1. Introduction
(a) 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’).
(b) Preliminary issues relating to the validity of wills or transfers of assets to trustees fall outside the scope of the Convention.
(c) 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.
(d) 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.
(e) 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’.
(f) 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).
2. 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, edited by Paul Torremans, 15th edition (2017), Oxford University Press, at p.1385).
3. 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:
(a) a person who lacks capacity in accordance with the MCA 2005;
(b) a minor; or
(c) someone who is legally disbarred from owning or disposing of legal or equitable title to property.
4. Validity and enforceability
(a) 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.
(b) 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.’
5. 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).
6. Exclusive jurisdiction clauses
(a) The effectiveness of an exclusive jurisdiction clause in a trust deed was decided in Crociani v. Crociani [2014] UKPC 40.
(b) Lord Neuberger stated at [33] to [37] that:
(i) 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.’
(ii) 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.
(iii) 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.
(iv) 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.’
7. Exercise by the court of its discretion to permit service of the claim form outside the jurisdiction
Once the claimant has shown a good arguable case that his claim falls within a sub rule of CPR, PD 6B, para 3.1, he must persuade the court to exercise its jurisdiction to permit service of the claim form out of the jurisdiction. The constituent factors of this discretion were reviewed by the House of Lords in Seaconsar (Far East) Ltd v. Bank Markazi Jomhouri Islami Iran [1994] 1 AC 348. See further, paragraph 1.138 of The International Trust, edited by Mr Justice David Hayton, Third edition 2011, Jordan Publishing, which states:
‘(1) The claimant must show that England is clearly or distinctly the natural forum. This requirement, previously a matter of common law authority, is now stated in CPR, r.6.37(3), which provides that,
“The court will not give permission unless satisfied that England and Wales is the proper place in which to bring the claim.”
The factors which would be relevant to establishing this are those considered in relation to the first limb of the stay test; the only difference is the reversal of the burden of proof. However, even if England is not the natural forum, the claimant might, in very exceptional circumstances, be able to demonstrate that England is the proper place in which to litigate, on the basis that justice cannot be obtained elsewhere.
(2) Permission will nonetheless not be granted if it would be unjust for the defendant to be sued in England. It is suggested that the burden of proof on this point should transfer to the defendant, though the matter is by no means clear. The relevant factors ought to be those which apply under the second limb of Spiliada Maritime Corp v. Consulex [1987] AC 460 in the stay context.’
[See also paragraph 5.80 of International Trust Disputes, edited by Steven Kempster, Morven McMillan and Alison Meek, Decond Eidtion, 2020, Oxford University Press].
(3) There must be a serious issue to be tried on the merits. At common law, it was established that the claimant’s prima facie case must be strong enough that the defendant could not successfully have struck it out. CPR, r.6.37(1)(b) now also requires the claimant to assert in his application that he believes that he has a reasonable prospect of success on the merits. However, it must be recalled that English law will not necessarily govern on the merits. It might be contended that whether there is a serious issue should be determined by applying the governing law on the merits of the dispute; although this would be somewhat inconvenient at the jurisdiction stage.’
8. PD 6B para 3.1
‘The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where –
General Grounds
(1) A claim is made for a remedy against a person domiciled within the jurisdiction.
(2) A claim is made for an injunction ordering the defendant to do or refrain from doing an act within the jurisdiction.
(3) A claim is made against a person (‘the defendant’) on whom the claim form has been or will be served (otherwise than in reliance on this paragraph) and –
(a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try; and
(b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim.
(4) A claim is an additional claim under Part 20 and the person to be served is a necessary or proper party to the claim or additional claim.
(4A) A claim is made against the defendant in reliance on one or more of paragraphs (2), (6) to (16), (19) or (21) and a further claim is made against the same defendant which arises out of the same or closely connected facts. …
Claims about trusts etc.
(12) A claim is made in respect of a trust which is created by the operation of a statute, or by a written instrument, or created orally and evidenced in writing, and which is governed by the law of England and Wales.
(12A) A claim is made in respect of a trust which is created by the operation of a statute, or by a written instrument, or created orally and evidenced in writing, and which provides that jurisdiction in respect of such a claim shall be conferred upon the courts of England and Wales.
(13) A claim is made for any remedy which might be obtained in proceedings for the administration of the estate of a person who died domiciled within the jurisdiction or whose estate includes assets within the jurisdiction.
(14) A probate claim or a claim for the rectification of a will.
(15) A claim is made against the defendant as constructive trustee, or as trustee of a resulting trust, where the claim arises out of acts committed or events occurring within the jurisdiction or relates to assets within the jurisdiction.
(16) A claim is made for restitution where –
(a) the defendant’s alleged liability arises out of acts committed within the jurisdiction; or
(b) the enrichment is obtained within the jurisdiction; or
(c) the claim is governed by the law of England and Wales.’
9. Extracts from the Hague Convention
Article 1
This Convention specifies the law applicable to trusts and governs their recognition.
Article 2
For the purposes of this Convention, the term “trust” refers to the legal relationships created – inter vivos or on death – by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. A trust has the following characteristics –
a) the assets constitute a separate fund and are not a part of the trustee’s own estate;
b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee;
c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.
Article 3
The Convention applies only to trusts created voluntarily and evidenced in writing.
Article 4
The Convention does not apply to preliminary issues relating to the validity of wills or of other acts by virtue of which assets are transferred to the trustee.
Article 5
The Convention does not apply to the extent that the law specified by Chapter II does not provide for trusts or the category of trusts involved.
Article 6
A trust shall be governed by the law chosen by the settlor. The choice must be express or be implied in the terms of the instrument creating or the writing evidencing the trust, interpreted, if necessary, in the light of the circumstances of the case. Where the law chosen under the previous paragraph does not provide for trusts or the category of trust involved, the choice shall not be effective and the law specified in Article 7 shall apply.
Article 7
Where no applicable law has been chosen, a trust shall be governed by the law with which it is most closely connected. In ascertaining the law with which a trust is most closely connected reference shall be made in particular to –
a) the place of administration of the trust designated by the settlor;
b) the situs of the assets of the trust;
c) the place of residence or business of the trustee;
d) the objects of the trust and the places where they are to be fulfilled.
Article 8
The law specified by Article 6 or 7 shall govern the validity of the trust, its construction, its effects, and the administration of the trust. In particular that law shall govern –
a) the appointment, resignation and removal of trustees, the capacity to act as a trustee, and the devolution of the office of trustee;
b) the rights and duties of trustees among themselves;
c) the right of trustees to delegate in whole or in part the discharge of their duties or the exercise of their powers;
d) the power of trustees to administer or to dispose of trust assets, to create security interests in the trust assets, or to acquire new assets;
e) the powers of investment of trustees;
f) restrictions upon the duration of the trust, and upon the power to accumulate the income of the trust;
g) the relationships between the trustees and the beneficiaries including the personal liability of the trustees to the beneficiaries;
h) the variation or termination of the trust;
i) the distribution of the trust assets;
j) the duty of trustees to account for their administration.
See also my blog ‘Trust Litigation after Brexit’: Trust Litigation after BREXIT | Carl’s Wealth Planning Blog – Just Google ‘Carl’s Wealth Planning Blog and use the search box. There is a link to the blog on the left hand side at www.ihtbar.com
