Trusts (conflict)
Encyclopedia
The Hague Convention on the Law Applicable to Trusts and on their Recognition, or Hague Trust Convention is a multilateral treaty
developed by the Hague Conference on Private International Law
on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of March 2011 ratified by 12 countries. The Convention aims to harmonise
not only the municipal law definitions of a trust, but also the Conflict rules for resolving problems in the choice
of the lex causae
. The key provisions of the Convention are:
Article 3 provides that the Convention only applies to express trust
s created voluntarily and evidenced in writing. It will therefore not cover oral trusts, resulting trust
s, constructive trust
s, statutory trusts or trusts created by judicial order. But signatory states are free to apply the Convention to any form of trust and the Recognition of Trusts Act 1987 has applied the provisions to all trusts arising under English law
, no matter when or how they were created, albeit only applying the provisions to transactions affecting those trusts made after 1 August 1987. There are incidental question
problems if the trust is testamentary and, under Article 4, if it is alleged that the testator
lacked capacity
, or that the will is formally or substantively invalid, or that it had been revoked, these issues must be determined first under the lex fori
Conflict rules on characterisation
and choice of law before the Convention rules can apply. This will include, for example, a detailed consideration of any marriage settlement or applicable law containing community property
provisions which might prevent the testator alienating property from a spouse or child
of the family (see succession (conflict)
). Obviously, if the will purporting to create the trust is held invalid, there are no trusts to adjudicate upon.
Despite the identification of these four factors, the court must actually perform a rounded evaluation of all the circumstances. Thus, it would be relevant to consider the distribution of the assets if in separate states, the purpose of the trust (which might be the evasion
of taxation or other provisions in some of the states where the assets are located), the lex domicilii
or lex patriae
of the settlor and the beneficiaries (particularly if the legal transaction is a marriage settlement or testamentary), the legal form of the document, and the law of the place where the document was executed (this latter factor may either be accidental and so of marginal value, or contrived to take advantage of a favourable law and so highly significant).
raised if an application to vary is made to a forum other than a forum of the Applicable Law); the distribution of the trust assets; the duty of trustees to account for their administration.
can be applied to micromanage the asset(s) by the trustee(s) without having to apply the situs law to the administration of the trust in that state. Equally, this is not an argument for a judicial approach which favours the law of the place of administration as the Applicable Law. Although the administration must comply with the municipal laws for general purposes, the duty to honour the intentions of the settlor may make the law of the place where the most significant part of that intention is to be realised the most significant single law.
or any person acting in an official capacity. In so far as the law applicable to the trust requires or provides, this recognition implies in particular: that personal creditors of the trustee shall have no recourse against the trust assets; that the trust assets shall not form part of the trustee's estate upon his insolvency
or bankruptcy
; that the trust assets shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee's estate upon his death; that the trust assets may be recovered when the trustee, in breach of trust, has mingled trust assets with his own property or has alienated trust assets.
However, the rights and obligations of any third party holder of the assets shall remain subject to the law determined by the choice of law rules of the lex fori. Thus, although the Convention makes provision for the trustee(s) and any third parties, it fails to address the position of the beneficiaries who, for example, might wish to pursue assets intermixed with the trustee's personal property through actions for tracing. One of the problems that beneficiaries might encounter is addressed in Article 12 which considers the problem where the situs law does not have a title registration system which reflects ownership registration in a representative capacity. While recognising that the Convention cannot require states to modify their existing registers, it provides that the trustee shall be entitled, in so far as this is not prohibited by or inconsistent with the law of the State where registration is sought, to do so in his capacity as trustee or in such other way that the existence of the trust is disclosed. This implicitly recognises the desirability of all registration systems distinguishing between beneficial and representative titles.
This general difficulty of municipal laws failure to support trusts is addressed in Article 13, which considers the situation of those who wish to create a trust but can only do so by invoking laws entirely outside their own state. As an application of comity
, no forum state is bound to recognise a trust the significant elements of which, except for the choice of the applicable law, the place of administration and the habitual residence
of the trustee, are more closely connected with States which do not have the institution of the trust or the category of trust involved. But, because this could be interpreted as an invitation not to validate otherwise perfectly appropriate financial arrangements for deserving beneficiaries, Article 14 provides that the Convention shall not prevent the application of rules of law more favourable to the recognition of trusts. This reflects the positive rules of public policy
which require that the validity of a transaction (whether commercial or not) be upheld if at all possible where this will give effect to the reasonable expectations of the parties. The only exceptions shall be where this will produce consequences offending against the mandatory policies of the forum court in which case Article 18 empowers the court to deny the Applicable Law, even if it has been expressly selected by the settlor. But Article 15(2) nevertheless requires the forum court to consider adopting an approach that will preserve the overall validity of the trust insofar as that generality does not offend against the mandatory policy.
(8 provinces only), China
(Hong Kong
only), Italy
, Luxembourg
, Liechtenstein
, Malta
, Monaco
, the Netherlands
(European territory only), San Marino
, Switzerland
and United Kingdom
(including 12 dependent territories/crown dependencies).
Treaty
A treaty is an express agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as an agreement, protocol, covenant, convention or exchange of letters, among other terms...
developed by the Hague Conference on Private International Law
Hague Conference on Private International Law
The Hague Conference on Private International Law is the preeminent organisation in the area of private international law....
on the Law Applicable to Trusts. It concluded on 1 July 1985, entered into force 1 January 1992, and is as of March 2011 ratified by 12 countries. The Convention aims to harmonise
Harmonisation
Harmonisation may refer to:* In music, the implementation of harmony, usually by using chords, including harmonized scales* Harmonisation of law, the process of establishing common laws and standards across the European Union...
not only the municipal law definitions of a trust, but also the Conflict rules for resolving problems in the choice
Choice of law
Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states , or provinces...
of the lex causae
Lex causae
In the conflict of laws, lex causae is the law or laws chosen by the forum court from among the relevant legal systems to arrive at its judgement of an international or interjurisdictional case....
. The key provisions of the Convention are:
- each signatory recognises the existence and validity of trustsTrust lawIn common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
. However, the Convention only relates to trusts with a written trust instrument. It would not apply trusts which arise (usually in common lawCommon lawCommon law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdictions) without a written trust instrument. - the Convention sets out the characteristics of a trust (even jurisdictions with considerable legal history relating to trusts find this difficult)
- the Convention sets out clear rules for determining the governing lawChoice of lawChoice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states , or provinces...
of trusts with a cross border element.
Background
Many states do not have a developed law of trusts, or the principles differ significantly between states. It was therefore necessary for the Hague Convention to define a trust to indicate the range of legal transactions regulated by the Convention and, perhaps more significantly, the range of applications not regulated. The definition offered in Article 2 is:- ...the legal relationship created, inter vivosInter vivosInter vivos is a legal term referring to a transfer or gift made during one's lifetime, as opposed to a testamentary transfer ....
or on death, by a person, the settlorSettlorIn law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
, when assets have been placed under the control of a trusteeTrusteeTrustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
for the benefit of a beneficiaryBeneficiary (trust)In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
or for a specified purpose. - A trust has the following characteristics:
- (a) the assets constitute a separate fund and are not a part of the trustee's own estate;
- (b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee;
- (c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.
Article 3 provides that the Convention only applies to express trust
Express trust
Where property is passed from an owner to a person an implied express trust, but no gift is made by the owner to that person, it is therefore held for the owner by the person, and this is the Resulting trust; where property should for some reason of public policy or rule of Equity be held by a...
s created voluntarily and evidenced in writing. It will therefore not cover oral trusts, resulting trust
Resulting trust
A resulting trust is the creation of an implied trust by operation of law, as where property gets transferred to one who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property is said to "result" back to the transferor...
s, constructive trust
Constructive trust
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
s, statutory trusts or trusts created by judicial order. But signatory states are free to apply the Convention to any form of trust and the Recognition of Trusts Act 1987 has applied the provisions to all trusts arising under English law
English law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
, no matter when or how they were created, albeit only applying the provisions to transactions affecting those trusts made after 1 August 1987. There are incidental question
Incidental question
In the Roman conflict of laws, an incidental question is a legal issue that arises in connection with the major cause of action in a lawsuit. The forum court will have already decided that it has jurisdiction to hear the case and will be working through the next two stages of the conflict process,...
problems if the trust is testamentary and, under Article 4, if it is alleged that the testator
Testator
A testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death. It is any "person who makes a will."-Related terms:...
lacked capacity
Capacity (law)
The capacity of both natural and legal persons determines whether they may make binding amendments to their rights, duties and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will...
, or that the will is formally or substantively invalid, or that it had been revoked, these issues must be determined first under the lex fori
Lex fori
Lex fori is a legal term used in the conflict of laws used to refer to the laws of the jurisdiction in which a legal action is brought...
Conflict rules on characterisation
Characterisation (conflict)
In conflict of laws, characterisation is the second stage in the procedure to resolve a lawsuit involving a foreign law element. This process is described in English law as classification and as qualification in French law...
and choice of law before the Convention rules can apply. This will include, for example, a detailed consideration of any marriage settlement or applicable law containing community property
Community property
Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions...
provisions which might prevent the testator alienating property from a spouse or child
Child
Biologically, a child is generally a human between the stages of birth and puberty. Some vernacular definitions of a child include the fetus, as being an unborn child. The legal definition of "child" generally refers to a minor, otherwise known as a person younger than the age of majority...
of the family (see succession (conflict)
Succession (conflict)
In the conflict of laws, the subject of succession deals with all procedural matters relevant to estates containing a "foreign element" whether that element consists of the identity of the deceased, those who may inherit or the location of property...
). Obviously, if the will purporting to create the trust is held invalid, there are no trusts to adjudicate upon.
The applicable law
Article 6 allows the settlor to select the applicable law in the inter vivos or testamentary document. Under normal circumstances, the settlor will be acting on professional advice and will make an express selection or it will be implied from the facts of the case. But, under Actable 6(2), if the settlor selects a law with no relevant provisions or the provisions in the municipal law selected would be inappropriate, or there is no selection, Article 7 applies to select the law which is most closely connected with the transaction. This is judged by reference to four alternative connecting factors which are to be considered as at the time the putative trust is created:- the place where the trust is to be administered;
- the place where the assets are to be found (for immovables, there is no problem the lex situsLex situsThe term lex situs refers to the law of the place in which property is situated for the purposes of the conflict of laws. For example, property may subject to tax pursuant to the law of the place of the property or by virtue of the domicile of its owner...
is easily identified; for movables, the most common form is choses in actionChose (English law)Chose , is a term used in common law tradition in different senses. Chose local is a thing annexed to a place, such as a mill. A chose transitory is something movable, that can be carried from place to place...
such as sharesShare (finance)A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
and bondsBond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, and their location does not change (bearer bondBearer bondA bearer bond is a debt security issued by a business entity, such as a corporation, or by a government. It differs from the more common types of investment securities in that it is unregistered – no records are kept of the owner, or the transactions involving ownership. Whoever physically...
s and other instruments where title is determined by mere possession are relatively uncommon), but for tangible assets, this will usually be the place where the assets are located at the time of the hearing given that this represents the place where any Court OrderCourt orderA court order is an official proclamation by a judge that defines the legal relationships between the parties to a hearing, a trial, an appeal or other court proceedings. Such ruling requires or authorizes the carrying out of certain steps by one or more parties to a case...
would have to be enforced: see property (conflict)Property (conflict)In the conflict of laws, property law follows the terminology of the civil law systems which divides property into two types:* Immovables is the equivalent of "real property" in common law systems, i.e. it is land or any permanent feature or structure above or below the surface .* All other...
); - the place where the trustee is resident or conducts his or her business;
- the place where the purpose or object of the trust is to be fulfilled.
Despite the identification of these four factors, the court must actually perform a rounded evaluation of all the circumstances. Thus, it would be relevant to consider the distribution of the assets if in separate states, the purpose of the trust (which might be the evasion
Evasion (law)
In law, the Doctrine of Evasion is a fundamental public policy. Whereas a person may legitimately plan his or her affairs so as to avoid the incidence of obligations or liabilities imposed by the law, no-one is allowed to evade the operation of otherwise mandatory provisions once duties and...
of taxation or other provisions in some of the states where the assets are located), the lex domicilii
Lex domicilii
The lex domicilii is the Latin term for "law of the domicile" in the conflict of laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are applied....
or lex patriae
Lex patriae
The term lex patriae is Latin for the law of nationality in the conflict of laws which is the system of public law applied to any lawsuit where there is a choice to be made between several possibly relevant laws and a different result will be achieved depending on which law is...
of the settlor and the beneficiaries (particularly if the legal transaction is a marriage settlement or testamentary), the legal form of the document, and the law of the place where the document was executed (this latter factor may either be accidental and so of marginal value, or contrived to take advantage of a favourable law and so highly significant).
The scope of the applicable law
Under Article 8, the law specified by Article 6 or 7 shall govern the validity of the trust, its construction, its effects, and the administration of the trust. In particular that law shall govern: the appointment, resignation and removal of trustees, the capacity to act as a trustee, and the devolution of the office of trustee; the rights and duties of trustees among themselves; the right of trustees to delegate in whole or in part the discharge of their duties or the exercise of their powers; the power of trustees to administer or to dispose of trust assets , to create security interests in the trust assets, or to acquire new assets; the powers of investment of trustees; restrictions upon the duration of the trust, and upon the power to accumulate the income of the trust; the relationships between the trustees and the beneficiaries including the personal liability of the trustees to the beneficiaries; the variation of termination of the trust (because variation is expressly within the scope of the Applicable Law, this may be a significant factor in any issue of forum non conveniensForum non conveniens
Forum non conveniens is a common law legal doctrine whereby courts may refuse to take jurisdiction over matters where there is a more appropriate forum available to the parties...
raised if an application to vary is made to a forum other than a forum of the Applicable Law); the distribution of the trust assets; the duty of trustees to account for their administration.
Severance
Articles 9 and 10 allow the Applicable Law by which the validity of the trust has been established, to sever aspects of the trust and its administration so that separate laws shall apply to each component. In fact, the settlor may expressly select an Applicable Law for each component and the forum court should respect his or her wishes. But, in general terms, it is desirable that a single law should be applied to the administration and the fact that there may be assets located in separate states should not, per se, justify severing the trust. The relevant lex situsLex situs
The term lex situs refers to the law of the place in which property is situated for the purposes of the conflict of laws. For example, property may subject to tax pursuant to the law of the place of the property or by virtue of the domicile of its owner...
can be applied to micromanage the asset(s) by the trustee(s) without having to apply the situs law to the administration of the trust in that state. Equally, this is not an argument for a judicial approach which favours the law of the place of administration as the Applicable Law. Although the administration must comply with the municipal laws for general purposes, the duty to honour the intentions of the settlor may make the law of the place where the most significant part of that intention is to be realised the most significant single law.
Recognition
Under Article 11, a trust complying with the Applicable Law shall be recognised as a trust which implies, as a minimum, that the trust property constitutes a separate fund, that the trustee may sue and be sued in his capacity as trustee, and that he or she may appear or act in this capacity before a notaryCivil law notary
Civil-law notaries, or Latin notaries, are lawyers of noncontentious private civil law who draft, take, and record legal instruments for private parties, provide legal advice and give attendance in person, and are vested as public officers with the authentication power of the State...
or any person acting in an official capacity. In so far as the law applicable to the trust requires or provides, this recognition implies in particular: that personal creditors of the trustee shall have no recourse against the trust assets; that the trust assets shall not form part of the trustee's estate upon his insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
or bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
; that the trust assets shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee's estate upon his death; that the trust assets may be recovered when the trustee, in breach of trust, has mingled trust assets with his own property or has alienated trust assets.
However, the rights and obligations of any third party holder of the assets shall remain subject to the law determined by the choice of law rules of the lex fori. Thus, although the Convention makes provision for the trustee(s) and any third parties, it fails to address the position of the beneficiaries who, for example, might wish to pursue assets intermixed with the trustee's personal property through actions for tracing. One of the problems that beneficiaries might encounter is addressed in Article 12 which considers the problem where the situs law does not have a title registration system which reflects ownership registration in a representative capacity. While recognising that the Convention cannot require states to modify their existing registers, it provides that the trustee shall be entitled, in so far as this is not prohibited by or inconsistent with the law of the State where registration is sought, to do so in his capacity as trustee or in such other way that the existence of the trust is disclosed. This implicitly recognises the desirability of all registration systems distinguishing between beneficial and representative titles.
This general difficulty of municipal laws failure to support trusts is addressed in Article 13, which considers the situation of those who wish to create a trust but can only do so by invoking laws entirely outside their own state. As an application of comity
Comity
In law, comity specifically refers to legal reciprocity—the principle that one jurisdiction will extend certain courtesies to other nations , particularly by recognizing the validity and effect of their executive, legislative, and judicial acts...
, no forum state is bound to recognise a trust the significant elements of which, except for the choice of the applicable law, the place of administration and the habitual residence
Habitual residence
In conflict of laws, habitual residence is the standard used to determine the law which should be applied to determine a given legal dispute. It can be contrasted with the law on domicile, traditionally used in common law jurisdictions to do the same thing....
of the trustee, are more closely connected with States which do not have the institution of the trust or the category of trust involved. But, because this could be interpreted as an invitation not to validate otherwise perfectly appropriate financial arrangements for deserving beneficiaries, Article 14 provides that the Convention shall not prevent the application of rules of law more favourable to the recognition of trusts. This reflects the positive rules of public policy
Public policy (law)
In private international law, the public policy doctrine or ordre public concerns the body of principles that underpin the operation of legal systems in each state. This addresses the social, moral and economic values that tie a society together: values that vary in different cultures and change...
which require that the validity of a transaction (whether commercial or not) be upheld if at all possible where this will give effect to the reasonable expectations of the parties. The only exceptions shall be where this will produce consequences offending against the mandatory policies of the forum court in which case Article 18 empowers the court to deny the Applicable Law, even if it has been expressly selected by the settlor. But Article 15(2) nevertheless requires the forum court to consider adopting an approach that will preserve the overall validity of the trust insofar as that generality does not offend against the mandatory policy.
States parties
As of March 2012, 12 countries have ratified the convention: Australia, CanadaCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
(8 provinces only), China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
(Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
only), Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
, Liechtenstein
Liechtenstein
The Principality of Liechtenstein is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east. Its area is just over , and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan...
, Malta
Malta
Malta , officially known as the Republic of Malta , is a Southern European country consisting of an archipelago situated in the centre of the Mediterranean, south of Sicily, east of Tunisia and north of Libya, with Gibraltar to the west and Alexandria to the east.Malta covers just over in...
, Monaco
Monaco
Monaco , officially the Principality of Monaco , is a sovereign city state on the French Riviera. It is bordered on three sides by its neighbour, France, and its centre is about from Italy. Its area is with a population of 35,986 as of 2011 and is the most densely populated country in the...
, the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
(European territory only), San Marino
San Marino
San Marino, officially the Republic of San Marino , is a state situated on the Italian Peninsula on the eastern side of the Apennine Mountains. It is an enclave surrounded by Italy. Its size is just over with an estimated population of over 30,000. Its capital is the City of San Marino...
, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
and United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
(including 12 dependent territories/crown dependencies).
External links
- Text of the Convention, Hague Conference on International Private Law
- Status of ratification and signatories, Hague Conference on International Private Law