Trust Litigation after BREXIT | LinkedIn
· PIL after a No-Deal BREXIT
· Trusts
PIL AFTER A NO-DEAL BREXIT
If there is no deal the Brussels 1 Regulation will not apply from midnight on 31.12.2020, and no arrangement for another private international law convention to fill the vacuum will have been agreed. Therefore, the Lugano Convention, unless agreed i.e. as a term of a future trade agreement cannot fill the void.
In a contract or tort action ‘in personam‘ (i.e. against a person) the English court will therefore only have jurisdiction in three situations:
(i) where the defendant has been served with the statement of claim whilst in England;
(ii) where a person who might otherwise be excluded, submits to the jurisdiction; or
(iii) if the case comes within CPR, r. 6.20, where discretionary leave is granted for service of proceedings outside of the jurisdiction.
The doctrine of Forum non conveniens will also apply, with the result that applications for stays are likely to increase, adding to the costs and risks of litigation.
The instruments that currently determine governing law, Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I) and Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II), have been implemented in UK domestic law and will continue to apply post-Brexit.
However, certain matters necessarily fall outside the ambit of either Rome I or Rome II, including:
(i) issues relating directly to property, i.e. ownership;
(ii) a person’s legal capacity; and
(iii) trusts.
Succession to moveable property in England is governed by the lex situs (location of the property) rule of the country where the property is located.
In the case of a dispute as to title to moveable property, e.g. where a painting has been stolen and the court is called upon to determine which country’s laws on passing of title and limitation periods apply, the lex situs rule is relevant, i.e. the law of the country where the object was situated on the date of the event which is alleged to have affected title to it.
As a general rule, in English law, proceedings are governed by the law of the forum. This applies amongst other things to the admissibility of evidence, and choice of court. At common law, the question of limitation of actions has traditionally been treated as being a procedural question. However, the Foreign Limitation Periods Act 1984 categorized it as a substantive issue (with the exception of public policy matters), which was re-affirmed in the Rome Regulations.
TRUSTS
Introduction
The choice of law rules for England and Wales, Northern Ireland and Scotland are set out comprehensively in the Hague Convention on the Law Applicable to Trusts and on their Recognition (the ‘Convention’), as implemented and extended by the Recognition of Trusts Act 1987 (‘RTA 1987’). Preliminary issues relating to the validity of wills or transfers of assets to trustees fall outside the scope of the Convention.
In practice, three questions typically arise:
(i) technically, does the English Court have jurisdiction to entertain the claim;
(ii) which legal system will the Court apply to resolve the dispute on the merits; and
(iii) will the English Court recognise and enforce a judgement.
The convention:
(i) harmonises the choice of law rules applicable in contracting states (and other states subsequently acceding to or implementing the Convention); and
(ii) expressly provides for the recognition of trusts falling within its scope.
Section 1(1) of the RTA 1987 states that ‘The provisions of the Convention set out in the Schedule … shall have the force of law in the United Kingdom’.
Under English law, questions involving the administration of a trust and the personal liability of the trustees to the beneficiaries for breach of trust are governed by the law applicable to the trust (Article 8 of the Convention as implemented by section 1(1) of the RTA 1987).
The applicable law is either the law chosen by the settlor (Article 6) or, if there is no choice, the law of the country with which the trust is most closely connected (Article 7).
Preliminary issues
‘In the case of a voluntary testamentary or inter vivos trust, there is an important preliminary issue to be faced, namely whether the instrument which creates the trust, i.e. the will or settlement, is valid according to the relevant governing law. Article 4 of the Convention makes it quite clear that this preliminary issue as to validity falls outside the scope of the Convention. The relevant choice of law rules will be those governing, for example, the formal or essential validity of wills or, in the fairly rare cases where there is a settlement, those governing the validity of contracts or deeds. In the case of a testamentary trust it will also be for the law governing the validity of the will to determine, for example whether the testator is required to leave a fixed portion of his estate to his or her spouse or children rather than on trust for other beneficiaries … Not only does a voluntary trust depend on there being a valid instrument of creation, it is also necessary that the transfer of the trust assets is valid. This further preliminary issue is also excluded from the Convention by reason of Article 4, as being an act “by virtue of which assets are transferred to the trustee”. The choice of law issue as to whether a trustee has effective legal title to the assets to hold them for the beneficiaries will normally be governed by the general rules applicable to the transfer of property, e.g. the law of the situs in the case of tangible movables and of immovables. If the instrument of creation of the trust is valid under its governing law, the trust will, nevertheless, fail if the law of the situs does not permit the transferee to alienate the property at all, but once the property can be alienated in some way it is for the law applicable to the trust to govern the validity and effect of the declaration of trust.’ (‘Cheshire, North & Fawcett – Private International Law, 15th Edition, Torremans et al p.1385).
Capacity
Capacity to make an inter vivos gift is governed by the law of domicile of the donor at the time of the gift. In the case of real property, the lex situs will determine what level of capacity applies.
Under English law, in order to put property into trust the settlor must not be:
(i) a person who lacks capacity in accordance with the Mental Capacity Act 2005;
(ii) a minor; or
(iii) someone who is legally disbarred from owning or disposing of legal or equitable title to property.
Validity and enforceability
In Akers & Ors v. Samba Financial Group (Rev 1) [2017] UKSC 6, at [17],[18],[20],[24] to [28],[32] to [34], and [36] to [40], Lord Mance stated the following principles:
(i) At common law, the nature of the interest intended to be created by a trust depends on the law governing the trust.
(ii) The governing law determines whether the intention is to give a beneficiary either an equitable proprietary interest in an asset held on trust, or a mere right against the trustee to perform whatever functions the trust imposes upon him with regard to the use and disposal of the foreign asset and income derived from it.
(iii) Where the intention is to create an equitable proprietary interest, then the common law position is as stated in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669, per Lord Browne-Wilkinson:
‘Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice.’
(iv) The initial inquiry is whether an equity subsists, which it will prima facie do at common law, so long as the relevant property (original or substitute) does not pass into the hands of a transferee for value of the legal interest without notice of the equity.
(v) In addition, where under the lex situs of the relevant trust property, the effect of a transfer of the property by the trustee to a third party, is to override any equitable interest which would otherwise subsist, that effect should be recognised as giving the transferee a defence to any claim by the beneficiary, whether proprietary or simply restitutionary.
(vi) The English Courts have regularly stated their willingness to enforce in personam trusts in respect of property abroad. As the Earl of Selborne LC said in Ewing v. Orr Ewing [1883] LR 9 App Cas 34, ‘The Courts of Equity in England are, and have always been, Courts of conscience, operating in personam and not in rem; and in the exercise of this personal jurisdiction they have always been accustomed to compel the performance of contracts and trusts as to subjects which were not either locally or ratione domicilii within their jurisdiction.’
(vii) The English Court has exercised such jurisdiction, applying the principles of English law to enforce trusts relating to foreign property, even though the lex situs did not recognise such principles.
(viii) Peter Gibson LJ, giving the lead judgment, applied the Earl of Selborne’s words in Ewing and endorsed the statement by Parker J in Deschamps v. Miller [1908] 1 Ch 856, that the Court would act where there was ‘some personal obligation arising out of contract or implied contract, fiduciary relationship or fraud, or other conduct which, in a view of a Court of Equity in this country, would be unconscionable’ and that whether it would do so did not depend ‘on the law of the locus of the immovable property’.
(ix) Peter Gibson LJ also recognised that the lex situs can, under the principle recognised in Macmillan v. Bishopsgate, have a significance in the case of a third-party transfer. He said, at (p 38), that the English Court had
‘not unnaturally regarded English law as applicable to the relationship between the parties before it in the absence of any event governed by the lex situs destructive of the equitable interest being asserted.’
(x) The English Court will accept jurisdiction and apply English law as the applicable law, even though the suit relates to foreign land.
(xi) However, if the equity which is asserted does not exist between the parties to the English litigation (e.g. where there has been a transfer of the property to a third party with notice of an equity but by the lex situs governing the transfer the transfer extinguished the plaintiff’s equity), the English Court cannot give relief against the third party even though he is within the jurisdiction.
(xii) These authorities were recently and instructively examined by Roth J in Luxe Holding Ltd v. Midland Resources Holding Ltd[2010] EWHC 1908 (Ch) who engaged in the following analysis:
‘It is trite but nonetheless important to recall that equity acts in personam … Unless precluded by authority, it seems to me that as a matter of principle where the parties have expressly chosen English law and the exclusive jurisdiction of the English Court, they have voluntarily subjected themselves to the English system of remedies.’
(xiii) After considering British South Africa Co v. De Beers Consolidated Mines Ltd and Lightning v. Lightning Electrical Contractors Ltd, Roth J continued:
‘I do not consider that the reasoning in Lightning is confined to the particular case of a resulting trust. On the contrary, it seems to me of general application.’
(xiv) Therefore, in the eyes of English law, a trust may be created, exist and be enforceable in respect of assets located in a jurisdiction, the law of which does not recognise trusts in any form.
(xv) To regard a trust as falling outside the Convention under article 4, simply because its assets consist of assets in a jurisdiction which does not recognise a division between legal and equitable proprietary interests, is wrong.
(xvi) There is nothing in the Convention to suggest that it was intended to be inapplicable to a trust simply because the trust was in respect of assets in a jurisdiction which does not recognise some form of separation of legal and equitable interests. Rather, the contrary – since one object of the Convention was to provide for the recognition of trusts in jurisdictions which did not themselves know the institution.
In ‘The Hague Trusts Convention after Akers v. Samba’, Trusts & Trustees, Vol 24, No.4, May 2018, Professor Jonathan Harris QC, concluded that, ‘clarification as to the applicability and application of the Hague Trusts Convention at Supreme Court level will have to wait for another day. In the meantime, their Lordships obiter remarks on the scope and application of the Convention arguably raise as many questions as they answer. [In particular]:
(i) The scope of Article 4 on preliminary matters excluded from the ambit of the Convention remains elusive.
(ii) It remains unclear precisely what the role of the law of the situs is.
(iii) It is clear from the judgements that article 15 is not the favoured route to determine the effects of the transfer of property held on trust to a third party. But the judgements otherwise provide little guidance as to the proper ambit of Article 15.
(iv) Perhaps above all, the Supreme Court proceeded to determine the case entirely on the basis of English domestic law.’
Transfer of trust assets
The choice of law issue as to whether a trustee has effective legal title to the assets to hold them for the beneficiaries will normally be governed by the general rules applicable to the transfer of property, e.g. the law of the situs in the case of tangible movables and immovables. (See Torremans, pp. 1267 to 1278).
Exclusive jurisdiction clauses
(i) The effectiveness of an exclusive jurisdiction clause in a trust deed was decided in Crociani v. Crociani [2014] UKPC 40.
(ii) Lord Neuberger stated at [33] to [37] that:
(a) in the context of contractual exclusive jurisdiction clauses, the approach of the Court to a claim brought in another jurisdiction was authoritatively described by Lord Bingham of Cornhill in Donohue v. Armco Ltd [2001]:
‘If contracting parties agree to give a particular Court exclusive jurisdiction to rule on claims between those parties, and a claim falling within the scope of the agreement is made in proceedings in a forum other than that which the parties have agreed, the English Court will ordinarily exercise its discretion … [But] where parties have bound themselves by an exclusive jurisdiction clause effect should ordinarily be given to that obligation in the absence of strong reasons for departing from it. Whether a party can show strong reasons, sufficient to displace the other party’s prima facie entitlement to enforce the contractual bargain, will depend on all the facts and circumstances of the particular case.’
(b) The defendant to such a claim has a contractual right to have the contract enforced and his right specifically to enforce his contract can only be displaced by strong reasons being shown by the opposite party why an injunction should not be granted. Thus, where a claim has been brought in a Court in breach of a contractual exclusive jurisdiction clause, the onus is on the claimant to justify that claim continuing, and to discharge the onus, the claimant must normally establish strong reasons for doing so.
(c) In the case of a clause in a trust, the Court is not faced with the argument that it should hold a contracting party to her contractual bargain … The Court [has] a power to supervise the administration of trusts, primarily to protect the interests of beneficiaries, which represents a clear and … significant distinction between trusts and contracts.
(d) Accordingly, the Board considers that, while it is right to confirm that a trustee is prima facie entitled to insist on and enforce an exclusive jurisdiction clause in a trust deed, the weight to be given to the existence of the clause is less (or the strength of the arguments needed to outweigh the effect of the clause is less) than where one contracting party is seeking to enforce a contractual exclusive jurisdiction clause against another contracting party.
Jurisdiction and the enforcement of foreign judgments in transnational trust litigation
Prior to BREXIT (i.e. midnight 31.12.2020) two principal sets of jurisdictional rules existed:
(i) the harmonised rules contained in the relevant European regulation (and Conventions); and
(ii) the common law rules.
The European harmonised rules were the first point of reference.
(i) The application of the common law rules was residual.
(ii) The European harmonised rules apply:
(a) to disputes between domiciliaries of member states; and
(b) in civil and commercial matters, if the defendant is domiciled in a member state, and in some cases, irrespective of where the parties are domiciled.
The recast regulation on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters (the ‘Regulation’) provides a set of uniform jurisdictional rules for European member states.
The Regulation does not apply to:
(i) capacity;
(ii) natural persons;
(iii) matrimonial property rights;
(iv) wills and succession;
(v) bankruptcy and insolvency; and
(vi) arbitration.
A settlor, trustee or beneficiary of a trust created:
(i) by the operation of a statute;
(ii) by a written instrument; or
(iii) orally, and evidenced in writing,
may be joined as a party to proceedings brought in the Courts of the country where the trust is domiciled (Regulation, Article 7(6)). (See Blackstone’s Civil Practice paragraph 16.33).
From midnight on 31.12.2020, in England, the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 (the ‘CJJEUR’) will come into force in the event of ‘no-deal’.
This contains saving provisions, which means that English Courts will continue to apply the Regulation to:
(i) judgments obtained from other EU Member States before the date of exit; and
(ii) questions of jurisdiction where proceedings were commenced before that date.
However, it is not known whether or not that practice will be reciprocated across the EU.
