Trusts in private international law
Introduction
Private international law concerns the rules about disputes between private individuals in different jurisdictions, not as between nation states. When parties have disputes within the same jurisdiction, there is no debate as to which jurisdiction will govern that dispute.
In the trusts context, trust property and the trust parties (settlor, beneficiaries, trustees etc) are all often domiciled in different places. For example, in Webb v Webb [1994] QB 696, the claimant father sought an order that the defendant son, to whom he had transferred title to land in France, held it on trust for him. The question was whether the English court had jurisdiction to hear the case.
It does not follow from the fact that an English court has jurisdiction to hear a case that English law will necessarily govern the parties’ dispute. It is a separate question which law the court will apply to the dispute. Determination of this question might have significant ramifications if an applicable foreign law differs from English law in its definition, or recognition, or a trust.
In such a case, the English court might have to accept the foreign rules determining the legal validity of the trust, even if the rules of English law would produce a different conclusion. For example, a dispute arising in connection with a private purpose trust set up in the Cayman Islands (which is perfectly valid under Cayman trusts law) may require an English court to recognise the arrangement as a valid trust, even though it would not recognise it as a valid trust under English law.
Thus, a dispute can give rise to the need for legal advice on cross-border issues, lawyers in different legal systems, and enforcement orders in respect of different jurisdictions.
The Hague Convention on Trusts
The main authority in the international law of trusts is the Hague Convention on the Law Applicable to Trusts and on their Recognition. The Convention was signed and ratified in 1987 in the UK.
Article 2 defines ‘trust’ as referring to the legal relationship created (inter vivos or on death) by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for some specified purpose. The language “under the control of” has been criticised by common lawyers for not reflecting the principle that, under a trust, legal ownership has actually passed to the trustee. However, it could be seen as a compromise for civil law jurisdictions, who do not recognise this common law principle.
Article 3 of the Convention does not apply to trusts created involuntarily, i.e. this means that constructive trusts and resulting trusts are outside its scope. Article 4 makes clear that the Convention only applies to the trust’s internal affairs after assets have been transferred to a trustee. It leaves the questions as to the validity of the initial transfer itself, e.g. due to the settlor’s lack of capacity, to the law of the forum.
Other important provisions of the Convention include Article 6, which provides that a trust shall be governed by the law chosen by the settlor, and Article 7, which deals with the applicable law when no law is chosen for a trust. Article 7 provides that a trust is governed by the law with which it is most closely connected, considering factors such as the place of administration, the location of the assets under the trust, the trustee’s residence, and the purposes of the trust. Article 15 provides that the Convention does not prevent non-derogable rules in the national law of choice, particular concerning capacity, marriage, insolvency, protection of good faith third parties, etc. In a similar vein, Article 18 provides that the Convention may be disregarded when their application would be manifestly incompatible with public policy.
Case law
In Akers v Samba Financial Group [2017] UKSC 6, a businessman (Mr Al-Sanea) owned shares legally situated in Saudi Arabia and made himself trustee of them for the benefit of a company incorporated in the Cayman Islands, SIC Ltd. Saudi law does not recognise the concept of a trust, or the division of legal and equable ownership.
SIC Ltd went into liquidation. Al-Sanea transferred the legal title of the shares to Samba Financial Group, a Saudi bank, to satisfy his debt to them. However, the liquidators of SIC Ltd claimed that this transfer was void under section 127 of the Insolvency Act 1986, which provides that during a winding-up by the court, any disposition of the company’s property made after the start of the winding up is void, unless the court orders otherwise.
The Supreme Court clarified some important points. First, Lord Mance confirmed at para [34] that a trust validly created under Cayman law may exist in relation to assets located in a jurisdiction (here, Saudi Arabia) which does not itself recognise trusts. English (and Cayman) trust law can still operate and enforce trusts. Second, it held that the liquidator could not unwind the transfer of the shares to the bank, as it was a third-party bona fide purchaser for value without notice (equity’s darling)—even though the transfer occurred in breach of trust. This is because the beneficiary’s equitable interest was overridden and extinguished by the bank’s status as equity’s darling, rather than transferred, and as such it was not a “disposition” under s.127 of the 1986 Act.
Since there could not have been a relevant disposition, it made no difference whether the dispute was governed by Saudi or Cayman law, and the rules on the Hague Convention need not be considered. Had the matter fallen to be decided, however, the court may have found (as Etherton LC did at first instance) that Saudi law applied under Article 15 of the Convention due to the mandatory lex situs rule, such that no property could have been disposed of for the purposes of section 127.
