J, Loughlin, JD, LL.M., Esq., MFP Mas. Fin. Prof., Attorney-at-Law, Member
Royal Society of Fellows; Member International Bar Association
DOMESTICATION OF THE TRUST
BRIDGING THE GAP BETWEEN
COMMON LAW AND CIVIL LAW:
© 2003 Peter Joseph
Loughlin, Esq., LL.M., J.D., B.A., CTEP, CAM, MFP, Mas, Fin. Prof..
article will examine the Common Law trust and the potentiality and methodology
of incorporating this institution into the domestic law of Civil Law countries.
To create a format for comparison, the trust is the centerpiece from which we
will compare a variety of Civil and Common Law concepts in order to determine
the extent of dichotomy and the pragmatism of domestication. This format was selected
not because the trust is favored for its functionally protean flexibility, although
I do, and not because I see it as an "incoming tide . . . [that] cannot be
held back," flowing into the estuaries and rivers of the civilian's terrain,
but rather because it is practical to select one principal institution to serve
as the benchmark.
This comparative format formed the basis of the Hague
Convention on the Law Applicable to Trusts and on their Recognition as the Report
on Trusts and Analogous Institutions and thus in choosing to place the trust center-stage,
I defer to my learned colleagues at the Hague.
Secondarily to the trust
is featured the fideicommissa, an institution of early Roman law. Trusts and fideicommissum
share much in common in terms of history and function. Even the words "trust"
and fideicommissum both mean a confidence reposed in a person although, they are,
at the end of the day, different.
Note that the sections below that address
the history of the trust and fideicommissum are not intended to provide the reader
with a comprehensive study of their background, but rather to offer a glimpse
to better understand the reasoning behind their modern function. Furthermore,
I compare the history of the trust and the fideicommissum purposely excluding
the history of other modern civil trust-like institutions. This is not because
all of the analogous institutions derive directly from the Roman fideicommissum,
they of course, do not. The leges barbarorum and other purely Germanic contributions
have, in a genuine sense, added to the sum of modern Civil Law. However, the greatest
progress was made in areas where Germanic law lagged behind, that is, in contract
and property rights. Likewise, the Church, which has historically exerted great
influence over the governments and daily life on the continent held great sway
in the area of succession and property law. All of these contributing influences,
however, share a broad similarity in terms of civil law principles, to that extent,
the fideicommissum supplies an ample paradigm.
Common Law trusts come in
a wide array of classifications, including charitable trusts, trusts of imperfect
obligation, or purpose trusts, constructive trusts, and resulting trusts. For
purposes of this examination, however, we will generally limit our discussion
to express private trusts, as its fundamental principles are most generally applicable
to all classes of trust.
The popularity of the English trust has steadily
increased over the centuries and is now well known throughout the world. This
is partially attributable to the enormous success of British colonization in which
its culture and law were exported to and eagerly embraced by its subjects. Even
where independence was later obtained by revolution or Parliamentary Act, the
former colonies and territories continued their love affair with British refinements,
with the law being no exception. The fact that the trust has flourished in England
and its common law progeny is not what is so remarkable. What is remarkable is
the newfound interest of the trust in Civil Law countries. Recent evidence of
this may be seen by the mere existence of the Hague Convention on the Law Applicable
to Trusts and on their Recognition. Adair Dyer has formulated a two-pronged hypothesis
to explain the civilian fascination with the trust.
1) The development of
the European Common Market in the late 1970s engendered the settlement of many
English and American citizens in continental Europe owing to the attractiveness
of the unified market. Many of these expatriates would then acquire property in
these civil law countries and the property would inevitably end up as the corpus
of a new or preexisting testamentary or inter vivos trust. As the practice continued,
civil notaries and jurists were compelled to deal with issues concerning these
common law trusts.
2) Similarly, owing to the expansion of the Common Market,
many civilian expatriates settled in the United Kingdom, United States or in one
of a multitude of other common law jurisdictions. These persons might then establish
a trust in which the corpus consisted of their assets in a civil jurisdiction.
At some point the civilian courts were forced to consider the beneficiaries' (or
creditors') rights in these properties.
I am not suggesting that the civilian
has or will completely embrace the trust. In fact, Dyer himself points to the
relatively paltry number of ratifications to the Convention since July 1985. It
should not be expected nor recommended that the civilian quickly bow to the Crown
of Common Law and cast aside domestic law. As will be examined here, there are
many potential conflicts for the civilian in recognizing the trust and even greater
dangers in bringing the trust within their domestic law. Some legal commentators,
in fact, find the Civil Law to be, in some ways, superior to the Common Law.
step in domesticating the trust into civil law countries, if it be advisable or
capable of being domesticated at all, must be carefully considered lest we disturb
the delicate legal structure that history has assembled in the respective systems.
BRIEF HISTORICAL BACKGROUND OF THE COMMON LAW TRUST
The modern Common
Law trust evolved from English history and is founded in what is considered the
uniquely English "legal" concept of equity. To that extent, the term
"Common Law trust" is largely a misnomer in that English common law
and equity are separate legal systems.
Equity can be viewed upon
conceptually as a system of fundamental fairness which developed to counteract
the harshness and limitations of the common law and its associated legal remedies.
Real justice, then, was to be found in the King as the embodiment of the fons
et origo justitiae, that is, the fountain and source of justice. "Equity
grew out of the residuum of justice left in the King" where the common law
system of writs resulted in unduly harsh or inadequate remedies. In its early
development, the King would refer such complaints to the advice of his Council.
The Council in turn would refer the matter to the Chancellor who was, in the early
period, not a lawyer, but rather an ecclesiastic trained in Roman law and canon
law. The Chancellor was said to be imbued with the "King's conscience,"
and possessed the authority to override the abstention or judgment of the common
This function of the Chancellor eventually evolved into the
Court of Chancery.
Ultimately, in the early 16th century, the ecclesiastical
reign itself gave way to the lawyers who began to carve out a system of equity
which would ultimately be lauded as "[a] noble, rational and uniform system."
This point is quite important if we are to look with an analytical perspective
toward the theme of this examination. It is also important to note that the term
"equity" in a legal context is not exactly what the word denotes in
its customary usage. Equity as a system of law is more narrowly tailored than
the general lay concept of equity and fundamental fairness.
what is Equity's greatest contribution to the world? Equity has presented the
world with its " . . . largest and most important invention," the trust.
The trust is thus said to be a creature of equity and, assuming its genesis
is properly found there, how was it born? According to Professor Hayton, the trust
developed from the rather ignoble medieval practice of conveying property to a
use. Essentially, a feoffor would convey his estate in land to a feoffee to hold
for the use of a beneficiary or "cestui que use." A historical curiosity
of this development was that the feoffee was given over title to the feoffor's
estate with the cestui que use having no enforceable legal rights against the
feoffee should he fail to discharge his moral obligation. Notwithstanding the
inherent risks, the inability and inequity of the common law in defending the
"rights" of the cestui que use could be tempered by equitable intervention.
The scheme thereafter developed rapidly into a viable and frequent device to avoid
conveyance taxes, that is, fines and incidents associated with the feudal system.
The trust or use became so popular that during the reign of Henry V (1413-1422)
the majority of the land in England was held in use.
In due course, Parliament
(and King Henry VIII) were moved to enact one of the world's earliest anti-avoidance
statutes, the Statute of Uses 1535. The effect of the statute was, however, arguably
contra to its purported purpose. Over the next several centuries the statute was
rather strictly interpreted by the courts in favor of finding that the statute
did not succeed in eliminating the use or the practice of separating a beneficial
and legal interest in the estate. The use continued and "what began life
as the 'use' came to be known as the trust as a result of the Statute of Uses."
This is largely due to the courts' interpretation of the Act as not prohibiting
a "use upon a use" and the conclusion that the second use was the "trust."
"A" the legal owner holds for use of "B"
who holds for the use of "C"
Thus the second use ("B")
was thereafter called a "trust" and the holder ("A"), the
"trustee." "C" was then the "cestui que trust."
As the trust's popularity expanded, the Court of Chancery had opportunity
to broaden and impose its system over the void of common law. Over time, Equity
perfected the concept of duality of estates and the equitable remedies of the
cestui que trust. By finding the feoffee to have a legal estate subject to an
equitable interest, there are in effect two estates. From this seemingly logical
concept leaps the proprietary interest of beneficiaries and the arrival of the
modern Common Law trust.
BRIEF HISTORICAL BACKGROUND OF THE FIDEICOMMISSUM
said Ihering, "did Rome conquer the world: by her arms, by her church and
by her law."
The roots of the fideicommissum, and its progeny in Civil
Law, can be traced back to early Roman law. While the fideicommissum is often
referred to as a civilian trust, this is not quite the case. Further, this institution
has metamorphosed into a number of subspecies in the modern context and must be
examined on a jurisdiction-by-jurisdiction basis. Notwithstanding, there are a
number of notable similarities in the development of the civilian fideicommissum
and the Common Law trust.
One of the earliest uses of fideicommissum stemmed
from the provision of Roman law that restricted inheritance from the paterfamilias,
or head of the Roman family, to non-citizen heirs. Furthermore, there was virtually
no substantial means of effecting succession to female heirs irrespective of their
citizenship. Establishing a fideicommissa provided the Roman testators/settlors
with a means of providing for his ineligible heir or legatee, permitting him/her
to benefit from the estate by indirect means. By this arrangement the Roman citizen
would appoint a "trusted" friend to take the estate subject to a moral
obligation to restore the true intended recipient.
This purpose closely
parallels the early English use, particularly in that the trusted friend, as fiduciary,
held dominium over the estate until it was restored to the fideicommissary, that
is, the beneficiary. As with the trust, the obligation to the beneficiary was
not one for which he could seek legal remedy, for there was none. The obligation
was one founded on good faith and is expressed by Cicero as:
est institiae fides, id est dictorum conventorumque constantia et veritas.
foundation of Justice is good faith-in other words, consistency and truthfulness
in regard to promises and agreements).
Cicero, De Officiis 1 .7. 23.
this paradigm, an aggrieved fideicommissary would appeal to the Roman Emperor
seeking relief for breaches of moral obligations, who would, in turn, order the
consuls to fashion an "equitable" remedy. Eventually this practice grew
in popularity and a special practor, the practor fidiecommissarius, was appointed
to deal with fideicommissa. This closely mirrors the English role of the Chancellor
in the twelfth through the fifteenth centuries. Further, the historian, Gibbon
said, "the invention of the fideicommissa or trusts, arose from the struggle
between natural justice and positive jurisprudence. . . . " This is strikingly
similar to the symbiotic relationship that developed between the common law and
equity of which, Frederic William Maitland said, "equity without the law
would be as a castle in the air, an impossibility." I think Maitland might
have uttered similar words in describing the civilian model.
this discussion has reviewed the English trust followed by Roman law and the fideicommissa,
it is important to note that historically, the latter precedes the former. In
fact, when William the Conqueror introduced Common Law in England in 1066, the
Corpus Juris Civilis was already in existence for more than 500 years. To a very
real extent, the civilian experience with equity was a primer to the "Kings
conscience" and his ecclesiastic Chancellor-trained in Roman law. Even the
supposed unique Common Law concept of a proprietary right and in rem tracing is
found in early Roman law. Quoting Justinian, "But . . . if in his lust for
wealth he should hastily proceed to sell or mortgage in the hope that the condition
will not take effect, let him know that upon the fulfillment of the condition,
the transaction will be treated as of no effect from the beginning. . . ."
The following discussion will examine the typical structure of the modern
trust to establish a yardstick of comparison.
FEATURES OF THE MODERN TRUST
dramatis personae of a modern trust are the settlor, the trustee(s) and the beneficiary.
These titles are commonly associated with the express private inter vivos trust,
that is, a trust established during the lifetime of the settlor and, while not
the only designations used in this context, will be the labels used somewhat exclusively
for the purpose of this examination. Further, it should be noted that there is
no statutory definition of a trust and there exists a scholarly consensus that
a trust cannot be defined; we will therefore dispense with such futilities and
look to the parties and metes and bounds of the trust relationship. A number of
concepts essential to our examination, such as dual ownership, proprietary rights
are briefly mentioned in this section to provide the reader with a point of reference
for a more in depth discussion to follow in subsequent sections.
the relative positions and responsibilities of the parties to a trust starts with
the settlor. The settlor essentially establishes a trust by having the requisite
intent to do so, by transferring title to the subject matter property (the trust
res or corpus) to another or others, the trustee(s), for the benefit of a third
party (or legally recognized purpose) known as the beneficiary. Further, the transfer
of the subject matter of the trust must be made in compliance with the requisite
formalities for the type of property involved. An alternative means of creating
a trust provides for the settlor to declare himself trustee for the benefit of
a beneficiary, although this may bring with it negative tax consequences for the
Though much has been written of the settlor's role, Lord Langdale
clearly and succinctly delineated the role of the settlor in the landmark English
case Knight v. Knight. In this case, his Lordship discusses, in orbiter, "the
three certainties." Briefly, they are as follows:
of Intent - The settlor's intent to establish a trust must be clearly established
before a trust will be found. A purported trust instrument in which mere precatory
words are used will generally not be sufficient.
· Certainty of
Subject Matter - The trust corpus must be unambiguous and clearly defined. Careless
lack of specificity will result in the trust being invalidated.
Certainty of Objects - The intended beneficiaries must be ascertainable. This
is not to say that the beneficiary must be absolute, he does not. A beneficiary
may be discretionary, a member of a class, etc., and subject to the appointment
of the trustee, however, the postulant(s) must not be ambiguous nor the class
so broad as to impede reasonable identification.
trustee, upon accepting his appointment, takes on the mantle of a fiduciary with
respect to his obligations to the beneficiary and the trust res. Further, he is
obligated by the express and implied terms of the trust instrument (which may
be oral unless otherwise required by law) and any applicable statutory or court
imposed duties. As a fiduciary, the trustee owes a duty of loyalty and care to
the beneficiaries, must avoid conflicts of interest, self-dealing and, absent
a charging clause, may not receive compensation for his duties.
will initially make an accounting of the trust corpus, and manage the property
in a prudent manner for the benefit of the income/capital beneficiaries. In undertaking
these duties, the trustee(s) take legal title to the property, however, this title
remains subject to the proprietary, equitable interests of the beneficiaries.
This bifurcation of "ownership" is sometimes referred to as dual ownership,
or the "duality of estates."
Duality brings with it some interesting
consequences, for example, while the trustee(s) hold legal title, the property
is insulated from the trustee's creditors, judgments and marital property distributions.
Further, it is also notable that the settlor's ownership is completely severed
as are his rights to force his will upon the trustee with respect to his duties
and/or distributions. Notwithstanding, some trust instruments provide for the
reservation of certain powers by the settlor. An example of this would be reserving
the right to replace the trustee or to appoint/replace a protector to assure that
the settlor's intentions are properly carried out.
With respect to such
reservations, the trustee may consider the settlor's wishes but must be careful
not to breach his duties to the beneficiaries as his liability is personal. Additionally,
the settlor needs to be wary of reserving such extensive rights as to run the
risk of the trust being deemed a sham and therefore a nullity.
trust is discretionary, the trustee generally may not be obliged to appoint a
beneficiary, however, he must at least consider, from time to time, whether or
not to make an appointment.
The Beneficiary (or Purpose)
above, the beneficiary obtains an equitable interest in the trust res by virtue
of the creation of the trust in his favor. This is unique in that the beneficiary
enjoys a proprietary right in the property notwithstanding his not being party
to the circumstances leading to its creation. In fact, the beneficiaries' rights
are established though they may be completely unaware of them. Compare this with
the generally strict English reluctance to find vested contractual rights for
third party donee beneficiaries of a contract. Although American jurisprudence
has long ago dispensed with this rule, the contractual third party beneficiary's
remedy is, however, limited to legal relief.
The beneficiary of a trust
does have some legal remedies against the trustee. For example, the beneficiary
has at his disposal the power to bring an action in personam against the trustee
for breach of trust. In addition, the beneficiary may trace the actual trust property
to multiple layers of transferees as well as to different changes in form that
the property may undergo.
As broad as these equitable remedies may be,
they are not without limitation. To a large extent they are limited by the tenets
of equity itself. For example, where a beneficiary is complicit in the trustee's
breach, he will not receive relief notwithstanding that other innocent beneficiaries
have found equitable relief. Moreover, where there are equal equities, for example
where a transferee is a bona fide purchaser for value and without notice ("Equity's
darling"), equity will not interfere to set aside an unauthorized conveyance
of the trust res from the trustee to a BFP. Likewise the beneficiary's rights
are subject to other equitable defenses such as laches and the clean hands doctrine.
the beneficiary's interests in the trust property, and in accordance with the
concept of "duality of estates," a beneficiary's creditors will often
find that they are unable to attach the trust property or otherwise give effect
to a charging order against a debtor beneficiary of a trust-unless or until there
is a present interest or distribution. For this reason, trusts are a useful tool
for providing for an irresponsible family member or avoiding creditors of an intended
beneficiary, for example, a protective or spendthrift trust. This strategy is
sometimes attempted by settlors, however, where the trust names the settlor as
the sole beneficiary or violates fraudulent transfer provisions, the trust would
not be likely to prevail.
A brief discussion of purpose
trusts is in order so as not to confuse our understanding of the beneficiary principle.
The general rule in English common law is that unless the trust is established
for an ascertainable beneficiary, that is, a person(s) who may enforce rights
under the trust, it may not be for a purpose save a legally recognized charitable
purpose. Notwithstanding the above, Common Law courts have long tolerated private
purpose trusts as a "concession to human weakness" but have successfully
limited those purposes to such things as the maintenance of monuments, graves,
churchyards and for payments for memorial masses - all subject to the common law
rule against perpetuities (not applicable to charitable trusts).
some Common Law jurisdictions, particularly in offshore financial centers, have
begun to deviate from the English aversion to purpose trusts. One adaptation is
the so-called "STAR trust" which presumably can be created for any "legal"
purpose irrespective of the absence of an interested beneficiary with enforceable
rights. This may be sounding the death knell on the long-standing Bishop of Durham
case, however, it is too early to predict how such trusts will fare under the
scrutiny of courts in more traditional jurisdictions.
OF THE PROBLEM: IS THERE A NEED FOR DOMESTICATION?
Although Common law has
been exported successfully throughout the world, Civil law has well rooted itself
on the global scene. There are currently eighty-seven purely Civil Law jurisdictions
throughout the world. (See Table 1) Compare the number of Common Law jurisdictions
which is forty-three, roughly half that of civil jurisdictions. (See Table 2)
However, comparing the number of jurisdictions does not fully illustrate the immensity
and extent of the problem faced in the importation of the trust. Looking to Table
4 below, we see that the percentage of world population attributed to Civil Law
jurisdictions is 23.95% while Common Law jurisdictions represent a mere 6.41%.
As such, domestication of the trust is an enormous undertaking which perforce
will require the cooperative acceptance and efforts of myriad individuals, nations
and political systems.
Of course, some jurisdictions have been influenced
by both the Civil and Common Law and have developed mixed or hybrid systems. (See
Table 3) These bijural systems have, in some ways, successfully forged a system
that focuses on utilizing the best components of each system. In Part IV, we will
examine Scotland, a mixed jurisdiction, that has established a well reasoned and
well functioning "trust" that comes extremely close to the results achieved
with the Common Law trust and may serve as a viable model for domestication.
should also be noted that many countries have legal systems that are not directly
derived from either Common Law or Civil Law, but have developed from other sources,
most notably Russia and the Scandinavian nations-notwithstanding that the Romantic
influence on their respective systems has been overwhelming.
examination here is restricted to the domestication of the trust in civilian jurisdictions,
recognition of the breadth of Civil Law jurisdictions and the existence of other
distinct legal systems serves to underscore the complexity of the domestication
CIVIL LAW JURISDICTIONS
Central African Republic
Pierre & Miquelon
Serbia & Montenegro
COMMON LAW JURISDICTIONS
Antigua & Barbuda
Saint Kitts & Nevis
Saint Vincent & Grenadines
Turks & Caicos
MIXED COMMON LAW AND CIVIL LAW JURISDICTIONS
WORLD POPULATION AND LEGAL JURISDICTIONS
CIVIL LAW JURISDICIONS
Number of Jurisdictions
of World Population
COMMON LAW JURISDICTIONS
Number of Jurisdictions
Percent of World Population
OF COMMON LAW AND CIVIL LAW
Number of Jurisdictions
of World Population
CUSTOMARY LAW JURISDICTIONS
Number of Jurisdictions
Percent of World Population
MUSLIM LAW JURISDICTIONS
Percent of World Population
Civil Law Trust-Like Institutions
In order to fully appreciate the extent of
resistance to domestication of the trust it is important to note that each Civil
Law country currently has a variety of trust-like institutions that function,
individually or in combination, to achieve results similar to the Common Law trust.
Furthermore, each country has its own unique variations, many of which have derived
directly from the fideicommissum, but none function exactly as the trust. Therefore
the civilian may raise a credible argument that there is no need for domestication
as there exists civil institutions capable of achieving substantially equivalent
results as the trust. Though this argument has some validity, the results achieved
under such civil institutions are generally not achieved with the same efficiency
as with the trust.
Following is a small sampling of civil institutions purported
to be "equivalent" to the Common Law trust. For convenience, they are
examined on a country-by-country basis.
does not recognize a legal institution directly equivalent to the common law trust.
The prevailing view in the Netherlands is as follows. The common law trust leads
to a splitting-up of ownership rights, or the creation of rights in rem, in a
manner not provided for by law, and therefore infringes on [their] closed system
(numerous clauses) of rights in rem." Notwithstanding, the Dutch have come
remarkably close to replicating the trust in a number of their trust-like institutions.
Fiducia Cum Amico
The fiducia cum amico has a long history in the Netherlands
and is recognized under the Burgerlijk Wetboek, the Dutch Civil Code. Further
support was given to the institution by the Hoge Raad, the Dutch Supreme Court
in the Sogelease case HR 19 (1995), confirming the fiducia cum amico's legal position
in Dutch society.
With the fiducia cum amico, the transferor (settlor)
transfers assets to a third party called the fiduciarius (trustee) to manage for
the benefit of the beneficiaries. Under this institution the fiduciarius not only
manages the assets, but also becomes the legal owner of the assets. In fact, validity
of the institution is based on the fiduciaries taking absolute title to the managed
assets. On the surface all of this seems to be very much the like trust, but there
are several key differences, as the following discussion demonstrates.
any claim by the beneficiary against the fiduciarius is strictly in personam and
not in rem. This means no in rem third party tracing. Further, the assets are
not held as a separate fund and thus are subject to attack by the manager's creditors,
and the beneficiaries are not deemed to be priority creditors of the assets. Normally
such arrangements operate with few problems, however, in the case of an insolvent
or unscrupulous fiduciarius, the beneficiaries' remedies are more limited than
with the Common Law trust.
The nominee account has been
described as a variation of the fiducia cum amico and, when used in a particular
manner, more nearly replicates the trust. The institution works where certain
assets are transferred to an agent (trustee) who establishes an account in his
name/capacity for the benefit of beneficiaries. The main difference is that the
bank account is deemed separate from the agent's estate in the event of his insolvency.
This would then protect the beneficiaries' interest in the account should the
agent become insolvent. While this does not answer the question of the agent's
improper transfer of the assets to third parties, it comes quite close to the
trust in other respects. One additional drawback of the nominee account is that
it is limited to assets placed in a bank account and would not be applicable for
a variety of other forms of property. Notwithstanding, the nominee account may
provide some foundation for investigating the feasibility of expanding its use
into a fully domesticated trust.
The bewind is another interesting
Dutch institution with trust-like qualities. Under the bewind, the transferor
(settlor) transfers assets to a bewindvoerder who administers the assets on behalf
of the named beneficiaries. As with the trust, the transferor/settlor parts with
ownership of the assets, however, with the bewind it is not the bewindvoerder
who takes ownership, but rather it is the beneficiaries who are vested with title.
This, of course, eliminates the problem of the insolvent trustee (bewindvoerder),
however as the assets are part of the beneficiaries estate, no protection is afforded
to the beneficiary with respect to his own creditors.
a privative mandate, assets are transferred over to a mandatary to hold, manage,
and/or dispose of as an agent of the transferor for the benefit of beneficiaries.
Again, all is not what it seems to be on the surface. Here the mandatary is merely
an agent of the transferor/settlor and thus legal ownership remains with his principle-the
"settlor." This would leave the assets open to attack by the settlor's
As stated in the National Report for Spain, "Spanish
law does not know the trust concept as such. Like other civilian systems it follows
the absolute theory of property which does not allow for a division between legal
rights in rem pertaining to the trustee and equitable rights in rem belonging
to the beneficiary."
Fiducia Cum Amico
Spain also has institutions
that function similar to the Common Law trust. One of these institutions, the
fiducia cum amico, is quite similar to the Netherlands' institution of the same
name. Under the Spanish model, the settlor's role is known as the fiduciante while
the trustee's role is the fiduciario. The fiduciario becomes the absolute owner
of the assets subject to the terms of the "trust" instrument, the pactum
fiduciae. As with the Netherlands' version, the Spanish model has a number of
flaws that prevent it from being a truly acceptable trust substitute. Firstly,
the rights of the beneficiary are personal rights against the fiduciario and not
against third party transferees, that is, no in rem tracing. Secondly, the assets
held by the fiduciario do not constitute a separate fund and thus are freely open
to attack by his personal creditors in the event of his bankruptcy.
Kotz points out in the National Report for Germany, "[n]owhere in German
law can one find any single institution which by itself performs all those functions
for which the common lawyer deploys the trust. The idea of having two persons
occupying owner-like positions with regard to the same thing in such a way that
one of them, as 'legal owner,' has powers of disposition 'at law' and the other,
as 'equitable owner,' has certain rights recognized in equity is a concept that
seemed to Maitland 'almost essential to civilization'. Yet there is nothing quite
like it in German law."
institutions provide a good example of combining a number of civil trust-like
institutions to imitate the function of a Common Law trust. For example, by combining
three German succession vehicles, the Nacherbfolge, gemeinschaftlicches Testament,
and the Testamentsvollsteckung, a Common Law testamentary trust is loosely replicated.
this strategy, a testator's assets are transferred to a third party (trustee)
to administer the assets for the "first heir" surviving spouse, and
upon her death or remarriage to administer the assets for any surviving issue,
the "second heirs." When youngest surviving issue reach maturity, the
assets are then distributed to them in shares predetermined under the agreement.
The first heir would normally take absolute ownership of the assets and thus would
be free to dispose of the assets notwithstanding the third party administration
of the assets-thereby defeating the second heir's interest.
This is where
the arrangement may begin to resemble a testamentary trust. The "testator"
may make an inter vivos transfer to a testamentary executor, the Testamentsvollstecker,
vesting him with absolute power over his assets to dispose of them according to
his wishes. Note that the first heir is still vested with absolute ownership but
without the power of disposition.
This seems very much like divided ownership
despite the German disclaimers, and comes rather close to a testamentary trust.
Still, there is no separate estate, and should the first heir become insolvent,
the second heirs (beneficiaries) would not have a priority claim over the first
heir's personal creditors. As such, the German testamentary trust is wanting and
not as practical or efficient as a Common Law testamentary trust.
With a fiduziarsche treuhand, assets are transferred over to a treuhänder
(trustee) under a contract to manage for the benefit of third parties. The contractual
arrangement is most analogous to an American third party beneficiary contract
and, as such, the beneficiaries rights are said to be in ius quaesitun tertio
and merely in personam-and not in rem.
Notwithstanding, the role of the
treuhänder is quite similar to the Common Law trustee in that his duties
are deemed to be those of a fiduciary. The beneficiaries' remedies for the treuhänder's
breach are, of course, contract based and not real but personal. Still, there
is a curiosity of German law that, at least, results in an outcome that could
certainly be defined as quasi in rem. Under German law, where a treuhänder
contracts to manage assets for beneficiaries and those assets are held without
change in the form originally received, the treuhänder's personal creditors
may not reach those assets unless they were incurred directly in the administration
of the treuhand assets. Additionally, in cases of the treuhänder's bankruptcy,
the beneficiaries are entitled to demand and receive the assets held by the treuhänder.
this clearly creates a separate fund and closely mimics in rem rights, for practical
purposes this feature may be of limited utility, since most assets held by a trustee
or their equivalent undergoes many changes in form in the proper administration
of the assets. For example, company shares may be purchased and exchanged for
investment profit and immovable property may likewise be held, disposed of, and
acquired. Therefore, it is likely that prudent management of the assets would
generally mandate a change in form and thus eliminate the benefits of a separate
estate available only where the assets are held in their original form. With this
understanding, the assets held in a fiduziarsche treuhand, as with most other
civilian trust-like institutions, do not constitute a separate fund and thus are
generally subject to creditor attack.
Professor Kotz points to another distinction
between the Common Law trust and the fiduziarsche treuhand. That is, the German
courts, unlike their Common Law counterparts, have no inherent supervisory powers
over the institution. Therefore, where, for example, the treuhänder fails
to properly comply with the management scheme set forth in the contract or fails
to undertake his duties at all, the beneficiaries may not petition the court for
his removal and replacement.
In general, the fiduziarsche treuhand is similar
in function to the trust, but lacks the efficiency and important remedies available
to beneficiaries of a trust.
The treuhandkonto, a variation
of the fiduziarsche treuhand, comes a bit closer to replicating the trust. Unfortunately,
this institution is not of general utility and is applicable to specific and limited
circumstances. With the treuhandkonto, a notary acts as treuhänder and opens
a bank account on behalf of a third party. Typically, this is to be used as an
escrow account to protect the vendor's purchase money payment until the vendee
fulfills all obligations concerning the transfer of property. What differentiates
the treuhandkonto is that the assets held by the notary/treuhand are absolutely
not deemed to be part of his personal estate and thus constitute a separate fund
with respect to his creditors. In this respect, the treuhandkonto comes very close
to functioning as a trust although any rights vis-à-vis the treuhänder
remain purely personal.
Italy has a number
of trust-like institutions that are worth mentioning. One of them, the fondopatrimoniale,
comes rather close to the trust in some respects.
The fondopatrimoniale is
established by a married couple or by one of the spouses to set aside certain
assets to provide for family needs. The spouse or spouses make a declaration establishing
the institution with absolute ownership vesting in the spouses. The spouses essentially
are trustees of the fund, which, under Italian law, will constitute a separate
fund unreachable by the spouses' personal creditors, save for debts attributable
to the "family needs." Issue of the marriage, however, are not vested
with a proprietary interest in the assets and the fondopatrimoniale automatically
terminates upon dissolution of the marriage. Here the result is somewhat similar
to a Common Law family settlement, however, no beneficial interest is ever perfected
in the issue, thus there is apparently no enforceable right in rem or in personam.
is no institution called 'trust' in Swiss law . . . Swiss law not offering anything
equivalent to the trust, practice tends to have recourse to trusts of other jurisdictions."
While Switzerland is noted as a world-banking center, it has thus far avoided
development of the trust under its law. The Swiss, however, have used a combination
of trust-like institutions to simulate the function of the trust. One institution
stands out as being most similar to the trust, that is, the fiducia cum amico.
Under this institution the fiduciant (settlor), transfers certain
assets to a fiduciaire (trustee) under a contract to manage those assets for beneficiaries.
This operates much the same as in the other jurisdictions we have discussed, with
one apparent twist. While the fiduciaire takes title to the assets absolutely,
Swiss law is unsettled as to the status of those assets in the event of the insolvency
of the fiduciaire. Certain authorities opine that where the arrangement is of
short duration the assets should be held in priority in favor of the fiduciant.
Additionally, the fiduciant can give directions to the fiduciaire at any time
and also retains the power to revoke the arrangement at any time. Compare this
with the trust where the settlor is largely prohibited from directing the trustee's
management of the trust res and where the trust is normally irrevocable.
light of the limitations discussed above, it appears that the Swiss institutions
do not currently present an adequate trust substitute.
privatstiftunggesetz is a form of foundation. Foundations are created by will
or inter vivos and are created by a founder transferring assets to a management
council, a separate legal entity, for some legally authorized purpose. Such purposes
are normally limited to charitable, cultural, or scientific advancement. Foundations
are used in many other civilian jurisdictions such as Germany Liechtenstein, Switzerland,
and Panama. What makes Austria's foundation, the privatstiftunggesetz, so unique
is that it may be legally established for almost any purpose including the benefit
of individual beneficiaries.
Moreover, under the privatstiftunggesetz, the
founder (settlor) may revoke or revise the arrangement at will and the institution
can continue for one-hundred years, and is capable of being renewed for an additional
one-hundred years-flexible features not even available in Common Law trust which
are normally limited by the rule against perpetuities. As wonderful and innovative
as the privatstiftunggesetz is, the beneficiaries' rights are not in rem but rather
In examining this sampling of Civil Law trust-like instruments,
it appears that a number of institutions come rather close to replication of the
trust, however, each is deficient in some way. Further, even where these civil
institutions are used in combination to achieve a trust-like result, they are
generally cumbersome and less efficient than the Common Law trust. Therefore,
there seems to be adequate evidence of a need for the trust in the civilian regime.
Irrespective of this apparent need, and as the following discussion illustrates,
there are a variety of conceptual problems and a countless other barriers to domestication
that must be understood and overcome before domestication can become a reality.
PROBLEMATIC TRUST CONCEPTS FOR THE CIVILIAN
"The heart of the difficulty lies in the fact that trust property
has two contemporaneous owners."
"But, wherever the Common
Law penetrates, it carries with it its younger sister Equity along with the whole
apparatus of trusts and the distinction of legal and equitable ownership - things
utterly incomprehensible to the civilian mind."
"To the tightly
logical civilian mind, regardless of the number of angels that may dance on the
point of a needle, two persons cannot occupy the same point at the same time,
and there cannot be two owners, legal and equitable, of the same property."
The above quotations from Professors Amos, Lee, and John Wisdom respectively,
succinctly set forth the civilian aversion to dual ownership. Notwithstanding,
the concept is generally held to be a distinguishing feature of the Common Law
trust. The Privy Council acknowledged this unique feature of the trust in its
decision in Abdoul Hameed Sitti and Another v. De Saramand Others. Here, their
Lordships adopted Professor Lee's explanation in his work, Introduction to Roman-Dutch
Law 372 (3d ed. 1931):
1) The distinction between the legal and equitable
estate is of the essence of the trust.
2) In the trust, the legal ownership
of the trustee and the equitable ownership of the beneficiary are concurrent and
often co-extensive; in the fideicommissum the ownership of the fideicommissary
begins when the ownership of the fiduciary ends.
3) In the trust, the interest
of the beneficiary, though described as an equitable ownership, is properly jus
neque in re neque ad rem against the bona fide alienee of the legal estate it
is paralysed and ineffectual; in the fideicommissum the fideicommissary, once
his interest has vested, has a right which he can make good against the world,
a right which the fiduciary cannot destroy or burden by alienation or by charge.
civilian aversion to dual ownership was reinforced during the French Revolution
where all forms of separated ownership became associated with feudalism and thus
taboo. The numerous clauses theory developed wherein multiple interests in property
were restricted to real property servitudes, mortgages, and usufructs. The influence
of the revolution and numerous clauses theory are still present today and thus
serve to buttress what is likely the major frustration to domestication of the
trust in Civil Law.
Considering the apparent repugnance to the concept of
dual ownership that permeates Civil Law, acceptance of such theory will not be
easily accomplished. In order to determine if a compelling case can be made in
its favor or, in the alternative, if compromise is to be reached, we must more
fully understand the nature of duality of ownership.
What is Ownership?
Law Dictionary defines "owner" as:
The person in whom is vested the
ownership, dominion, or title of property; proprietor. He who has dominion of
a thing, real or personal, corporeal or incorporeal, which he has a right to enjoy
and do with as he pleases, even spoil or destroy it, as far as the law permits,
unless he be prevented by some agreement or covenant which restrains his right.
Under this definition, may the trustee be said to be an owner of the trust
property? Firstly, the subject matter of the trust may certainly be real or personal,
corporeal or incorporeal, so irrespective of the particular character of the property,
ownership may be contemplated. Secondly, the trustee is limited in his ability
to enjoy and do what he pleases with the property. True, he may at times be permitted
to sell property, however, this is subject to the express or implied terms of
the trust, thus not an unfettered right. Further, spoliation and destruction of
the property would be tantamount to a breach of trust. The "dominion"
of the trustee is, then, imperfect and thus not dominium plenum. The trustee does,
however, have legal title to the property, but his nominal ownership does not
meet the broad terms of ownership set forth in our definition.
Is the beneficiary,
then, the owner of the property? Again, the character of the property is not determinative.
Here we find that a beneficiary may sell, mortgage, devise or bequeath his interest
in the trust property and he may do so, generally as he pleases. Where he may,
for example, have a possessory interest in the property, such as where a beneficiary
resides in a home which is the subject matter of the trust, he may not waste or
destroy the property. Further, he lacks title and dominion over the trust property
until the property is disposed of in his favor. Therefore the beneficiary, while
also having a number of incidents of ownership, fails to meet the broad definitional
requirements of ownership.
Maitland warns that we must not speak of the
beneficiary as the owner of the trust property and Sir Edward Coke similarly cautions
of such determinations as leading to anarchy. Notwithstanding this sage advice,
we cannot blind ourselves to the reality that both the trustee and beneficiary
each have some qualities of ownership, but each ownership is imperfect thus neither
is an owner in the truest sense of the word.
I submit that there is in
reality no dual ownership in the Common Law trust and that it is a mere fiction,
a term of convenience that serves to keep the historical myth alive. What we really
have here is a divided ownership, one in which the benefits and burdens are separated
for the purpose of insulating the estate and/or providing an effective means of
succession. This view is not novel by any means and has been the topic of academic
discourse for centuries. Professor Fratcher, in the International Encyclopedia
of Comparative law writes: Because both the trustee and beneficiary have concurrently,
in rent interests in the subject matter, the creation of a trust normally involves
a splitting of ownership. [Emphasis added]
The rejection of the dual ownership
theory is likewise supported by Bernard Rudden who has stated, "the orthodox
explanation, given in terms of the traditional distinction between law and equity,
provides only a historical and not a rational account of the trust".
truth, the concept of duality has served us well. For example, if the beneficiary
is found to be the owner of the trust property, then his creditors may freely
reach the property in satisfaction of his debts. Moreover, true duality or even
divisional ownership is a precursor to the finding of a special patrimony, or
separate estate inviolable by creditors of the trustee and beneficiary. Thus maintaining
the status quo is more an issue based squarely on public, commercial and economic
policy rather than one of law or logic. I am not denying the efficacy of the concept
in its application, I do, however, object to holding out fiction as universal
I would be remiss if I failed to point out
that the feature of special patrimony or separate estate, or fund, as it is sometimes
referred to, is the issue on which there seems to be a degree of common ground
between Civil Law and Common Law. Professor Gretton points out that the concept
dates back to early Roman law. Though the concept has, according to Gretton, lost
widespread favor in the 19th century, the idea is not one which the civilian would
object to on traditional grounds. In a trust the trustee becomes, as we have noted,
the, legal owner of the trust property. His general patrimony, or estate, would
consist of all that he owns less his liabilities. The trust res is not considered
part of his estate in terms of the matrimonial estate or his general estate, falling
instead within the fund or special estate, thus not subject to attack by his personal
creditors-the insolvency effect.
Realistically, however, there remain some
substantial differences between separate estates and trusts that may not be possible
to remedy without major modifications to Civil Law. Consider for a moment that
the Common Law trust affords the beneficiary a wide degree of protection from
creditors by virtue of the fact that the trust res is not legally his property.
True, a bankruptcy trustee may at times successfully defeat this separate fund,
particularly where the recipient is the sole beneficiary of a fixed fund, however,
careful drafting to create a discretionary trust, protective or spendthrift trust
will normally afford complete protection against the beneficiary's creditor's-absent
fraudulent transfer. In many Civil Law countries, the outcome would be markedly
different depending on whom the absolute owner of the property is determined to
be. (See Part II).
Consider also the treatment of the settlor's creditors
vis-à-vis the trust assets. Here, where the settlor parts with ownership
of the assets in favor of the trustee/beneficiary, he is no longer deemed to have
an interest in the property and therefore such trust assets would be shielded
from his creditors. Again this assumes that there has not been a fraudulent transfer
of assets or that the settlor retains an interest in the trust assets, for instance,
where he is also named a beneficiary. Under Civil Law, the outcome would be uncertain
where trust arrangements are likely to be deemed as being a contract or perhaps
an agency relationship. In either case, it would be difficult to conclude that
the trust assets would be insulated or that the settlor would be free of personal
liability as he would with a Common Law trust. (See Part II).
of the trustee's creditors concerning the trust res follows a similar pattern.
Under Common Law trust principles, the trustee legally owns the trust res. However,
in recognition that he holds the property subject to the beneficial interest,
the property is absolutely shielded from his personal creditors. Again this is
not always the case under Civil Law, where dual ownership is generally unthinkable.
Where the "trustee" in Civil Law is deemed the absolute owner, his creditors
are likely to prevail in a creditor's action against him. (See Part II).
problem remains unsettled with respect to finding sufficient common ground between
the Civil and Common Law concepts. True, when dual ownership is stripped down
it is really a matter of divided ownership which, although slightly more than
a matter of semantics, may make domestication more palatable. Notwithstanding,
divided ownership brings with it another objectionable problem, the division of
rights-this also poses a significant challenge to domestication of the trust.
Rights v. Real Rights
The problem here is in uncovering the true nature of
the beneficial rights, that is, are they jus in rem or jus in personam? Part of
the solution to discovering the true nature of these rights is to look at the
terms within the context of their meaning; the other part of the solution is in
abandoning reliance upon inflexible definitions-the purist or absolutist view.
look at how the relevant terms have been traditionally defined.
civilian speaks of personal rights and real rights, he draws from the strong tradition
of Roman law. Real rights are based upon the relationship between a person and
property, that is, it is one's nexus with the res that creates the right. Further,
the real right is operable erga omnes, that is, against the world and affords
a priority position in insolvency cases. A personal right, on the other hand,
is based on the relationship between two persons (generally resulting from some
express or implied agreement) with those rights being enforceable between the
two parties. Although, as Professor CG van der Merwe rightfully points out in
his treatise, Law of Things, the personal right may at times be enforceable against
third parties by virtue of the third person's interference with the parties' relationship.
Notwithstanding, the extension of the personal right in such circumstances is
founded on the initial "personal" relation of the parties.
the Roman legal tradition, real and personal rights were procedurally distinct
as actiones in rem or actiones in personam. Further, by the nineteenth century,
owing to historical refinements, real and personal rights were considered fully
distinct rights in Civil Law.
It is interesting to note that Professor
Gretton makes the conclusion that beneficial rights are not real rights and defends
his conclusion, in part, by stating:
Real rights are defined primarily in
terms of the third party effect. The fact that in third party terms-for instance
in suing an intruder for trespass or registering a title-it is the trustee who
is owner shows where ownership lies. There is nothing mysterious or puzzling about
an owner who undertakes, by way of obligation, to hold the whole benefit for someone
else: to call that 'divided ownership' is mystification.
While I agree
in principle with the learned professor, the conclusion discounts the practical
realities of the respective rights of the trustee and the beneficiary as they
currently operate in most Common Law jurisdictions today. To conclude in this
manner, Gretton seems to lean toward a purist view that real and personal rights
are absolutely distinct and mutually exclusive. This may be the case in a civilian
context, but it is inconsistent with the present reality of those rights in a
Common Law trust. That present reality, of course, is not cast in stone and a
paradigm shift may be long overdue. [I confess to incline toward Gretton's general
views concerning trust-like institutions-sin non aequitas].
a moment that the beneficiaries' rights may be real, albeit that they do not fall
within the absolutist's definition of real, in rem rights. This would seem quite
logical considering our discussion above that neither the trustee nor beneficiary
are owners of the res in the truest sense of the term. However, as was concluded,
each shares some of the qualities of ownership-my apologies to Maitland. Thus
it follows that there should be room for some modified definition of real rights;
one that retains sufficient aspects of the pure definition yet permitting it to
fall somewhere within its ambit.
For instance, while it is certainly true
that the right of the beneficiary against the trustee may be one in personam,
it is equally true that where the res has been wrongfully disposed of or dissipated,
the beneficiary has a proprietary right in respect of the trust res. As to the
latter, I see no reason why the right should not be considered a real right notwithstanding
that it may not be erga omnes-that is, it may be defeated by Equity's darling,
a bona fide purchaser for valuable consideration without notice of the trust.
Moreover, we see that the beneficiary's rights, in cases where the trustee has
become insolvent, are in priority with respect to the trust res to the exclusion
of others. Is this not a real right?
Professor Gretton himself labored over
this "insolvency effect" wherein he laments of the beneficiary's priority
right to the res in the bankruptcy of the trustee, "[i]f the rights of the
beneficiary were real," he said, "that would be an explanation."
I submit that to be precisely the explanation. The rights of the beneficiary are
to a degree, and at times, real and personal.
Notwithstanding, I recognize
that asking the civilian to consider the modified theory of real rights may be
a bit absolutist itself and, as such, an impediment to domestication. For this
reason, the better approach may be to consider if it is really worth rationalizing
the practical reality of real rights vesting in the beneficiary rather than shedding
fictional explanations for what can be functionally achieved by more compatible,
albeit equally fictional theories-without sacrificing the equitable remedies.
For this reason it is not a leap of faith by which we must cross over to the more
neutral camp, but rather one in which a compromise is made with little or no loss
to the function of the trust.
Although Scott, at the turn of the century,
took an absolutist view toward the beneficiaries' in rem rights, some of his contemporaries
were quick to attack this position. For example, Harlan Fiske Stone rebutted Scott
noting that "the real reason for the liability of third persons is the unconscientious
interference with the right in personam which the [beneficiary] has against the
trustee and not any right in rem in the trust asset". Thus Stone contends
that it is not a real right that protects the beneficiary from a third party,
but rather a personal right that protects the beneficiaries' (and settlor's) reliance
on the trustee's promise. Likewise, Ernest Weinrib in his article, The Fiduciary
Obligation further supported the argument that real rights of the beneficiary
were nothing more than legal fiction in his assertion that "[p]roperty is
itself merely the label for that crystallized bundle of economic interests which
the law deems worthy of protection . . . affixing the label of property constitute
a conclusion not a reason."
If we cast off the absolutist's spectacles
and look to function over labels, we see that these Civil and Common Law concepts
are different, but perhaps not so utterly diametrically opposed.
OTHER BARRIERS TO DOMESTICATION OF THE TRUST
Cultural and Traditional
It must be reiterated that the modern Civil Law countries have long
imbibed the nectar of Roman jurisprudence and have inherited a historical tradition
of well over two thousand years. Even after the Empire fell to the Barbarians,
the former Roman citizens were permitted to follow their laws, the lex romanorum.
Continuing through the middle ages, the Church kept Roman culture and law
alive until the late eleventh and twelfth centuries when there was a secular revival
of Roman law commencing in Bologna and quickly spreading throughout Europe. By
1500, the Corpus Juris Civilis regained prominence and became the basis of legal
science in Western Europe. And as late as 1804, the Napoleonic Code revived Roman
law well beyond the expanding borders of the fledgling but moribund empire reaching
to the new world including Central and South America and Africa.
to a great extent, most modern Civil Law jurisdictions have enjoyed a nearly seamless
nexus with the Civil Law. This would indicate that domestication of the trust
would be likely to meet with resistance to any change that might tend to alter
the balance of tradition and culture. Notwithstanding, the influence of Common
Law has made some inroads into the civilian's world.
Influence of Language
considering the feasibility of domestication of the trust, we should consider
those civil countries that have become mixed jurisdictions. Professor William
Tetley, Q.C., points to a number of factors that seemingly lead to an erosion
of Civil Law and a supplanting by Common Law. According to Tetley, language itself
may play an important role in maintaining the integrity of a legal system. For
instance, Quebec is a civil jurisdiction surrounded by a sea of Canadian Common
Law provinces. The French speaking Quebeckers derived their civil law from their
French ancestral founders who later ceded the territory to the British. Notwithstanding,
Civil Law predominates in the province today.
". . .[A]ll provincial
laws and regulations of Quebec, as well as all federal laws and regulations, must
be adopted in both French and English, so that Canada and Quebec have, in fact,
two languages of legislation." Thus the French language was not supplanted,
but rather stands pari passu with English. Tetley believes this to be a strong
factor in maintaining the Civil Law tradition. Similarly, South Africa, where
English and Afrikaans are the official languages provides us with another example
of lingual integrity that supports a strong civil, though bijural system.
contrast, Louisiana, the only Civil Law state in the United States, has fallen
more heavily under the influence of Common Law. While its first state Constitution
was drafted in French, a condition of statehood was that the laws, public records,
judicial, and legislative proceedings be preserved and conducted in English. The
1845 Constitution, while requiring all laws to be promulgated in French and English,
still reiterated the English requirement for public records and proceedings. By
the 1974 revision of the state's Constitution, no language provision was expressed,
or apparently necessary, as English had become the official language de facto.
This is not to imply that Civil Law no longer exists in Louisiana, it most
certainly does, however, it has fallen under the sway of Common Law more so than
other mixed jurisdictions. Thus, language seems to be at least a contributing
factor in the encroachment of Common Law.
I therefore submit that domestication
of the trust would prove more challenging in jurisdictions where the language
of the citizenry is one associated with the civil tradition. In the broadest sense,
and practically speaking, this means Civil Law countries where English holds no
official role, or where it does, it is pari passu with the "civil" tongues.
This seems to indicate that there would be greater resistance or, perhaps, impenetrability
of the trust in these jurisdictions which would, at least, include most of continental
Legislative and Judicial Barriers
In Civil Law jurisdictions,
the legislature has supreme and nearly absolute law making authority. This is
because the focus of the law and the administration of justice is on the written
code. Consider Article 1 of the Louisiana Civil Code: "Law is a solemn expression
of legislative will." English common law, by contrast, developed quite differently
for the greater part of its history. Under the English system, the judges played
the major role in creating law in novel cases where there was no legislation or
prior cases on point. Where the instant case could not be distinguished from a
prior decision of a higher court, the judge was bound by that decision under the
doctrine of precedence.
Modernly, Common Law jurists have, in actuality,
little opportunity to make new law considering the voluminous legislation that
takes place daily in nearly all jurisdictions. They do, however, serve to interpret
that legislation, remaining bound by precedence. In this regard, the Civil Law
and Common Law jurists are, in practice, not all that different. Notwithstanding,
there do remain some distinct differences. In Civil Law, the emphasis of the judicial
process remains substantive, while in Common Law the emphasis is adjectival, that
is, procedural. Civil Law, for the most part, starts and ends with the Code. Thus
while the respective legislative and judicial systems are not as diverse as they
once were, there are some differences which might prove problematic in terms of
domestication of the trust.
The trust, for example, has resisted codification
in Common Law since its inception. This may be in part due to the fact that the
trust is so diverse in function and thus chameleon-like that it is difficult,
if not impossible, to form an adequate definition.
Absence of a codified
definition of a domesticated trust would likely be intolerable for the civilian
considering the sacrosanct nature of the Code. However, such domestication by
codification is not unheard of in Civil Law. Liechtenstein provides a good example
of such codification under Articles 897 through 932 of the Personenund Gesellschaftsrecht,
that is, Persons and Company Law (PGR). Under the PGR, the trust has been domesticated
since 1926 and although not completely analogous to the Common Law trust, it comes
quite close, while retaining its civil origin.
Firstly, Liechtenstein has
dispensed with the Common Law rule against perpetuities thus permitting, at least
potentially, limitless succession. Secondly, and perhaps more pertinent for our
current discussion, the PGR provides for the settlor's proceeding against the
trustee for failure to comply with the terms of the trust instrument. Recall that
with the Common Law trust the settlor has no such influence or rights vis-à-vis
the trustee once the trust has been fully constituted. Matt Selig, author of Half
trust, Half Company, All Anstalt, believes this to be due to the Civil Law tendency
to treat the trust as a contract between the settlor and the trustee.
of the Trust as a Contract
This seems to be one aspect that might make the
domestication of the trust more palatable for the civilian; to view the trust
"arrangement" as one based on obligation, that is, contract. John Langbein,
in his article, The Contractarian Basis of the Law of Contracts, points out that
the equitable basis of the law of trust merely filled a void left by the primitiveness
of the law of contracts in fourteenth century England-a void that no longer exists
in our time. The contractarian concept seems plausible even where one is hopelessly
entangled in the belief that the trust without equity is tantamount to blasphemy.
In fact, Langbein makes a good argument that the modern trust is "functionally
indistinguishable" from modern third party beneficiary contracts. This is
particularly evident in three-party trusts, that is, trusts in which the settlor,
trustee and beneficiary are separate and distinct parties as opposed to the less
common two-party trust structure wherein the settlor declares himself to be the
sole trustee. The contractarian theory is not immune from attack however, and
Langbein himself acknowledges that the revered Restatement (Second) of Trusts
practically dismisses the concept wholesale with its comment "The creation
of a trust is conceived of as a conveyance of the beneficial interest in the trust
property rather than as a contract." [Emphasis added] Notwithstanding, the
theory finds support from a rather unlikely "traditional" candidate
in the venerated Frederic William Maitland. According to Langbein, "the contractarian
character of the trust can be traced back to Maitland's celebrated lectures on
Equity, published posthumously in 1909. Even in the late fourteenth century, observed
Maitland, when the English Chancellor first began to enforce the trust, the trust
'generally ha[d] its origin in something that we can not but call an agreement.'"
Professor Langbein further points out Maitland's rationale for the apparent
historical inability to reconcile the function of the trust as being one of contract
due to the then immaturity of the common law. Maitland is quoted as stating, "If
. . . in the fourteenth century our law of contract had taken its modern form,
I think the courts of law would have been compelled to say 'Yes, here is an agreement;
therefore it is a legally enforceable contract. . . .'"
At the cornerstone
of contractarian theory is the undeniable similarity between the three-party trust
and third party beneficiary contracts. This relationship works quite well in Common
Law jurisdictions such as the United States where privity requirements where relaxed
over a century ago with the widespread acceptance of the decision in Lawrence
v. Fox wherein "Justice Gray's opinion reasoned that trust exemplifies contract,
hence that third-party-beneficiary contracts have long been enforced in trust
and might as well also be admitted in contract law." The English, however,
have been particularly resistant to the relaxation of the privity rule preventing
enforecement by third party beneficiaries to contracts. Notwithstanding, the English
privity rule seems to be more traditionally based rather than one founded in logic
and thus presents a weak argument to what seems to be an obvious relationship.
civilian would have little argument to domesticating a trust based on contractarian
principles based on either tradition or logic. In fact, the civilian contractual
approach to trusts is exemplified in the Swiss landmark decision of Harrison v.
Credit Suisse in which the Swiss Federal Supreme Court held that there was no
basis in Swiss law upon which the Common Law trust could be recognized. Notwithstanding,
the Swiss court did give effect to the Harrison trust by combining a variety of
Swiss institutions essentially forming a mixed contract under the Code of Obligations.
With all the contractarian theory has to offer in making the domestication
of the trust more palatable, it must be recalled that for historical and practical
reasons, the trust is not a contract. True, by compromise, personal rights may
give way to real rights or quasi-real rights and in most cases the outcome will
be the same for beneficiaries seeking to enforce their right, however, it cannot
be denied that real rights are an added source of remedy.
theory does not address the issue of the ability to hold assets as a separate
estate-although this may be achieved by legislation. Therefore the contractarian
theory, although helpful, cannot alone cure the impediments to domestication of
If we can consider, as we have throughout this examination,
that we needn't be inhibited by words and definitions, but can rather adjust words
and definitions to serve us within the context of the matter we are seeking to
define, we may find that a compromise may be fashioned. This seems to be the type
of compromise that was reached in the case of Liechtenstein's trust.
Liechtenstein trust is notable because it provides an example of how legislation
can closely replicate the Common Law trust. However, Scotland may provide an even
more palpable example of how the trust may be domesticated without disregarding
The Scottish Trust
Scotland, although a mixed law jurisdiction
has a property law system that is entirely Civil Law based. Yet The Scots have
a trust that works remarkably similar to the Common Law trust without sacrificing
its civilian principles. How is this possible? According to Professor K.G.C. Reid,
"[i]t is possible to have the trust and yet still remain virtuous. To adopt
the trust is not, or not necessarily, to sink into the arms of equity."
Scottish trust is not exactly like the Common Law trust, but it is so close and
has been operative since the seventeenth century that it now stands out as a beacon,
a paradigm, of the prospect of domestication in other jurisdictions.
model is created in much the same way as the Common Law trust, that is, a settlor
creates the trust by declaration or by delivering the res to the trustee who takes
title and manages the assets subject to the beneficiary's interest. Further, the
scheme includes a separation of estates, however, this is not dual or divided
ownership in the Common Law sense. Here the trustee is deemed to have two separate
estates, a personal estate and the trust estate-each is distinct and unaffected
by the other. For example, where the trustee becomes personally insolvent, the
trust estate is unaffected as is the beneficiaries' interest.
be noted the beneficiaries' interest is not one of ownership, but rather a personal
right with respect to the trustee. Therefore if the trustee wrongfully conveys
or gifts the trust property the action is normally against the trustee, however,
trust property in the hands of a donee may normally be set aside and the proceeds
of a conveyance in the hands of the breaching trustee may be traced. This does
not, however, extend to third party tracing. Still this is not significantly different
from the result of a wrongful conveyance to a BFP under Common Law.
for a moment to the insolvency example, where the trustee becomes insolvent, the
beneficiaries may acquire the trust assets free of any claims of the trustee's
creditors. The rights of the beneficiary seem to be real rights, but Professor
Reid warns against this conclusion stating that " . . . appearances mislead.
The beneficiary's preference is based not on real right, but on separation of
The Scots have therefore come as close to the trust as
can be expected without betraying their civil roots. I suspect that some of the
explanations concerning the disclaimers to the beneficial rights being real are
to a degree a fiction, however, as we have discovered the absence of real rights
is not necessarily fatal to the domestication of the trust. The Scottish trust
has quietly demonstrated this for the past three hundred years.
There are, in the end, many differences between Common and
Civil Law, but I believe a pathway has been cleared to a common ground from which
the trust may one-day seed the union of global law formed from the community of
law. Professor Lee, stated in his article, The Civil Law and the Common Law-a
Word Survey: "The law of the future, like the first man fashioned by Prometheus,
will consist of particles gathered from every side, will be as composite as an
For the present time, however, we must be content
to work incrementally toward such a lofty mission as Professor Lee has charged
us with. The civil domestication of the Common Law trust is an appropriate opening
step to take. The trust should be embraced by the civilian not because it is a
product of superior law, but rather for its sheer utility. But this is not a marriage
that can be arranged, no, the bride and groom must come to the alter as willing
participants if the union is to last. In terms of courtship, the two have only
recently met; time alone will determine their compatibility.
In truth, Common
Law and Civil Law have much to offer each other and it is not a one sided proposition.
Most recently, Civil Law has given Common Law the gift of "restitution"
to use in its courts. Restitutionary remedies were unknown until the civilian
influence from Scots Law introduced it to their English neighbor. Similarly, the
Common Law defense of contributory negligence operated as a complete bar to a
plaintiff's recovery while the civilian had always considered it to be a mere
factor in determining causation. The civilian approach is now widely adopted in
most Common Law jurisdictions under the more "equitable" civil theory
of proportional fault.
We have not discussed in any detail the Hague Convention
on the Law Applicable to Trusts. This is partially because the Convention seeks
to increase the recognition of the trust and not necessarily its domestication.
However, the Convention goes a long way toward bringing the systems to the table
to examine the true nature of their differences and thus increasing the prospect
of domestication. This comparative approach is a critical and necessary process
in the domestication of the trust and its importance cannot be overstated. Dr.
Daan S. Ribbens states in his intriguing article, The Hague Convention on the
Law Applicable to Trusts and on their Recognition: Setting and Significance, "The
importance of the comparative approach and the prospective it yields is emphasized
. . . in the following passage":
Comparative law plays a role comparable
to that of history. It gives to him who studies his own national law the perspective
necessary to understand its contours. It shows the contingent or accidental nature
of rules and institutions to which, in the absence of comparison, one might tend
to a necessary and permanent character.
Thus it appears that by this approach,
we may overcome our differences and find a willingness to see our own law not
in terms absolute and permanent, diametric to our brother's, but rather as an
opportunity to ". . . see that we walk worthy of our high calling. . . ."
The domestication of the Common Law trust is a high calling, a worthy,
noble and obtainable pursuit.
About The Author
Loughlin is president and principal of, JurisConsults International Group, LLC.
He is a member of the State Bar of California, Federal Bar Association, International
Bar Association, the Royal Society of Fellows and a member of the AAFM Global
Board of Academic Advisors and Professors. He may be reached by email at: peter@LoughlinLawFirm.com
J, Loughlin, JD, LL.M., Esq., MFP Mas. Fin. Prof., Attorney-at-Law, Member
Royal Society of Fellows; Member International Bar Association
L. Gretton, Trusts Without Equity, Int'l & Comp. L.Q. 599, 604 (2000). See
also, Austin Wakeman Scott, Abridgement of the Law of Trusts § 1 (Little
Brown 1960). Quoting Maitland, "[T]he trust is an institute of great elasticity.
. . ."
Bulmer Ltd. v. Bollinger, Ch. 401, 418 (1974). Borrowing from
Lord Denning's famous orbiter dictum.
Hans van Loon & Adair Dyer, Report
on Trusts and Analogous Institutions, Hague Conf. Proc. 15th Sess., Tome II (October
George T. Morice, English And Roman Dutch Law 309 (2d ed., 1905).
Adair Dyer, International Recognition of the Trust Concept: Comparative Trusts
and Legal Entities Module 6, St. Thomas University 3, 4 (2001).
Amos, Common Law and the Civil Law In The British Commonwealth of Nations, Harv.
L. Rev. 1249, 1257 (1936-1937). "[T]he Civil Law displays some signs of more
Jill E. Martin, Modern Equity 14-18 (14th ed., 1993).
According to Professor Martin, the separate rival legal systems of equity and
common law had by the early 19th century became partners in the administration
of justice. The popularity of the Court of Chancery, which was the seat of equity,
was experiencing rapid growing pains. This culminated with the Judicature Acts
1873 and 1875 under which the courts of equity and courts of Common law became
David L Hayton, Commentary and Cases on the Law of Trusts and Equitable
Remedies 8-13 (11th ed., 2001).
Scott, supra note 1 §1.1.
supra note 8. Also, Robert H. Hahlo The Trust In South African Law, 78 S.A.L.J.
195, 197 (1961).
Scott, supra note 1.
Martin, supra note 7.
Quoting from Re Diplock Ch.465, 481,482 (1948). "A plaintiff asserting some
equitable right or remedy must show that his claim has an ancestry founded in
history and in the practice and precedents of the court administering equity jurisdiction.
It is not sufficient that we may think that the justice of the present case requires
it. . . ."
Scott, supra note 1 § 1.
Professor Hayton cites the
frequent and apparently common example of a knight going off to fight in the Crusades,
who, conveys to another for safekeeping and for the benefit of his family should
he not return.
Scott, supra note 1 § 1.5. Taxes were based on the burdens
of the feudal system.
id. at § 1.5. Citing Professor
Holdsworth: "And what was the remedy that Parliament provided? It was a simple
one. Uses were not made illegal, the cestui que use was not deprived of his beneficial
interest; but on the contrary the cestui que use was given the legal title."
id. at § 1.6) "Within ten years after the passing of the statute it
was held that it did not apply to active trusts . . . if further active duty was
imposed upon the feoffee, an active trust was created, which it was held, the
statute did not execute."
David J. Hayton, The Law of Trusts (2d ed.,
George T. Morice, English and Roman-Dutch Law 309-311 (2d ed., 1905).
Id. at 311.
The Earl of Oxfords Case (1615) [where equity and common law conflict,
Robert H. Hahlo, The South African Legal System and its
Background 517-519 (1973).
Morice, supra note 21 at 311.
The Roman-Dutch Law of Fideicommissa (1949).
Id. at 5. Also see J. Inst. 2.23.1
"Afterwards the late Emperor Augustus, first being moved to action more than
once by way of favour to particular persons, or because of some notable breaches
of faith, ordered the consuls to interpose their authority." ['i.e., so as
to give fideicommissa legal effect'].
id. at 4. See also, 4 Edward
Gibbon's Decline and Fall of the Roman Empire. 492 (Bury's ed.).
Ribbens, Comparative Trusts & Legal Entities - Module 1, St. Thomas University.
(Oct. 22-28, 2001).
R. W. Lee, An Introduction to Roman-Dutch Law 381 (5th
ed. 1953). Quoting Justinian, "But . . . if in his lust for wealth he should
hastily proceed to sell or mortgage in the hope that the condition will not take
effect, let him know that upon the fulfillment of the condition, the transaction
will be treated as of no effect from the beginning. . . ."
Milroy v. Lord, 4 De G.F.&J 264 (1862). Here the settlor delivered
company share certificates to the trustee, however transfer was held to be incomplete
as legal transfer of the certificates could only be made by registration of the
transfer in the company's transfer book. Similarly the transfer of land is required
to be in writing in most common law countries. See also, Law of Property Act 1925
§ 53(1)(b) (Eng.).
Knight v. Knight, 3 Beav. 148-9 (1840).
v. Eames, 6 Ch. App 597 (1871).
Boyce v. Boyce, 16 Sim 476 (1849). Here the
testator specified that his houses should be held on trust by his widow for the
benefit his daughters. The problem arose due to the settlor's intention that one
of the two daughters should first select the house of her choice with the remaining
to go to the other. The first daughter died before making a selection and the
court thereafter held the trust to have failed for uncertainty as it could not
be certain which house the surviving daughter should be entitled to.
Trust, 1 All E.R. 1067; 96 S.J. 246 (1952).
Boardman v. Phipps, 2 A.C. 46
Re Hay's Settlement Trust, 1 W.L.R.202 (1982).
Lawrence v. Fox,
20 NY 268 (1859).
He who comes to equity must come with clean hands.
v. Bishop of Durham, 9 Ves.Jr. 399 (1804).
Re Endacott, 3 All E.R. 562 (1960).
Supra note 42.
Civil Law Systems at http://www.uottawa.ca/world-legal-systems/eng-civil.htm
(last visited Feb. 19, 2002).
Common Law Systems at http://www.uottawa.ca/world-legal-systems/eng-civil.htm
(last visited Feb. 19, 2002).
Mixed Legal Systems at http://www.uottawa.ca/world-legal-systems/eng-civil.htm
(last visited Feb. 19, 2002).
World Population and Legal Systems at http://www.uottawa.ca/world-legal-systems/eng-civil.htm
(last visited Feb. 19, 2002).
S.C.J.J. Kortmann and H.L.E. Verhagen, National
Report for the Netherlands: Principles of European Trust Law (Kluwer 1999).
A. Borrás and C. González, National
Report for Spain: Principles of European Trust Law (Kluwer 1999).
H. Kotz, National Report for Germany: Principles of European Trust Law ( Kluwer
M. Lupoi and T. Arrigo, National Report for
Italy: Principles of European Trust Law (Kluwer 1999).
A. E. Von Overbeck,
National Report for Switzerland: Principles of European Trust Law (Kluwer 1999).
International Estate Planning, Ch 8.08 (Matthew Bender 2001).
supra note 6 at 1263-64.
R. W. Lee, The Civil Law And The Common Law-A World
Survey, 14 Mich. L. Rev. 99, 100-01 (Dec. 1915)
John Minor Wisdom, A Trust
Code in the Civil Law, Based on the Restatement and Uniform Acts: The Louisiana
Trust Estates Act, 13 Tul. L. Rev. 70, 70-71 (1938-1939).
Abdoul Hameed Sitti
v. De Saram, A.C. 208 (P.C. 1946) (appeal taken from Ceylon).
and Ugo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis,
73 N.Y.U.L. Rev. 434, 442 (May 1998).
Black's Law Dictionary 1105 (6th ed.
Certain protective or spendthrift trusts, for example may limit these
Scott, supra note 1 at § 1.
George L. Gretton, "Trusts
without Equity" An Excellent Recent Scottish Perspective, 49 Intl. L.Q. 599,
600-01 (July 2000).
Bernard Rudden, Things as Things and Things of Wealth,
14 Oxford J. Legal Studies 806, 809 (1994).
Note that where tax authorities
allocate, for example, trust income as being property of the beneficiary, this
is largely for administrative expediency and not applicable to this examination.
Hansmann, supra note 68 at 452.
Id. at 461.
CG van der Merwe Sakereg [Law
of Things] Ch 3. (1979), translated in Comparative Law of Entities Module 11,
St. Thomas University (2002).
id. at 1.
note 72 at 607. Gretton, by supporting footnote, cites the most interesting analogy
that "Robinson Crusoe had no law. When an Island has two people, there must
be law-ubi socirtas ibi jus-but only personal rights are needed, not real rights.
Real rights will arrive with the third castaway".
It is commonplace for
the property or ownership rights of the beneficiary to be termed as "proprietary
rights" in the context of the trust. The author thus sees no significant
difference in finding that the proprietary right is synonymous with real rights,
jus in rem, particularly in connection with the intermediate theory of rights.
Re Kayford, 1 WLR 279 (1975).
Gretton supra note 72 at 606. In fairness to
Professor Gretton, he goes on to say that ". . . the theory that beneficial
rights are real does not even solve the problem for which it was created. It is-at
best-the fifth wheel on the car."
Austin W. Scott, The Nature of Rights
of the Cestui Que Trust, 17 Colum. L. Rev 269, 275 (1917)
John H. Langbein,
The Contractarian Basis of the Law of Trusts, 105 Yale L.J. 625, 637 (1995). Also,
see Harlan F. Stone, The Nature of the Rights of the Cestui Que Trust, 17 Colum.
L. Rev. 467, 477 (1917).
Ernest J. Weinrib, The Fiduciary Obligation, 25 U.
Toronto L.J. 1, 10 (1975); cf. Thomas C. Grey, The Disintegration of Property,
22 NOMOS 69 (1980). See also, Langbein, supra note 86.
H. F. Jolowicz, Historical
Introduction to the Study of Roman Law (2d ed., 1952).
Mixed Jurisdictions: Common Law vs. Civil Law (Codified and Uncodified) at http://www.unidroit.org/english/publications/review/articles/1999-4a.htm.
1, 11 (last visited Jan. 27, 2002).
Id. Also see, 1867 La. Acts Constitution
Act § 133.
id. at 12.
id. at 13.
Gregory R. Oliver DeKeyzer,
The Civil Law in Louisiana Louisiana Notary - The Notary's Newsletter 1, 3 (1997).
Tetley, supra note 90 at 2. See also, id.
Hayton, supra note 8 at 2.
Selig, Half Trust, Half Company, All Anstalt: The History and Possible Tax Consequences
of the Liechtenstein Anstalt Down Under, International Bureau of Fiscal Documentation
1, 12 (2002).
Langbein, supra note 86 at 630.
(Second) of Trusts § 197 cmt. b (1959).
Langbein, supra note 86 at 628.
See also, Frederic W. Maitland, Equity: A Course of Lectures 28 (2d ed., 1936).
Id. at 630
Lawrence v. Fox, supra note 40.
Langbein, supra note 86 at
Harrison v. Credit Suisse, ATF 96 11 79 ff Jd (1971)
Daan S. Ribbens,
The Sui Generis Nature of the Trust - Module 2, St. Thomas University (Nov. 26,
K.G.C. Reid, National Report for Scotland Principles of European Trust
Law (Kluwer 1999).
R. W. Lee, The Civil Law and the Common
Law-a Word Survey, 14 Mich L. Rev. 89, 100-01 (1915-1916).
Tetley, supra note
90 at 5.
Daan S. Ribbens, The Hague Convention on the Law Applicable to Trusts
and on their Recognition: Setting and Significance, Mod. Business Law 93, 98 (1985).
Here Dr. Ribbens is quoting a passage from a source unknown to the this author.
Lee, supra note 111 at 101.