78. That may be so but, in the meantime, it is extremely difficult, particularly when it comes to the potential for the situs of trust assets to change over the life of a trust, for settlors or their trustees reliably to order trust affairs. The Hague Trusts Convention has the potential to provide a principled set of rules capable of consistent application for the recognition and enforcement of trust obligations internationally but its reach is partial and inconsistent. In addition there are also serious doubts as to whether its restrictive provisions are capable of striking the correct balance between proprietary and trust related rights and other interests. Stephen Moverley Smith QC and Sarah Bayliss are barristers in practice at XXIV Old Buildings, Lincoln’s Inn who specialise in offshore and international trust work. 1. James Fawcett (ed), Reform and Development of Private International Law 201, ch 8. 2. David Hayton was head of the UK delegation to the Fifteenth Session of the Hague Conference on Private International Law at which the Hague Trusts Convention was adopted and was a member of the drafting committee during that session. 3. David Brownbill QC (ed), International Trust Laws , (Jordans Publishing) vol 2 s C, ch 3. 4. ‘The Trust in Private International Law’ in Fawcett (n 1) 201, ch 8. 5. ‘International Recognition of Trusts’ in International Trust Laws/Brownbill (n 3) vol 2, s C, ch 3. 6. See in particular, David Hayton, ‘International Recognition of Trusts’ in International Trust Laws/Brownbill (n 3) vol 2, s C, ch 3, C3.9 and Jonathan Harris, ‘The Trust in Private International Law’ in Fawcett (n 1) 201, 197–98, ch 8. 7. Australia, Canada, China (in respect of the Hong Kong Special Administrative Region), Cyprus, France, Italy, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, San Marino, Switzerland, the UK and NI, and the USA according to the Hague Trusts Convention website on 4 September 2014. Within the UK umbrella are included Bermuda, the Turks and Caicos Islands, the BVI, the Isle of Man, Jersey and Gibraltar. 8. Eleven of the signatories have enacted the convention in national law. Those states are Australia, Canada, Italy, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, San Marino, Switzerland, and the UK. 9. And, accordingly, Barbados, the BVI, the Isle of Man, Jersey and Gibraltar. The others are Canada, China, Luxembourg and Monaco. 10. The others are Canada, Hong Kong, Luxembourg, and Monaco. 11. (n 4) 201. 12. Hayton (n 6) vol 2 s C ch 3 at C3.34. 13. The Overbeck Official Report on the Hague Trusts Convention states at paras 136 and 54: ‘The first paragraph of this provision preserves the mandatory rules of the law designated by the conflicts rules of the forum for matters other than trusts,’ having earlier stated: ‘It may be that the law applicable to a trust will encroach on the area of another law designated by the forum’s conflict rules. Under Article 15 it is then that other law which will prevail but only – and this is its difference from Article 4 – as concerns the mandatory rules of that other law. By virtue of Article 15 the law applicable to the trust must yield to the provisions for forced heirship of the law governing succession to property upon death as designated by the forum’s conflict rules’. 14. Hayton (n 6) vol 2 s C ch 3. 15. ibid 3.40. 16. ibid. 17. Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387. 18. David Hayton, The International Trust (3rd edn) ch 2. 19. Joint Administrators of Rangers Football Club plc, Noters 2012 SLT 599 in the Outer House. 20. Hayton (n 6) vol 2, s C, ch 3, C3.42. © The Author (2015). Published by Oxford University Press. All rights reserved.
TI - Conflict of laws and the proper law of trusts: sufficient protection of proprietary interests?
JF - Trusts & Trustees
DO - 10.1093/tandt/ttv137
DA - 2015-12-01
UR - https://www.deepdyve.com/lp/oxford-university-press/conflict-of-laws-and-the-proper-law-of-trusts-sufficient-protection-of-e3vmeevFwc
SP - 1064
EP - 1081
VL - 21
IS - 10
DP - DeepDyve
ER -