Asia-Pacific Trusts Law, Volume 2: Adaptation in Context 9781509954605, 9781509954636, 9781509954629

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ASIA-PACIFIC TRUSTS LAW This book brings together leading legal scholars and practitioners from across the Asia-Pacific region to probe the ways in which trusts law has been by various jurisdictions, and to analyse their causes and effects. The contributions discuss how the trust structure, with its inherent malleability, has been adapted to meet a diverse set of local needs, including social, religious, economic, ­commercial, or even historical needs. But in most instances, those needs – and the ways in which trusts law has been adapted to meet them – are not unique to a single jurisdiction: they often (coincidentally or otherwise) find much in common with others. By making its readers aware of the commonality of needs in Asia-Pacific, this book also aims to encourage coordination and cooperation in utilising trusts law to address shared concerns across the region.

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Asia-Pacific Trusts Law Volume 2: Adaptation in Context

Edited by

Ying Khai Liew and

Ying-Chieh Wu

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2023 Copyright © The editors and contributors severally 2023 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2023. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. Library of Congress Control Number: 2021013837 ISBN: HB: 978-1-50995-460-5 ePDF: 978-1-50995-462-9 ePub: 978-1-50995-461-2 Typeset by Compuscript Ltd, Shannon

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PREFACE Life as we used to know it has had to adapt in unprecedented ways over the last two years. The Asia-Pacific Trusts Law project was no exception, facing the challenge of navigating through the unchartered waters of the Covid-19 pandemic. We began planning the second instalment of the project in earnest in early 2020, during the early stages of lockdowns. We were uncertain how those we approached to contribute would respond, in light of the pandemic. Nor had we any idea how we would organise a symposium, with international travel grinding to a halt. Fast-forward to December 2021, and we had successfully organised a two-day symposium, bearing the theme ‘Adaptation in Context’. The conviviality and stimulating dialogue at the symposium were as inspiring as if everyone were physically in one place. The papers presented at the symposium form the basis of the chapters in this collection. The Asia-Pacific Trusts Law project is an inherently collaborative one and, as always, we owe a debt of gratitude to everyone who made this second instalment a success. We would first like to thank all our contributors for their support, for engaging in the rich discussions at the symposium as well as contributing the chapters for this book. Those discussions were also enriched tremendously by three invited discussants: Michael Bryan, Lusina Ho and Kelvin Low; we thank them for their generosity of time and expertise. The production of this book benefited from the efficient research assistance provided by Hugo Rogers, and we would like to thank him for his hard work. The unwavering commitment demonstrated by this list of people, particularly in the light of the challenges created by the pandemic, truly personifies the idea of ‘adaptation’ that is the theme of this book. Finally, we would like to acknowledge the financial support we obtained from the Melbourne Law School’s Research Excellence Grant, for which we are grateful. Ying Khai Liew Ying-Chieh Wu Global Handwashing Day 2022

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CONTENTS Preface�������������������������������������������������������������������������������������������������������������������������������������v 1. Introduction: Adaptation in Context�����������������������������������������������������������������������������1 Ying Khai Liew and Ying-Chieh Wu PART I FAMILIAL ADAPTATION 2. Resulting and Constructive Trusts in the Contemporary Singaporean Family Context��������������������������������������������������������������������������������������������������������������15 Man Yip 3. Marrying English Trusts Law with Chinese Customary Law? Historical Evolution and Modern Anomalies of the Tso/Tong in Hong Kong����������������������������33 Rebecca Lee PART II RELIGIOUS ADAPTATION 4. Religious Endowments and Trusts Law in Colonial India������������������������������������������55 TT Arvind 5. Adaptation of the Law of Trusts to Regulate Administration of Places of Religious Worship in Sri Lanka������������������������������������������������������������������������������������77 Anton Cooray 6. Innovations within Malaysian Trusts Law: Labuan’s Trusts Law and the Hibah Trust�������������������������������������������������������������������������������������������������������������93 Hang Wu Tang PART III COMMERCIAL ADAPTATION 7. Trust in a Trustless World: Crypto-Asset Custodians, Trusts and Trust Regulations in Taiwan������������������������������������������������������������������������������������������������111 Yueh-Ping (Alex) Yang

viii  Contents 8. Adaptation in a Civil Law and Sharia Context: Trusts and Foundations in the Gulf Region�������������������������������������������������������������������������������������������������������129 David Russell QC 9. Adaptation of Offshore Trusts in the South Pacific: Tension between Commercial and Social Needs������������������������������������������������������������������������������������149 Katy Barnett PART IV STATUTORY ADAPTATION 10. Trusts and Statutes in the Australian Federation������������������������������������������������������183 Matthew Harding 11. Trustee Duties in Thailand’s Statutory Trusts������������������������������������������������������������203 Adam Reekie and Surutchada Reekie 12. Pakistan’s New Trusts Acts 2020: Adaptation to Regulatory Overkill����������������������223 Muhammad Zubair Abbasi 13. The Trusts Law Legislation Project in New Zealand�������������������������������������������������241 Jessica Palmer 14. Adaptation Throughout History: The Journey of the Israeli Trust from a Charitable Trust to an Estate Planning Instrument��������������������������������������263 Meytal Liberman 15. Application of Cambodia’s New Trust Law from a Practitioner’s View��������������������287 Matthew Rendall and Soromnear Sin PART V DOCTRINAL ADAPTATION 16. Trusts in South Korea: Towards an Independent Fund Mechanism�������������������������311 Ying-Chieh Wu 17. Accessory Liability and Tracing: Modern Adaptations of Japanese Trusts Law�������327 Masayuki Tamaruya 18. Intention in the Creation of Chinese Inter Vivos Express Trusts������������������������������349 Hui Jing PART VI CROSS-BORDER ADAPTATION 19. Trusts Choice of Law Rules in Asia-Pacific: Adapting to the Future������������������������373 Ying Khai Liew Index�����������������������������������������������������������������������������������������������������������������������������������399

1 Introduction: Adaptation in Context YING KHAI LIEW* AND YING-CHIEH WU**

I. Background This collection of essays is the second in the Asia-Pacific Trusts Law series. The series aims to encourage awareness and discussion of trusts law practice and scholarship in Asia-Pacific, first, by providing an opportunity for trusts-developed jurisdictions to contribute their experiences to those jurisdictions whose trusts laws are either less developed or absent; and second, to obtain insights from jurisdictions not typically looked to for trusts law expertise. The first volume, entitled ‘Theory and Practice in Context’,1 was the product of a symposium held at the Melbourne Law School, University of Melbourne in 2019. That symposium was the first ever forum to involve jurisdictions across Asia-Pacific, in a truly inclusive way, in trusts law dialogue. Under the circumstances, the theme of the first volume was left relatively open-ended: its fundamental aim was to canvass a picture of the state of trusts law across Asia-Pacific. The conversations at the 2019 symposium provided novel insights and unique perspectives about how trusts law is theorised and practised in Asia-Pacific. We were particularly struck by one of those points, which is the interesting ways in which trusts law has interacted with the rich diversity of histories and cultures in the region. For example, trusts law has been introduced in Asian-Pacific jurisdictions in diverse ways, including by way of case law, statute law, regulatory devices, historical accident, judicial misunderstandings, or a combination of these. Many jurisdictions also have a diversity of trusts-like customary, religious, or legal devices, for example the benami, waqf, Hindu endowment, tsos and tongs, name-borrowing arrangements, and unique land laws, whose relationships with trusts law have been the subject of debate. Diversity also lies in the diametrically different attitudes which law reform bodies have taken towards the desirability of trusts law; and continually changing and diverse social and commercial needs have evoked different reactions from regulatory bodies. These social, * Professor, Melbourne Law School, University of Melbourne. ** Associate Professor, School of Law, Seoul National University. We thank Lusina Ho for her helpful comments on an earlier draft. 1 YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021).

2  Ying Khai Liew and Ying-Chieh Wu religious, economic, commercial and historical diversities have led to the mobilisation of trusts law to differing extents as responses to each jurisdiction’s unique circumstance. But crucially, in most instances, those diversities and attempted solutions are not unique to a single jurisdiction: they often (coincidentally or otherwise) find much in common with others across the region. It became quickly apparent to us that an exploration of how the trust structure has been adapted across the region to meet the specific needs of each jurisdiction, and an analysis of their causes and effects, would be integral to encouraging coordination and cooperation in addressing shared concerns across the region. With that in mind, we organised the second symposium in December 2021. The online symposium bore the theme ‘Adaptation in Context’. The jurisdictions which were discussed included: China, Japan, India, South Korea, Australia, Taiwan, Thailand, Hong Kong, Malaysia, Singapore, Pakistan, New Zealand, Sri Lanka and Cambodia. Contributions discussing Israel and the nations in the Gulf region were also included by adopting an extended notion of ‘Asia’. To these were added one contribution discussing South Pacific offshore jurisdictions, namely the Cook Islands, Niue and Western Samoa, and another discussing private international law issues. These contributions form the basis of the chapters in this second volume in the Asia-Pacific Trusts Law series.

II.  The Book The chapters in this book are divided into six parts. Each part reflects a particular context in which trusts law has been adapted. These are: the family context, the religious context, the commercial context, the statutory context, the doctrinal context and the cross-border context. It will be noticed that not all the chapters within each part deal exclusively with the relevant context; on occasion they may include discussion of more than one context. In those instances, we have sought to place chapters within the relevant part that reflects the primary context discussed. In any event, the purpose of having these six parts is neither technical nor taxonomical; rather, our aim is to allow for relevant commonalities to be drawn and comparisons to be made between the jurisdictions discussed.

A.  Part I: Familial Adaptation The book begins by discussing the adaptation of trusts law in the family context. Familial circumstances are unique to each jurisdiction, often being affected by local cultures, beliefs, customs and so on. For this reason, the family context provides an easy but significant example of the importance of adapting trusts law to local circumstances: simply copy-pasting established laws developed in other jurisdictions would render domestic law out of touch in view of the needs that trusts law ought to meet. Man Yip’s chapter makes precisely this point in relation to Singaporean law. It is well known that Stack v Dowden2 provided a watershed moment for English common

2 Stack

v Dowden [2007] UKHL 17, [2007] 2 AC 432.

Introduction  3 law in determining the beneficial interests of parties to a family home: the relevance of resulting trusts was de-emphasised and the application of the ‘common intention constructive trust’ was tweaked, signifying an ‘evolution of the law of property to take account of changing social and economic circumstances’.3 But as Baroness Hale also rightly pointed out, ‘context is everything’;4 and as Yip argues, the Singaporean context has called for a different approach. Thus, Singapore courts have retained the relevance of both constructive and resulting trusts in determining beneficial interests. Moreover, in determining parties’ intentions, courts are mindful of quintessential Singaporean family norms pertaining to the fact that disputes usually arise between parents and children rather than de facto partners. Thus, for example, Singapore courts stand unique in the conclusions they draw from the communitarian attitudes of the older generation, and from the oft-found selflessness of individuals in repaying mortgage instalments or allowing family members to be included on the legal title. Rebecca Lee’s chapter discusses the exclusively Chinese customary familial arrangement of collective hereditary land ownership, ‘tsos’ and ‘tongs’. This sort of arrangement is of significant practical consequence in Hong Kong, where 6,000 acres in the New Territories – representing between one-quarter to one-third of all land in the New Territories – are subject to such arrangements. Lee demonstrates from a historical perspective that, rather than treating tsos and tongs as part of Chinese customary law, courts have adapted a trusts law analysis of these arrangements, whereby managers are taken to be trustees, and members of tsos and tongs are treated as beneficiaries. However, Lee argues that rather than clarifying the legal analysis, this adaptation causes difficulties, for example in squaring the analysis with the terms of the relevant Ordinance, as well as in causing a mismatch between trusts rules and the way these customary arrangements function.

B.  Part II: Religious Adaptation The region of Asia reflects a rich diversity of religious beliefs. As a result of British colonialism, trusts law has been adapted in this context, either to regulate, to adjudicate upon, or to extend the use of religious property devices. In his chapter, TT Arvind considers and evaluates the adaptation of trusts law in India through the lens of Hindu religious endowments. Tracing the history of the matter, Arvind explores the reasons leading colonial officials to use the trust as a tool to explain and regulate these endowments. One significant reason was that those officials lacked an appreciation of customary law and norms. Happily, however, Arvind argues that the trust did in fact provide a fit with religious endowments; he demonstrates this by carefully unpacking the pre-colonial jurisprudence on religious endowments and evaluating the trust’s contributions in that light. But that fit was far from perfect, and the law on religious endowments has had to adopt trusts law principles in the process. An interesting – and perhaps outstanding – issue raised by this historical story concerns



3 ibid 4 ibid

[46]. [69].

4  Ying Khai Liew and Ying-Chieh Wu how best to exploit trusts law to regulate Hindu religious endowments efficiently. Some provinces have focused on establishing a regulatory body, analogous to the English Charity Commission, while others have chosen instead to develop trusts rules and standards in order to utilise their inherent regulatory potential. Sri Lanka is home to a rich diversity of cultures and ethnicities, and reflects a melting pot of religions. Against this backdrop, Anton Cooray’s chapter examines how trusts law has been adapted to regulate gift-giving in the context of Buddhism, Hinduism and Islam in Sri Lanka. Tracing the intricacies of the historical development of religious laws, Cooray demonstrates that no one-size-fits-all adaptation has occurred. Rather, in some cases courts have utilised a trust analysis in a creative way to analyse gifts; in other instances statute has attempted to adopt trusts-like thinking to regulate gift-giving; in yet other cases religious congregations have pushed for the incorporation of trustees to manage gifts. Although the interplay between trusts law and religious laws has not always been an easy one, Cooray shows how the adaptation of trusts law has enriched the functioning and application of local religious laws. Hang Wu Tang’s chapter surveys two unique ways in which trusts law has been adapted in Malaysia, one of which is religious and the other commerce related. Taking the latter first, Tang discusses how trusts law has been adapted in the Labuan International Business and Financial Centre situated in East Malaysia. The Centre offers financial services, holding itself out as unique in terms of its central geographical position in the Asia-Pacific region, its trade links to ASEAN countries, and its expertise in Islamic wealth management. But Tang notices that its success has at best been lukewarm, suggesting that non-legal factors, for example, the political context of the jurisdiction, may have a greater influence on decisions of where one invests. Separately, Tang also considers the ‘hibah trust’, an innovation involving an adaptation of trusts law in combination with the Muslim ‘hibah’ device. Tang notes that in many instances the outcome of a hibah trust can be mimicked by an irrevocable discretionary trust. The fact that the former, and not the latter, is marketed is, he argues, an effect of the growing phenomenon of religiosity in Malaysia, where it is important that arrangements appear to abide by Muslim principles rather than contradict them.

C.  Part III: Commercial Adaptation For many jurisdictions, the main impetus for adapting and developing trusts law is the promotion of commerce, that is, either to support or regulate commercial activities, or as a financial product to improve local economic conditions. In his chapter, Alex Yang notes that trust business in Taiwan is a tightly controlled sector reflecting intense regulations and demanding requirements for setting up such trusts. Yang argues that this stringent approach is less than well suited in the modern day. He demonstrates this using crypto-asset custodians as an analytical test case. Yang argues that these custodians fall outside the definition of a ‘trust business’, not due to any logical choice made by the courts or regulatory bodies, but rather due to the technical reason that the transactions with which these custodians are involved all fall outside the definition of a Taiwanese ‘trust’, which requires the transfer of a title to the trustee. The upshot is that these custodians fall outside the regulatory framework for trust

Introduction  5 businesses, a state of affairs Yang laments. More broadly, Yang argues that this is a symptom of the unduly narrow focus of Taiwanese law. He notes that a statutory overhaul of trusts law is in the works, and argues in favour of adapting trusts law more innovatively in order to widen the scope and reach of trusts products and trusts regulation, as well as to address the monopoly of trust businesses by banks and securities companies. David Russell’s chapter examines the adaptation of trusts law in the Gulf region. Russell makes the excellent point that the provision of trusts services is morally consistent with the Islamic principle of prudent wealth management, and therefore it is no surprise that the Islamic nations in the Gulf have embraced trusts law in their designated financial centres. It will be noticed from Russell’s chapter that the relevant trusts statutes have a distinctly common law flavour. This is an interesting point, as it differs from the usual strategy civil law jurisdictions adopt, which is to adapt trusts law rules in such a way that does not offend core civil law notions, for example, the numerus clausus principle. In many of the Gulf nations, by contrast, trusts law is adapted by carving out geographical enclaves designated as common law jurisdictions. This is a strategy which may well be of interest to other jurisdictions intending to set up financial centres of their own. Katy Barnett’s chapter investigates the South Pacific jurisdictions of the Cook Islands, Niue and Western Samoa. Barnett explains how these jurisdictions have come to be known as ‘offshore’ jurisdictions and have adapted the doctrinal aspects of trusts law to suit their particular needs. To take one example, their laws often favour the settlor’s interest to the extreme, at the expense of what others might consider to be legitimate claims on his or her assets. Barnett observes that the provision of trusts services is both fiscally and politically attractive to these small, independent nations. But they are often found caught between a rock and a hard place: larger jurisdictions constantly exert pressure on them, on the one hand to drive the development of those characteristically ‘offshore’ rules, but on the other hand also to police or deter immoral financial arrangements. All this comes at high sociological costs, including economic and political dictation by powerful forces, and the breeding of an attitude of greed in the local society.

D.  Part IV: Statutory Adaptation Being the product of the English Chancery courts, the trust was historically a creature of case law. In modern times, however, there is an increasing interaction between case law and statutes. This is certainly true of England and other common law jurisdictions, where statutory provisions often supplement or clarify case law rules. But that interaction is particularly significant in civil law jurisdictions, since without statutory intervention trusts law – a concept which is not indigenous to those jurisdictions – would not exist. Therefore, in a sense, the interaction between case law and statutes is an important dimension of all the jurisdictions discussed in this collection. But the chapters in this part discuss instances where trusts law has been adapted via statutory intervention. The first two chapters examine statutory interactions with trusts in particular contexts, while the other four chapters consider instances of extensive statutory intervention approximating to an overhaul of trusts law.

6  Ying Khai Liew and Ying-Chieh Wu In his chapter, Matthew Harding explores the interaction between case law and statutes in the unique context of the Australian federation. While equity falls within the purview of state and territory courts, federal legislation has also been enacted that affects trusts law. Harding explores three particular areas of interaction, namely charity law, family assets and trading trusts, observing that they reflect varying degrees of consistency and coherence between judge-made law and statutes. One important point Harding makes is that adapting the law based solely on harmony is not always desirable: although consistency of outcome at any level ought usually to be prioritised, sensitivity to the policies behind certain laws (for example, tax versus general trusts law) may require state or territory law to diverge from federal law. Although Thailand does not have any general trusts law, the concept appears in the Trusts for Transactions in Capital Markets Act 2008 (TTCMA). In their chapter, Surutchada Reekie and Adam Reekie examine the TTCMA in light of the irreducible core of trustee duties, namely the duty to account and the duty to act honestly and in good faith. While concluding that those core elements are reflected in the TTCMA, Reekie and Reekie argue that those core elements are not the consequence of the Act’s importation of the common law concept of the trust and associated trustee duties. Instead, they argue that the Act draws closely from corporation law; thus, trustees are treated similarly to directors of public limited companies, and beneficiaries have rights closely analogous to those of shareholders. Importantly, Reekie and Reekie argue that this realisation will impact on the planned adaptation of trusts law more generally in Thailand. A previous trusts bill that had attempted to introduce a general law of trusts had drawn heavily on the TTCMA, but Reekie and Reekie suggest that a better approach would be to take a more expansive view of trusts law, in order better to serve the purpose of the proposed legislation. Turning to the chapters which consider extensive statutory intervention in trusts law, Zubair Abbasi’s chapter on Pakistan is the starkest of them all. The trust has been part of Pakistani law since the Trust Act 1882 was introduced. However, due to pressure to curb terrorism financing, in 2020 the five provincial legislatures and central legislature promulgated new Trusts Acts. Abbasi discusses the effects of these Acts, noting that they overhaul Pakistani trusts law in a radical and extreme fashion. Among the new changes introduced is a requirement of registration for every trust, with the relevant authorities having ultimate and essentially uncontrolled discretion to refuse registration. Another significant change is the imposition of onerous duties on trustees, for example, to disclose trusteeship, to provide reports and to audit trust dealings. Abbasi argues that these changes will have the self-defeating effect of stifling many other legitimate trusts, and he questions whether this adaptation is an overreaction to antiterrorism sentiments. It is well known that the Trusts Act 2019 has set New Zealand apart as the first mainland common law jurisdiction to enact in statutory terms aspects of trusts law which would otherwise be found in case law. These aspects include: a definition of an express trust, its core principles and default trustee duties. Jessica Palmer’s chapter subjects the Act to scrutiny. The essential question Palmer examines is whether the Act indeed overhauls New Zealand case law on trusts to which her answer is in the negative. Unlike others who have argued that the Act has the effect of substantially changing the common law and renders the law inflexible, Palmer argues that, in fact, the Act has the

Introduction  7 effect simply of clarifying the law for the benefit of trustees. This is a particularly useful adaptation of trusts law, given the high number of trusts per capita in New Zealand and the phenomenon that a vast majority of trustees are lay persons. Meytal Liberman’s chapter demonstrates that Israel’s trusts law is a product of a course of development throughout its history, adapted in the context of the mixed legal traditions reflected in the Israeli legal system which includes the influence of Sharia law during the Ottoman Empire as well as the common law during the British Mandate. Historically, any device resembling a trust was at best analogous to the charitable trust, this finding its roots in the waqf. Since the Trust Law 1979 introduced the non-charitable private trust device, Liberman notes that ‘trusts law’ today refers to the provisions in that statute, but may also refer to the waqf or the Jewish endowment (hekdesh). Despite the adaptation of trusts law provided for by that statute, however, Liberman argues that work remains to be done to understand the status of and extent to which it interacts with the waqf and hekdesh. Discussing one of the most underexplored jurisdictions in this collection, Matthew Rendall and Soromnear Sin consider Cambodia’s new Trust Law which was enacted in 2019. Rendall and Sin note that the introduction of trusts law in the country was driven by, among other things, a desire to attract investment, to increase tax revenue, to diversify its offering of financial products and to improve the management of funds. They observe that, on its surface, the Trust Law employs a strategy similar to those of the East Asian jurisdictions: it sets out in detail the rules for the creation, registration and management of trusts, as well as the rights and obligations of trustees and beneficiaries. More remarkably, however, due to the recentness of the statute as well as the lack of common law influence in Cambodia’s legal system, Rendall and Sin argue that the Trust Law is simply the first step of many in the development of the law in Cambodia: trusts law is in its infancy and a work in progress. The chapter reproduces a number of questions their law firm has raised concerning ambiguities in the Trust Law to the Ministry of Economics and Finance, the designated regulator of trusts, and the Ministry’s responses. Those responses provide interesting insights as to the Ministry’s understanding of how trusts law operates and ought to develop in future.

E.  Part V: Doctrinal Adaptation Because trusts law is a unique creation of the common law, the project of adapting trusts law is a laborious one, from a doctrinal perspective, when it comes to civil law jurisdictions. In particular, there is the perceived difficulty of squaring a round peg: the civilian legal tradition embraces strict categorical distinctions, for example between in rem and in personam rights, while the common law trust provides beneficiaries with rights that resemble property rights in some respects but personal rights in others. The chapters in this part all deal with jurisdictions with a civil law tradition, and each discusses ways in which trusts law has been or ought to be adapted to fit tenets of that tradition. In his chapter, Ying-Chieh Wu considers the nature of trusts in South Korea. Unlike the common law conception of the trust, which – at least in part – reflects proprietary rights, Wu argues that the trust in South Korea remains essentially a device granting purely personal rights. At best, South Korean law can be said only to have adapted

8  Ying Khai Liew and Ying-Chieh Wu one particular feature of trusts law, namely the independence of the trust fund. Wu demonstrates this by pointing to the carefully crafted provisions of the Trusts Act 1961, as revised in 2011. Wu also notes a number of fundamental difficulties that the South Korean legal system faces in adapting the proprietary analysis of beneficiaries’ interests, for example, that this clashes with the numerus clausus principle, and that a proprietary interest requires a transfer of property to the right-holder, which a beneficiary lacks when a trust is created. It can be observed that Wu’s arguments are potentially of wider relevance, not only to other civil law trusts jurisdictions, but also to jurisdictions such as India5 where beneficial interests are conceptualised as obligational in nature. In relation to Japan, Masayuki Tamaruya’s chapter considers the liabilities of third parties where a breach of trust occurs, namely for assisting in the breach, for receiving proceeds of a breach and for giving up traceable proceeds of the breach to beneficiaries. These liabilities are aspects of trusts law which receive close attention in Anglo-Australian law, but not in Japan. Tamaruya argues that this lack of attention is unfortunate but unintentional. However, he also argues that adaptation of Japanese law in these respects is crucial for the protection of beneficiaries, particularly in view of the increasing deregulation of banks and the rise of non-professional trustees. His central argument is that the fiduciary concept can provide a useful tool to develop these liabilities in Japan without offending core civil law notions. Hui Jing’s chapter examines the adaptation of trusts law in China from the perspective of intention. By comparing Chinese trusts law with orthodox common law, Jing argues that they are both similarly autonomy-enhancing; however, important differences exist. Most crucially, Chinese law has opted for the requirement of bilateral intentions rather than unilateral intentions; it has also closely aligned the trust concept with contracts. Jing observes that these choices are explicable on the basis that the trust concept is alien to Chinese law, and therefore for reasons of convenience the trust drew heavily on the existing contract law framework. For that reason, Jing argues, trusts are generally understood as third-party contracts. Yet, as Jing demonstrates, trusts are ultimately distinct from contracts; and he suggests that this ought to be reflected in efforts to update trusts law in the future.

F.  Part VI: Cross-Border Adaptation Ying Khai Liew’s chapter stands alone in this final part in considering trusts law from the private international law perspective. The main question Liew seeks to answer is how jurisdictions across the Asia-Pacific region can best adapt to the likely increase in cross-border trusts disputes in the future. Liew argues that, although choice of law rules are ultimately rules of the forum, the question need not be answered by each jurisdiction in isolation; rather, there is much to be gained by approaching the question on a region-wide scale. Liew suggests that one way to do so is by dividing Asia-Pacific jurisdictions into groups depending on the state of and extent to which they have adapted 5 See S Tofaris, ‘The Transplantation of Trusts Law in India’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021).

Introduction  9 domestic trusts laws, because doing so informs the choice of law discussion, including the strategies that may be adopted to adapt those rules for the future. In his chapter, Liew also seeks to demonstrate how a proper understanding of domestic trusts law in these jurisdictions can inform the development of sound choice of law rules.

III. Reflections Most of the contributions in this book concern trusts law in individual jurisdictions. However, one of the benefits of having these contributions put together in an edited collection, we hope, is that it places the reader in a position to reflect on the relevance of lessons drawn from individual jurisdictions on trusts law more widely across AsiaPacific. To that end, we offer in this part our own reflections on how the contributions in this collection may inform and extend our understanding of trusts law in the region. We offer these subject to one proviso, which is that these reflections are by no means meant to be exhaustive – nor, indeed, definitive. Rather, these are personal to us, and are intended simply to be indicative of the sorts of reflections that we hope this collection will evoke. First, the flexibility of the trust is demonstrably one of its greatest assets. This has allowed jurisdictions in Asia-Pacific to adapt the trust in different ways to meet the unique needs raised by local conditions. Thus, Wu’s, Tamaruya’s and Jing’s chapters, which constitute part V of this book, provide useful examples of how trust doctrines have been or can be adapted in line with the civilian legal tradition. But the trust’s flexibility is not only beneficial to civil law jurisdictions; as Yip’s chapter demonstrates, even a common law jurisdiction – in her case, Singapore – may adapt mainstream trusts rules to suit the needs of local societies. These instances of adaptation suggest two related points. The first is that, regardless of how trusts law first came to be received in a jurisdiction – whether it be an autonomous civil law jurisdiction choosing to adopt trusts law, or a colony having trusts law imposed on it – courts or legislatures can and do adapt trusts concepts to meet local needs through the passage of time.6 The second related point is that, although English trusts law is often used as the yardstick for discussing the law in other jurisdictions, it may be better to view English law simply as a starting point. This allows jurisdictions to analyse any divergence from English law in a normatively neutral manner, which will also encourage a more intense focus on local conditions in adapting trusts law. Second, in addition to its flexibility trusts law is also inherently multidimensional. By this we mean that trusts law has a number of distinct aspects, each of which provides different benefits to jurisdictions. For instance, the express trust provides a facility for the arrangement of private wealth, which is the aspect discussed in the context of China in Jing’s chapter, and an aspect which Tamaruya argues ought to be exploited more intensely in the ageing society of Japan. Trusts law also has a regulatory aspect, which informs the adaptation of trusts law as demonstrated, for example, in Yang’s chapter in relation to the regulation of trusts businesses in Taiwan, in Abbasi’s chapter in relation

6 We

thank Lusina Ho for this excellent observation.

10  Ying Khai Liew and Ying-Chieh Wu to the regulation of terrorism financing in Pakistan, and in Arvind’s chapter in relation to the regulation of Hindu religious endowments. In addition, trusts law has an analytical aspect, in that it provides a framework for the analysis of non-trusts devices, as seen, for example, in Lee’s, Arvind’s, and Cooray’s chapters in relation to various customary and religious arrangements. The fact that trusts law is multidimensional indicates that jurisdictions can – and indeed, must – make informed choices as to which aspect(s) of trusts law to exploit in order to tailor their adaptation of trusts law to meet their individual needs. Third, law is a living thing and therefore the adaptation of trusts law is not a one-off activity but a continuous process. Rendall and Sin’s chapter makes this crucial point, noting that the Cambodian Trust Law of 2019 is but a starting point, with much development left to be made. The point is equally reflected in Yang’s chapter, which anticipates the ‘Trusts 2.0’ project which will overhaul the Taiwanese Trusts Act of 1996. This would follow the lead set by Japan and South Korea, whose Trusts Acts have already undergone fundamental overhauling.7 Similarly, the chapters by Harding, Reekie and Reekie, Palmer, and Liberman also remind us, in different ways, that legislature plays a crucial role in introducing trusts law or keeping it up to date in order to ensure it is adapted appropriately to suit the needs for which it is meant to meet. This last point leads nicely on to the next, which is that it is in everyone’s interest for jurisdictions across Asia-Pacific to maintain an open and collaborative dialogue in relation to trusts law matters. We have observed earlier in the introductory part of this chapter that jurisdictions in the region often find much in common with one another in terms of the needs they face and the ways in which they attempt to mobilise trusts law to meet them. Since adaptation is a continuous process, it only makes sense for the line of communication between jurisdictions to remain open. This point is reflected in Liew’s chapter, where he argues that an analysis of the region as a whole, as opposed to a consideration of any particular jurisdiction on a stand-alone basis, can richly inform the development of trusts law rules. Fifth, there are risks accompanying uncritical or undiscerning methods of adapting trusts law. At the less serious end are doctrinal risks, such as those highlighted in Lee’s and Arvind’s chapters, where courts may struggle convincingly to explain and adjudicate on issues concerning customary or religious devices in terms of trusts law rules. A step up the seriousness scale is the risk, observed in Tang’s chapter in relation to hibah trusts, that certain innovative trusts products may, upon examination, be of no effect, putting people’s properties in jeopardy. Even more serious are the risks of ruining social morale and attracting unwanted political and economic pressure, as Barnett’s chapter demonstrates has occurred in South Pacific offshore jurisdictions. Most seriously, is the risk considered in Abbasi’s chapter of trusts law becoming self-defeating. All this cautions that the adaptation of trusts law must be taken seriously, and carried out in a critical and careful manner. Finally, trusts law is not exclusive but widely inclusive. Before the Asia-Pacific Trusts Law series began, only a few jurisdictions in the region, namely, Australia,

7 The Japanese Trusts Act of 1922 was amended in 2006; the South Korean Trusts Act of 1961 was amended in 2011.

Introduction  11 New Zealand, Hong Kong, Singapore and the East Asian jurisdictions, had a presence in any significant trusts law forums. But there is no inherently logical or analytical reason for which these jurisdictions should form an exclusive club; as the discussions of other Asian-Pacific jurisdictions in this collection (as well as in volume one) demonstrate, trusts law has a much broader presence than commonly assumed. And the inclusivity of trusts law need not end there: the ways in which civil law jurisdictions have adapted trusts law can serve as a template for other non-trusts jurisdictions in the region to follow suit. As the experiences of Asian-Pacific jurisdictions demonstrate, trusts law is highly adaptable, much like the chameleon.

12

part i Familial Adaptation

14

2 Resulting and Constructive Trusts in the Contemporary Singaporean Family Context MAN YIP*

I. Introduction The legal rules that emerge in a society are shaped by the conditions of that society. In the area of trusts law, this chapter argues that the English principles of the presumed resulting trust and the common intention constructive trust have been adapted to suit the Singaporean family context. At first sight, given that Singapore law has declined to follow the Stack v Dowden1 line of developments that have taken place in English law concerning beneficial ownership of family property,2 it may appear that Singapore trusts law is more conservative3 and that pre-Stack English law is better preserved on Singapore soil than in England. This chapter argues that whilst there is no outwardly radical departure from preStack English trusts law principles in the family context under Singapore law, subtle substantive adaptation has occurred. First, a clear framework of analysis has emerged, even though the principles of the presumption of resulting trust and the common

* Associate Professor, Yong Pung How School of Law, Singapore Management University. The author would like to thank Ying Liew, Ying-Chieh Wu, Kelvin Low and Lusina Ho for their insightful comments and questions. All errors and views remain the author’s own. 1 Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432. 2 It is currently unclear if the approach in Marr v Collie [2017] UKPC 17, [2018] AC 631, which suggested that the Stack reasoning is applicable beyond the purely domestic setting, will replace the Stack approach in English law. See Thomas v Bulathwela [2019] EWHC 3511 (Ch) [25]–[26]. 3 See KFK Low, ‘Victoria Meets Confucius in Singapore: Implied Trusts of Residential Property’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021). Low, whose chapter is intensely focused on the resolution of property disputes between spouses, observed that ‘Singapore law likely reflects the most conservative position among the leading Commonwealth jurisdictions both in relation to the resulting trust as well as with respect to the common intention constructive trust’. See also M Yip, ‘The Presumptions of Resulting Trust and Advancement under Singapore Law: Localisation, Nationalism and Beyond’ in A Robertson and M Tilbury (eds), Divergences in Private Law (Hart Publishing 2016).

16  Man Yip intention constructive trust that operate within the framework do not look radically different from pre-Stack English law. Second, and more pertinently, most of the family property disputes that come before the Singapore courts concern non-spousal types of family relationships. They tend to be legal contests arising between parents/parents-inlaw and their adult children/children-in-law or between siblings.4 As a consequence, the liberality of the Stack approach – which was crafted to cater for the informal and less calculative nature of a relationship between committed partners such as spouses or long-term cohabitees5 – is unsuited for other types of family relationships. Simply put, the conservative pre-Stack English law principles – developed in the context of spousal or spousal-like relationships – have been deployed by the Singapore courts to resolve property disputes arising in other family relationships. English law is in this sense adapted to suit the cultural contours of the Singapore family. In the main, this chapter seeks to explain the seemingly conservative developments of the presumption of resulting trust and the common intention constructive trust under Singapore law by reference to the features of the types of disputes that usually come before the Singapore courts. The Singapore courts’ treatment of these cases also reveals the underlying assumptions on non-spousal family relationships, as well as the contemporary socio-economic and cultural conditions of Singaporean society. In particular, many of these property disputes are underlined by an argument as to whether the relevant property had been purchased or transferred pursuant to an informal family understanding which reflects that the parties had intended to hold their interests differently from the legal title. These cases are typically characterised by the lack of formal documentation, the absence of direct evidence from key witnesses who had already died at the time of trial, the children’s strong deference to the parents’ wishes and a communal treatment of property by at least some of the family members. Where the party relying on the family understanding is able to convince the Singapore court that his or her version of the story is more credible, the presumption of resulting trust and the common intention constructive trust are wielded to give legal effect to that family understanding. In other words, these are not cases in which the court determines the parties’ respective shares in the property based purely on the conduct of parties in a horizontal relationship, much less imputing an intention based on what would be fair sharing in the circumstances. Instead, the informal family agreement is often formed between two generations and concerns how parents provide for their adult children. Moreover, the assets in dispute are not always the family home – an asset that is regarded as the principal form of wealth between spouses or unmarried cohabitees in English case law.

4 See, eg, Su Emmanuel v Emmanuel Priya Ethel Anne [2016] 3 SLR 122; Tan Yok Koon v Tan Choo Suan [2017] 1 SLR 654; Ong Chai Soon v Ong Chai Koon [2022] SGCA 36; Somwonkwan Sharinrat v Wong Hong Sang Maurice [2021] SGHC 127; Kwek Pit Seng Jeffrey v Koek Ah Hong [2021] SGHC 143; Koh Lian Chye v Koh Ah Leng [2021] SGCA 69; Tay Nguang Kee Serene v Tay Yak Ping [2021] SGHC 194; Lim Sze Wei (the joint executor and trustee of the estate of Mrs Lim Ah Fong née Loh Ah Fong) v Lim Chuan Wei [2021] SGHC 267. 5 See M Yip, ‘Comparing Family Property Disputes in English and Singapore Law: “Context” is Everything’ (2021) 41 Legal Studies 474.

Singapore  17

II.  Doctrinal Departure from English Law A. The Chan Yuen Lan Framework Chan Yuen Lan v See Fong Mun is generally considered to be a watershed in Singapore trusts law for two reasons.6 First, and the most frequently discussed aspect, is the Singapore Court of Appeal’s unequivocal refusal to follow the Stack approach, attributing the development of the English approach to the unique ‘changing economic and social conditions in England’7 and the diminishing relevance of the presumptions of resulting trust and advancement under English law.8 The Court also observed that the Stack approach has been fiercely criticised for being subjective and uncertain in its operation,9 noting in particular the lack of a sharp definition for the domestic and commercial context distinction which is critical in determining the applicability of the relevant equitable doctrine under English law.10 Second, and pertinently for the development of Singapore law, Chan Yuen Lan sets out a multi-step framework of analysis to address property ownership disputes where parties have contributed unequally to the purchase price. The framework, which reflects Lord Neuberger’s minority approach in Stack, affirms the relevance of both the applicability of the resulting trust and the common intention constructive trust under Singapore law, as well as clarifying their interplay in resolving property disputes. The Court also made it crystal clear that Singapore law will not impute an intention11 and where the evidence of parties’ intentions is available, it will not resort to presumptions.12 Hence, when confronted with a property ownership dispute, whether arising in the commercial or domestic context, lawyers now refer to the Chan Yuen Lan framework. This has contributed to a growing pool of Singapore cases on the common intention constructive trust. As the Singapore Court of Appeal acknowledged in Chan Yuen Lan,13 there were previously very few cases on the common intention constructive trust and one reason for the infrequent invocation of this equitable doctrine could be the ‘perceived restrictive nature of the remedy’ following the English case of Lloyd’s Bank plc v Rosset.14 It would be apposite to set out the Chan Yuen Lan framework in full: In view of our discussion above, a property dispute involving parties who have contributed unequal amounts towards the purchase price of a property and who have not executed a

6 Chan Yuen Lan v See Fong Mun [2014] 3 SLR 1048, noted in HW Tang, ‘A Dispute in Chancery Lane: Re-Considering the Resulting and Common Intention Constructive Trust’ [2015] Conveyancer 169. 7 Chan Yuen Lan (n 6) [127]. The Singapore Court of Appeal pointed to the ‘rise in property prices in England (as well as other parts of the UK), coupled with the dramatic increase in the number of unmarried couples living together (some with dependent children) over the past 50 years’. 8 For the Singapore Court of Appeal’s reasons, see ibid [127] and [131]–[132]. 9 ibid [136]. 10 ibid [153]–[155]. 11 ibid [160]. 12 ibid [51]. 13 ibid [97]. 14 Lloyd’s Bank plc v Rosset [1991] 1 AC 107.

18  Man Yip declaration of trust as to how the beneficial interest in the property is to be apportioned can be broadly analysed using the following steps in relation to the available evidence: (a) Is there sufficient evidence of the parties’ respective financial contributions to the purchase price of the property? If the answer is ‘yes’, it will be presumed that the parties hold the beneficial interest in the property in proportion to their respective contributions to the purchase price (ie, the presumption of resulting trust arises). If the answer is ‘no’, it will be presumed that the parties hold the beneficial interest in the same manner as that in which the legal interest is held. (b) Regardless of whether the answer to (a) is ‘yes’ or ‘no’, is there sufficient evidence of an express or an inferred common intention that the parties should hold the beneficial interest in the property in a proportion which is different from that set out in (a)? If the answer is ‘yes’, the parties will hold the beneficial interest in accordance with that common intention instead, and not in the manner set out in (a). In this regard, the court may not impute a common intention to the parties where one did not in fact exist. (c) If the answer to both (a) and (b) is ‘no’, the parties will hold the beneficial interest in the property in the same manner as the manner in which they hold the legal interest. (d) If the answer to (a) is ‘yes’ but the answer to (b) is ‘no’, is there nevertheless sufficient evidence that the party who paid a larger part of the purchase price of the property (‘X’) intended to benefit the other party (‘Y’) with the entire amount which he or she paid? If the answer is ‘yes’, then X would be considered to have made a gift to Y of that larger sum and Y will be entitled to the entire beneficial interest in the property. (e) If the answer to (d) is ‘no’, does the presumption of advancement nevertheless operate to rebut the presumption of resulting trust in (a)? If the answer is ‘yes’, then: (i) there will be no resulting trust on the facts where the property is registered in Y’s sole name (ie, Y will be entitled to the property absolutely); and (ii) the parties will hold the beneficial interest in the property jointly where the property is registered in their joint names. If the answer is ‘no’, the parties will hold the beneficial interest in the property in proportion to their respective contributions to the purchase price. (f) Notwithstanding the situation at the time the property was acquired, is there sufficient and compelling evidence of a subsequent express or inferred common intention that the parties should hold the beneficial interest in a proportion which is different from that in which the beneficial interest was held at the time of acquisition of the property? If the answer is ‘yes’, the parties will hold the beneficial interest in accordance with the subsequent altered proportion. If the answer is ‘no’, the parties will hold the beneficial interest in one of the modes set out at (b)–(e) above, depending on which is applicable.15

B.  General Observations on Post-Chan Yuen Lan Developments The rest of the chapter focuses on reviewing post-Chan Yuen Lan cases. Four key observations may be made of these cases at the outset. First, although the framework prescribes a particular sequence in which the different doctrines are to be addressed, more recent cases have taken the view, whether explicitly or implicitly, that the prescribed sequence



15 Chan

Yuen Lan (n 6) [160] (emphasis added).

Singapore  19 need not be rigidly adhered to.16 Much would depend on parties’ pleadings. This clarification renders the Chan Yuen Lan framework a more useful and sensible analytical tool. Second, post-Chan Yuen Lan cases have not noticeably advanced the law of common intention constructive trust in Singapore. There has not been a liberalisation of the Rosset approach17 which established that where an express common intention could not be proved, a common intention was generally to be inferred from direct contributions to the purchase price. Indeed, the Singapore Court of Appeal affirmed in Geok Hong Co Pte Ltd v Koh Ai Gek that local law remains very much focused on parties’ direct financial contributions in the inference of a common intention.18 As I have explained in a previous publication,19 this state of affairs can be explicated by reference to the type of family property disputes that most frequently come before the Singapore courts. Unlike the English landmark decisions, the cases that have confronted the Singapore apex court have not concerned unmarried cohabitees parting ways which require the court to determine their beneficial interests in the family home, an area that is fraught with socio-economic issues.20 The landmark Singapore cases that have established the modern Singapore law in the area of beneficial ownership over family property have generally involved children fighting over parents’ assets or have been shaded by such a contest.21 This feature, as I have argued, would explain the Singapore courts’ focus on the proprietary aspects of the disputes.22 Notably, Geok Hong Co, a post-Chan Yuen Lan decision, concerned a property held in the name of the family owned company which the claimant and his family had resided in rent free for 40 years. The unusual fact pattern, coupled with the lack of documentation of an alleged exchange between the claimant and his father (the family patriarch) over the former’s entitlement to the home, rendered the application of a conventional common intention constructive analysis far less straightforward, much less provided occasion for liberalisation. In the subsequent 16 Ng So Hang v Wong Sang Woo [2018] SGHC 162 [24]; Soemarto Sulistio v Stukan Yetty Fang [2021] SGHC 4 (the appeal before the Appellate Division of the Singapore High Court was focused on whether the proper legal inquiry ought to have been whether the husband intended to make an inter vivos gift to the wife as opposed to whether the parties had a subsequent change in common intention: see Soemarto Sulisto v Stukan Yetty Fang [2021] SGHC(A) 5); Koh Lian Chye (n 4) [26]; Ong Chai Koon v Ong Chai Soon [2021] SGHC 76 [43]–[46] (this point was not appealed nor revisited by the Singapore Court of Appeal: Ong Chai Soon (CA) (n 4). cf Lim Sze Wei (n 4) [19]. 17 Endorsed to be part of Singapore law in Tan Thiam Loke v Christina Woon [1991] 2 SLR(R) 595. 18 Geok Hong Co Pte Ltd v Koh Ai Gek [2019] 1 SLR 908 [81]. cf Ng So Hang (n 16) [56]–[57]. The High Court accepted that a common intention can be inferred from indirect financial contributions that enable direct contributions to be made towards the purchase price. 19 See Yip, ‘Comparing Family Property Disputes in English and Singapore Law’ (n 5) 483–86. 20 The prevailing societal attitude towards unmarried cohabitation in Singapore is that it is a pre-marital short-term arrangement. It has yet to be widely accepted as a long-term family structure within which children are produced. See ‘50 per cent of Singles Okay with Cohabitation’ The New Paper (15 February 2014), available at: www.asiaone.com/singapore/50-cent-singles-okay-cohabitation; K Strijbosch ‘Single and the City: State Influences on Intimate Relationships of Young, Single, Well-Educated Women in Singapore’ (2015) 77 Journal of Marriage and Family 1108, 1113. Moreover, there are non-commercial, intimate relationships (whether there is cohabitation or not) which are not based on a family paradigm such as the domestic partnership we see in Stack: see, eg, Ng So Hang (n 16) 30 (‘a relationship of some intimacy at the start which persisted for a considerable period of time’); Xu Zhigang v Wang Fang [2020] SGHC 254 (an extra-marital affair). 21 See Lau Siew Kim v Yeo Guan Chye Terence [2008] 2 SLR(R) 108; Chan Yuen Lan (n 6); Geok Hong Co (n 18). In Lau Siew Kim and Chan Yuen Lan, the parties did not even advance any argument based on the common intention constructive trust. 22 Yip, ‘Comparing Family Property Disputes in English and Singapore Law’ (n 5).

20  Man Yip case of Ong Chai Soon v Ong Chai Koon, the Singapore Court of Appeal confirmed that in inferring a common intention, the focus would very much be on the financial contributions of the parties.23 It, however, acknowledged that in exceptional situations a common intention can be inferred from other forms of conduct.24 In that case,25 a property dispute arose between siblings and the Court noted that it was an exceptional situation as ‘neither the appellant nor the respondents had made any direct financial contributions towards the purchase price of the Property in the typical manner, such as by using moneys from their personal bank accounts or Central Provident Fund’. Instead, sub-tenancy rental monies and earnings from what was regarded as a family business were used to finance the mortgage instalments.26 The Court thus held that the High Court was justified in inferring a common intention from ‘the totality of the evidence’, instead of focusing on the parties’ direct financial contributions.27 Notwithstanding that neither side had made direct financial contribution from the typical sources of funding, if the sub-tenancy rental proceeds and the family business earnings were indeed profits generated from family assets, they would be considered as parties’ direct financial contributions. Third, and related to the second observation, the clarification on the interplay between the presumption of resulting trust and the common intention constructive trust in the Chan Yuen Lan framework has not led to a sharp decrease in the number of cases in which the presumptions of resulting trust and/or advancement are argued as the primary or sole case. This may come as a surprise as the common intention constructive trust, at least based on the English experience, is thought to be more flexible and therefore more appropriate for the domestic setting. The presumption of resulting trust, which is exclusively focused on the parties’ direct contributions to the purchase price at the time of the purchase of the property, is generally assumed to be more in line with dealings arising in the commercial context.28 There are two probable reasons for this development. First, the structure of the Chan Yuen Lan framework prescribes the presumption of resulting trust as a starting point which would undoubtedly influence how parties plead their case. The influence of this factor may however diminish over time in view of recent judicial comments that parties need not faithfully adhere to the apparent order of the analysis. Second, and arguably the more influential factor, is that the common intention constructive trust doctrine does not greatly assist the parties in a number of the Singapore disputes. There are two facets to this factor. As explained above, the doctrine remains rather restrictive under Singapore law. The flip side, which is the other facet, is that a majority of the post-Chan Yuen Lan disputes are not concerned with family members (at least one of whom is the legal owner) contributing financially or non-financially to a shared home as a joint commitment. As highlighted above, most of the cases concern contests between parents and their adult children or between siblings. Further, in many of the cases the contributions



23 Ong

24 ibid. 25 The

Chai Soon (CA) (n 4) [35].

facts of the case are discussed in the text to and around nn 41–46. discussion in the text to and around nn 59–60. 27 Ong Chai Soon (CA) (n 4) [36]. 28 Stack (n 1) 455. 26 See

Singapore  21 relied on by the parties to acquire an equitable interest in the property are financial in nature, usually comprising contributions to the purchase price and/or mortgage instalments. Parties who do not rely on direct financial contributions for the acquisition of an equitable interest (or an equitable interest that differs from the legal interest) usually advance a case based on an inter vivos gift being made in their favour; argue their case based on direct evidence of a gift; or invoke the presumption of advancement. Even in cases where the common intention constructive trust is argued, the argument is built on whether the parties had arrived at a certain understanding or agreement, whether at the time of purchase or post-purchase, as to their sharing of the asset that was different from the legal interests.29 In other words, these are cases concerned with divining an express common intention. Fourth, where the litigants are joint legal owners, this would not give rise to an automatic and strong presumption under Singapore law that they are to share the property equally in equity while all parties are still alive.30 The Singapore courts are aware that where the parties concerned are siblings or in a parent–child relationship, they might have opted for joint tenancy to enable the operation of the right of survivorship without intending equal sharing in equity during their lifetime. As I have explained in detail elsewhere, joint tenancy is frequently used in Singapore as a device to effect intergenerational transfer of wealth.31 Notably, in a couple of the cases the Singapore courts found on the evidence that parties had been joined as legal co-owners post-purchase of the property to enable them to contribute (usually through their Central Provident Fund) to mortgage instalments which the original legal owners had difficulty paying.32 This factual finding would strengthen the case that the parties did not intend equal sharing in equity. It also goes on to establish that sharing in equity would be based on their financial contributions, thereby greatly reducing the strength of an applicable presumption of advancement and rendering it easily rebuttable.33 I will return to this point in section IV.

29 In Soemarto Sulistio (n 16), before the Singapore High Court, the parties argued their case based on the common intention constructive trust. The case, however, concerned 122 gold bars which were purchased as an investment, as opposed to a family home. The parties’ arguments were directed at the parties’ intention post-purchase when the husband put his signature under the ‘Delivery Instructions’ section of the gold certificates, without indicating the name of the intended transferee. On appeal ([2021] SGHC(A) 5 [5]), the Appellate Division of the Singapore High Court ruled that ‘an important factual question is whether the appellant intended to gift legal and beneficial ownership of the gold bars to his wife solely when he signed the Original Gold Certificate in 2016’. 30 Ng So Hang (n 16) [46]–[47]; BUE v TZQ [2018] SGHC 276, [2019] 3 SLR 1022 [57]. 31 Yip, ‘Comparing Family Property Disputes in English and Singapore Law’ (n 5). The morbidity and inauspiciousness associated with drafting a will, coupled with estate duty which was applicable to all Singapore assets owned by the deceased until its abolition on 15 February 2008, might have made will-making a less popular option. 32 Su Emmanuel (n 4) (the husband’s sister was added as a legal owner to the married couple’s property to enable her to assist in the mortgage repayments; their respective registered legal interests were 50% (wife); 49% (husband’s sister) and 1% (husband)); Low Yin Ni v Tay Yuan Wei Jaycie (formerly known as Tay Yeng Choo Jessy [2020] SGCA 58 (the son and his wife were added as co-owners after they got married to enable them to financially help with mortgage repayments); Somwonkwan Sharinrat (n 4) [61] (the son and his wife became co-owners as his parents had difficulty servicing the mortgage loan on their own). 33 Low Yin Ni (n 32) [8]–[10].

22  Man Yip

III.  The Singapore Family Norms In section III, we turn to examine the recent Singapore disputes with attention being paid to the characteristic norms within a Singapore family. Extracting these norms not only advances our understanding of the Singaporean family, but also helps us better appreciate the apparent conservatism of the Singapore developments, as well as the subtle adaptation of the English trust principles on Singapore soil. Of course, an important caveat for this part of the analysis is that the norms are gleaned from a review of the litigation that has been resolved by the local courts. These are the most complex cases where substantial assets are at stake, reliable documentary evidence or oral testimonies are lacking, where family relationships have irretrievably broken down or where all (or most) parties involved have the means to pursue litigation to a court determination. It is possible that the norms highlighted are not representative of family property disputes that have been settled out of court. Nor am I suggesting that the norms accurately depict all Singaporean families as the observations are not obtained from or corroborated by a contemporaneous sociological survey. The value of my analysis is nevertheless significant. First, it is the disputes that end up in court which shape the developments of Singapore law. Second, the analysis can assist some Singaporean families to have better planning of their dealings, in order to avoid bitter and long drawn out court battles. I should also add that this chapter is a complementary research project to another book chapter that I have co-authored with Hang Wu Tang in which we explored the family norms of very rich families in Singapore to gain insights into how their disputes on family assets and family business germinate and can be prevented.34 The present chapter, with its focus on the presumption of resulting trust and the common intention constructive trust, considers only family property disputes but without limiting the scope of the review to the wealthy. Some of the family norms observed amongst the very rich are equally relevant in less wealthy families residing in less opulent homes, such as government housing flats or private apartments. These norms include, as examined below, the informality of family dealings between the different generations, the deference and trust which the younger generation usually pay towards the older generation, and the communal treatment of assets owned by family members or family businesses. The analysis offered in this chapter can thus provide a general indication of the local family culture.

A.  Informal Family Understanding In a number of the Singapore family property disputes, the courts have found that an informal family understanding existed which relates to the specific property in dispute or family assets in general. It is informal because the family understanding

34 See M Yip and HW Tang, ‘Crazy Rich Families in Singapore: Property, Trust and Business Disputes and the Incompatibility of English Principles’ in R Nolan, M Yip and HW Tang (eds), Trusts and Private Wealth Management: Developments and Directions (Cambridge University Press 2022).

Singapore  23 has not been properly or contemporaneously reduced in writing. It is divined by the court based on an evaluation of inconsistent and/or patchy oral testimonies from all parties involved in the litigation.35 There is undoubtedly some conjecture and guesswork involved.36 Nor could the court be confined to reviewing evidence at the time of purchase in determining disputes argued based on the presumptions of resulting trust and advancement if it were to arrive at an objective and educated guess as to what probably happened. It is thus hardly surprising that the Singapore Court of Appeal abolished the restrictive rule in Shephard v Cartwright37 and allowed all evidence to be admitted and assessed as to the appropriate weight to be ascribed.38 As the Court explained, ‘the new approach would allow the court to consider the parties’ intentions more holistically and achieve a fairer result especially in complex cases where parties’ intentions are not readily apparent’.39 Informality in family dealings is nothing new. The abolition of the anachronistic rule in Shephard v Cartwright – which established that post-purchase acts and declarations are only admissible as evidence against the party who made them for the purpose of rebutting the presumptions of resulting trust and advancement – is also somewhat within expectation.40 There are, however, two features of the informal family understanding in the Singaporean family context that merit further scrutiny. In Quek Hung Heong v Tan Bee Hoon (executrix for estate of Quek Cher Choi), the Singapore High Court has made the following observation regarding an informal family understanding: It is not unusual for arrangements between family members not to be documented. That is true – it may even be especially true – when those arrangements concern money or property rights, always a sensitive subject-matter. Arrangements of this nature are arrived at in an informal context between individuals of different generations, united by their close and unique relationship as family members and subject to the inevitable deference which younger members accord to older members. It is typical that family members will not feel the same desire or need to document their rights and interests that strangers would. Even if they were to feel the same desire or need to do so, it is also typical that they would feel inhibited in acting upon it. That would have been even more true of the more patriarchal families of 1966 than it is of today’s more egalitarian families.41

First, the informal family understanding is usually formed between two different generations, often concerning how parents would distribute family wealth amongst their adult children. Second, the deference which the younger family members accord to the

35 See, eg, Tan Yok Koon (n 4) [2]; Ong Chai Soon (HC) (n 16) [1] (on appeal, the Singapore Court of Appeal found no basis to ‘disturb the specific findings of fact made by’ the lower court: see Ong Chai Soon (CA) (n 4) [37]). 36 Ong Chai Soon (HC) (n 16) [52]. The Singapore High Court commented that ‘[i]n the absence of any documentary evidence, in assessing the oral evidence of the Ong siblings, I had to consider the inherent probabilities of each side’s version of events against the undisputed facts’. 37 Shephard v Cartwright [1955] AC 431. 38 Tan Yok Koon (n 4) [110]. 39 ibid. 40 In Lau Siew Kim (n 21), a case decided nine years before Tan Yok Koon, the Singapore Court of Appeal had already considered the parties’ entire course of relationship in assessing the strength of the presumption of advancement, without differentiating between pre-purchase acts and declarations and post-purchase acts and declarations. 41 Quek Hung Heong v Tan Bee Hoon (executrix for estate of Quek Cher Choi) [2014] SGHC 17 [91].

24  Man Yip older family members is why the family deems it unnecessary to have matters recorded in black and white. The corollary to deference is complete trust which the adult children often repose in parents who are authoritative figures at home. The trust is so strong in some cases that they do not even quibble over who is registered as the legal owner of the family assets at the time of purchase and quite often, even up to the time of the parents’ demise or loss of mental incapacity. In Ong Chai Soon v Ong Chai Koon,42 six siblings disputed over whether they shared a common intention that a Housing and Development Board (HDB) shophouse purchased many years ago was a family asset or their ‘retirement fund’ and that they were to share in the sale proceeds equally if the property was sold. The shophouse was registered in the name of the oldest son,43 the defendant, who claimed sole ownership of the property. In particular, the shophouse housed, amongst others, a hair salon business that was registered in the defendant’s sole name. The Singapore High Court,44 on a careful review of the evidence and tracing of the source of the funding for the property, concluded that the parties did indeed have such a common intention, having regard to the fact that the property was purchased using a combination of funds that were regarded as family monies. As to why the property and the business were registered in the name of the defendant, the Court clearly preferred the evidence of the second plaintiff (the youngest sibling) that she had ‘thought it was probably fine to have the property registered in the name of the defendant given the whole family knew that this was considered a “family property”’.45 This was notwithstanding that the siblings always had a strained relationship.46 According to the second plaintiff, a collective decision to purchase the shophouse was arrived at pursuant to a discussion with her mother (who managed the family finances) and the siblings.47 When their mother – whose presence must have prevented deep-seated tension between the siblings from developing into legal contests during her lifetime – died in 2016, the defendant’s behaviour led the plaintiffs to become concerned that he wanted to claim sole ownership in the shophouse, which resulted in the courtroom battle. On appeal, the Singapore Court of Appeal found no basis to disturb the factual findings and conclusion of the High Court on the issue of common intention constructive trust.48 In Tay Nguang Kee Serene v Tay Yak Ping,49 the plaintiff asked her parents to use the proceeds from her successful leather goods business to purchase an apartment for the entire family to live in. An apartment was duly purchased and registered in the names of the father, the mother and the youngest brother, Yak Ping, as tenants-in-common

42 Ong Chai Soon (CA) (n 4). 43 He was the existing tenant of the shophouse and the opportunity to purchase the property was offered to him in April 1995: see ibid [68]. 44 Ong Chai Soon (HC) (n 16). 45 ibid [69]. 46 ibid [19]. 47 ibid [68]. 48 Ong Chai Soon (CA) (n 4) [30]–[42]. The Court of Appeal also upheld the High Court’s orders for the sale of the property and equal distribution of the sale proceeds amongst the Ong siblings, even though it had ‘considerable reservations’ regarding the High Court’s basis for arriving at its conclusion to make the aforesaid orders (see Ong Chai Soon (CA) (n 4) [117]–[124]). 49 Tay Nguang Kee Serene (n 4).

Singapore  25 whose respective interests were 50:25:25. Her mother later died and according to her will, her one-quarter interest in the property was bequeathed to her two other children and Yak Ping in equal shares.50 This apartment was later sold in an en bloc exercise and a second apartment, registered in the names of the father and Yak Ping (the defendants). It was not disputed that the purchase of the second apartment was funded mainly by the proceeds from the sale of the first apartment. Yak Ping contributed $26,300 towards the purchase of the second apartment. The second apartment was subsequently sold in an en bloc exercise, yielding close to $3.3 million in sale proceeds which became the subject matter of the dispute between the plaintiff and the defendants. The plaintiff claimed that the sale proceeds were held on resulting trust for her as the purchase of both apartments was mostly funded by the proceeds of her business. Her alternative claims lay in constructive trust and express trust. Yak Ping, on the other hand, contended that the leather goods business, registered in the names of the plaintiff, the father and Yak Ping, was a family business rather than being solely owned by the plaintiff. He also argued that their father had used his own money to pay for the purchase of the first apartment. To cut a long story short, based on the objective evidence, the Singapore High Court found for the plaintiff, holding that the first apartment was indeed purchased with the proceeds of the business which was determined to be owned solely by the plaintiff on a balance of probabilities. Accordingly, the sale proceeds of the second apartment (subtracting the sum of $26,300 which was provided by Yak Ping) was held on trust by the defendants for the plaintiff. The application of the law was straightforward and brief once the Court had completed the Herculean task of combing through the evidence to decide which party’s version of the events was more credible on a balance of probabilities. What is pertinent to note, for present purposes, is the level of trust which the plaintiff reposed in her father. She did not object to the defendants’ names being included in the business nor did she object to the apartments, which were mainly funded by business proceeds belonging to her, being registered in the names of her parents and other siblings. The Court noted that ‘[i]t is understandable that [the plaintiff], and her siblings, trusted Father in these circumstances and there was never any consideration for the need to document such arrangements’ as their father, ‘an authoritative figure in the family’, had reassured the plaintiff that the first apartment remained hers.51 However, the plaintiff ’s father lost mental capacity in 2017 and it thereafter became clear to the plaintiff that Yak Ping wished to claim the sale proceeds of the second apartment for himself. The father was unable to give testimony at trial, although the other siblings did step forward to corroborate the plaintiff ’s version. In both Ong Chai Soon v Ong Chai Koon and Tay Nguang Kee Serene, an informal family understanding was found and given effect to through implied trusts. In Ong Chai Soon v Ong Chai Koon, the informal family agreement was legitimised by the common intention constructive trust as all siblings were taken to have contributed to the purchase price of the shophouse equally since it was funded by family funds. In Tay Nguang Kee Serene, on the other hand, the family understanding was indirectly 50 The sale proceeds from the sale of this property were paid to the legal owners based on their respective shares. The plaintiff allowed her two other siblings to keep their shares of the sale proceeds (see ibid [12]). 51 ibid [83].

26  Man Yip given effect to through the presumption of resulting trust as it was the plaintiff who had contributed to the purchase monies of the two apartments. The Court’s factual findings meant that the presumption could not be rebutted on the facts. Even though the device of the presumption of resulting trust is not agreement based, its application indirectly buttressed the contributor’s position.52 And conversely, the available evidence supported the presumption. Of course, it is not in every case that an informal family agreement is alleged that one would be found by the court on the facts. Parties may be fabricating an informal family arrangement that does not exist; there might be insufficient evidence to prove the existence of the family agreement; or the parties might have come to an understanding that was not shared by the other family members. In any event, the lack of a proper documentation of parties’ intentions and understanding often results in property contests once the authoritative parent dies, especially if the financial contributions of the co-owners in the younger generation are unequal. In Koh Lian Chye v Koh Ah Leng,53 an HDB shophouse was registered in the joint names of the father and his two sons, Lian Chye and Ah Leng. After the demise of their father, the two brothers each claimed to be solely entitled to the property based on a common intention constructive trust. The purchase of the property was financed by a bank loan. Although the mortgage was taken out in the joint names of all parties, Ah Leng had never contributed towards the repayment. Lian Chye applied $76,800 towards paying down the mortgage of $570,000; the rest was paid off by the father. Ah Leng, in particular, relied on a video recording of a discussion that took place at the father’s bedside in the hospital at a point when the latter was speaking in a ‘very soft’ and ‘breathy’ manner.54 During the discussion, the father asserted that ‘Lian Chye’s share in the Property “cannot eat” the shares held by Ah Leng and himself, their shares could “eat” Lian Chye’s share’.55 The trial judge, with whom the Singapore Court of Appeal agreed, did not consider the video relevant as the father was found to be labouring under possible dementia at the time of the recording.56

52 It may be questioned whether the court needed to resort to presumptions as inferences were drawn from both direct and circumstantial evidence, even if the evidence might not be complete. See KFK Low, ‘Apparent Gifts: Re-Examining the Equitable Presumption’ (2008) 124 Law Quarterly Review 369, 373. Perhaps, the court did not feel confident in resolving the dispute based simply on the evidence, given the heavily contested facts, the lack of documentation and unavailability of oral testimonies from key witnesses as a result of their demise or loss of mental capacity. In Chan Yuen Lan (n 6) [51], the Singapore Court of Appeal commented that ‘[i]n Lau Siew Kim, the father was no longer alive; thus, it was necessary to rely on the presumptions and the circumstantial evidence in order to divine his intentions with respect to his contributions towards the purchase price of the properties in question’. It has also been clarified that the equitable presumptions do not only apply where there is no evidence on parties’ intentions; they would apply where there is ‘insufficient evidence’ (see Pereira Dennis John Sunny v Faridah bte v Abdul Latiff [2017] 5 SLR 529 [25]). An alternative explanation is found in Ying Khai Liew, ‘Trusts: Modern Taxonomy and Autonomy’ (2021) 35 Trust Law International 27, 37–40. Liew points out that there is a tendency for courts to conflate the presumption of resulting trust with the resulting trust, the latter of which is a legal response which is triggered by positive evidence. 53 Koh Lian Chye (n 4). 54 ibid [10]. 55 ibid. 56 ibid [31].

Singapore  27 The Singapore Court of Appeal, upholding the lower court’s ruling, held that the beneficial interests in the property held by Lian Chye and Ah Leng were in the ratio of 57.15: 42.85. The figures were arrived at by taking into account Lian Chye’s financial contribution to the purchase price (14.3 per cent) and by operation of the presumption of advancement pursuant to which the father was taken to have gifted his share (85.7 per cent) jointly to his two sons.57 The Court gave credence to the fact that the father had not dealt with the property in his will, and on this basis it could be inferred that ‘he saw no need to make provision for the Property as his share had already been given to the sons whom [the father] wished to benefit’.58

B.  Older Generation’s Attitude Towards Assets Owned by the Family and Individual Family Members More broadly, the discussion of the cases above reveals that the older generation generally holds a communitarian view towards assets owned by the family and individual family members. Such a view is sometimes shared by members of the younger generation who grew up under the parents’ influence. The older generation family members also consider that they have the power to use the assets and decide on their ownership, quite apart from who paid for the assets or who the registered owner was. In Ong Chai Soon v Ong Chai Koon, for instance, the compensation proceeds paid to the parents for the acquisition of their kampong land were treated as a communal fund to pay for the expenses of the Ong family and intended by the mother to be used for setting up businesses to benefit all her children. The Court of Appeal affirmed the High Court’s finding that the source of funding for the initial payments for the tenancy of the shophouse and the costs for setting up the hair salon business was derived from the mother’s funds which in part probably came from the balance compensation proceeds.59 The mortgage for the shophouse was serviced by rental payments from the hair salon business (treated as a family business) and other sub-tenants in the shophouse. The High Court’s decision (which was upheld on appeal) was also arrived at based on the Ong family’s dealings and treatment of two HDB flats which were regarded by all siblings as family assets shared equally between them. Whilst one of the flats was purchased with the compensation proceeds, the mortgage repayments for the other flat, which purchase price was $60,000, was initially paid by the mother and later by one of the siblings who was the legal owner and who contributed $39,267.15 towards servicing the mortgage.60 Different family members resided in the flats over the years. Whilst parents’ communitarian views of family assets might proceed out of the good intention of providing for their children, such an attitude, taken to the extreme, could lead to a complete and outrageous disregard of an individual family member’s ownership of his or her assets. In Tay Nguang Kee Serene, even though the plaintiff ’s mother acknowledged that the plaintiff had paid for the purchase of the first property,

57 ibid

[3]. [40]. 59 Ong Chai Soon (HC) (n 16) [66]. 60 ibid [90]. 58 ibid

28  Man Yip she bequeathed her legal interest in the property by will to her other children. In fact, she did so partly on the thinking that the plaintiff ‘was very good in making money and she did not have to worry about [the plaintiff] in the future’.61 Further, the parents had added the names of the plaintiff ’s siblings as co-owners of the two properties without seeking her consent.62 Her parents, who insisted on safekeeping the plaintiff ’s business proceeds for her, had also spent the plaintiff ’s money on other purposes without telling the plaintiff.63 The communitarian attitude towards family assets may also extend to a blurring of the ownership of family business assets and family assets. In Tan Yok Koon v Tan Choo Suan, the Singapore Court of Appeal noted that the patriarch of the family, Mr Tan, drew ‘no distinction between the assets of this family members and those of his companies’.64 The case concerned Mr Tan’s transfer of company shares to his children and his pattern of behaviour gave a sense that he never had a clear intention as to whether his children became the legal owners of the company shares.65 As I have explained in my work with Tang, the tendency to blur the line between family and business and between the self and the collective may partly be explained by the Asian collectivist culture of prioritising the family and common good above the individual.66 However, such a pattern of behaviour would make it more challenging for the courts to determine the parties’ intentions.

C.  ‘Blood is Thicker than Water’? Reading some of the Singapore cases brings to mind the proverb that ‘blood is thicker than water’. On a positive note, the essence of the proverb is exhibited in the selfless family behaviour of stepping in to assist with servicing mortgage payments67 and helping to provide for one’s siblings and parents even after one has married.68 On the flip side, the perverse effect of this belief would mean that one is to place greater trust in one’s family with whom one shares blood ties than in one’s spouse or partner. Such a mindset could lead to complications in property interests, as can be seen in the case of Tay Kguang Kee Serene. In that case, the plaintiff had allowed her parents to safekeep her business proceeds, agreed to her family members being registered as co-owners of the business even though she solely funded and operated the business,

61 Tay Nguang Kee Serene (n 4) [47]. 62 ibid [81]–[82]. 63 ibid [37]. 64 Tan Yok Koon (n 4) [49]. 65 Many years after the share transfer, Mr Tan executed statutory declarations to the effect that he retained beneficial ownership of the shares transferred to his children. The Singapore Court of Appeal, however, did not place weight on the declarations as they ‘were too far removed in time’ from the transfers and they were made at a time when he was in poor health and under one of his children’s influence (see Tan Yok Koon (n 4) [117]). 66 Yip and Tang (n 34). 67 Su Emmanuel (n 4) [7]–[10]. The sister was prepared to utilise her CPF funds to assist her brother in servicing the mortgage repayments of the brother’s matrimonial home (then registered in the joint names of the brother and his wife) so as to help them keep their home. 68 Kwek Pit Seng Jeffrey (n 4) [4].

Singapore  29 consented to her parents using her monies to pay for mortgage repayments in a way that would make it harder to trace the source, and (unwillingly) acquiesced to her name not being included in properties she purchased with her own money, on her parents’ advice that they were protecting her assets from her boyfriend (and later her husband).69 It subsequently emerged that her own family members could not be trusted.

IV.  Parents and Siblings In this final part of the discussion, I would like to highlight the Singapore courts’ assumptions as to the norms of family relationships. It cannot be denied that different family relationships are underpinned by different expectations and norms. This is in fact very much reflected in the categories of family relationships which attract the application of the presumption of advancement under Singapore law and those that do not. In this connection, the Singapore Court of Appeal has affirmed that new ‘advancement’ relationships may be recognised on the basis of ‘love and affection’.70 It is, however, clear that ‘love and affection’ does not bring into play the presumption of advancement in familial relations such as between siblings71 or from an adult child to his or her parent.72 The same assumption underlines the courts’ assessment of the facts of a case in deciding what has happened based on a balance of probabilities or whether the family members had a common intention to share regardless of financial contributions. Indeed, in disputes involving siblings and in the absence of clear evidence to the contrary, the court would ordinarily determine the siblings’ shares in the property based on their respective financial contributions.73 The Singapore courts are alive to the reality that while siblings can be very generous towards each other, it cannot be said that on a balance of probabilities that siblings are more likely to make a gift to each other in circumstances where the actual intentions are not readily apparent. After all, siblings would in the ordinary course of things go on to form their own households (whether with a spouse/partner or living on their own) and build up their own economic resources. As between parents and adult children, it cannot be denied that Singaporean parents do have a culture of providing for their adult children, whether through inter vivos gifts or testamentary bequests. Indeed, we currently see more disputes involving co-owned properties paid fully or principally by parents than the converse scenario. And certainly, the recently recognised presumption of advancement applicable in the transfers from parents to independent adult children is not based on a legal obligation to provide,74 69 Tay Nguang Kee Serene (n 4) [11], [38], [47] and [50]. 70 Lau Siew Kim (n 21) [68]. 71 Chan Gek Yong v Chan Gek Lan [2008] SGHC 167 [17]. 72 Ang Hai San Henry v Ang Bee Lin Elizabeth [2010] SGHC 353 [8]; Neo Hui Ling v Ang Ah Sew [2012] 2 SLR 831. 73 See Tay Nguang Kee Serene (n 4); Kwek Pit Seng Jeffrey (n 4); Koh Lian Chye (n 4). cf Su Emmanuel (n 4) (the Court of Appeal ruled that only 49% was available for sale to the sister who repaid most of mortgage repayments; her remedy in respect of the amounts that were paid beyond the parties’ common agreement would lie in equitable accounting). 74 Lau Siew Kim (n 21) [68].

30  Man Yip but rather stems from parental love and affection. Perhaps the better view is that, apart from love and affection, the parents also feel a moral obligation to provide for their adult children based on cultural and social norms. Kelvin Low has suggested that the presumption of advancement in respect of transfers from parents to independent adult children may require some adjustments to take into account the proliferation in financial exploitation of the elderly.75 He makes two proposals: first, the burden of proving a gift to an adult child where the parent is especially elderly should lie with the child; and second, the presumption of resulting trust in respect of the life interest should apply in favour of such an elderly parent to safeguard his or her financial security, unless a gift is clearly intended. Recent Singaporean developments do reflect greater cautiousness on the part of the courts to protect parents (whether especially elderly or not) from unmeritorious claims of their adult children.76 First, joint tenancy under Singapore law does not lead to a strong or even automatic presumption of equal sharing in equity while the parties are alive. The courts have pointed out that joint tenancy might be used in order to enable the operation of the right of survivorship. Second, the courts examine the parents’ reasons for including adult children as co-owners. Where there is evidence that the adult children are registered as co-owners to enable them to assist with servicing mortgage repayments, the presumption of advancement might be inapplicable, or even if applicable, would be weak and therefore easily rebutted. Whether these developments are sufficient to safeguard the financial interests of parents remains to be seen.

V.  Crystal Ball-Gazing: Future Developments of the Law This chapter concludes by crystal ball-gazing into the future developments of the law of the implied trusts in the context of family property disputes in Singapore. It is apposite to do so because the thesis of this chapter is that the development of the law is inextricably linked to and influenced by the type of family relationship and the underpinning norms. Family norms are, however, constantly evolving. The collectivist culture that is characteristic of the family relationships in the family property disputes we discussed may progressively be watered down and even be replaced by a more individualistic mentality in the younger families in Singapore. It has been noted that modern Singaporean families are smaller as compared to families in the past. The collectivist culture in the past might also be strengthened by reason of the older siblings having to step in to ‘act as surrogate parents’ in households where both parents work,77 which arguably fosters

75 Low, ‘Victoria Meets Confucius in Singapore’ (n 3). 76 In Lau Siew Kim (n 21) [68], the case in which the Singapore Court of Appeal endorsed (in obiter) the application of a presumption of advancement in respect of transfers from parents to independent adult children, the Court made clear that ‘the greater the number of children one has, the less likely that a transfer of property of substantial value to a single child without similar provision for the other children would be intended as a pure gift to that child’. 77 Dr Foo KH ‘Commentary: Smaller Families in Singapore, Leading to Unhealthy Parent Styles’ (ChannelNewsAsia, 27 August 2017), available at: www.channelnewsasia.com/singapore/commentary-smallerfamilies-singapore-leading-unhealthy-parenting-styles-1002631.

Singapore  31 a stronger bond of kinship and spirit of sharing in both vertical and horizontal relationships in the family. In contrast, in the smaller modern families, children have direct and constant access to an outpouring of love and material resources from their parents78 which may lead to a growing sense of entitlement in the children. A psychologist has thus pointed out that this may result in the children having a lack of empathy for their parents instead of gratitude.79 And certainly, the traditional virtue of filial piety would greatly diminish in the young generation if this trend of parenting continues. As such, it may be in 10 to 20 years’ time, we will see a very different culture of family interaction in Singapore. If this prediction comes true, trusts law will need to adapt to these changes accordingly.

78 It has been found through a recent survey that modern Singapore parents care more about their children than themselves, and many spend 20% or more of their monthly household income on their children alone which is far more than the amount they set aside for their own retirement. See Tan Ooi Boon, ‘Parents in Singapore Spend More on Kids than for their Own Future’ Straits Times (8 August 2021), available at: www. straitstimes.com/business/invest/parents-in-singapore-spend-more-on-kids-than-for-their-own-future. 79 Dr Foo KH (n 77).

32

3 Marrying English Trusts Law with Chinese Customary Law? Historical Evolution and Modern Anomalies of the Tso/Tong in Hong Kong REBECCA LEE*

I. Introduction Hong Kong’s colonial rule began when the British Empire took over Hong Kong in 1841. English common law was transplanted to the territory, but certain aspects of Chinese customary law were also preserved in order to reduce clashes with local customs. An example is the Chinese customary laws on collective hereditary land ownership, tso (祖) and tong (堂), which remained in place in the New Territories of Hong Kong and endured even after the resumption of sovereignty by mainland China. Tsos/tongs are imperial Chinese landholding institutions embodying Confucian features of Chinese customary land law such as attributing property to the family rather than the individual; allowing only male descendants to inherit land; and prohibiting land from being freely sold. The ancestral tso/tong lands in the New Territories are held collectively by family clans or groups belonging to the same lineage. It is estimated that there are currently at least 800,000 indigenous inhabitants in the New Territories and roughly 6,000 acres of tso/tong land. Despite the trust being an English concept that had no equivalent in Chinese law, English judges in the early colonial period adapted English trust principles to resolve disputes involving ancestral tsos/tongs. A rather broad-brush approach, however, was applied by the courts without detailed consideration of potential points of conflict. As a result of the preservation of Chinese customary law and the adaptation of English trust principles to tsos/tongs in Hong Kong, they are now dealt with under both English trusts law and Chinese customary law.

* Faculty of Law, The University of Hong Kong. Email: [email protected]. Research for this chapter was funded by the RGC General Research Fund 2020–21 (project number: 17605720).

34  Rebecca Lee Although such an approach may have been defensible in early colonial Hong Kong when English judges had a limited understanding of local customs, this chapter argues that it needs to be reviewed as the socio-economic and cultural order of Hong Kong continues to evolve. For example, as the population of Hong Kong expanded and the economy boomed over the decades, a considerable amount of private tso/tong land was sold to the government and private property developers. This raises questions such as the requisite consent requirement for the sale of these lands and the limits of adapting English trusts principles to resolve disputes involving tso/tong lands. Besides, as the public benefit requirement in charity law continues to evolve, it is necessary to revisit whether a trust established for traditional ancestor worship in modern times indeed facilitates activities that are beneficial and hence charitable to society. This chapter critically examines the interaction between Chinese customary law and English common law in the adaptation of English trust principles to tsos/tongs in Hong Kong, and is divided into six sections. After the introduction, section II gives a brief historical background to the evolution of ancestral tsos/tongs into customary land trusts recognised by English–Hong Kong common law trust principles. Section III examines the difficulties of shoehorning English trust principles into the tso/tong and the intriguing interaction amongst the statutory instrument preserving Chinese customary law, Chinese customary law itself and the common law concept of the trust as regards tsos/ tongs. Sections IV and V turn to the modern anomalies for characterising the tso/tong as trusts, in face of the demand for utilising tso/tong lands for development, and the suggestion of the use of the English charitable trust to accommodate the Chinese practice of ancestor worship in the tso/tong. Section VI concludes this discussion, suggesting that the adaptation of trusts law should take into account the broader evolving contexts in which ancestral tsos/tongs operate, namely the preservation of custom vis-a-vis the modern reality that scarce land resources are being used to perpetuate privilege and discrimination.

II.  Historical Evolution of the Tso/Tong into Chinese Customary Land Trusts A.  Reception of English Law and Preservation of Chinese Customary Law By the time Hong Kong became a British colony in 1841, the British experience of colonialism prompted the colonial government to envisage clashes between local Chinese customary law, in particular those relating to family, gender equality and landholdings, and modern Western values concerning individualism and equality. To strengthen its rule and balance the authority of the British government with the autonomy of the ethnic Chinese, the colonial government adopted cultural acceptance as one of its governing strategies. Shortly after the colony had been established in 1841, Captain Charles Elliot made two proclamations declaring the colonial policy of

Hong Kong  35 preserving Chinese ‘laws and customs’ amongst the native population of Hong Kong.1 The Supreme Court Ordinance, one of the colony’s first local statutes, was enacted to apply English law (including the principles of equity and trusts) directly to Hong Kong from 1843 ‘except so far as the said laws are inapplicable to the local circumstances’.2 So where English law was inapplicable, Chinese customary law was to apply.3 Chinese customary law consisted of written imperial codes (such as the Qing Code)4 and local customs. Consequently, and notwithstanding the reception of English law in Hong Kong under British colonial rule, Chinese customary law was preserved. A dual legal system was thus created – Chinese customary law for the Chinese and common law for the British – as an interim strategy for managing the colony.5 A gradual approach was adopted in the transformation and modernisation of Chinese customary law. For example, whilst the British colonial government tolerated polygamy and concubinage practised by many local rich men during the early colonial period, the Marriage Ordinance was reformed as Hong Kong became more urbanised and receptive to Western values, with polygamy finally prohibited in 1971.6 Notwithstanding a spate of legislative reforms to reverse the preservation of customary rules on marriage and succession,7 however, the exclusively Chinese customary phenomenon of collective hereditary land ownership, tso and tong, was unaffected and remains in place in the New Territories of Hong Kong.8 Tsos/tongs are creatures of Chinese customary land law. Although the precise content of Chinese customary law was often unclear, a number of notable features of Chinese customary land law can be discerned. First, social control was maintained on the basis

1 JW Norton-Kyshe, The History of the Laws and Courts of Hong Kong, vol 1 (Vetch and Lee Ltd 1971) 4–6; Y Su, ‘The Application of Chinese Law and Custom in Hong Kong’ (1999) 29 Hong Kong Law Journal 267. Subsequent cases confirmed the application of customary laws: eg, Ho Tsz Tsun v Ho Au Shi (1915) 10 HKLR 69; and The Estate of Chak Chiu Huang (1925) 20 HKLR 1. 2 Supreme Court Ordinance (No 15 of 1844) s 5. The relevant provision was subsequently improved by a series of legislation culminating in the Application of English Law Ordinance (No 2 of 1966) s 3(1), repealed on 1 July 1997. Customary law is preserved in the Basic Law and applicable to the present day. 3 See generally MB Hooker, ‘The Relationship between Chinese Law and Common Law in Malaysia, Singapore, and Hong Kong’ (1969) 28 Journal of Asian Studies 723. 4 The Qing Code (大清律例) is the comprehensive criminal code of the Qing Dynasty (1644–1911) and the last traditional legal code in Chinese history. Although it ceased to have effect with the downfall of the imperial Qing Dynasty, it continued to influence the legal landscape of early colonial Hong Kong in the form of customs. See, further, DJ Lewis, ‘A Requiem for Chinese Customary Law in Hong Kong’ (1983) 32 International & Comparative Law Quarterly 347; LH Zhang and N Dong, ‘A New Reading on Great Qing Code: A Comparative and Historical Survey’ (2017) 11 Historia et Ius paper 25, available at: www.historiaetius.eu/uploads/5/9/4/8/5948821/zhang_dong_11_.pdf. 5 See Re Tse Lai Chiu [1969] HKLR 159; Ho Tsz Tsun v Ho Au Shi (1915) 10 HKLR 69; P Wesley-Smith, The Sources of Hong Kong Law (Hong Kong University Press 1994) ch 12. 6 Marriage Reform Ordinance (No 68 of 1970). See generally, DE Greenfield, ‘Marriage by Chinese Law and Custom in Hongkong’ (1958) 7 International & Comparative Law Quarterly 437. 7 Marriage Reform Ordinance (No 68 of 1970); Adoption Ordinance (No 62 of 1971); Legitimacy Ordinance (No 29 of 1971); Wills Ordinance (No 32 of 1970); Intestates’ Estates Ordinance (No 1 of 1971). See also MWL Wong, Chinese Marriage and Social Change: The Legal Abolition of Concubinage in Hong Kong (Springer 2020). 8 See further, M Merry, The Unruly New Territories: Small Houses, Ancestral Estates, Illegal Structures, and Other Customary Land Practices of Rural Hong Kong (Hong Kong University Press 2020) ch 8.

36  Rebecca Lee of Confucianism, which mandates the family as opposed to the individual as the basic social unit; hence, property was attributable to the family rather than the individual. The family, however, comprised only male descendants, which meant that only sons could inherit land, and inherited land had to pass in equal shares from one generation of males to the next in accordance with the customary rules on succession. Second, and as a result, women could not inherit land or hold ancestral land by way of a testament or gift.9 Third, inherited land was expected to remain in the family, and thus it could not be freely sold, but had to be sold within the clan, unless doing so proved impossible. Last but not least, land was to be a perpetual institution. Tsos/tongs are imperial Chinese landholding institutions embodying these features of Chinese customary land law. They comprise endowments of imperial Chinese ancestral land for the purpose of maintaining and preserving family property by the male descendants of a common ancestor.10 The effect of the tso/tong designation is to tie up property in such a way that every dealing made in the name of the tso or tong by any clan member is made on behalf of the lineage estate.11 Although the two terms are often used interchangeably, the tso and tong in fact involve distinct institutions. Three main differences can be discerned, although in past practice the line between tsos and tongs was often blurred. First, a tso is created posthumously by the heirs of a deceased landowner to avoid family arguments over the division of property between heirs.12 Tso is the local Cantonese name for a lineage estate. The tso institution allows a set of families with a common ancestor to maintain in common the wealth of the lineage through the collective ownership of land and buildings. In contrast, a tong is usually created by the landowner inter vivos13 to enable the clan to hold the land in perpetuity.14 Second, tsos are created mainly for ancestral worship, and thus are devoted to the ancestors’ shrine and temple maintenance, whereas tongs are created for a greater variety of purposes, including education, business and social purposes. Hence, there are two main types of tong: business tongs, which involve business partnerships between clansmen or friends that make investments to provide communal welfare, and religious tongs, which comprise land registered in the name of temples and are treated as the property of the tong to provide for temple maintenance and the education of clan members sitting official examinations. Third, whereas a tso is an arrangement by which family and clan hold land in the name of a group of individuals with a hereditary link, and is thus more closely connected with the clan, tongs are

9 Customary male-only succession was permitted by the New Territories Ordinance until an amendment was made in 1994 to allow wives to inherit land from their husbands. 10 M Merry, ‘Are T’sos Really Trusts?’ (2012) 43 Hong Kong Law Journal 669; Tang Kai-chung v Tang Chikshang [1970] HKLR 276, 279–80 (Mills-Owen J). 11 Li Chok Hung v Li Pui Choi (1911) 6 HKLR 12, 44. 12 The dicta of Mills-Owen J in Tang Kai-chung v Tang Chik-shang is often quoted to provide a brief description of the nature of a tso: Tang Kai-chung (n 10) 279–80; cited with approval by the Court of Final Appeal in Secretary for Justice v To Kan Chi [2000] 3 HKLRD 756, 760. 13 Tang Yau Yi Tong v Tang Mou Shau Tso [1995] 2 HKC 245 (CFI) 254–55. Cheung J also recognised that a tong may be created following a land owner’s death, when all or a part of his land may be set aside by his sons or later descendants by mutual agreement, in veneration of the ancestor’s name: 255. 14 J Sihombing, ‘Chinese Customary Law in Hong Kong’ (1998) 25 Journal of Malaysian and Comparative Law 269.

Hong Kong  37 not necessarily lineage-based or clan-based,15 although in most cases tong members have well-defined regional and familial links.

B.  Tsos/Tongs as Chinese Customary Land Trusts How did the colonial government accommodate the unique social institutions of tsos/tongs within the British–Hong Kong common law legal system? In light of the very different Chinese and British legal cultures, the colonial government tried not to interfere with the ‘usages and good customs’ of New Territories residents.16 Nonetheless, over time judges, legislators and academics have all labelled tsos/tongs as ‘trusts’. Rather than clarifying the nature of the tso/tong by statute, however, the colonial government merely enacted the New Territories Land Ordinance 1905 to grant the courts ‘the power to recognise and enforce’ local customary rights affecting land.17 But the Ordinance is silent on the nature of tsos/tongs; it merely stipulates that where land is held in the name of a ‘clan, family or tong, such clan, family or tong shall appoint a manager to represent it’ and details the appointment of a manager and his power and duties in that capacity. Unlike in China where disputes arising from tsos and tongs were traditionally resolved informally by village elders who applied a mix of moral norms and customary conventions, most of the early colonial-era judges in Hong Kong were neither born nor brought up in the colony, and did not speak the language spoken by the majority of the population. When the tso/tong was interfaced with common law, they thus struggled to understand the institution by reference to common law principles. As a result, when adjudicating disputes concerning tsos and tongs, the judges adopted a trust analysis and presumed an intention to create a trust over the land in accordance with the common law system.18 Thus, the New Territories Ordinance was interpreted as granting the manager legal power over the land as if he were a trustee. The most influential adoption of the trust analysis can be found in the obiter by Mills-Owens J in Tang Kai-chung v Tang Chik-shang,19 which enabled the court to treat managers as trustees and as subject to the Trustee Ordinance. This analysis was repeatedly endorsed by subsequent courts,20 including the Court of Final Appeal in Secretary for Justice v To Kan Chi.21

15 Tang Yau Yi Tong (n 13) 254; Tang Yau Yi Tong v Tang Mou Shau Tso [1996] 2 HKC 471 (CA), citing JW Hayes, ‘The Pattern of Life in the New Territories in 1898’ (1962) 2 Journal of the Hong Kong Branch of the Royal Asiatic Society 75, 80. 16 New Territories Ordinance of 1900. 17 New Territories Land Ordinance (No 3 of 1905) s 11, subsequently New Territories Regulation Ordinance (No 34 of 1910) s 25. The Ordinance underwent a series of amendments and consolidations to reach its current form. The current legislative provisions are ss 13 and 15 of the New Territories Ordinance (Cap 97 of the Laws of Hong Kong). 18 Kan Fat-Tat v Kan Yin-Tat [1987] 4 HKLR 516 [32] and [33]; Tang Kai-chung (n 10) 294. 19 Tang Kai-chung (n 10) 278–79 and 304: the trust analysis allowed the court to treat managers as trustees subject to the Trustee Ordinance (Cap 29 of the Laws of Hong Kong). 20 Kan Fat-Tat (n 18) [32]–[33]; Leung Kuen Fai v Tang Kwong Yu Tong [2002] 2 HKLRD 705 [24]; Tang Kun Nin Tong v Cheng Wai Fong [2014] HKCFI 449 [74]; Man Mi Sang v Man Shek Tong [2018] HKCFI 2755. 21 To Kan Chi (n 12), observing also that tongs are ‘essentially in the nature of unincorporated associations’: 760.

38  Rebecca Lee Subsequently, legislators made express references to the language of trusts. For example, whereas the New Territories Ordinance grants the manager power over the land without using the trust terminology, by the time the New Territories Land (Exemption) Ordinance was enacted in 1994, the terminology of ‘Chinese customary land trusts’ was used.22 Against this backdrop, some academics also used the ‘trusts’ label for tsos/tongs in their academic writings, such as Chinese customary trusts,23 kinship-ritual trusts24 or corporate lineage trusts.25 The trust analogy is perhaps historically justifiable. Although the trust is traditionally seen as a popular device used by the Victorian middle-classes to preserve private property for the benefit of their families, trust-like devices also existed in the Qing Dynasty (1644–1911). Studies show that some Chinese families devised a system of dividing household property that was similar to the trust. For example, whilst it was conventional practice for a family patriarch to provide for his children in his will, he would generally also stipulate that some of his land was to be held for his first born grandson until he reached maturity or married, and that said land was to be managed by an elder to avoid its embezzlement. This practice is essentially the holding of land in trust for an infant beneficiary in the Anglo-common law sense.26 On other occasions, to prevent land from being inefficiently subdivided, rather than leaving land directly to his descendants the family patriarch would direct that his land be managed by clan elders for the benefit of the entire village. The land was to remain intact over the generations, with the resulting income being used for ancestral halls of worship or the education of promising young males of the family. As the patrilineage multiplied over time, membership in these ancestral trusts came to constitute an extended kinship group known as the clan identified by the titular ancestor.27 Besides, by characterising tsos/tongs as trusts, judges are able to receive and access ready-made English principles on trustees’ duties and tracing to resolve disputes.28 For example, in Li Chok Hung v Li Pui Chi trust principles were applied in a tong dispute to recover allegedly embezzled funds.29 However, as will be discussed in the next section, 22 Cap 452 of the Laws of Hong Kong. The Ordinance removes discrimination against female descendants in cases of intestate succession of land in the New Territories. Customary land trusts, however, remain unaffected: s 5. 23 Merry, ‘Are T’sos Really Trusts?’ (n 10) 670; M Wilkinson and J Sihombing, Hong Kong Conveyancing: Law and Practice, vol 1 (Lexis Nexis 2019) [31] and [46]; A Cooray, ‘The Non-Recognition of Chinese Ancestral Worship Trusts as Charitable Trusts in Hong Kong: With Some South Asian Comparisons’ (2002) 8 Third Sector Review 153. 24 Merry, ‘Are T’sos Really Trusts?’ (n 10) 670; HRD Baker, A Chinese Lineage Village (Stanford University Press 1968) ch 4. In ch 7, Baker calls them ‘kinship-ritual trusts’. 25 JW Hayes, The Great Difference: Hong Kong’s New Territories and Its People, 1898–2004 (Hong Kong University Press 2006) ch 3; JW Hayes, The Hong Kong Region 1850–1911: Institutions and Leadership in Town and Countryside (Hong Kong University Press 2012) xiv. 26 D Wakefield, Fenjia: Household Division and Inheritance in Qing and Republican China (University of Haiwaii Press 1998) 157–58. 27 ibid 186–99; T Ruskola, ‘Conceptualizing Corporations and Kinship: Comparative Law and Development Theory in a Chinese Perspective (2000) 52 Stanford Law Review 1599; D Faure, The Structure of Chinese Rural Society: Lineage and Village in the Eastern New Territories, Hong Kong (Oxford University Press 1986). 28 See, eg, Tang Kai-chung (n 10): the manager was treated as a trustee and hence subject to the Trustee Ordinance; Tang Kan Yip v Tang Lik Yuen [2016] 4 HKLRD 593 [47]–[48]. 29 Li Chok Hung v Li Pui Chi (1910) 5 HKLR 121, 132–33; decision reversed by the Full Court on other points: Li Chok Hung (n 11). See also, Chu Tak Hing v Chu Chan Cheung Kiu [1968] HKLR 542.

Hong Kong  39 shoehorning of the tso/tong into the common law is not without difficulties and has created a sui generis category of ‘Chinese customary land trusts’.

III.  Difficulties with Shoehorning Tsos/Tongs into the Common Law Two problems have arisen in relation to the adaptation of English trusts law for the tso/tong. First, although the trust characterisation enables judges to access common law trust principles to resolve disputes, the use of trust terminology has become so pervasive in case law that judges have very often axiomatically characterised these ancient institutions as modern English trusts without a rigorous examination of the difficulties with the trust analogy presented by the statute.30 Second, the judicial and statutory label of ‘customary land trust’ highlights the presumption that the tso/tong is subject to customary rules, which necessitates that judges look to those rules by default. Indeed, courts have interpreted the provision in the New Territories Ordinance (section 13) giving the courts the power to recognise Chinese custom and customary law affecting land in the New Territories as mandatory. Accordingly, the courts are compelled to adapt English trust principles to conform to Chinese customary rules, thereby creating a sui generis category of trusts.31 What follows is a detailed examination of these two problems.

A.  Difficulties with the Trust Analogy Presented by the New Territories Ordinance Section 15 of the New Territories Ordinance stipulates that where land is held in the name of a ‘clan, family or tong, such clan, family or tong shall appoint a manager to represent it’. Does the manager stand in the position of a trustee or merely that of a representative? One line of authority suggests that a tso is a trust and that a manager registered under section 15 is a trustee within the meaning of the Trustee Ordinance.32 For instance, Chu J held in Tang Kam Wah v Tang Ming Yat that the concepts of English trusts law are compatible with section 15.33 Similarly, in Leung Kuen Fai v Tang Kwong Yu Tong, Lam J held that, in the context of Hong Kong law, the trust concept is applicable to a tso, with the managers as trustees and the members as beneficiaries.34 Taking the courts’ interpretation of section 15 at face value, a tso is certainly analogous to a trust. Both the founders of a tso/tong and the settlors of a trust have the intention to place land in trust, and will have done everything necessary to perfect

30 Merry, ‘Are T’sos Really Trusts?’ (n 10) 669–70. 31 Some academic commentators have described Hong Kong’s customary land trusts vis-a-vis modern English trusts as a ‘league of their own’: RSY Chan and A Young, ‘Chinese Customary Trusts in Hong Kong: A League of their Own’ (2015) 21 Trusts & Trustees 530. 32 Cap 29 of the Laws of Hong Kong. 33 (HCA 10141/1998, 26 November 2002) [68]. 34 Leung Kuen Fai (n 20) [24]. See also Tang Kai-chung (n 10) 304; Kan Fat-Tat (n 18) 533.

40  Rebecca Lee the trust.35 Moreover, the income derived from tso land is to be used for the benefit of male descendants, who resemble the beneficiaries of a trust. In customary law, the clan members are joint owners. In trusts law, they are beneficiaries with equitable proprietary interests in the tso/tong land, which allows them to sue individually. More importantly, the facilitator role of the managers of tsos is reminiscent of the role of trustees. Last but not least, land is often registered in managers’ names, as well as in the name of the tso. Therefore, Chu J drew the ‘inevitable conclusion’ that the manager of a tso is a trustee and enjoys power not only vis-a-vis the tso members, but also in relation to tso property.36 However, a closer reading of section 15 reveals loopholes in the courts’ reasoning.37 In the first place, as mentioned above, the section does not employ trust terminology; rather it expressly refers to a ‘manager’ being appointed to ‘represent’ the members of the family or tong, in other words, to act as a representative or an agent. It is also worthy of note that the closest equivalent favoured for the managers of a tso was the Cantonese ‘sze lei’ (司理) found in the schedule to the block Crown lease in the early twentieth century, but that term means only a ‘nominee, manager, supervisor or administrator’, not a ‘trustee’.38 Compared with section 18, wherein the word ‘trustee’ is used explicitly for land held for a minor or widow, section 15 contains neither the word ‘trust’ nor ‘trustee’. Given the express reference to trustees in other sections of the Ordinance, the absence of the term in section 15 is unlikely to be an oversight. Furthermore, section 15 provides for land being held in the name of a clan/tong/ family, not by managers as trustees for them. Indeed, such formality requirements as a signature and writing for the creation of a land trust are absent, which suggests that the concept of the ‘customary land trust’ is misconceived. More specifically, to bestow dispositive powers upon managers, section 15 mandates that their names be registered. If managers were intended to be trustees, or more precisely ‘the legal owner[s] of the land’, then such registration would be unnecessary because the power to dispose of and deal with land is legally entrenched in the trustee role. It would also be unnecessary to subject a manager’s legal power over tso land to fetters,39 including the need for him to be registered with the Land Officer and for all of his dealings with the land to be approved by that Officer, as the New Territories Ordinance currently requires. In fact, if one looks back to the purposes of enacting the Ordinance, namely to facilitate land transactions by managers acting as representatives of a tso/tong and to protect members from malpractice by managers, it becomes apparent that neither purpose requires a manager to be designated a trustee. Accordingly, the ‘inevitable conclusion’ Chu J drew in Tang Kam Wah, with the widespread approval of other judges, is open to challenge.

35 Chu Tak Hing (n 29); Sihombing (n 14). 36 Tang Kam Wah v Tang Ming Yat (HCA 10141/1998, 26 November 2002) [69]. 37 For details, see Merry, ‘Are T’sos Really Trusts?’ (n 10) 677–78; Merry, Unruly New Territories (n 8) 155–57. Merry, ‘Are T’sos Really Trusts?’ (n 10) 678; Merry, Unruly New Territories (n 8) 155. 38 Merry, Unruly New Territories (n 8) 154–55. 39 Light Ocean Investments Ltd v Enway Development Ltd [1994] 3 HKC 31, 40. See also Lai Chi Kok Amusement Park Co Ltd (No 2) v Tsang Tin Sun [1966] HKLR 124, 130.

Hong Kong  41

B.  Haphazard Adaptation of English Trusts Principles to Conform to Chinese Customary Law Even if we accept the trust analogy, the interaction amongst the New Territories Ordinance which preserves Chinese customary law, Chinese customary law itself and the common law concept of the trust as regards tsos/tongs is intriguing to say the least. Despite acknowledging that concepts of English law can be applied to this Chinese customary institution, the courts have concomitantly, or perhaps paradoxically, remarked that, by reason of local circumstances, certain concepts in English trusts law are inapplicable.40 In fact, the courts must recognise and enforce any Chinese law or customary right affecting tso/tong land, despite the wording ‘shall have power’ in section 13 of the New Territories Ordinance.41 Consequently, the adaptation of English trusts law principles was partial and haphazard, as illustrated by issues pertaining to (1) the applicability of the English rule against perpetuities and (2) whether a Chinese customary land trust can be created inter vivos and/or by testamentary dispositions. Given that the purpose of creating a tso is to prevent family disputes between male descendants over the division of family land upon the death of the head of the family, or the disposal of the property by unfilial sons,42 tso land is intended to be perpetual. Were a trust to be imposed upon tso land, it would be incompatible with the English rule against perpetuities, which prohibits property from being held in trust for an indefinite period of time to prevent the loss of tenure to perpetual trusts.43 In Tang Kai-chung v Tang Chik-shang, an action for the partition of tso land failed.44 Mills-Owen J disapplied the English law of partition and the rule against perpetuities on the ground that section 13 of the New Territories Ordinance was mandatory and hence the tso land was governed by Chinese customary law which intended such land to remain inalienable and perpetual. Application of the perpetuities rules would effectively destroy these social institutions. Thus, although tsos/tongs are now dealt with under both English trusts law and Chinese customary law, judges have invariably disapplied trust principles where this may, in their view, cause ‘oppression or injustice’. This is reflected in the judgment of Lam J in Tang Che Tai v Tang On Kwai. The judge opined that application of the rule against perpetuities to tso/tong land which was intended to remain perpetual would mean that the trust will fail and a resulting trust will arise in favour of the settlor; but there would be all sorts of difficulties in identifying the settlor and the rightful beneficiaries to his estate. Such proceedings may cause serious dissension amongst the members which could be destructive to the social cohesion essential to

40 Tang Kai-chung (n 10); Leung Kuen Fai (n 20) [24(b)]. 41 New Territories Ordinance (Cap 97 of the Laws of Hong Kong) s 13: the court ‘shall have power to recognise and enforce any custom or customary right affecting [tso/tong] land’. 42 Chan and Young (n 31) 533; S Selby, ‘Everything You Wanted to Know about Chinese Customary Law (But were Afraid to Ask)’ (1991) 21 Hong Kong Law Journal 45. 43 cf the British courts that have held (in Malaysia) that the Chinese tong violates the rule and should be voided: see, eg, Choa Choon Neoh v Spottiswoode (1869) 1 Kyshe 216 and Yeap Cheah Neo v Ong Cheng Neo (1875) LR 6 PC 381. 44 Tang Kai-chung (n 10). See also Kan Fat-Tat (n 18).

42  Rebecca Lee the clan, and thus the imposition of such a burden on the administration of the tso was unjust and oppressive.45 The haphazard adaptation of English trusts law is also evident in relation to how an ancestral worship trust (ancestral tso land held under a Chinese customary land trust for the purpose of ancestral worship) can be established. Unlike English trust principles, which allow trusts to be created by both inter vivos and testamentary dispositions, Chinese customary law allows an ancestral worship trust to be created only by an inter vivos disposition. In Re Lau Wai Chau, the issue was whether an ancestral worship trust was created by a codicil to the testator’s will.46 The testator, Lau, died in 1933. He had five wives and eight sons who subsequently had their own families, or fongs (房). Lau made a will (and codicil) dividing his land in the New Territories into nine portions: one portion for each of his eight sons, with the ninth portion to be held in trust for ancestral worship. After Lau’s death, a dispute arose amongst his sons, and a deed of family arrangement was created in 1946 that subdivided the ninth portion. The dispute in Re Lau Wai Chau arose because the government had resumed part of the subdivided land, for which compensation monies were paid. Some of the fongs argued that the compensation should be distributed in accordance with the deed of family arrangement, which required the court to consider whether an ancestral worship trust could be created under Chinese law and custom by a testamentary disposition. The Court of Final Appeal held that the 1946 deed of family arrangement was valid, as no ancestral worship trust had been established by the testator during his lifetime. Bokhary PJ expressed strong objection to marrying English trust principles with Chinese customary law in the context of ancestral worship trusts: In my judgment, our jurisprudence leaves no room for Hong Kong law to operate so as to create an instance of a Chinese law and custom institution in circumstances where Chinese law and custom itself does not so operate. That would amount to the Hong Kong courts assembling a hybrid between Hong Kong law and Chinese law and custom, and then applying that hybrid in the name of, but contrary to, Chinese law and custom. I can see no juridical foundation for such an exercise.47

The decision in Re Lau Wai Chau on the non-recognition by Chinese customary law of testamentary dispositions spurred a flurry of interesting subsequent decisions touching on when the ancestral worship trust in question had been created. For example, in Tang Tak Sum v Tang Kai Fong, the question of whether an ancestral worship trust had been created by a ‘division of family’ document authored by the deceased arose.48 Although it was initially pleaded that the document had been intended to take effect after his death, in light of the Court of Final Appeal decision that Chinese customary law does not recognise testamentary dispositions, it was instead argued at trial that the ancestral worship trust had been intended to take effect immediately.

45 Tang Che Tai v Tang On Kwai [2008] 3 HKC 521 [86]. 46 Re Lau Wai Chau (2000) 3 HKCFAR 98, 101. 47 ibid 106. See also the first instance judgment in Re Lau Wai Chau [1998] 1 HKLRD 579, 593–94 (Cheung J). 48 Tang Tak Sum v Tang Kai Fong [2013] 4 HKLRD 16. See also Man King Chuen v Hong Lok Yuen International School Association Ltd [2018] 4 HKLRD 294.

Hong Kong  43

IV.  Modern Anomalies: Limits of Trusts Principles in Resolving Tso/Tong Land Disputes A.  Modern Context in which Ancestral Tsos/Tongs Operate Chinese customary law as applied to ancestral tso/tong land in the New Territories survived not only the British colonisation, but in fact endured even after the resumption of sovereignty by mainland China.49 Specifically, article 40 of the Basic Law, the mini constitution of Hong Kong, requires that the traditional rights of the New Territories’ indigenous inhabitants continue to be protected. These indigenous inhabitants continue to constitute themselves as communities and localities, and are recognised as a special category with significant privileges vis-a-vis their counterparts on Hong Kong Island and Kowloon, including the application of Chinese customary land law and family customs, exemption from liability to pay government rates for rural landholding held by them,50 and privilege on the part of male indigenous villagers to build small houses without paying a land premium.51 The adaptation of trusts law should thus take into account the broader evolving contexts in which ancestral tsos/tongs operate, namely the preservation of custom vis-a-vis the modern reality that scarce land resources are being used to perpetuate privilege and discrimination. At the moment, the tso/tong-trust analogy has resulted in an anomaly with only one certainty, namely that customary privileges over ancestral lands continue to be entrenched despite the passage of time. The preservation of customary law in essence constitutes celebration of the imperial past and imperial legal culture, which may not fit modernity.52 Indeed, there is very little that an English trust settlor would recognise in the Chinese customary land trust in Hong Kong.

B.  Limits of Adapting Trusts Principles in Resolving Tso/Tong Land Disputes Against this background, one may consider whether the trust institution is indeed an appropriate tool to resolve tso/tong land disputes. Following the Second World War and the Civil War and the subsequent Cultural Revolution in China, the population of Hong Kong expanded rapidly. By 1980, the New Territories had undergone considerable development, with massive infrastructure projects, housing estates and

49 See Basic Law, art 8. 50 Government Rent (Assessment and Collection) Ordinance (Cap 515 of the Laws of Hong Kong) s 4. An indigenous villager is defined as ‘a person who was in 1898 a resident of an established village in Hong Kong or who is descended through the male line from that person’: see s 2. 51 In its recent judgment in Kwok Cheuk Kin v Director of Lands [2021] HKCFA 38, the Court of Final Appeal affirmed the constitutionality of the so-called ‘small house policy’: such privilege was protected under art 40 of the Basic Law which must be construed to exclude a discrimination challenge based on grounds of gender, birth or social origin. 52 J Bourgon, ‘Historians at the Court: How Cultural Expertise in Qing Law Contributes to the Invention of Hong Kong “Chinese Customary Law”’ (2020) 38 Law and History Review 85, 96.

44  Rebecca Lee new town projects. Once the rural hinterland of Hong Kong, the New Territories were transformed from a patchwork of hills, agrarian land and villages into a site of new satellite towns. Indigenous inhabitants in the New Territories totalled approximately 100,000 people in the first New Territories census in 1911. The number grew to about 700,000 in 2017.53 Whilst the Hong Kong government does not keep official information on the amount and area of existing tso/tong land across the territory,54 statistics show that there are approximately 4,000 tsos and 2,000 tongs in the New Territories – covering roughly 6,000 acres of land – with one-fourth to one-third of all New Territories land held by these customary institutions. As the population of Hong Kong expanded and the economy boomed over the decades, property prices in Hong Kong soared while living conditions became more and more overcrowded. The government was forced to tap into rural land in the New Territories for housing. More private tso/tong land are being resumed by the government or sold to private property developers. A number of difficulties have arisen. First, whereas the English rule against perpetuities prohibits property from being held in trust for an indefinite period of time to prevent the loss of tenure to perpetual trusts, the disapplication of the rule may tie up tso/tong land for further developments.55 In this connection, even the former Chief Executive acknowledged in her Policy Address that it was necessary to ‘break the current impasse in developing Tso/Tong lands’.56 Disentangling trusts from tso/tong will enable the government to focus on whether it should relax the sale restrictions of tso/tong lands through amendment to the New Territories Ordinance. Second, as ancestral tsos are intended to be inalienable and indivisible under Chinese customary law, the unanimous consent of all tso members is required for the sale of such land. Accordingly, the government will only approve a sale where the manager of the relevant tso/tong has obtained the unanimous consent from all clan members. Difficult questions have arisen as to the meaning of ‘unanimous consent’, namely whether such consent can be inferred from just the heads of a family or whether consent of all individual members of the family is required. Case law has suggested that unanimous consent can be inferred from the consent of the heads of all fongs (ie, family of the male descendants of the focal ancestor) of the ancestral tso. In Re Lau Wai Chau, a case discussed above, the major issue was whether a will created an ancestral worship trust under Chinese customary law. After holding that it did not, Bokhary PJ of the Court of Final Appeal observed the following by way of obiter: Under Chinese law and custom, property endowed in perpetuity for the purpose of ancestral worship may be divided amongst the settlor’s male descendants if they, as the heads of all his

53 According to information from Our Hong Kong Foundation (Our Hong Kong Foundation, available at: www.ourhkfoundation.org.hk), a pro-government think-tank. The government does not have official statistics on the number of indigenous villagers in the New Territories. 54 Caspar Tsui, ‘LCQ 10: Development of Tso/Tong’ (The Government of Hong Kong Special Administrative Region Press Releases, 7 July 2021), available at: www.info.gov.hk/gia/general/202107/07/P2021070700386. htm. 55 eg, the rule against perpetuities was held to be inapplicable in Kan Fat-Tat (n 18) and Tang Kai-chung (n 10). In practice, as discussed below, tso/tong lands are often resumed by the government or sold to private property developers upon obtaining unanimous consent of the clan members. 56 HKSAR Government, ‘The Chief Executive’s Policy Address 2021’, para 93(ii).

Hong Kong  45 fongs, unanimously agree to such a division. Thus may an ancestral worship trust be dissolved under Chinese law and custom.57

This important dictum from Re Lau Wai Chau on the requirement of unanimous consent by the heads of all fongs for the sale of tso land has been repeatedly applied by subsequent courts. For example, in Tang Kap Wing Tso, the key issue was whether the shares of the tso in question could be alienated only with the unanimous consent of all members of the tso.58 Applying the dictum in Re Lau Wai Chau, the Court of Appeal held that because Tang Kap Wing Tso had only one fong, of which Tang Junior was the head, Tang Junior’s agreement to the alienation of the shares was equivalent to the agreement of all members of Tang Kap Wing Tso.59 While case law consistently suggests that unanimous consent can be inferred from the consent of the heads of all fongs of the family, none of them requires the court to decide whether the family head can disregard dissent by any individual family member. Yet it is also a frequently encountered question whether and to what extent the requisite consent requirement for the sale of ancestral tso land can be displaced.60 In the event of actual dissent by the individual members, it is unclear whether unanimous consent could still be inferred by the consent of the family head under Chinese customary law, or whether and to what extent the unanimous consent requirement could be circumvented by applying common law trust principles. Thus far, the government’s view has been that lowering the unanimous consent threshold for the sale of these lands through an amendment to the New Territories Ordinance would have considerable impact on tso/tong members, and so the tsos/tongs should make their own internal rules to facilitate the sale of tso/tong lands.61 Unfortunately, leaving the matter to individual clans is unlikely to resolve disputes in practice. Third, similar difficulties may also arise in relation to distribution of compensation monies paid upon resumption of tso/tong land as case law has also held that the compensation monies were subject to the same trust, which means that no distribution should take place without the unanimous consent of all members of the tong. In Tang Che Tai v Tang On Kwai,62 the tong in question had been established more than 200 years previously with the principal objective of ‘[facilitating] the continued worship of the common ancestors and proper maintenance of the ancestral halls and graves’. Between 1998 and 2000, various lots of land owned by the tong were resumed by the government, and a question arose as to distribution of the compensation monies owed under the ancestral worship trust, which amounted to HK$73 million. No question concerning the validity of the tong as an ancestral worship trust arose, and the Court of Appeal unanimously held that the compensation monies were subject to the same trust

57 Re Lau Wai Chau (n 46) 106. 58 Tang Kap Wing Tso [2011] 4 HKLRD 132. 59 See also Tang Che Tai (n 45). 60 eg, in Tang Kap Wing Tso (n 58), the Court of Appeal found that no actual dissent by Tang Junior’s sons had been proved or pleaded, and in any event, there was evidence showing unanimous consent by all members of the tso. 61 Caspar Tsui (n 54). 62 Tang Che Tai (n 45).

46  Rebecca Lee and imprinted them with the same characteristics as the original land had been.63 As a result, Chinese customary law applied, and no distribution could take place without the unanimous consent of all members of the tong. Last but not least, as a result of the judicial attitude, Chinese customary law inevitably takes precedence in the adjudication process. It is perhaps unsurprising that the ascertainment and applicability of Chinese law and custom is likely to cause difficulties. In this regard, the general practice of the Hong Kong courts has been to admit expert evidence to prove propositions of Chinese customary law.64 This practice has been followed even when there are previous decisions on the point of Chinese customary law in question.65 Such expert consultation is very costly, particularly bearing in mind that customary laws often do not represent a coherent set of norms endowed with sufficient internal logic to offer enforceable rules that are efficient for resolving conflicts, meaning that conflicting expert evidence is not uncommon.66 In sum, as landholding institutions managed by managers in favour of their members, tsos/tongs share some similarities with traditional trust arrangements under common law, yet many questions of law relating to tsos/tongs remain unresolved. Accommodating the tso/tong institution within British–Hong Kong common law did not end the clash between English trusts law and native customs. Since English trusts law has been disapplied whenever its application would cause injustice or oppression67 and judges have interpreted section 13 of the New Territories Ordinance on the recognition and enforcement of Chinese customary law as mandatory,68 labelling the tso/tong a trust has not helped adopting common law trust principles in resolving issues that have arisen in the sale and distribution of ancestral tso/tong property.

V.  Modern Anomalies: Difficulties with Characterising Ancestral Worship on Tso/Tong Land as Charitable Trusts Religion has long been intertwined with charities in the Western context, with charity and religion often seen as synonymous. During the medieval period, it was the Church that was responsible for the administration and operation of charities. The cy-prés doctrine, which is still applicable to charitable trusts today, also has canon law origins.69 63 ibid [57]. 64 See, eg, Re Lau Wai Chau (n 46) 101 (Bokhary PJ): ‘Whenever there is any live issue as to what the provisions of Chinese law and custom are, the usual practice in our courts is to resolve such issue with the benefit of expert evidence’. See also, Leung Sai Lun v Leung May Ling (1999) 2 HKCFAR 94, 102; Re Tse Lai Chiu (n 5) 175–76; and Ma Siu Siu Vivian v Tam Wai Mun Alice (HCAP 13/2011, 7 March 2016) [10]. 65 Ng Kuk Mui v Yu Bik Fong Rebecca (HCAP 2/1997, 29 April 2000) [17], where the plaintiff chose not to adduce expert evidence to prove her Chinese customary marriage, but instead relied on cases on the requirements for the validity of a Chinese customary marriage. The court remarked that this course was not to be recommended. For an extra-judicial view, see K Bokhary, ‘Judicial Notice and Other Facts of Life in Hong Kong’ [1975] Hong Kong Law Journal 178. 66 Bourgon (n 52) 96. 67 Re Tse Lai Chiu (n 5) 177; Tang Che Tai (n 45) [35]–[40]. 68 Tang Kai-chung (n 10). 69 J Getzler, ‘Morice v Bishop of Durham (1805)’ in C Mitchell and P Mitchell (eds), Landmark Cases in Equity (Hart Publishing 2012); Justice SC Derrington, ‘Faith, Hope, and Charity: Religion as a Public Benefit

Hong Kong  47 Following the landmark case of Pemsel, the advancement of religion was recognised as a legally charitable purpose throughout the Commonwealth.70 Although Hong Kong does not have specific legislation setting out charitable purposes, such advancement has also been recognised as a charitable purpose.71 In this connection, ancestor worship is arguably the most important religious72 phenomenon in the life of the people of Hong Kong, and this was especially true in the early colonial period. One of the primary objectives of the tso/tong is ancestor worship as an expression of religious piety. The Hong Kong courts have repeatedly labelled tso/tong trusts for ancestor worship ‘ancestral worship trusts’. The tso/tong-trust analogy has also led to the suggestion that these trusts are charitable.

A. Characterising Tsos/Tongs as Charitable Trusts The question of whether ancestral worship trusts are charitable was considered by the Hong Kong Court of Appeal in Ip Cheung Kwok v Sin Hua Bank Trustee Ltd.73 Applying Re Compton Powell,74 the Court rebutted the presumption of public benefit in respect of a tong with an ancestral worship fund that had been created in 1875 to hold private ancestral worship ceremonies because the ceremonies were attended only by the male descendants of the Ip clan to the exclusion of other members of the public.75 The nexus between this group of persons was their relationship to a single personal propositus rather than the community or a section thereof. In this connection, the Court of Appeal also rejected the argument that the Ip clan constituted an appreciably important class of the community or section of the public. The trust was thus only a private trust for the Ip clan. In so holding, the Court of Appeal applied Choa Choon Neoh v Spottiswoode,76 one of the earliest reported cases in colonial Singapore involving wealthy Chinese using trusts law to promote similar ancestor worship known as ‘Sin Chew’ (shénzhǔ 神主) rites. In that case, the Court also rejected an attempt to use the trust to accommodate the Chinese practice of ancestor worship. It held that the purpose of the Sin Chew ceremony was not to advance religion; its sole objective was to benefit the testator himself in

in Modern Australia’ (Charity Law Association of Australia and New Zealand Annual Public Lecture 2019, 29 November 2019) [10]–[11]. 70 eg, Charities Act 2011 (UK) s 3(1)(c); Charities Act 2013 (Cth) s 12(1)(d); Charities Act 2005 (NZ) s 5(1). 71 Inland Revenue Department of Hong Kong, ‘Tax Guide for Charitable Institutions and Trusts of a Public Character’ (revised September 2021). 72 There is no statutory definition of religion in Hong Kong. cf definition in Charities Act 2011 (UK) s 3(2): ‘a religion which involves belief in more than one god, and … a religion does not involve belief in a god’. Advancement of religion: see Charity Commission for England and Wales, ‘Guidance: Charitable Purposes’ (GOV.UK, 16 September 2013) [5]: ‘the provision of places of worship; raising awareness and understanding of religious beliefs and practices; carrying out religious devotional acts; carrying out missionary and outreach work’, available at: www.gov.uk/government/publications/charitable-purposes/charitable-purposes. 73 Ip Cheung Kwok v Sin Hua Bank Trustee Ltd [1990] 2 HKLR 499; see also Kan Fat-Tat (n 18). 74 Re Compton Powell [1956] Ch 123, 181. 75 See also Tang Yau Yi Tong (CA) (n 15), where the Court also noted the exclusive nature of the ancestral worship ceremonies. 76 (1869) 1 Kyshe 216 (n 43).

48  Rebecca Lee the afterlife, although his descendants would benefit incidentally by ‘pleasing God and escaping the danger of being haunted’.77 The tong was not established for a charitable purpose, the Court ruled. For example, there was no distribution to the poor of the food offered to the ancestors. It has been contended that some Singaporean and English decisions have adopted a more liberal and sympathetic attitude. For example, in Cheang Tew Muey v Cheang Cheow Lean Neo,78 it was held that although a trust providing burial grounds for a wealthy individual’s family members could not be regarded as promoting a public benefit, a trust providing land for the burial grounds of a particular clan could be regarded as charitable.79 Further, in the English case of Neville Estates Ltd v Madden,80 although the synagogue concerned was primarily for the benefit of Jews and membership of the synagogue was closed to the public, Cross J applied the presumption of public benefit to overcome the lacuna in the evidence and held that the trust for the purpose of the synagogue was a trust for charitable purposes.81 Indeed, Neville Estates was applied in the more recent Hong Kong case of Cheung Man Yu v Lau Yuen Ching.82 In that case, a tong had been established in the New Territories as an unincorporated association in the 1930s. The Court of Appeal held that it had been established for the advancement of Taoism. The Court acknowledged that, generally speaking, an association that was supported by its members for the purpose of providing benefits to themselves would not be considered a charity, but, applying Neville Estates, held that this principle could not apply with full force in the case of trusts for religious purposes.83 Accordingly, the Court of Appeal found the tong in question to have the requisite public benefit, as the prayers and ceremonies were open to public participation and the public space was accessible to the public. These seemingly inconsistent decisions highlight the difficulty of identifying public benefit for charities, particularly for exclusive, private groups with a blood relationship. Thus, it is necessary to examine the public benefit, if any, in ancestral worship trusts. In England, the presumption of public benefit for charities established for the relief of poverty and the advancement of education or religion was removed in 2008 after implementation of section 3(2) of the Charities Act 2006. The Act now requires that all charities positively demonstrate, on an ongoing basis, that their activities are undertaken for the benefit of the public. Although the presumption of public benefit remains in Hong Kong, following the abolition of the presumption in the English Act, the Hong Kong Law Reform Commission made a similar recommendation for charities in Hong Kong.84 Thus, the issue of whether a trust established for traditional ancestor worship 77 ibid 219. 78 Cheang Tew Muey v Cheang Cheow Lean Neo [1930] SSLR 58 (Sing). 79 Hang Wu Tang, ‘From Waqf, Ancestor Worship to the Rise of the Global Trust: A History of the Use of the Trust as a Vehicle for Wealth Transfer in Singapore’ (2018) 103 Iowa Law Review 2263, 2275. 80 Neville Estates Ltd v Madden [1962] Ch 832. In that case, the trustees of the synagogue wanted to sell some of the synagogue’s surplus land. Because the trust that owned the land was held to be for a religious purpose, and hence charitable, the Charity Commissioner had a duty to intervene and prevent a sale below market value. 81 ibid 853. 82 Cheung Man Yu v Lau Yuen Ching [2007] 4 HKC 314. 83 ibid [72]–[73], [75]. 84 Law Reform Commission of Hong Kong, Report on Charities (2013), Recommendation 2.

Hong Kong  49 is capable of being charitable has also been brought to the fore. Whilst the removal of the presumption of public benefit will make it more difficult for religious charities to prove affirmatively the presence of public benefit, the identification of public benefit for an ancestral worship trust must be conducted in the context of what ancestor worship entails, in order to determine whether such a trust is indeed facilitating activities that are beneficial to society, and is thus charitable in nature. The following discussion will now address this enquiry.

B.  Ancestor Worship and Public Benefit At common law, questions about whether a particular religious cause is for ‘public benefit’ have typically arisen in circumstances where membership is restricted to a particular closed group of persons, entry to a place of worship is restricted or the religious entity is operated for private profit.85 All of these questions are highly relevant to ancestral worship on tso/tong lands, and must be answered by reference to what ancestor worship entails. Given that religion is intertwined with charity in the West, what ancestor worship entails also relates to whether a Western, Christianity-centric conception of religion and public benefit is too narrow for ancestor worship as an expression of religious piety in Hong Kong. Two aspects of ancestor worship are worth noting in answering this question. First, ancestor worship is the spiritual representation of the kinship system; and second, it is intertwined with feng shui, which aims to benefit the specific clan. It is submitted that once the assessment of public benefit is conducted in these contexts, it becomes easy to differentiate ancestor worship from other traditional Chinese religions. First, ancestor worship is the spiritual representation of the kinship system,86 as evidenced by its major rituals, which involve the offering of food and incense as a sacrifice (1) to individual-lineage ancestors at household altars, (2) to focal ancestors at ancestral halls collectively and, finally, (3) to remote ancestors at ancestral tombs during the Ching Ming and Chung Yeung festivals as a lineage community.87 These individual, collective and communal rituals confirm that ancestor worship takes place in the context of the kinship system and lineage groups.88 Second, ancestor worship is integral to many local religious practices. In particular, it is intertwined with feng shui, which literally means wind and water, as feng shui involves practices that enhance or redirect the positive flow of wind and water to ensure prosperity and health. Feng shui is the cornerstone of the practice of ancestor worship. For example, an important ancestral worship rite that relates to feng shui concerns the importance of the location of ancestral tombs; namely, they must be located in a place that interacts positively with the flow of wind and water to safeguard the prosperity and health of the whole family. A family that

85 P Ridge, ‘When is Advancement of Religion Not a Charitable Purpose?’ (2020) 6 Canadian Journal of Comparative and Contemporary Law 360, 372–79. 86 Based on empirical study of the single-lineage village of Sheung Shui in the New Territories: Baker (n 24). 87 These are also known as grave-sweeping festivals. 88 O Tavor, ‘Ancestor Worship’, Oxford Bibliographies (27 February 2019), available at: www.oxfordbibliographies.com.

50  Rebecca Lee suffers health or financial problems may be suspected of having had their good feng shui altered; for example, because ancestral rites have not been performed, because someone has built in front of their ancestor’s grave or because a stream of flowing water has been blocked near their home.89 Although an ancestral worship trust has a quasi-religious purpose, ie, to have one’s ancestor venerated by future generations, it is not charitable. The beneficiaries of such a trust are not the general public but a limited class of persons, namely, the living male descendants of a clan who are also members of the tso/tong in question. Furthermore, once the close connection between ancestor worship and the private benefits accruing to the relevant clan (ie, the securing of good feng shui to safeguard the prosperity and health of the clan) is revealed, the public benefit argument falls away. Accordingly, there seems to be no sound evidence showing that an ancestral worship trust facilitates activities that are beneficial to society as a whole. To sum up, it is necessary to differentiate between ancestral worship within a lineage-based clan and traditional Chinese religions such as Taoism and Buddhism. Even if it is acknowledged that the maintenance of ancestral temples and performance of attendant rites are important features of Chinese communal life, ancestor worship on tso/tong land with feng shui practices for the benefit of lineage-based clans that constitute only a small section of the public does not warrant additional fiscal benefits.

VI. Conclusion When common law trust principles were first introduced in Hong Kong, then a small fishing village, the institution of the trust as an asset management tool was foreign to most locals. Nevertheless, the trust was used as a label for the perpetual lineage landholdings of the tso and tong that belonged to a small group of natives in the New Territories. That being said, the English trust was merely received in form, but not substance. The ancient Chinese institutions of tso and tong are expressly recognised by the New Territories Ordinance to be governed by Chinese custom or customary rights. As a result, the court disapplies the rule against perpetuities, mandates the requirement of unanimous consent for the sale of tso/tong lands, and allows them to be created only by inter vivos dispositions. As private tso/tong land are increasingly sold to the government and private property developers for huge profits, the difficulties of adapting English trusts law principles for tso/tong land in this broader evolving context will become more apparent. On the one hand, there will be more and more questions whether, and if so to what extent, the requisite consent requirement for the sale of ancestral tso/tong land can be displaced. On the other hand, characterising ancestral tsos/tongs as trusts is unlikely to aid the resolution of these questions, which involves political and socio-economic considerations. Consequently, English trusts law principles are often distorted in the name of the

89 RS Watson and JL Watson, ‘Geomancy, Politics and Colonial Encounters in Rural Hong Kong’ in F Pine and J de Pina‐Cabral (eds), On the Margins of Religion (Berghahn 2008).

Hong Kong  51 preservation of customs, and scarce land resources are being used to perpetuate privilege and discrimination. Relatedly, the suggestion of characterising ancestral worship trusts as charitable trusts can be seen as an attempt to seek additional fiscal benefits for these customary institutions. In this regard, this chapter has argued that although the maintenance of ancestral temples and performance of attendant rites are important features of Chinese communal life, they must be differentiated from other traditional Chinese religions practised by the general public. Ancestor worship is practised to reinforce the entrenched privileges of an individual clan on the pretext of feng shui. It has been rightly pointed out that the public benefit requirement is a ‘quid pro quo for the fiscal benefits of charitable status’.90 Whilst the removal of the presumption of public benefit will make it more difficult to prove affirmatively the presence of public benefit, the identification of public benefit for an ancestral worship trust must be conducted in the context of its lineage-based kinship structure and the benefits brought about by the attendant feng shui practices to determine whether such a trust is indeed facilitating activities that are beneficial to society, and is thus charitable in nature.

90 P Ridge, ‘Religious Charitable Status and Public Benefit in Australia’ (2011) 35 Melbourne University Law Review 1071, 1082.

52

part ii Religious Adaptation

54

4 Religious Endowments and Trusts Law in Colonial India TT ARVIND*

I. Introduction In his speech introducing the draft Indian Trusts bill, Whitley Stokes, President of the Law Commission for India and the bill’s chief draftsman, described it as part of a process to adjust the common law to Indian conditions. Stokes argued that Indian law had imported ‘English rules ill-suited to Oriental habits and institutions’ as a result of judges following unadapted English precedent.1 The solution to the problems this had created lay in legislation which could adapt English law to meet Indian needs. Quoting Henry Maine,2 he described the adaptations contained in the bill as fulfilling the colonial government’s project of creating ‘a system of codified law adjusted to the best Native customs and the ascertained interests of the country’.3 Yet, as this chapter will show, the process of adapting trusts law to Indian conditions was anything but straightforward, both in terms of the adjustments it entailed and in terms of the actual outcomes it produced. On a deeper analysis, it poses two puzzles whose importance extends well beyond the specific context of trusts law in India. The first puzzle is the very fact that trusts law was sought to be adapted to fit the Indian context. As Alan Watson pointed out in his foundational work on legal transplants, a key factor in the transplantation of a legal institution from one jurisdiction to another is its ability to offer tools that users in the receiving jurisdiction believe to be convenient or attractive ways of responding to real legal questions or challenges.4 Trusts law, however, is built on ideas, concepts and distinctions that lack the universality that characterise other areas of private law such as contract: there is, as Maitland famously

* Professor of Law and Head of Department, York Law School, University of York. 1 ‘Governor General’s Council Proceedings of 15 June 1881’ in Abstract of the Proceedings of the Council of the Governor General of India 1881, vol 20 (Office of the Superintendent of Government Printing 1882) 149. 2 HS Maine, ‘The Revival of the Indian Law Commission’ (BL IOR/C/138, 20 November 1875) 3. 3 ‘Proceedings of 15 June 1881’ (n 1) 149–50. 4 See, eg, A Watson, ‘Aspects of Reception of Law’ (1996) 44 American Journal of Comparative Law 345.

56  TT Arvind put it, nothing quite like it in any other legal system.5 What, then, were the unmet legal needs in colonial India that trusts law was seen as having the potential to meet? What was it about the trust that led to it appearing attractive in the social and cultural conditions of nineteenth century India? The second puzzle relates to the failure of what was intended to be the central pillar of the adaptation of trusts law to India. The primary innovation of the Indian Trusts Act 1882 was its reworking of the conceptual underpinnings of trusts to eliminate their dependence on the distinction between legal and equitable title – a distinction that colonial governors were keen to avoid introducing into Indian law. Yet, as prior work has shown, this attempt at adaptation failed. Despite careful drafting, the idea of equitable ownership rapidly came to be embedded in Indian trusts law.6 What, then, led to this failure, and to Indian law importing the precise ideas that the Act sought to exclude? These questions matter not just for our understanding of Indian trusts law, but also for the way in which we approach the introduction and adaptation of trusts law in other colonised jurisdictions. The question of how and why an institution as distinctively English as trusts came to take root in colonised jurisdictions is one that holds important lessons for our understanding of the colonial reception of common law and the (in many ways still ongoing) process of its adaptation to the new social and cultural context presented by the receiving state. The argument of this chapter is that the answer to these questions lies in an older, and less studied, aspect of the history of trusts law in India. The earliest use in India of concepts derived from trusts occurs not in the context of the Indian Trusts Act 1882 or the secular trusts that were its focus, but in statutes and regulations dealing with religious endowments. Long before the enactment of a general law of trusts, the language of ‘trusts’ and ‘trustees’, and ideas derived from the law of trusts, had come to find their way into rules dealing with Hindu religious endowments, as well as the practices of colonial administrators whose work brought them into contact with these bodies; and the problems and questions that arose in relation to religious endowments had come to be conceived of and regularly described in terms of trusts, trustees, beneficiaries, and intentions. It is this dimension of the adaptation of trusts law to Indian legal needs – the use of trusts-like concepts in relation to religious endowments – that is the focus of this chapter. The central thesis of this chapter is that the transplantation and adaptation of trusts law shows the influence of two themes, one facilitatory in character and the other regulatory in character. Prior work has largely focused on the facilitatory theme, wherein colonial authorities sought to create a way to allow trusts to be used by British subjects in India (European as well as Indian) without having to also import into Indian law the distinction between legal and equitable title. This chapter demonstrates that a second and equally important theme in the development of trusts law was the regulatory use of the trust, instantiated in the use of rules and concepts taken from trusts law to regulate the management of the Hindu religious endowment. As this chapter shows, the need for both arose from a legal gap left by the erosion of pre-colonial legal and conceptual rules

5 FW Maitland, Equity (Cambridge University Press 1910) 23. 6 S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299.

India  57 and frameworks, a gap that concepts and structures taken from the law of trusts were seen as ideally placed to being adapted to fill. The chapter begins (section II) by discussing how colonial officials came to be involved in administering and resolving issues connected with Hindu religious endowments, by using the example of the interaction between temples and Boards of Revenue in colonial Madras. As it shows, the protection of temples was seen in pre-colonial constitutional theory as an important aspect of the proper role of kings, making it inevitable that colonial administrators would come to be concerned with them. The nature of the problems colonial administrators encountered made an analogy with trusts both attractive and useful as a tool not only for problem solving, but also for strategic action. It then moves (section III) to discussing how the conceptual framework provided by the law of trusts related to the pre-colonial jurisprudential framework within which Hindu religious endowments were created, organised and regulated. As I show, the status of these endowments was the subject of considerable legal debate in pre-colonial jurisprudence, encompassing theoretical debates about the legal nature and character of property as well as religious debates about the theological character of temple deities, and there was a significant, but poorly understood, gap between legal theory and legal practice. The result was that whilst concepts derived from the law of trusts rapidly came to be embedded both in administrative practices and in colonial legislation, their extension to religious endowments required a complex process of mutual adaptation (section IV). Although the colonial government made several attempts to extricate itself from close involvement in managing religious endowments, its involvement not only endured but also created a regulatory understanding of the trust which exercised significant influence over Indian law, and ultimately led to the emergence of the modern public trust as a distinct category. Equally, and despite a stated intention to refrain from altering the substantive rules of customary law in relation to traditional religious or charitable institutions, it led to the extension to religious endowments of principles taken from the law of trusts, such as the cy-près doctrine, that had no counterpart in pre-colonial law (section V). The chapter concludes by arguing that this formed part of a broader trend in colonial India in which equitable concepts were used in legislation in order to give the courts power to deal responsively with social issues created by the gradual erosion of pre-colonial law.

II.  Religious Endowments and the Imagined Trustee: The Origins of a Metaphor As the introduction has suggested, the career of the law of trusts in India began not with secular trusts but with attempts to deal with administrative problems created by Hindu religious endowments. In order to understand why colonial administrators found themselves drawn into these problems and why it was the law of trusts for which they reached in their quest to find a familiar and serviceable framework for responding to them, it is useful to begin by understanding the manner in which colonial administrators came into contact with these administrative problems – and, thus, the legal and social expectations to which they were forced to respond.

58  TT Arvind

A.  Regulating Misuse: Kings, Colonisers and the Management of Endowments At the start of the colonial period, the main legal framework relating to Hindu religious endowments was the law of gifts (dāna). Religious endowments were created by the making of a ‘pious gift’, under which a person bequeathed a portion of their property to be used for pious or charitable purposes. The making of pious gifts, in the general sense of a donation used for religious purposes, had a special significance in Hindu religious thought, and endowments were often made as a form of atonement for worldly sins. The purposes for which they were used was quite varied. Hindu law classified pious gifts into two: iṣṭā and pūrta. In origin, iṣṭā referred specifically to gifts given in the context of rituals of sacrifice while pūrta was a broader concept encompassing a range of types of pious liberality, but the precise scope of both classes evolved considerably as Hindu law developed.7 By the colonial period, the received view among Indian jurists was that iṣṭā primarily referred to endowments for the purpose of hospitality – for example, rest houses along pilgrim routes, homes for widows, and so on.8 Pūrta referred to a range of other endowments for religious work, ranging from the construction of hospitals for the sick to endowments associated with temples.9 Endowments could be made for the construction of temples or of new shrines within existing temples, but they could also be made for the purpose of funding an aspect of the daily rituals associated with the worship of a deity in a temple. An endowment could, for example, be made to support the daily sweeping and cleaning of temples, for the presentation of temple offerings, for the regular carrying out of particular prayers or rituals, and so on. Equally, they could be made to construct, repair, or maintain temple tanks or wells, to plant or maintain sacred groves of plants or trees, to acquire or maintain sacred animals such as cows, bulls, or elephants, or to support scholars or priests within a temple or religious institution.10 Pre-colonial Hindu law on religious endowments, at least in the form recorded in texts, was concerned more with the disposition of property than the management of endowments. Examples of questions discussed included the question of when property owned by a Hindu undivided family could be the subject of a pious gift, whether an intention to make it the subject of a pious gift made it impartible, whether the making of a pious gift was within the capacity of a widow if there was a spiritual benefit to her deceased husband, the extent to which the making of a pious gift was subject to or exempt from the standard rules of Hindu law in relation to capacity, the distinction between an absolute donation of property and a donation of the proceeds of property, and so on.11 Beyond that, however, classical Hindu law texts had relatively little to say in relation to how properties should be managed, how disputes in relation to an endowment were to be resolved, who had standing to complain and what gave them standing, or



7 For

an overview, see R Thapar, ‘Dana and Daksina as Forms of Exchange’ (1976) 13 Indica 37. Saraswati, The Hindu Law of Endowments (Thacker Spink & Co 1897) 18–25. 9 ibid 25–27. 10 ibid 27–28. 11 ibid 154–76. 8 Prannath

India  59 what sort of duties the persons who managed or ran an endowment had beyond their religious obligations to the temple or its presiding deity and to whom these obligations were owed. The peculiar silence of the texts on what was almost certainly a real problem is at least partially explained by the fact that in practice, the task of dealing with issues with this type appears to have been seen as being within the domain of the obligations of kings. Rulers had a duty to uphold customary practices to the extent they were consistent with law, including customs in relation to the management of endowments. In addition, mediaeval legal texts such as the Mitākśarā suggest that kings and local ‘petty’ rulers were seen by virtue of the position they occupied as having an obligation to protect all religious institutions within their realm,12 an obligation which included both a negative obligation to refrain from appropriating revenues from endowments13 as well as a positive protective obligation which extended to resolving disputes and taking action against persons who were held to have misappropriated property that was the subject of an endowment. This was not simply a theoretical matter. Epigraphical and textual sources from the pre-colonial period demonstrate that complaints and disputes in relation to the management of endowments were regularly brought to kings for resolution.14 It was the relationship between the obligations of the ruler as traditionally conceived and the protection of endowments that led to colonial authorities being drawn into the management of Hindu religious endowments. Colonial records from the late eighteenth and early nineteenth centuries suggest that two factors lay behind their growing role in managing endowments. The first was their attempt to entrench their rule by depicting themselves as providing good governance and, thus, demonstrating to their subjects the ‘happy distinction between British generosity and justice and Mohammadan rapacity and sacrilege’, as one official put it.15 The sectarian overtones of this statement were not disingenuous: district level officials appear to have genuinely believed that the management of endowments had, through ‘abuses that everywhere prevailed’, degenerated into ‘an empire of anarchy, soothed by the insidious conceits of premediated deceit’16 – a state of things that they ascribed to the endowments’ ‘usurpation … by the Mussulman Government and its managers’.17 Providing good governance required the colonial government to take on functions that had traditionally been performed by local rulers which, in turn, meant inevitably that the colonial government had to concern itself both with the stability and sustainability of endowments themselves and with disputes in relation to the manner in which they were used or applied by bringing them ‘under the

12 Mitākśarā II:186. 13 Śukranīti IV:2:V:9. 14 See, eg, the examples discussed in G-D Sontheimer, ‘Religious Endowments in India: The Juristic Personality of Hindu Deities’ in H Brückner, A Feldhaus and A Malik (eds), Essays on Religion, Literature and Law (Manohar 2004) 38–40. 15 Board of Revenue Consultations, 26 February 1802, vol 311, 2094 (Tamil Nadu State Archives), quoted in CY Mudaliar, State and Religious Endowments in Madras (University of Madras 1976) 15. 16 Madura District Collectorate Records, 26–28 January 1802, vol 1248, Hurdis to Petrie, para 31 (Tamil Nadu State Archives), quoted in CA Breckenridge, ‘The Śri Mīṉākṣi Sundarēṣvarar Temple: Worship and Documents in South India, 1833 to 1925’ (PhD thesis, University of Wisconsin-Madison 1977) 143. 17 Madura District Collectorate Records, 26–28 January 1802, vol 1248, Hurdis to Petrie, para 26 (Tamil Nadu State Archives), quoted in Breckenridge (n 16) 143.

60  TT Arvind immediate care of the Collector’.18 As an official in the Madras presidency put it in the early nineteenth century, the government had given ‘implied pledges of protection and support’ to its Indian subjects which required it to intervene to defend religious endowments against misappropriation.19 This was given added force by a second, and not unrelated, impetus, namely, the work of revenue boards. The collection of revenue was from an early date an important aspect of the work of the East India Company in colonial India. The Company’s approach to establishing British-governed bridgeheads in locations that were important for trade led to its acquiring concessions from pre-colonial rulers, which carried with them the right to revenue collection. Given the importance of religious institutions in Indian society, and the economic value of the holdings of the richer institutions, this inevitably brought revenue boards into contact with religious institutions and endowments, as well as with disputes in relation to how institutions were run which they, as rulers, were expected to resolve.20 These factors meant that the colonial administration, and particularly administrators at the provincial or district level, found themselves dealing quite regularly with disputes in relation to the management of religious endowments. Like the Indian rulers they displaced, the key concerns they faced were, first, the loss of property which formed part of these endowments as a result of its alienation by the persons who managed the endowments and, second, allegations that endowments were being misappropriated or misapplied.21 It was as part of their attempt to find ways of resolving these disputes in a manner that was acceptable to the communities they governed that colonial administrators in India sought to adapt the conceptual tools provided by the law of trusts to the context of Hindu religious endowments.

B.  Responsiveness and Strategy: The Pragmatics of an Analogy Unlike their Indian predecessors, colonial administrators neither knew nor had any easy way of accessing the intellectual and cultural framework which underpinned the manner in which pre-colonial rulers had exercised their powers of supervision and control over the use and maintenance of endowments. That framework was built on a large body of practice, which had its origins not only in ideas as to the nature of kingship and the social role of the king, but also in the manner in which property, ownership, and religious endowments were conceptualised in pre-colonial Indian legal thought. At an early date, administrative officials appear to have begun drawing on analogies with

18 Letter of the Madura Board of Revenue of 3 January 1803, quoted in JH Nelson, The Madura Country: A Manual Compiled by Order of the Madras Government, vol 4 (Asylum Press 1868) 130. 19 Board of Revenue Consultations, 1 October 1838, vol 1628, 12858 (Tamil Nadu State Archives), quoted in K Nirmala Kumari, History of the Hindu Religious Endowments in Andhra Pradesh (Northern Book Centre 1998) 39. 20 For an overview, see CY Mudaliar, The Secular State and Religious Institutions in India: A Study of the Administration of Hindu Public Religious Trusts in Madras (Franz Steiner Verlad 1974) 1–12. 21 Both were exhaustively documented in a major report by TB Hurdis, District Collector of Madura, to the Board of Revenue. See the discussion in Nelson (n 18) 122–23.

India  61 trusts in deciding how to resolve these disputes. None of the extant sources explain precisely what led to them using these analogies, but the law of trusts appears to have provided administrators with a set of intellectual resources that were useful in at least two distinct ways. The first was that trusts law had the ability to provide effective solutions to the type of problems that were encountered in practice. Second, trusts law also did so in a way that provided rhetorical tools that helped to mitigate political pressures which India-based administrators faced from their superiors in London. To begin with the first, thinking about endowments as a type of trust provided a useful way of defining the problem and, thus, of identifying possible types of action that colonial officials might take. The fact that issues connected with endowments were being dealt with by Boards of Revenue meant that they were in effect being handled by district-level administrators who lacked the understanding of local customs and the embedding in local networks that native rulers had in the pre-colonial period. It was, for example, a known practice for individuals to make a nominal gift of land to a temple without having any intention of actually transferring to the temple the benefit of holding that land, for the sole purpose of bringing that land under the temple’s protection.22 In consequence, if a complaint was made to a Board of Revenue that ‘self-appropriation of temple funds’ by the persons charged with administering them had caused ‘ceremonies to be laid aside, and lesser servants to relinquish their duties’ (as in fact happened in the Madurai District Collectorate in 1802),23 the officials who had to deal with this dispute lacked the cultural context to understand the significance of the actions that were the subject of the complaint, the historical knowledge to locate those changes within the context of broader shifts in religious practices, and the social context to understand the interpersonal dynamic that underpinned the complaint. Against this background, the conceptual framework of trusts law and the duties of trustees provided an intuitive way in which to analyse allegations that funds had been misappropriated or mismanaged, or that the funds were not in fact supporting the activities they were intended to support; as well as a useful framework to identify solutions to these allegations. Thinking about the issue in terms of trusts law also appears to have been helpful as a way of structuring and legitimising government action. Colonial authorities perceived their actions in relation to religious institutions as being open to objections on two fronts. First, they were potentially vulnerable to being characterised as the actions of foreign rulers by Indians whose interests were affected. As discussed above, the colonial government believed that India’s erstwhile Mughal rulers had been perceived precisely in this light, and it was anxious to avoid creating a similar perception itself.24 Second, and more pressingly, as section III discusses in more detail, actions that were seen as supporting Hindu religious practices were frequently opposed to or criticised by officials in Britain, on the basis that they undermined support for the British rule by interfering in native institutions, or alternatively that they supported what many in Britain regarded as false religions. This dimension became increasingly important 22 See, eg, Nelson (n 18) 123. 23 Madura District Collectorate Records, 26–28 January 1802, vol 1248, Hurdis to Petrie, paras 34–35 (Tamil Nadu State Archives), quoted in Breckenridge (n 16) 143, 145. 24 Mudaliar, The Secular State and Religious Institutions in India (n 20) 7.

62  TT Arvind with the growth of Christian revivalist movements in nineteenth-century Britain, and colonial officials in India came under growing pressure from the Court of Directors of the East India Company to terminate all activities that might ‘promote the growth and popularity of superstitions, the prevalence of which every rational and religious mind must lament’.25 Against this background, the idea that colonial authorities were doing no more than exercising powers of superintendence over the Indian equivalent of a public trust offered a powerful tool to justify their continued involvement with these institutions. The focus trusts law placed on the intentions of the donor or settlor reinforced this, making it straightforward for colonial administrators to respond to criticism from Britain by saying, as an official in the government of Madras presidency put it in 1803, that: ‘If the donation be made under the trust of a particular person, Government does not interfere further than in right of its general superintendence to see that it be appropriated as intended by the donor’.26 These aspects of the interaction between the colonial administration and its Indian subjects explain why concepts and principles derived from the law of trusts came to be seen as a set of intellectual sources that could appropriately be applied to religious endowments. Nevertheless, it leaves open two questions: first, how good a fit trusts law was, and second, why it came to be accepted by Indians connected with temple endowments as an appropriate framework within which to resolve the types of issues that arose in connection with them. The answer to these questions is complex, but also important. As the next section will show, colonial administrators and jurists largely misunderstood the manner in which religious endowments were conceptualised and discussed in pre-colonial legal thought and, in consequence, what the strengths and limitations of trusts law were as a mechanism to regulate their management. Similarities and differences went equally unrecognised, with the result that it was not only the law of trusts that had to adapt to fit Hindu religious endowments. The endowments, too, had to adapt to fit the manner in which they were regulated by the law of trusts, and that process of mutual adaptation holds broader lessons for the manner in which we analyse the reception of trusts law in colonised jurisdictions.

III.  Owners, Gods and Things: Religious Endowments in Pre-Colonial Jurisprudence Pre-colonial legal thought described Hindu religious endowments as ‘devasvaṃ’, literally, ‘god-property’. The legal nature and incidents of devasvaṃ had been the subject of extensive theoretical and jurisprudential discussion since at least the ninth century CE. Two strands of this debate are of particular relevance to analysing the nature 25 ‘Dispatch from the Court of Directors to the Governor General of India’ (20 February 1833) para 31, printed in House of Lords, Papers respecting the Pilgrim Tax and the Employment of Christian Troops in the Religious Processions and Festivals of the Natives in India (House of Lords 1838, 261) 3, 8. 26 Board of Revenue Consultations, 28 March 1803, vol 341, paras 3053–61 (Tamil Nadu State Archives, Chennai), quoted in Mudaliar, State and Religious Endowments in Madras (n 15) 20.

India  63 and extent of the adaptation that was required for the law of trusts to be capable of application to religious endowments. The first strand relates to the legal character and understanding of property that prevailed in pre-colonial Indian thought. Indian jurists had advanced a number of different theories of property, ownership and the limits of the owner’s rights over property, all of which had important implications for the way in which religious endowments were conceptualised and regulated in law and, thus, for how good a fit trusts law would be. In particular, a significant majority of jurists took the view that the powers of an owner over property were inherently limited, and that property could have multiple simultaneous owners. The second strand relates to the question of how ‘god-property’ related to the deity, and whether the deity could in some way be said to have an interest in the property. This question was also the subject of significant jurisprudential and theological debate, which was in turn linked to debates as to the religious status of temple worship. There was a non-trivial gap between the positions taken by the elite jurists who produced the texts on which colonial lawyers relied and what appear to have been the actual rules of positive law that were administered in pre-colonial courts. The debate and its implications were poorly understood by colonial jurists and lawmakers, but the positions taken in it nevertheless had very significant implications for the relevance of trusts law as a way of thinking about and dealing with contested issues arising in relation to religious endowments and, thus, for the direction and extent of its adaptation.

A.  Debating God-Property: The Sources, Nature and Limits of Divine Ownership Property in pre-colonial Indian legal thought was conceptualised not as a bundle of rights or interests as it was in England, but rather as a relationship (saṃbandha) between the thing that was owned (svaṃ) and its owner (svāmin). Indian jurists were essentially concerned with the nature of the ‘propertyness’ (svatva) that made something capable of being owned. The two aspects on which all jurists agreed were, first, that ‘propertyness’ was connected with the owner’s ability to use the property to desired ends and, second, that a thing’s ‘propertyness’ had to include within it principles that set limits on the uses to which an owner could put property. They differed, however, on three issues: first, the nature of the connection between svaṃ and svāmin that constituted svatva; second, where the limits of ‘propertyness’ lay, what their sources were, and the extent of the restrictions they placed on a svāmin; and third, and even more significantly, whether ‘propertyness’ was a sui generis, intrinsically moral category that could be derived from scriptural sources, or whether it was a set of extra-moral, pragmatic principles that had emerged from custom and usage.27 27 The discussion in this section is based on the original Sanskrit texts of the sources cited. There have been two recent studies by Western scholars of property theory in pre-colonial India: ES Kroll, ‘A Logical Approach to Law’ (PhD thesis, University of Chicago 2010) and CT Fleming, Ownership and Inheritance in Sanskrit Jurisprudence (Oxford University Press 2020). Kroll and Fleming disagree in material ways in their reading of the relevant texts, but nevertheless between them give a good flavour of terms in which property theory was discussed and debated by theorists working within the Indian legal tradition.

64  TT Arvind The last of these was the key point of division from which the others emerged. Early scholars had discussed ‘propertyness’ in terms of the thing’s usability to desired ends (yatheṣṭaviniyogabhāva28 or yatheṣṭaviniyojyatva),29 but by the ninth century it was broadly agreed that this definition was, on a literal understanding, overinclusive. Scholars who broadly belonged to the Navyanyāya school of philosophy took the view that ‘propertyness’ was a moral category which emerged from scriptural sources, that its use was limited by considerations of decorum (aucitya), and that the essence of ‘propertyness’ lay in the propriety of using a thing according to one’s desire (yatheṣṭaviniyogayogyatva).30 In contrast, other scholars took a broader view of property. To Vijñāneśvara, a twelfth-century commentator, and those who adopted his view, ‘propertyness’ had non-scriptural roots, and emerged from the fitness (arha) of using something to a desired end, with fitness not necessarily being connected to scripture but having a broader base. One consequence was that commentators from this latter school were open to recognising a number of innovations, one of the most important of which was the possibility of property having multiple owners, with the svāmisaṃbandha of one acting as a restraint on the others’ ability to exercise powers ordinarily associated with ownership, such as alienation or disposal. In the context of family-owned land, for example, Vijñāneśvara argued that every member of the family became an owner by birth, and that their ownership limited the ability of the head of the family to dispose of the land. This has obvious implications for religious endowments, but the situation was complicated by a long-running theological debate, which also spilled over into jurisprudence, as to the religious status of temple worship and the deities that were the subject of that worship. One school, referred to as pūrvamīmāṃsā or simply mīmāṃsā, denied the existence of deities as corporeal beings and, consequently, also denied that they were capable of owning property. Despite the use of the term ‘devasvaṃ’, a religious endowment was not and could not in any real sense be the property of the deity. The other school, referred to as uttaramīmāṃsā or vedānta, affirmed the corporeal reality of deities and their ability to own property. The philosophical tradition represented by pūrvamīmāṃsā was significantly more influential among jurists than vedānta, and legal texts therefore largely deny both the theologically existence of corporeal deities and their juristic capacity to own property. As a philosophical tradition, one of the core concerns of pūrvamīmāṃsā was the priority of sacrificial rituals and burnt offerings over temple worship. Whilst the arguments its proponents offered were partially a matter of theology – and, more specifically, concerned with the question of whether forms of worship prescribed in scripture had or should have priority over forms of worship derived from popular practice – the positions they took also drew heavily on property theory. Thus, for example, Śabara, an early pūrvamīmāṃsā philosopher, based his argument in favour of burnt offerings on the theological ground that deities did not exist as concrete entities and were mere verbal constructs to assist with sacrificial rites; but he also augmented this with the legal



28 Dvitiyavācaspatimiśra 29 Tantraratna

Nyāyatattvāloka 2:1:34. 4:2. Nyāyavārttikātatparyaṭīkā 1:2:1.

30 Vācaspatimiśra

India  65 argument that deities could not logically be the recipients of offerings because they were incapable of ownership. ‘Propertyness’ was fundamentally dependent on the ability to use a thing to desired ends, and deities patently lacked this power. A deity did not decide how a field dedicated to it would be used. It was, rather, the temple priest, and it was therefore the priest who was the owner.31 Śabara’s views were influential, and to later more legally focused commentators such as Medhātithi, a tenth-century writer, their legal implications were obvious: a deity was incapable of having any relation to property as a svāmin, and devasvaṃ was only ‘god-property’ in the sense that it was dedicated to religious purposes. It was not, and could not be, the property of a god.32 Subsequent commentators added to this a further argument: a pious gift could not in fact be a gift to a deity because a gift required an act of acceptance, such as saying ‘this is mine’. This was an act a deity, being only a verbal construct, was incapable of undertaking.33 The vedānta philosophical tradition took a very different view. Classical philosophers within the vedānta tradition wrote with the express goal of bringing the philosophy of religion into closer contact with popular religion and they accordingly took popular perceptions (lokāḥ) as being a valid source of knowledge, including in relation to the corporeal reality of deities and their ability to be the subject of pious acts.34 Scholars working within this tradition tended to focus on philosophy rather than law, but the fact that it was more in tune with popular perceptions meant that it in practice tended to have a greater influence on the law than the works of legal theory produced by the pūrvamīmāṃsā tradition. Epigraphical evidence, particularly from Southern India where pūrvamīmāṃsā was significantly less influential than vedānta, shows that the conception of deities as being capable of ownership combined with the idea of multiple simultaneous owners (discussed in the previous section) to produce an understanding of devasvaṃ as representing ownership by a deity could operate even though the property was in practice owned, managed and enjoyed by a person or religious institution. It is, for example, not uncommon to see property described in inscriptions as being given for a deity to a priest.35 Equally, inscriptions also show that the law was in practice influenced by the theory that multiple ownership meant that the powers of one owner, such as the power to alienate, were necessarily limited by the svāmisaṃbandha of other simultaneous owners. The power of religious institutions to deal with property that was the subject of an endowment was, in consequence, significantly limited by the fact the property was seen as being vested in the presiding deity, thereby restricting the ability of the persons who actually ran or managed the institution to alienate endowed property.36 That this points to a significant gap between legal theory and the law as actually practised should not come as a surprise in the context of an advanced legal system such as that of pre-colonial India. The modern English law of trusts presents us with numerous examples of divergences between what legal theory tells us the law ought to be and



31 Mīmāṃsāsūtra

Śabarabhāṣya 9:1:9. manubhāṣya 11:26. 33 Raghunandana Śuddhitattva, cited in Girijanund v Sailajanund (1896) 23 Cal 645, 654-56. 34 Brahmasūtra Śaṅkarabhāṣya 1:3:33. 35 Sontheimer (n 14) 35. 36 For examples, see ibid 32–39. 32 Medhātithi

66  TT Arvind what the law really is. That pre-colonial India had similar divergences is not unexpected, even if contemporary colonial legislators did not wholly appreciate the nature of the phenomena with which they were dealing.

B.  Divergences and Convergences: Assessing the Fit of Trusts Law As the discussion thus far should have demonstrated, trusts law was an imperfect fit with the nature and needs of religious endowments, but it was nevertheless a fit. The imperfect character of the fit comes from the very significant divergences between the pre-colonial conception of religious endowments and the conception that emerged from trusts law. Thus, for example, the focus on the will of the grantor which, as we have seen above, characterised colonial administrators’ responses to problems connected with religious endowments was a consequence of the reliance on an analogy with the trust. The pre-colonial conception of ‘propertyness’ as a relationship between svaṃ and svāmin, and its focus on use and desires in conceptualising the nature of that relationship, means that its focus was on the wishes of the recipient rather than the donor, and pre-colonial customs and practices in relation to endowments had no obvious parallel to the central role the settlor’s intention played in English trusts law. Equally Hindu law, unlike English law, did not distinguish between public and private purposes in regulating religious endowments. In consequence, it could and did treat identically religious endowments that, in English law, would necessarily have been private rather than public trusts. The use of trusts-based reasoning meant, however, that the public/private distinction was imported into Indian law, creating an uneasy fit whose results have been anything but straightforward. The question is, in principle, a question of fact37 which looks at whether the beneficiaries are ascertainable individuals or an unascertainable community,38 but its application to determine whether a given religious endowment is private or public continues to pose considerable difficulties for Indian courts.39 The problem also extended to the regulation of how religious endowments were used. As late as the 1910s, comments from provincial authorities in response to proposed India-wide legislation on religious and charitable trusts stressed the inappropriateness of an intrusive regulatory framework to the numerous smaller endowments associated with small shrines and individual holy men, which had never truly separated between using endowments for personal purposes and for the purposes of the trust.40 That the analogy with trusts law persisted, and continued to have an apparent utility, reflected the congruence of two factors. The first was a simple historical contingency, namely, that the first endowments the colonial authorities encountered were the large and resource-rich endowments that were associated with particularly prominent temples with a complex and involved calendar of festivals and rituals to which the endowments

37 Radhakanta Deb v Commissioner of Hindu Religious Endowments, Orissa AIR 1981 SC 798. 38 Deoki Nandan v Murlidhar AIR 1957 SC 133. 39 See, eg, State of Bihar v Charusila Dasi AIR 1959 SC 1002; SGPC Amritsar v Som Nath Dass AIR 2000 SC 1421. 40 ‘The Charitable and Religious Trusts Law, 1920: Paper II’ (BL IOR/L/PJ/6/1627, File 6265, 28 October 1919) 79 (comment from the Deputy Commissioner, Attock).

India  67 related. Of their nature, it was these that were the likeliest to provoke controversies and to otherwise come to the attention of revenue authorities, and not the smaller endowments. As a result, these differences, despite their importance, were rarely if ever central to the issues that occupied colonial authorities. The second, and arguably more significant, is that there were in fact significant congruences between the conceptual basis of pre-colonial Indian law and English trusts law, which remain significant even though colonial jurists and legislators were largely unaware of them. At least some pre-colonial theoretical understandings of property could and did contemplate the possibility of ownership as being limited rather than absolute, of the existence of a plurality of ownerships over the same asset, and of such an owner’s powers of ownership and management being limited by the svāmisaṃbandha of others. While this is not the same as the distinction between legal and beneficial title that underpins the law of trusts, it is easy to see how, against the background of the erosion of the pre-colonial concept of property in colonial India, that distinction could be pressed into service to serve a very similar end. For all that it was poorly understood, it is at least arguable that it was this congruence that made it possible to use trusts law as a way of conceptualising and dealing with the issues arising out of religious institutions.

IV.  Entrenching the Metaphor: Colonial Legislation on Charitable Endowments The factors discussed in the previous section led to the analogy with trusts becoming increasingly entrenched in the way endowments were regulated by colonial law, and colonial lawmakers drew extensively on that body of law in framing statutes and regulations regulating religious endowments. In the 1810s and 1820s, each of the three presidencies passed laws to formalise the principles and practices that had evolved in relation to administering and settling disputes concerning Hindu religious endowments, starting in 1810 with Bengal,41 followed in 1817 by Madras42 and 10 years later in 1827 by Bombay.43 The purpose of the regulations was to ensure that income from religious and charitable endowments was applied for the purpose for which they were endowed, and they were framed in a manner that sought to avoid interfering with the management of the institutions themselves whilst at the same time enabling Boards of Revenue in the relevant district to exercise superintendence over the ends to which funds were used. The text of the regulations shows the extent to which analogies with trusts had come to shape the authorities’ thinking. The preamble to the Madras Regulation begins by describing the mischief it was intended to deal with as being the appropriation of the produce of the endowments ‘contrary to the intentions of the donors, to the personal use of the individuals in immediate charge and possession of such endowments’, and declared it to be ‘the duty of the Government to provide that all such endowments be

41 Bengal

Regulation XIX of 1810. Regulation VII of 1817. Regulation XVII of 1827.

42 Madras

43 Bombay

68  TT Arvind applied according to the real intent and will of the grantor’.44 The substantive regulations similarly emphasise the broader goal of ensuring ‘the due appropriation of lands or other endowments granted for public purposes agreeably to the intent of the grantor’,45 and the language of trusts is expressly used by the regulations. The individuals in charge of the institutions are described as their ‘trustees, managers, or superintendents’,46 and disputes in relation to succession are discussed in terms of ‘the person or persons claiming the trust’.47 The primary reference point in determining the validity of the appointment of a trustee was to be ‘the special provisions of the original endowment and appropriation by the founder’ and, failing that, the ‘general rules or maxims applicable to such institutions and foundations’.48 The other limb of the Regulation was the creation of a regulatory mechanism to exercise powers of superintendence over the administration of endowments, which sought to codify existing practice, but was also based on an analogy with the powers of the Charity Commissioners over public or charitable trusts under English law (an analogy that would continue to be influential in legislation well into the twentieth century). The power of ‘general superintendence’ of all endowments – whether granted for the support of ‘mosques, Hindu temples or colleges, or for other pious and beneficial purposes’ – was vested in the Board of Revenue.49 The Board had a specific obligation to ‘prevent any endowments in land or money … from being converted to the private use of individuals or otherwise misappropriated’,50 and its agents in every district were to monitor and ascertain the particulars of all endowments covered by the Regulation,51 including the trustees, managers or superintendents in charge of them, the manner of their appointment,52 and all vacancies as and when they arose.53 Both limbs soon entrenched themselves and appear to have become popular in the Indian community, although the extent of the involvement of colonial administrators in Hindu (and, in due course, Muslim) religious affairs continued to cause unease in London. In 1833, in part as a result of pressure brought by Protestant churches,54 the Court of Directors of the East India Company ordered the Supreme Government in Calcutta to require servants of the Company to withdraw from all ‘arrangements which implicate the Government, be it in a greater or lesser degree, in the ministrations of the local superstitions of the Natives’, on the basis that they ‘exhibit the British power in such intimate connexion with the unhappy and debasing superstitions’ and lead to the belief ‘that we admit the divine origin of those superstitions, or at least, that we ascribe to them some peculiar and venerable authority’.55 44 Madras Regulation VII of 1817, preamble 45 ibid reg 14. 46 ibid regs 10, 12, 16. 47 ibid reg 11. 48 ibid reg 10. 49 ibid reg 2. 50 ibid reg 5. 51 ibid reg 9. 52 ibid reg 10. 53 ibid reg 11. 54 See, eg, The Connexion of the East-India Company’s Government with the Superstitious and Idolatrous Customs and Rites of the Natives of India Stated and Explained (Hatchard & Son 1838). 55 ‘Dispatch from the Court of Directors’ (n 25) 5–6.

India  69 This did not, however, end the majority of practices of provincial governments nor did it influence their supervisory power. As a result, the Government in 1863 took a policy decision to legislate to ‘rid itself of a burden which had been bequeathed to it by the former Rulers of India’ by withdrawing colonial administrators at all levels from ‘all further concern with Religious establishments’.56 The Religious Endowments Act 1863 repealed the Bengal and Madras regulations in as much as they related to endowments made for religious purposes.57 This did not, however, mean that the analogy with trusts was abandoned. Rather, the withdrawal of the government from direct involvement in management was dealt with by reinforcing that analogy and transferring jurisdiction to the ordinary courts. The civil courts were given the jurisdiction to deal with disputes in relation to the validity of appointment of trustees, and giving any person interested in the religious establishment, in worship within it, or in ‘the trusts relating thereto’ the power to apply to the civil courts for appropriate relief.58 Interested persons could also sue trustees in the civil court for any ‘misfeasance, breach of trust, or neglect of duty … in respect of the trusts vested in, or confided to them’.59 ‘Interest’ was defined broadly. Interests that were neither pecuniary nor direct nor immediate, such as a right of attendance at worship, or partaking in the benefit of distribution of alms, were sufficient.60 The courts were given the ability to order trustees to file accounts in court,61 and the jurisdiction of criminal courts to entertain actions for criminal breach of trust was expressly mentioned as being unaffected by the powers of the civil courts.62 Broader powers of superintendence were transferred from the Board of Revenue to special district-level committees63 which were to consist of members of the same religion as the endowment related to64 and who were appointed for life. The analogy with trusts, in other words, was here to stay, and continues to remain part of the framework for regulating religious endowments.

V.  Extending and Questioning the Metaphor The years after the passage of the 1863 Act saw a growing dissatisfaction with the arrangements it had put into place. A key focus of the dissatisfaction was the abolition of the jurisdiction of Boards of Revenue over endowments and the relative weakness of the committees that were created to take the place of that jurisdiction. There was a strong perception that the change had detracted from the objective of securing better management of religious, charitable, or public trusts. In 1890, the Charitable Endowments Act

56 ‘Governor General’s Council Proceedings of 25 February 1863’ in Abstract of the Proceedings of the Council of the Governor General of India 1863, vol 2 (Office of the Superintendent of Government Printing 1863) 47–48. 57 Religious Endowments Act 1863, s 1. 58 ibid s 5. 59 ibid s 14. 60 ibid s 15. 61 ibid s 19. 62 ibid s 20. 63 ibid s 7. 64 ibid s 8.

70  TT Arvind attempted to partially solve the problem by creating a new (and permissive) mechanism for charities whose purpose was poor relief, medical relief, or the advancement of any other object of general public utility. It permitted trustees or settlors to apply to the local government to vest the trust property in a newly created government office, the treasurer of charitable endowments.65 Yet the fact that this was a purely permissive law meant that it, too, was perceived as being inadequate. The Charitable and Religious Trusts Act 1920 expanded the powers of interested persons to sue in the civil courts to investigate the nature and objects of a religious trusts and audit its accounts,66 but in the absence of any power of superintendence there was no effective obligation on trustees to actually keep accounts. There was also considerable dissatisfaction with making litigation the primary vehicle for contesting the administration of religious endowments: courts, it was argued, decided cases without having any sense of the social or cultural context that lay behind the creation of the endowment as the community itself would, and by expanding the range of persons who could invoke the power of the courts the Act had in effect divorced the management of endowments from their underlying cultural roots.67 The extension of the rule of trusts law that beneficiaries could apply for the costs of litigation to be met from out of trust assets68 was also the focus of considerable criticism, with one commentator arguing that it would ‘foster all sort of vexatious and unnecessary litigation … thereby proving the ruin of many an ancient institution’.69 There was also concern that the breadth of the power to initiate litigation would disrupt the traditional relationship between guru and disciple, by in effect subjecting it to the court’s jurisdiction.70 A number of private efforts were made by Hindu and Muslim members of the national and provincial legislatures to pass legislation to alter the legal position and reintroduce some form of supervisory power, but they did not receive governmental support with the official position being that the government would not be justified in intervening in relation to religious charities. Attempts by provincial legislatures to legislate – such as an attempt made in Madras in 1877 and one in Bombay in 191171 – were denied sanction to proceed by the Government of India. The failed 1877 legislation in Madras is of particular interest. The bill sought to abolish the committees created by the 1863 Act, and instead create a new Central Board of Commissioners with a wide power of superintendence over all religious and charitable trusts in Madras, and not merely the subset of them that were subject to supervision by the committees created by the 1863 Act (which in turn was based on the endowments over which Boards of Revenue had jurisdiction under the 1817 Regulation). Crucially, the powers of the Central Board were closely modelled on those that the Charity Commissioners had under English law, highlighting the extent to which it had become accepted orthodoxy that endowments were in substance trusts 65 Charitable Endowments Act 1890, ss 4–6. 66 Charitable and Religious Trusts Act 1920, s 3. 67 ‘The Charitable and Religious Trusts Law, 1920: Paper II’ (n 40) 28–29 (comment from the President, South Indian Liberal Federation). 68 Charitable and Religious Trusts Act 1920, s 8. 69 ibid 24–25 (comment from the Raja of Kollengode). 70 ibid 33–34 (comment from the Agent to Sri Sankara Acharya Swamigal, Kumbakonam). 71 ‘Charitable and Religious Trusts Act 1920, Statement of Objects and Reasons’ (BL IOR/L/PJ/6/1627, File 6265, 21 August 1919).

India  71 and that their regulation was most appropriately modelled on the manner in which trusts were regulated in English law. Nevertheless, permission to proceed with the statute was not granted by the Government of India, which continued to hold to the policy of withdrawal on which the 1863 Act was based.72 They held to this position even when, in 1893, a more modest proposal was put forward in Madras by a committee comprised wholly of Hindus, making it clear that they would not sanction any departure from the policy of the 1863 Act.73 Although the 1920 Act was said by the government to mark a reconsideration of this policy,74 it made no moves towards reintroducing administrative supervision of the type that the Boards of Revenue had previously exercised. This position did not change until the reforms to the governance of India brought about by the Government of India Act 1919, which transferred the power to legislate in relation to religious endowments to provincial governments and vested them in the new ministries run by popularly elected members of the provincial legislatures. As this suggests, there was during this period a divergence between, on the one hand, the position of the colonial government at the national level and, on the other, the position of representatives of the actual population of colonial India. The government appears to have placed the emphasis on the regulatory potential implicit in the ordinary operation of trust-like structures – and, in particular, in the legal duties of trustees and the ordinary powers of civil courts to exercise control over trusts – to deal with the issues that arose in relation to the management of religious endowments. Indeed, this was so much so that it saw it fit to reject the need for a more expressly regulatory or supervisory body to exercise powers of superintendence. Indian representatives, in contrast, appear to have placed considerably more weight on the need for a governmental body with powers of superintendence over religious endowments than they did on general principles of trusts law. To put it differently, the colonial authorities placed emphasis on and confidence in the positive outcomes which were capable of being produced if full effect was given to the standards of conduct and transparency of process that the law of trusts promotes. In contrast, the focus of Indian representatives was on creating a public body that could efficaciously exercise the powers of superintendence that were also associated with the legal regulation of public trusts in England because their overriding concern was to ensure that the resources of religious endowments were neither misappropriated nor squandered, but were rather managed and applied to the intended ends in an effectively and efficient manner. This difference of view is instantiated by the controversy provoked by the operation of doctrines of trusts law that were not directly connected with correcting maladministration and, in particular, the cy-près doctrine. The analogy drawn with trusts law meant that by the twentieth century, there was a general juristic view that the cy-près doctrine also applied to religious endowments, even though the Indian cases on the doctrine related largely to ordinary charitable trusts rather than specifically religious endowments, and in the few cases that did relate to religious endowments – such as Harish Chandra v Hindu Dharam Sewak Mandal – the courts largely declined to



72 Mudaliar, 73 ibid

The Secular State and Religious Institutions in India (n 20) 33–34. 35–36. and Religious Trusts Act 1920, Statement of Objects and Reasons’ (n 71).

74 ‘Charitable

72  TT Arvind apply the cy-près doctrine on other grounds.75 The received juristic view eventually made its way into statutes, where both its inclusion and the manner of its application were far from uncontroversial, particularly in the Madras presidency. Madras was home to some of the most resource-rich temples in India, and its Legislative Council had been behind nine of the 12 attempts to alter the regime established by the 1863 Act. In 1922, its government introduced a bill to create a Central Board modelled, as before, on the Charity Commissioners,76 but with a broader jurisdiction than under the 1817 Regulation. The 1922 Bill sought to enable them not just to exercise general superintendence, but also to ‘do all things which are reasonable and necessary to ensure that maths and temples are properly maintained and that all religious endowments are properly administered and duly appropriated to the purposes for which they were founded or exist’.77 The new bill also covered a wider range of religious institutions and assets than had been covered under the 1817 Regulation, with the definition of ‘religious endowment’ widened to include not just endowments proper, but also all property belonging to temples and other religious institutions including their premises.78 Most controversially, the bill created an expanded, statutory version of the cy-près doctrine which applied not only to cases where the original purpose was no longer capable of fulfilment, but also to any surplus funds in religious endowments.79 Any funds left over after satisfying the purposes of the endowment and setting aside a sum for the repair and renovation of buildings connected with the environment could be treated as a surplus, and the Central Board was given wide discretion to decide how much of the surplus should be retained as a reserve and how much should be used for other purposes.80 The Board also had a wide discretion to decide the purposes to which the surplus should be applied: any ‘religious, educational, or charitable purposes not inconsistent with the objects of the endowment’81 were eligible and, unlike the cy-près doctrine, the Board did not need to apply to the court to divert the surplus, although trustees of the endowment could apply to the court to modify or set aside an order made by the Board.82 The provision was the culmination of a campaign by the Justice Party, which had fought the 1921 Provincial election on a plank of using surplus funds from religious institutions for social, rather than narrowly religious, ends.83 The policy was controversial, with opponents in the Legislative Council arguing that it was wrong as a matter of principle to divert religious funds for public projects that should, rather, be funded out of general taxation. Its proponents, in contrast, defended the extension on the basis that 75 Harish Chandra v Hindu Dharam Sewak Mandal AIR 1936 All 197 (refusing to apply the doctrine on the ground that the testator’s intention was a specific charitable intention rather than a general charitable intention to be carried out in a specific way). 76 Madras Hindu Religious Endowments Act 1926, s 10. 77 ibid s 18(2). 78 ibid s 9(11). 79 ibid s 67(1). 80 ibid s 67(2). 81 ibid s 67(1). 82 ibid s 67(4)–(5). 83 K Nambi Arooran, Tamil Renaissance and Dravidian Nationalism, 1905–1944 (Koodal Publishers, 1980) 146–48.

India  73 a person who made an endowment in the hope of attaining salvation or of obtaining relief from an ailment or from difficulties – all of which had historically been motives for making a pious gift – should be understood as having made it for that purpose rather than for the purpose specified in the donation, thus making it wholly appropriate to use the cy-près doctrine to divert the funds to other ends.84 This argument was disingenuous. As discussed above, Hindu law focused on the needs of the recipient rather than the intentions of the donor, and there was little basis in it for the reapplication of pious gifts to secular ends. Nevertheless, attempts to amend the law to limit the Board’s power to divert surplus funds failed, and the expanded power passed into law and remains in force. Its application, and the use of religious endowment funds for social rather than religious purposes, remained controversial even after Indian independence and continue to remain controversial, with opponents arguing that surplus funds from endowments should, as a matter of preference, be diverted to less resource-rich temples rather than being pressed into service for other social purposes.85 Underpinning this is the same divergence of position discussed above. If one’s focus is on trusts law’s standards of conduct and transparency, then one will be more inclined to adopt the position taken by the proponents of the expanded cy-près doctrine, namely, permitting the diversion of religious funds as long as that diversion is done in accordance with an open and established process. In contrast, if one’s focus is on ensuring the security and preservation of the fund and increasing the efficiency with which it furthers the purposes it was intended to serve, then one will be more inclined to adopt the position taken by the opponents of the expansion of the cy-près doctrine. That this issue remains the subject of controversy in the present day highlights the extent to which the extension of trust-derived concepts to religious endowments in India continues to be affected by the lack of clarity or consensus around the precise goals or ends that extension was intended to serve. An even starker example of this divergence can be seen from the very different routes to regulating religious endowments taken by the legislatures of Bombay and Madras, a difference that has only grown wider after endowments. In 1951, the post-independence Government of Madras passed the Hindu Religious and Charitable Endowments Act, which abolished the Board of Commissioners and in its place assimilated the function of regulating Hindu charitable endowments into a government department. Bombay, in contrast, took a different path. In 1935, the Bombay Legislative Council passed the Bombay Public Trusts Registration Act 1935, along with two other similar laws that applied to Muslim awqaf86 and Parsi public trusts.87 This law unlike the control-oriented scheme enacted by the Madras legislature is principally concerned with transparency and standards, creating obligations to register, to prepare accounts, and so on; reinforcing in a statutory context the equitable duties of trustees and the rights of action of beneficiaries; and focusing the role of the Charity Commissioner on superintendence rather than control.



84 Madras

Legislative Council Proceedings 17 September 1926, vol 32, 951. Smith, India as a Secular State (Princeton University Press 1963) 250–52. 86 Mussalman Wakf (Amendment) Act 1935. 87 Parsi Public Trusts Registration Act 1936. 85 DE

74  TT Arvind Subsequent laws in Bombay (and now Maharashtra) have largely followed the same scheme. A full analysis of the relative effectiveness of the two schemes is, of course, well beyond the scope of this chapter, but the fact that two such different schemes exist, and that both can ultimately be traced back to the same early roots in colonial government, instantiates the plurality of views in India as to the precise social needs that the regulation of religious endowments should serve, and as to which aspects of the law of trusts offer the most useful regulatory potential to serve those ends.

VI.  In Conclusion: Trusts, Government, Regulation and Adaptation When the codification of a law of trusts for India was first proposed, Sir James Stephen thought it would do more harm than good. Introducing the concept of a trust, he argued, ‘must of necessity introduce into India the very distinction between law and equity of which we in England are struggling to rid ourselves’.88 Simply defining a trust in terms of obligations, as the draft bill did, would not avoid this consequence. No amount of drafting skill could.89 The subsequent development of trusts law in India, which unfolded in precisely the way Stephen feared, might at one level appear to have vindicated his concern. Yet, as this chapter has sought to argue through its discussion of how concepts derived from the law of trusts were applied to regulate religious endowments, the history is open to a different, and more positive, reading, in which equitable concepts and structures were used by colonial authorities and Indian subjects in two constructive ways: first, to deal with unfolding social issues and needs; and second, to mitigate problems caused by the disruption by colonial rule of frameworks and mechanisms that existed in pre-colonial law for dealing with situations in which the interests of different groups within society came into conflict. Nor is this unique to the law of trusts. Rather, the history of adaptation described in this chapter is part of a broader part of the story of the reception of equity in British colonies which has only recently begun to be told. The doctrine of unconscionability, for example, was introduced into Indian contract law along with a significantly expanded power to relieve against penalties to deal with social unrest caused by agricultural debt, which was in turn caused by the abolition of pre-colonial rules and practices regulating debt.90 Although the need to borrow ideas from the law of trusts to deal with religious endowments only arose because the introduction of colonial administration disrupted pre-colonial practices in relation to these endowments, the social regulatory potential that trust-based approaches offered gave it the ability to act as a starting point for framing laws that met Indian ends at least as much as they met the goals of Empire, and that enabled the preservation of at least some of the work that pre-colonial legal

88 ‘Memorandum on Codification in India by the Honourable Mr Justice Stephen’ (BL/IOR/C/142, 2 July 1879) 17–18. 89 ibid 19. 90 I discuss this in more depth in a chapter on liquidated damages in Indian law in the forthcoming Oxford Handbook of the Indian Contract Act 1872.

India  75 frameworks had done. A central theme in any legal transplant, including legal transplants made necessary by colonial rule, is the challenge (and difficulty) of identifying, in a plural and diverse society, which type of regulatory potential the law should prioritise, what mechanisms it should adopt to further the chosen potential, and perhaps most fundamentally deciding to which of the many competing social needs the use of trusts law is intended to speak. In the context of this challenge, the reading advanced by this chapter has sought to show that far from being a failed attempt to adapt English law to Indian conditions, the introduction of trusts law to India represents a successful adaptation brought about by processes in which Indian subjects of Empire, and the needs and goals they prioritised, exercised at least as much agency as did colonial administrators and governors.

76

5 Adaptation of the Law of Trusts to Regulate Administration of Places of Religious Worship in Sri Lanka ANTON COORAY*

I. Introduction The reception of the English law of trusts in Sri Lanka has mainly been through legislation, while English principles of trusts law have also found their way into the local legal system through judicial decisions. In the early years of the British administration, the judges found the local arrangements for the management of religious temples and shrines to easily resemble trusts. For instance, in the 1902 case of Government Agent, Northern Province v Pararajasingham1 the Supreme Court drew upon trusts law to describe the position of the manager of a Hindu temple: There is no magic in the term ‘trustee’. I believe the word ‘manager’ is used in connection with the administration of the temporal affairs of Hindu temples as describing an officer who, in the eye of the law, would be a trustee for the temple.

Indeed, there were instances where a party to a dispute would describe himself as a trustee.2 There are also instances where courts were prepared to construe a deed of management of a temple executed well before 1917 as a deed of trust in all but name. For instance, in the 1923 case of Kumaraswamy Kurukkal v Karthigesu Kurrukkal the Supreme Court observed that, after dedicating the temple, a deed of management of the temple was executed in 1898, which did not explicitly declare a trust, though it did so in substance, inasmuch as it recited the formal dedication (or consecration) of the temple for religious uses, provided for the management of the temple and its * Professor of Law, City, University of London and Senior Associate Research Fellow, Institute of Advanced Legal Studies, University of London. 1 Government Agent, Northern Province v Pararajasingham (1902) 6 NLR 54 (SC) 56. 2 For instance, in 1875 the plaintiffs had brought an action, describing themselves as ‘trustees of the temple’ to vindicate their title to certain lands and the District Judge decreed that they be declared proprietors of the disputed lands ‘qua trustees of the Munnessaram temple’. This is narrated by the Supreme Court in the case of Kalimuttu v Muttusamy (1925) 27 NLR 193 (SC), tracing the history of this Hindu temple of great antiquity.

78  Anton Cooray succession, for the appointment of and succession of officiating priests, for the control of the temple ceremonies, the custody of its treasures and the appropriation of public subscriptions. Treating the deed of management as a trust instrument, the Supreme Court observed that ‘no Court of Equity … would allow the great principles it administers to be defeated by a formal defect of this character, and our own Ordinance expressly provides for the point’.3 In Ramanathan v Kurukkal,4 the Supreme Court identified four ways in which arrangements for the management of a Hindu temple were commonly made: Hindu temples in Ceylon are under the control and management of persons in whom the fabric is vested (1) by right of private ownership; (2) by grant or assignment of the owners of the land on which the temple is built; (3) by appointment by the congregation; (4) by deed of trust.

In relation to Muslim places of religious worship too, courts adopted a similar approach since any endowment to a mosque was an irretrievable transfer of the property to God. As we will see later, Muslims too relied on the idea of a trust for administration of mosques. The first statute to deal with religious trusts was the Buddhist Temporalities Ordinance of 1889. The first comprehensive code on trusts law, the Trusts Ordinance, was enacted in 1917. Statutory provision was made for the administration of Muslim mosques in 1931 with the enactment of the Muslim Intestate Succession and Charitable Trusts or Wakfs Ordinance. In 1956, the Muslim Mosques and Charitable Trusts or Wakfs Act repealed the relevant provisions of the 1931 Ordinance and made improved provisions for the management of Muslim mosques and charitable trusts.5 No similar legislation has been enacted in relation to Hindu temples. In this chapter we will first examine how the idea of the trust was used in Hindu and Muslim religious trusts in harmony with the relevant fundamental concepts of religious law, and to avoid conflict between religious law and the law of the land. We will also examine the Buddhist Temporalities Ordinance which introduced a fundamental change to the traditional way in which Buddhist places of worship had been administered, by transferring the legal ownership and powers of management from the chief Buddhist priest or incumbent of the temple to a lay trustee. We will then proceed to provide an overview of how the English trust was adapted to suit the local customary practices and religious law.

II.  Hindu Law and Trusts In Sri Lanka, as in India, a donation to a Hindu temple is regarded as a dedication of the property to a Hindu idol, which upon such dedication irretrievably passes to the 3 Kumaraswamy Kurukkal v Karthigesu Kurrukkal (1923) 26 NLR 33 (SC). s 3 of the Trusts Ordinance of 1917 provides as follows: ‘(a) “trust” is an obligation annexed to the ownership of property … of such a character that, while the ownership is nominally vested in the owner, the right to the beneficial enjoyment of the property is vested or to be vested in such other person, or in such other person concurrently with the owner’. 4 Ramanathan v Kurukkal (1911) 15 NLR 216 (SC). 5 See Bhai Beebi v Naeem [1981] 2 Sri LR 335 (CA).

Sri Lanka  79 idol, the donor however retaining the right to manage such temple property. The donor, commonly referred to as the founder, in his capacity as manager, had all the powers of a proprietor subject to a trust, and the control of the property passed with the office. As explained in the 1923 case of Kumaraswamy Kurukkal v Karthigesu Kurrukkal: [T]he legal ownership is actually vested in the trustee, but it does not under ordinary circumstances devolve with the office … unless the founder provides for the devolution of the trust property either by will or by an instrument executed during his lifetime, the legal ownership passes to his heirs. The heirs, it is true, hold it subject to the trust and can be made to transfer the legal ownership to the new trustee … Though there is a difference in form between our own conception and that of the Hindu religious law, there is no difference in substance.6

The Supreme Court emphasised that while the court may have regard to religious law and custom of the community concerned,7 any conflict between religious law and legislation must be resolved in favour of legislation.8 In Kumaraswamy Kurukkal v Karthigesu Kurrukkal Bertram CJ went on to explain that when a founder dedicated a property to a temple, without declaring a trust as would have happened in many instances, he was regarded as having made a self-declaration of trust. If he transferred the property to another, or upon his death his heirs succeeded to the estate, they received the property subject to the trust. So, for the purposes of law the transferee or the successor becomes the legal owner, but equity would regard him as a mere legal owner holding the property on trust. This analysis is a clear adaptation of the essential feature of trusts law – that the legal ownership of the trust property vests in the trustee and equitable ownership belongs to the beneficiaries – in the context of the Hindu law principle that the dedication of property passes ownership to the Hindu idol. Because the common law of Sri Lanka has not adopted the Roman law of foundation and therefore does not recognise that a place of religious worship is endowed with legal personality, it is not possible by decree of court to declare that land dedicated to a Hindu idol is the property of a temple.9 As will be seen in our discussion on Muslim law, it is possible for a place of religious worship to be incorporated by legislation, in which case the legal ownership of the mosque and any donations to it passes to the corporation, the trustee only exercising their powers and performing their duties connected with the mosque’s management. This incorporation of the Board of Trustees was the ideal solution to the legal position that a mosque, a Hindu temple or a Buddhist temple was not a legal person. In fact, the

6 Kumaraswamy Kurukkal v Kathiragesu Kurrukkal (n 3) 39. 7 s 106 of the Trusts Ordinance provides as follows: ‘in determining any question relating to … (c) the administration of the trust; the court shall have regard to (i) to the instrument of trust (if any); to the religious laws and custom of the community concerned; (iii) to the local custom or practice with reference to the particular trust concerned’. 8 Kumaraswamy Kurukkal v Kathiragesu Kurrukkal (n 3) 36. Where there is a conflict between common law and a special law, such as Kandyan law or Hindu law, such special law prevails. See Sultan v Peiris (1933) 35 NLR 58 (SC) 81: ‘The Roman-Dutch law thus became the general law of the Island applicable to all its inhabitants in all matters upon which their personal laws are silent and, in this sense, the Common law of the land’. On the reception of trusts law into the mixed legal system of Sri Lanka, see A Cooray ‘Oriental and Occidental Laws in Harmony: The Case of Trusts in Sri Lanka’ in E Orucu (ed), Mixed Legal Systems at New Frontiers (Wildy, Simmonds and Hill Publishing 2010). 9 See Karthigasu Ambalavanar v Subramanium Kathiravel (1924) 27 NLR 15 (SC).

80  Anton Cooray device of incorporation by statute has been adopted by some Hindu temples, enabling a board of trustees to hold property for the purposes of the devalya (Hindu place of worship).10

III.  Muslim Law and Trusts Islam was brought to Sri Lanka by Muslims who made Sri Lanka their home. In relation to the management of Muslim mosques, shrines and similar religious places, Muslim legal principles formed the theoretical basis for gifts to such places. These basic principles of Muslim law had to operate alongside the relevant statutory provisions, especially the Trusts Ordinance. As discussed below, arrangements similar to trusts had been used by Muslims in relation to the management of their religious places, even before the enactment of the Trusts Ordinance in 1917. According to Muslim law, property donated for the purposes of a mosque is regarded as a dedication of property to God in perpetuity for the benefit of mankind. Such a donation is known as a ‘waqf’, (spelt as ‘wakf’ in Sri Lanka) which literally means detention: property being detained as divine property. The general practice in Sri Lanka has been that, as in the case of donations to Hindu temples, the donor becomes the manager for the purposes of the dedication, who is not a true trustee as he no longer can claim to have legal ownership of the property dedicated to God.11 Where a person builds a mosque for public worship or donates property for the building or maintenance of a mosque, the donor would usually retain an interest in the management of the mosque for them and their descendants. In the 1923 case of Mohomedu v Meera Kandu,12 a charity was founded in 1854, the founders declaring that they would spend the whole of the produce of their land for the celebration of an annual religious ceremony conducted by a mosque. The deed went on to provide that after their death one of their heirs should continue this tradition but no directions were given as to how an heir should be chosen as successor. When after their death a dispute arose as to who was entitled to succeed to the founders, the Supreme Court observed that it could not be determined by reference to strict legal rights, since the deed contained no criteria for selecting one of the contenders. It was held that what the judge should do was to take all the circumstances of the case into account, such as who had in recent years managed the property for the prescribed purpose and decide whether such person was suitable to continue as trustee. The congregation could not replace him with a new trustee without first applying to the court for settling a scheme of administration of the trust.13 An illustration of how the idea of the trust was relied on for the management of a mosque is provided by the elaborate ‘Rules and Regulations for the Management of 10 See for instance, Board of Trustees of the Sri Maha Bathrakalee Devalaya (Incorporation) Act No 1 of 1991 and the Board of Trustees of the Ratmalana Historic Gonabendi Kataragama Maha Devalaya (Incorporation) Act No 18 of 1992. 11 See Bhai Beebi v Naeem (n 5). 12 Mohomedu v Meera Kandu (1923) 24 NLR 390 (SC). 13 s 102 of the Trusts Ordinance provides that ‘any five persons interested in any place of worship, or any religious establishment or place of religious resort, or in the performance of the worship or the service thereof … may obtain a decree for (a) settling a scheme for the management of the trusts thereof ’.

Sri Lanka  81 the Mosque’ that the congregation of the Maradana Mosque had adopted in 1902. It provided for the management of the affairs of the mosque by a trustee acting under the supervision of a committee elected by the congregation.14 The congregation of the Maradana Mosque took a further step in 1924 when it promoted the enactment of Maradana Mosque Ordinance No 22 of 1924, incorporating provisions similar to those found in the internal arrangement the congregation had adopted in 1902. The 1924 Ordinance incorporated the Board of Trustees of the Maradana Mosque. Section 5 of the Ordinance provides as follows: On the coming into operation of this Ordinance, all and every the property belonging to the Maradana mosque, whether held in the name of the Maradana mosque or in the name or names of any person or persons in trust for the Maradana mosque shall be, and the same are hereby vested in the corporation hereby constituted [the Board of Trustees of the Maradana Mosque], and the same together with all after-acquired property and all subscriptions, contributions, donations, and income from whatsoever source shall be held by the corporation in trust for the Maradana mosque.

The Board of Trustees was given extensive powers for the purpose of administering the mosque.15 The next development was to extend the benefit of this arrangement to all Muslim mosques by securing the enactment of the Muslim Intestate Succession and Charitable Trusts or Wakfs Ordinance of 1931. The provisions made by the 1931 Ordinance for the management of a Muslim Mosque by a Board of Trustees were incorporated in a much-improved form in the Muslim Mosques and Charitable Trusts or Wakfs Act of 1956. The 1956 Act created a Wakf Board which has general supervisory powers over the management of mosques. It requires the trustee of the mosque, or if there is no such trustee, the person in charge of the mosque to apply for registration of the mosque. Where no such application has been made the Board of Trustees may yet, upon enquiries being made, register a mosque. Once a mosque has been registered, the Board must appoint a trustee or trustees of the mosque. In appointing a trustee, the Board must have regard to (a) the terms of any trust instrument relating to that mosque; (b) the religious law and custom of the sect of the Muslim community concerned; (c) the local custom with reference to that mosque; and (d) the practice and other arrangements in force for the administration of the mosque. This provision enabled the adaptation of the trust arrangements to suit the local circumstances. When a trustee is appointed by the Board, the person who held any property belonging to the mosque immediately prior to the date of such appointment must deliver them to the trustee. The powers and duties of a trustee are set out in the Act, which also provides for the suspension or dismissal of trustees. Provision is made to ensure the propriety of all financial transactions relating to the management of the mosque.

14 Discussed in Abul Aziz v Abdul Rahim (1909) 12 NLR 330 (SC). 15 This example set by the Maradana Mosque has been followed by some other mosques too. See for instance, the Colombo Grand Mosque (Incorporation) Act No 22 of 1986, which provides that the Colombo Grand Mosque, the Corporation, holds property and that the management of the Mosque is entrusted to a board of trustees appointed by the corporation. Interestingly, unlike the Maradana Mosque Ordinance, which incorporates the board of trustees of the temple, the Grand Mosque (Incorporation) Act incorporates the Mosque, making the corporation the legal owner of property, while the board of trustees discharges trust obligations.

82  Anton Cooray The trustees must carry out their functions under the general supervision of the Board. This statute was largely based on the Buddhist Temporalities Ordinance, which we will discuss immediately below.

IV.  Buddhism and Trusts From ancient times, Buddhism enjoyed state patronage. Since the reception of Buddhism in Sri Lanka around 250 BC, the king had always been a Buddhist and nearly all his subjects were Buddhists. A strong bond existed between the king and the community of Buddhist priests, which lacked a centralised, well-structured and effective system for guiding and regulating Buddhist priests and for the management of Buddhist places of worship. Filling that vacuum, the king assumed the role of benefactor of the Buddhist priests and temples and supervisor of Buddhist affairs. Royal grants of land were made to establish and maintain temples.16 Temples also benefited from donations of land and other offerings from devotees. The king regularly visited monasteries and temples for worship and to seek advice and guidance from Buddhist priests on affairs of state. Being Buddhists, native chiefs too naturally turned to Buddhist priests for advice and guidance. The Buddhist priests not only became the spiritual leaders of the village, they also acted as the link between the villagers and the administration. The British succeeded in annexing the Kandyan Kingdom in 1815, when the native chiefs, who were disillusioned with their king, invited the British in. The Kandyan Convention of 1815 signed by the British colonial administration and the Kandyan Chiefs recognised the continuation of state patronage of Buddhism. Article 5 of the Convention provided as follows: ‘The religion of Boodhoo professed by the Chiefs and inhabitants of these [Kandyan] Provinces is declared inviolable, and its Rights, Ministers and Places of worship are to be maintained and protected’.17 This obligation was not only to recognise the Buddhist religion as inviolable but, much more significantly, to maintain and protect the rights of Buddhist priests and places of worship. This latter obligation required the British administration to provide for the maintenance of temples, especially the Temple of the Tooth18 in Kandy, participate in the election of the Diyawadane Nilame (secular superintendent of the Temple of the Tooth) and the Basnayake Nilame (secular superintendent of the Hindu shrine constructed in the premises of a Buddhist place of worship, especially in the leading temples of Sri Lanka) and make grants to support Buddhist priests.19 During the early years of the British administration of the Kandyan Provinces, the colonial government continued the previous practice of the king’s participation in

16 For the usual wording of a Royal grant of land, see Ratnapala Unnanse v Appuhamy (1900) 4 NLR 167 (SC). 17 Kandyan Provinces refer to the central hilly area of Sri Lanka, the Kandyan Kingdom, which fell to the British in 1815. 18 The Temple of the Tooth is believed to house a tooth relic of Buddha. The tooth relic was the symbol of power and the person who had control of it was believed to have a legitimate right to govern the people. 19 Most kings of Kandy were from Indian royal families, who followed Hinduism, their own religion, and Buddhism, the religion of their subjects. This resulted in the construction of a devale (a Hindu shrine) in the Buddhist temple premises.

Sri Lanka  83 Buddhist affairs. It continued to appoint the Maha Nayakes (the Chief Buddhist priests of the two chapters or sects of Buddhist clergy) and chief priests of temples; guarded the sacred tooth relic of Buddha in the Temple of the Tooth; and made annual grants for the conduct of religious ceremonies, towards maintenance of the Temple of the Tooth and for the welfare of Buddhist priests. The colonial government’s responsibilities also involved administration of temple properties, oversight of the community of Buddhist priests and the general welfare of temples. Unwilling to be seen as favouring Buddhism, particularly in view of the strong protests of Christian missionaries that the government was promoting a ‘pagan religion’ to the distinct disadvantage of their evangelical mission, the colonial government looked for opportunities to extricate itself from its treaty obligation to protect the rights of Buddhists, and to support Buddhist priests and places of worship.20 The first occasion arose in 1818 when the Kandyan chiefs led a failed rebellion against the colonial government. The Governor’s Proclamation of 21 November 1818 issued after the rebellion, stated as follows: As well as the Priests and all the Ceremonies and Processions of the Budhoo Religion shall receive the Respect which in former times was shewn them; at the same time it is in no wise to be understood that the protection of Government is to be denied to the Peaceable exercise by all other Persons of the Religion which they respectively profess or to the erection under due License from His Excellency of Places of Worship in proper situations.

This balancing of freedoms and rights of all religions was a reaffirmation of the government policy as enunciated in the Proclamation of 23 September 1799: And we do hereby allow liberty of Conscience and the free exercise of Religious worship to all persons who inhabit and frequent the said settlements of the Island of Ceylon, provided always that they quietly and peaceably enjoy the same without offence or scandal to Government.

The overriding public interest in maintaining religious harmony and respect for each other was judicially recognised in a dispute that arose in 1912 regarding the ancient right of Buddhists to conduct a religious procession accompanied by the playing of traditional musical instruments. In response to objections raised by the local Muslim community to the making of such noises when passing their mosque, the government officer, acting under powers vested in him by two ordinances that had been passed after 1815, granted permission for the procession subject to a condition that no musical instruments must be played when passing the mosque. When the Basnayake Nilame contested the validity of the licence condition, the Supreme Court roundly rejected the argument that a right recognised by the Kandyan Convention could not be interfered with by subsequent legislation observing that ‘the Kandyan Convention only guaranteed that the religion of Buddha generally as practised in the [Kandyan] provinces will be maintained and protected, not that every local custom of particular towns or districts should for ever remain unaltered’.21

20 See CW Karunartna, ‘Buddhism and Christianity in Ceylon (1796–1948)’ (PhD thesis, University of London 1974). 21 Basnayale Nilame v The Attorney General (1915) 18 NLR 193 (SC).

84  Anton Cooray Noting that the appeal from the Supreme Court decision had been withdrawn as a result of an amicable settlement, their Lordships of the Privy Council observed that since the Proclamation of 1818, the Government of the Island has always been administered upon the footing that all persons inhabiting the island should have full liberty in conscience, and the free exercise of all such modes of religious worship as were not prohibited by law, provided that they contended with the quiet and peaceable enjoyment of the same, not giving offence or scandal to the Government.22

Some of the more significant ways in which the colonial administration distanced itself from Buddhist affairs are as follows. In 1847, the government declared that henceforth Buddhist priests would appoint their chief priests and that the governor’s involvement was limited to the ratification of such appointments. In 1853, the responsibility for the safe custody of the sacred tooth was solely entrusted to Diyawadane Nilame, the lay custodian of the Temple of the Tooth. The British government absolved itself from its duty to make an annual grant to support the Buddhist establishment by making a grant of land the income of which was thought to be sufficient for that purpose.23 The colonial government was aware that distancing of itself from the administration of Buddhist affairs necessitated the institution of an effective mechanism to ensure legality and regularity of the conduct of Buddhist affairs. This, they did by introducing policies and legislative measures for the oversight and control of Buddhist affairs. One could argue that by taking such measures the British government in fact continued to perform the role of the Kandyan kings in relation to Buddhist affairs, now on a secure and transparent legal basis. The most significant subject that attracted legislative and administrative control was the administration of temple properties. The first measure that the government took was in 1818 to exempt temple properties from taxation, as had always been the practice under the Kandyan kings.24 Realising however that the exemption from taxes was prone to abuse whereby large tracts of temple lands were nominally held by temples for the benefit of relatives and friends of the priests, in 1819 the Government by Proclamation required that all temple lands must be registered.25 The same Proclamation also prohibited the grant of any land to a Buddhist place of worship without the approval of the government, a practice that had prevailed under Kandyan kings. The Buddhist Temporalities Ordinance of 1899 provided that a temple could not acquire land without a licence from the government and any land donated to a Buddhist temple without a licence would go to the nearest heir of the donor. This provision which was retained by the Buddhist Temporalities Ordinance of 1905 was omitted when the law relating to Buddhist Temporalities was consolidated by

22 Basnayale Nilame (Ellekewala) v The Attorney General (1918) 20 NLR 376 (PC) 377. 23 See generally, H-D Evers, ‘Buddhism and British Colonial Policy in Ceylon, 1815–1875’ (1964) 2 Asian Studies 323. 24 Article 1 of the Proclamation of 21 November 1818, issued after the Kandyan Insurrection. The Supreme Court narrowly interpreted this privilege by holding that this exemption applies only to the then prevailing taxes and any subsequent taxes replacing them and not to any new taxes introduced after the proclamation: Fernando v Municipal Council of Kandy (1904) 9 NLR 9 (Full Bench). 25 See Proclamation of 18 September 1819.

Sri Lanka  85 the Buddhist Temporalities Ordinance of 1931, which meant that gifts to temples no longer required government approval.26 Kandyan kings gave land, sometimes a whole village, to Buddhist places of worship. Such royal grants were supplemented by donations from devotees. Any lands so given were dedicated to the whole community of Buddhist priests (the Sangha) but given to the incumbent (the chief priest) of a temple. This was the case even where the donor’s motive might have been gratitude to a priest for his services.27 Such property was known as Sanghika property and was acquired by the incumbent to be used for the purposes of his office, including his own support, the maintenance of the temple and its services. On his death, the property would devolve on his pupil priest and the property would remain in the line of pupillary succession.28 Where the line of succession came to an end the land would in default belong to the Sangha and the Mahanayake could appoint a new incumbent of the temple.29 Similarly, the incumbent could not leave the temple property by deed or otherwise to a stranger, thereby depriving the Sangha of the benefit of the property he held.30 Thus, the ecclesiastical law was clear that any property dedicated to the Sangha would always remain so and that the incumbent was in effect a de facto trustee.31 The 1875 case of Udanwita Loku Banda v Giragama Ratemahatmaya provides a good example.32 There it was held that a Basnayake Nilame had no power to grant long leases of temple lands, the court observing that ‘any person accepting a lease from any of these ecclesiastical officers must be presumed to have been aware of the fact that there was in law a difference between the position of his lessor and that of any ordinary private landowner’. Underlying this observation is the court’s characterisation of the Basnayake Nilame as a fiduciary or trustee. It should be noted that land, money or other properties given to a Buddhist priest as personal gifts fall outside the rules relating to Sanghika property and such personal properties of a Buddhist priest are not impressed with a trust. The incumbent is free to use or dispose of them as he pleases. However, there is a qualifying rule that if the incumbent does not dispose of such property during his lifetime, it would devolve on the incumbent as Sanghika property, to be held for the benefit of the Sangha.33

26 See Dhammananda v Davith Ranasinghe (1937) 39 NLR 567 (PC). 27 Ratnapala Unnanse v Appuhamy (n 16). The royal grant in question recited that the income derived from such property should be used by the incumbent and his successive pupils for the purpose of maintaining the temple and the priests and for the performance of religious services. 28 Saranankara Unnanse v Indajoti Unnanse (1918) 20 NLR 385 (SC). 29 Dhammaloka Thero v Saranapala Thero (1956) 57 NLR 518 (SC). 30 Sobitha Terunnanse v Siddatte Terunnanse [1863–68] Ramanathan Reports 288 (SC). 31 Ranasinghe v Dhammananda (1935) 37 NLR 19, 23. There it was held that an incumbent who died in 1872, who held title to a property donated to the temple, could not have acquired possessory title to such property by prescription because he held the property for the benefit of the temple and not adverse to its interest. On appeal, this decision was affirmed by the Privy Council: Dhammananda v Davith Ranasinghe (n 26) 568. 32 Udanwita Loku Banda v Giragama Ratemahatmaya [1872–76] Ramanathan Reports 185 (SC). 33 See for instance, Dhammananda Thero v Sederanhamy (1939) 41 NLR 236 (SC). s 20 of the Buddhist Temporalities Ordinance of 1931 embodies this rule. See among many cases which interpreted and applied s 20, William Singho v Rev Dhammajothi Isthaweera (1955) 57 NLR 16 (SC) where it was held that where the priest had abandoned robes and become a layman, on his death any such private property not disposed of by him during his lifetime becomes the property of the temple.

86  Anton Cooray The Buddhist Temporalities Ordinance No 3 of 1889 can be said to have developed this idea of de facto trusteeship by introducing the concept and technical rules of trusts law whereby the incumbent of a Buddhist temple, a Basnayake Nilame and a Diyawadane Nilame, who were all in truth the caretakers of properties dedicated to their respective religious places, became express trustees. We will now proceed to examine how the Buddhist Temporalities Ordinance No 3 of 1889 introduced the concepts and mechanisms of trusts law, adapted to suit the peculiar local circumstances of Buddhist law and practices, and how that Ordinance was amended and consolidated in 1905 improving the regulatory scheme to better protect the interests of Buddhist temples as well as to accommodate local demands for change.34 Since the Ordinance was an attempt to give legal effect to the underlying principles of ecclesiastical law we will also consider the interplay between ecclesiastical law and the law of trusts and how courts often had to enquire into the nature and practical application of ecclesiastical law, which would generally fall outside the jurisdiction of ordinary courts of law. As we shall see below, vesting legal power and trust duties in a lay trustee and general management power in the incumbent in his capacity as the religious leader of the temple, as under the 1889 Ordinance and the 1905 Ordinance, ended in 1931 when the amended and consolidated Ordinance permitted the incumbent to become the trustee, if he so wished, thereby to a large extent restoring the pre-1889 position of the incumbent being the legal owner, except that legal obligations much similar to the ones which the two previous Ordinances imposed on the trustee continued to bind the incumbent.

V.  Introduction and Adaptation of Trusts Law for the Management of Buddhist Temple Properties In our discussion on Hindu law and Muslim law we noted that judges could draw upon the extensive jurisprudence developed by British judges in India who had borrowed heavily from the English law of trusts. In contrast, there was little intervention by the courts in relation to the administration of Buddhist places of worship, leaving it almost entirely in the hands of the Buddhist priests to be regulated by Buddhist ecclesiastical law, which operated outside the jurisdiction of ordinary courts of law. However, it did not mean that courts as a matter of practice refrained from settling disputes relating to the administration of Buddhist temporalities. The Buddhist Temporalities Ordinance of 1889 transferred the ownership and powers of management of temple properties from the incumbent or the chief priest of a temple to a lay trustee who had to be a Buddhist layman resident in the district,35 elected by a District Committee, members of which were elected by Buddhist residents and Buddhist priests of the district in which the temple was situated.36 34 The description ‘temple properties’ is used for convenience. It is technically incorrect because such properties were owned by a Buddhist priest (as a de facto trustee) or since 1889 by a trustee. The temples, Buddhist priests and Buddhist activities benefited under the trust. 35 Buddhist Temporalities Ordinance No 3 of 1889, s 8; Buddhist Temporalities Ordinance No 8 of 1905, s 8. 36 1889 Ordinance, s 8; 1905 Ordinance, s 8. As will be seen later, the Buddhist Temporalities Ordinance No 19 of 1931 did away with the election of a lay trustee and empowered the incumbent of the temple to nominate a trustee, including himself.

Sri Lanka  87 The 1889 Ordinance and the 1905 Ordinance provided for the oversight of how the trustees of temples performed their powers and functions. Under the 1889 Ordinance such supervisory functions were given to the District Committee which exercised its powers subject to the supervisory jurisdiction of the Provincial Committee.37 For instance, the trustee was required to obtain prior approval of the District Committee for its estimate of annual income and expenditure.38 Certain powers could be exercised at the direction or with the consent of the Provincial Committee, and certain powers could only be exercised by the Provincial Committee. For instance, while the District Committee could suspend a trustee guilty of negligence or misconduct,39 the power of dismissal belonged to the Provincial Committee.40 The trustee of a temple was the legal owner of all temple property holding it on trust for the benefit of the temple: ‘All property “belonging or in any wise appertaining to or appropriated to the use of any temple … and all offerings made for the use of such temple” shall vest in the trustee of the temple’.41 The trustee could sue and be sued in his capacity as trustee.42 The trustee was bound to use all the monies received or recovered by him for the purposes stipulated in the Ordinance and no other. These purposes included: using temple property and income for the maintenance of the temple and related buildings; the maintenance of the priesthood and ministerial officials attached to the temple; the due performance of religious services and ceremonies; and the promotion of education.43 The duties of the trustee included keeping complete and detailed accounts of income received and disbursements made by him, subject to auditing and approval by the District Committee.44 Provision was made to ensure that a trustee acted properly within his powers in receiving and spending the income so received.45 Assuming legal ownership of all property received for the purposes of the temple, the trustee succeeded to all the rights and obligations of the incumbent. He could enforce any contracts made before the Ordinance came into operation in favour of the temple or any person on its behalf; and recover any money owing to the temple or to any person on its behalf as at the date of the coming into force of the Ordinance.46 The trustee had

37 For instance, any rules the District Committee made had to be approved by the Provincial Committee (1889 Ordinance, s 13). For the composition and functions of the District Committee see ss 5–16 of the 1889 Ordinance and ss 5–16 of the 1905 Ordinance. For the composition and functions of the Provincial Committee, see ss 31–36 of the 1889 Ordinance. The 1905 Ordinance transferred the powers of the Provincial Committee to the Commissioner. 38 1889 Ordinance, s 27. The 1905 Ordinance did not contain such a provision, although it retained the requirement that the trustee should make six-monthly reports of accounts to the District Committee. 39 The validity of the decision of the District Committee could be questioned in court: Ratwatte v Nugawela (1911) 14 NLR 150 (SC). 40 1889 Ordinance, s 16; 1905 Ordinance, s 16. 41 1889 Ordinance, s 20; 1905 Ordinance, s 20. 42 1889 Ordinance, s 30; 1905 Ordinance, s 30. 43 1889 Ordinance s 20; 1995 Ordinance, s 20. 44 1889 Ordinance, s 21; 1905 Ordinance, s 21. 45 1889 Ordinance, ss 22–28; 1905 Ordinance, ss 22–26. 46 1889 Ordinance, s 19; 1905 Ordinance, s 19. See for instance, Mudalihamy v Kuruppan (1891) 1 Ceylon Law Reports 88 (SC), where it was held that the lay trustee appointed to take over control of the temple properties could sue the tenant for arrears of rent under a tenancy agreement made by the incumbent prior to such appointment.

88  Anton Cooray the power to lease temple lands with prior approval of the Provincial Committee under the 1889 Ordinance, or the District Committee under the 1905 Ordinance.47 When directed by the Provincial Committee or the District Committee, it was the trustee’s duty to institute legal proceedings to set aside any sale, mortgage or other alienation of property to the detriment of the temple and recover such property.48 It was to prevent the occurrence of any incidents of maladministration that the 1889 Ordinance and the 1905 Ordinance granted trustees extensive powers and imposed on them onerous duties. These ordinances also provided for taking corrective measures in respect of any contracts or dealings predating the coming into force of the Ordinance. For instance, where before the appointment of a lay trustee, any temple land had been given on a lease ‘(a) for a longer term of years than is consistent with the interests of such temple, or (b) on terms showing an improvident alienation, or (c) for clearly inadequate consideration, or (d) for the private benefit of the lessor or his relatives or servants, or (e) with a fraudulent intent’ the trustee could institute legal proceedings to set aside such transaction and recover such property.49 Such a lease could be set aside even if the lease was quite proper at the time it was entered into, but appeared at the time of litigation to be detrimental to the interests of the temple – in other words if it was one no prudent owner or trustee would enter into.50 The vesting of the temple property in the lay trustee giving him the responsibility of maintaining the temple, its priests and due performance of religious ceremonies, often led to conflicts between the trustee and the incumbent of the temple who, by ecclesiastical law and customary practice, was in reality the person in charge of the temple and its properties.51 Courts therefore had to demarcate areas of competence of the lay trustee as the person having legal powers and duties in respect of the affairs of the temple52 and the incumbent priest who in his capacity as the spiritual leader of the community conducted temple affairs. Attempt at such demarcation is well illustrated by the 1926 case of Gooneratne Nayake Thero v Punchi Banda Korale.53 There the practice of the temple had been that rice and other provisions would be stored in the main store and sufficient supplies would from time to time be transferred to a store adjoining the temple kitchen to be used for the purposes of religious ceremonies. It was held that while both these stores were 47 1889 Ordinance, s 29; 1905 Ordinance, s 27. 48 1889 Ordinance, s 43; 1905 Ordinance, s 37. See De Silva v Dheerananda Thero (1926) 28 NLR 257 (SC). 49 1889 Ordinance, s 44; 1905 Ordinance, s 38. s 31 of the 1931 Ordinance provides that where the trustee fails to make such an application, any person may make an application on the direction of the Public Trustee (since 1981 the Commissioner) and the court may set aside such lease and restore its possession to the trustee. In Banda v Rosehaugh Tea and Rubber Co Ltd (1917) 20 NLR 51 (SC), the Supreme Court held that this provision applied to a situation where the lease in question was flagrantly in conflict with the vital and elementary interests of the temple. Appeal to the Privy Council was unsuccessful: Banda v Rosehaugh Tea and Rubber Co Ltd (1921) 22 NLR 321 (PC) 322. The 1931 Ordinance provides that when it appears to the court that such a lease had been entered into, it may set aside such lease and restore its possession to the trustee. It appears that anyone interested in the administration of the trust may move the court. 50 Banda v Rosehaugh Tea and Rubber Co Ltd (SC) (n 49) 54. 51 For instance, s 28 of the 1905 Ordinance imposed a duty on the incumbent to furnish to the trustee, when so demanded, all such information regarding the annual income of the temple from offerings and other sources such as rents and profits from temple properties. 52 For instance, it was the trustee, and not the incumbent, who could sue for the recovery of temple land, even when the trustee refused to act: Gonamaeruwewa Case (1906) 19 NLR 36 (SC). 53 Gooneratne Nayake Thero v Punchi Banda Korale (1926) 28 NLR 145 (SC).

Sri Lanka  89 vested in him, the trustee could not prevent the incumbent from unhampered access to provisions stored in the room next to the kitchen for the purposes of maintaining the customary religious rites and ceremonies. As the Supreme Court explained: In order to ascertain how far the duties of the trustee extend, one has to consider the scope and intention of the Ordinance. It is clear that the main intention of the Ordinance is to remove from the priesthood the general control and management of the property belonging to a temple. Such property usually consists – apart from the temple buildings and ornaments – of lands which are set aside for the maintenance of temple worship. No intention is shown in the Ordinance, and it is inconceivable that any such intention could exist, to interfere in any way with the due performance of religious rites.54

The 1931 Ordinance introduced a fundamental change in trusteeship to prevent the occurrence of conflicts between the incumbent and the trustee. This Ordinance did away with the appointment of a lay trustee elected by the District Committee and empowered the incumbent to nominate a trustee, who could be a priest or a lay person. He could even nominate himself to be the trustee.55 Where the incumbent decided to nominate himself as trustee, the pre-1889 position regarding the ownership and management of temple property would be restored, most importantly that all property of the temple would vest in him, in his capacity as trustee.56 As long as he and his successors decided against appointing someone else as trustee, legal ownership would remain with the succeeding incumbents. Where the trustee of any temple (including the trustee-incumbent) vacates his office, he forfeits the right to hold such property. The trustee, be it the incumbent or someone else, is bound by the legal obligations imposed by the Ordinance. Most importantly as under the 1889 and 1905 Ordinances, all the income of the temple could be used only for the purposes connected with the affairs of the temple.57 As before, the trustee was prohibited from mortgaging, selling or otherwise alienating temple property and the Public Trustee could direct the trustee to recover such properties.58 The trustee could lease any temple property or assign such a lease only with the previous written sanction of the Public Trustee.59 In order to ensure propriety in dealings with trust property and income, the 1931 Ordinance imposes on the trustees duties of accounting and auditing, as before 1931. The trustee is required to keep an inventory of all the property belonging to the temple, detailed accounts of all the income and disbursements made by him for the purposes of the trust, and submit statements of accounts every six months.60 The incumbent is required to furnish to the trustee, or to the Public Trustee (since 1981 to the Commissioner) if the incumbent was the trustee, all information relating to the income of the temple from offerings and other income such as from rents and profits.61 Where the trustee fails to 54 ibid 148. 55 1931 Ordinance, ss 10 and 11. 56 ibid s 20. 57 ibid s 25. 58 ibid ss 26 and 28. In 1981, the Ordinance was amended to replace the Public Trustee with the Commissioner responsible for Buddhist affairs. 59 ibid ss 29 and 30. s 31 provides that, as previously, the court may set aside a lease which was detrimental to the interests of the temple. 60 1931 Ordinance, ss 35 and 36. 61 ibid s 37.

90  Anton Cooray duly account for the income the Public Trustee had the power to hold any necessary inquiry and prosecute any trustee who may be reasonably suspected of having committed a criminal breach of trust.62 The 1931 Ordinance, while it opens the door for the incumbent to act as trustee, sets out disqualifications from being appointed a trustee and provides for the suspension and dismissal of trustees. Before the enactment of the Buddhist Temporalities Ordinance in 1889 there were no such legal restrictions on the incumbent, who as we have seen above was considered to be a de facto trustee when exercising his powers of ownership and management of temple property. The disqualifications from being a trustee under the 1931 Ordinance include having been convicted of theft, fraud, forgery, perjury or other crime and being over the age of 70 except with the approval of the Public Trustee. On the complaint of any person interested or on his own motion, the Public Trustee may hold an inquiry into any alleged misfeasance, breach of trust or neglect of duty committed by the trustee (including the trustee-incumbent) in respect of the temple property and direct corrective measures to be taken or order the removal of such trustee. As a preliminary measure the Public Trustee may suspend the trustee in question, pending the framing of charges and giving him a hearing.63 Our discussion of the Buddhist Temporalities Ordinance shows how the framework for the management of temple properties was to a great extent modelled on the English law of trusts, adapted to be compatible with religious law and customary practices. While the essentials of the English law of trusts such as the division between legal ownership vested in the trustee and the beneficial interest vested in the Buddhist priesthood formed the foundation of the Buddhist Temporalities Ordinance, ecclesiastical law and customary practices which previously regulated temple affairs were kept alive in the form of legal rules, enforceable in a court of law.

VI.  Concluding Observations on Trusts and Religion in Sri Lanka There is a significant difference between the nature of donations to Buddhist places of worship on the one hand and donations to Hindu and Muslim places of worship on the other. The practice in relation to donations to Buddhist places of worship had, since the time of Kandyan kings, been to make a donation of property to the incumbent of the temple, so that legal ownership would vest in him. If the property was for the promotion of a Buddhist place of worship, maintenance of its priests and the performance of religious services and ceremonies, the property was regarded as Sanghika (dedicated to the Buddhist priesthood) and the incumbent could not deal with the property as his own for his own purposes. The intervention of the Buddhist Temporalities Ordinance was to transfer legal ownership of Sanghika property from the incumbent to a lay trustee, who held it for the purposes of the temple, and who exercised his powers and 62 ibid s 39. 63 1931 Ordinance, s 15; s 15 of the 1889 Ordinance; and ss 16 and 17 of the 1905 Ordinance provided for the suspension and removal of a trustee.

Sri Lanka  91 performed his duties under the supervision of the District Committee which had the power of appointing, suspending and removing the trustee. The Buddhist Temporalities Ordinance 1931 enabled the incumbent, if he was so minded, to instal himself as trustee and recover properties and incomes that previously belonged to the lay trustee. As we saw, the Ordinance made provision to ensure that the incumbent, if he decided to take over trusteeship, would hold the property for the benefit of the temple and associated purposes. As was explained in the 1918 case of Saranankara Unnanse v Indajoti Unnanse, the beneficial interest of every vihare [Buddhist monastery] and its endowments is in the Sangha [the community of Buddhist priests] as a whole. This principle is not affected by the Buddhist Temporalities Ordinance, No 8 of 1905, which vests the legal title to temple endowments in a trustee, and commits to him the management and administration of these endowments. The beneficial interest still remains in the persons who are the object of the original trust. This general principle of the dedication of every vihare to the Sangha as a whole is affected by the religious custom under which temples have been from time to time dedicated for the use of a particular priest and his pupils and the pupils of those pupils in perpetual succession.64

Both Hindu and Muslim doctrine considered that any property dedicated to a Hindu or Muslim place of worship no longer belonged to the founder, while in law, the founder remained the owner, who would customarily reserve powers of management. This religious doctrine would be at odds with trusts law which requires that the trust property is vested in the trustee. This was overcome by adopting the device of self-declaration of trust, by a fiction that the donor who remained the legal owner of the property intended to place himself under a binding obligation to manage it for the purposes for which the property was dedicated. The arrangement was necessary because one could not donate a property to a Hindu temple or a Muslim mosque which did not have legal personality to hold property. In the early years, this difficulty was overcome by making a self-declaration of trust and providing for devolution of the trust obligation along with the devolution of property. In later years, the congregation would make formal arrangements for the holding and management of such dedicated property. We have seen how Muslim charitable gifts were brought within the scope of trusts by legislation while there have been no such legislative developments in relation to Hindu law. These three religions therefore indicate the different ways in which the concept of the trust was adapted in Sri Lanka to harmonise religious law and the common law. In determining disputes in relation to the administration of temples and shrines the court is invariably guided by ecclesiastical or religious law and there are many instances where courts have interpreted and applied Buddhist ecclesiastical law.65 However, courts will not assume jurisdiction to resolve disputes which are best left to the religious organisation or community to resolve, unless civil rights are at stake. The 1914 case of Pitche Tamby v Cassim Marikkar66 dealt with objections from a

64 (1918) 20 NLR 385 (SC) (n 28) 395–96. 65 See for instance, Gunaratne Unnanse v Dharmananda (1921) 22 NLR 276 (SC); Unnanse v Unnanse (1921) 22 NLR 323 (SC); and Somaratna v Jinaratna (1941) 42 NLR 361 (SC). 66 Pitche Tamby v Cassim Marikkar (1914) 18 NLR 111 (SC).

92  Anton Cooray section of the Muslim community to a colourful procession the mosque had conducted for many years (and for centuries in some other mosques), on account of the growing view among the local community that such processions were contrary to fundamental Muslim doctrine. It was held that courts will not adjudicate upon controversies between rival religious sects as to points of doctrine or ceremony, except where civil rights are at issue. In the absence of evidence that the conduct of the procession involved any breach of civil rights, the court refused to grant an injunction against the trustee of the mosque. The 1893 case of Mohamadu Lebbe v Koreen provides another example.67 There the officiating priest of a mosque brought an action against the defendants who prevented him from entering the mosque and performing his duties. The defendants successfully objected to the case being heard in the District Court on the ground that the claim was a matter to be settled by the Muslim community according to their religious and customary practices. Disagreeing with the District Judge, the Supreme Court held that the officiating priest’s civil rights were at stake and remitted the case to the District Court. Where an ecclesiastical tribunal has decided a dispute involving religious law, courts would not interfere unless the decision is vitiated by, for instance, failure to comply with rules of natural justice.68 A matter which was previously governed by ecclesiastical law may fall within the jurisdiction of ordinary courts of law. As we have previously seen, courts had decided that while the lay trustee had legal ownership of trust property the incumbent had a legal protected right to have access to temple buildings and things belonging to the temple for the purpose of fulfilling the duties of his office as incumbent.69 Thus it was said in the 1919 case of Davarakkita v Dhammaratne, it would seem that the presiding priest or incumbent has the control and administration of the Vihare itself, although the property vests in the trustee, and, therefore, the right to an incumbency is still a legal right, and not purely an ecclesiastical matter.70

The reception of principles of trusts law through legislation, common law or general practice among the local population has been beneficial to the development of law in Sri Lanka. The rather selective discussion of case law in the area of trusts shows that courts have finely balanced the principles drawn from local religious and customary laws with the received English law of trusts so that each is enriched by the influence of the other. The legislature also adopted a similar approach when it enacted legislation for the management of places of religious worship drawing from both religious law and English trusts law.

67 Mohamadu Lebbe v Koreen (1893) 1 NLR 351 (SC). 68 See Attadassi Unnnnse v Rewata Unnanse (1928) 29 NLR 361 (SC), where the Court upheld the decision of the Supreme Council of Buddhist Priests to expel a priest from priesthood; and Therunnnnse v Therunnanse (1929) 31 NLR 161 (SC), where the Court refused to recognise a decision of Supreme Council Buddhist priests on a dispute between two priests to incumbency. 69 Gooneratne Nayake Thero v Punchi Banda Korale (n 53), where at 147 the Court observed that the dispute did not simply involve consideration of ecclesiastical law but that it was about the possession and management of temple property – a matter governed by the law of trusts. 70 Davarakkita v Dhammartne (1919) 21 NLR 255 (SC), where the Court took as an illustration Saranankara Unnanse v Indajoti Unnanse (n 28), where the question was what is necessary to constitute pupillage.

6 Innovations within Malaysian Trusts Law: Labuan’s Trusts Law and the Hibah Trust HANG WU TANG*

I.  Trusts Law in Malaysia Due to its colonial past, Malaysia’s trusts law was derived from English law as ­modified by local legislation.1 Common law (which includes the law of equity and trusts) was ostensibly introduced into Penang via the First Charter of Justice in 1807 on the basis that Penang was terra nullius, ie, the land of no one.2 But as Tun Abdul Hamid Mohamad and Adnan Trakic have pointed out, this assertion is almost certainly wrong: there are reliable historical documents which prove that Penang was not terra nullius at the time of the introduction First Charter of Justice in 1807 because there were organised Malay communities living there at that time.3 Hence, this initial reception of English law is based on a contested legal fiction. Be that as it may, Penang was subsequently grouped with two other states, Singapore and Malacca, and together they were known as the Straits Settlement. English law was then received into the Straits Settlement via the Second Charter of Justice in 1826.4 In Malaya, the reception of English law was a matter of accepted judicial practice5 until formal recognition occurred in 1937. In 1937, the Civil Enactment Act was passed which provided that the common law of England

* Professor, Yong Pung How School of Law, Singapore Management University. I am grateful to Ying Khai Liew and Katy Barnett for their perceptive comments on an earlier draft of this chapter and my research assistant, Noémi Chaw, for her excellent work. The usual disclaimers apply, and the views expressed are my own. 1 SY Tan, ‘Some Aspects of the Law Relating to Trustees in the States of Malaya and Singapore’ (1968) 10 Malaya Law Review 113; Tun Abdul Hamid Mohamad and Adnan Trakic, ‘The Reception of English Law in Malaysia and the Development of the Malaysian Common Law’ (2015) 44 Common Law World Review 123. 2 See Fatimah v D Logan [1808–84] 1 KY 255, 259. 3 See Mohamad and Trakic (n 1). 4 See A Phang, From Foundation to Legacy: The Second Charter of Justice (Singapore Academy of Law 2006) 3. 5 See Kandasamy v Suppiah (1919) 1 FMSLR 381; Re Yap Kwan Seng’s Will (1924) 4 FMSLR 313.

94  Hang Wu Tang and rules of equity as administered in England at that time were applicable in the Federal Malay States subject to modification by local legislation and circumstances as necessary. Subsequently, the Civil Enactment Act was repealed and replaced with the Civil Law Ordinance in 1956 which provided for the reception of the common law and rules of equity as administered in England in 1956. In relation to Sarawak and North Borneo (now Sabah), the Laws of Sarawak Ordinance 1928 and Civil Ordinance 1928 formally acknowledged the introduction of English law into these respective states with the necessary regard to native customs and local conditions. The trust has been used for a variety of purposes since colonial days. In the past, wealthy Chinese, Indian and Muslim merchants in the colony used English trusts law to further purposes such as ancestor worship,6 maintaining or establishing burial grounds7 and temples,8 Muslim religious ceremonies9 and establishing awqaf.10 The story of the use of the trust during the colonial days in Penang mirrors the early use of the trust in Singapore.11 In terms of the practice of Chinese ancestral worship, it is unheard of these days for persons to dedicate real estate or substantial funds for this purpose. Hence, such trusts have lost modern significance.12 Awqaf have also not been subject to frequent disputes in the civil courts. Nowadays, awqaf are usually regarded as a matter of state law and fall within the Syariah court’s jurisdiction.13 Therefore, the complex interplay between Islamic waqf principles and English trusts law has not been ventilated in the Malaysian courts in recent times.14 The first part of this chapter traces the development of Labuan, a Federal Territory located in Malaysia, as an international trusts jurisdiction. While the elements of domestic trusts law in Malaysia have remained largely similar to English trusts law, Labuan has adapted many of the features of offshore jurisdictions by offering parallel innovations in trusts law. Labuan’s advanced trusts law represents Malaysia’s attempt to capture the

6 Yeap Cheah Neo v Ong Cheng Neo (1875) LR 6 PC 381. 7 Lim Eow Thoon v Lim Keng Chuan & Ors [1965] 2 MLJ 154 (express trust for burial grounds in Penang settled in 1930 which was subsequently compulsorily acquired by the government). 8 Lim Chooi Chua & Ors v Lim Chew Chee [1948] MLJ 66 (a trust to establish a Chinese temple for ancestral worship in Penang); Attorney-General v Thirpooree Soonderee (1935) 4 MLJ 26 (a gift to a person for the benefit of a Hindu temple was held to be charitable. However, a gift to an idol in the temple was regarded as void as an absurdity). See generally Then Bee Lian, ‘The Meaning of “Charity” in Malaya – A Comparative Study’ (1969) 11 Malaya Law Review 220. 9 Re Abdul Guny Abdullasa (1936) 5 MLJ 174 (a gift in Penang for recital of prayers in the name of Muslim saints was held to be good charitable gifts). 10 The reported cases on Muslim charitable trusts have been in Singapore. See, eg, Mohamed Alsagoff v Syed Omar Bin Mohamed Alsagoff (1918) 15 SSLR 103; Attorney-General v Shaik Ali bin Awath [1928] SSLR 101; Re Syed Shaik Alkaff v Attorney General (1923) 2 MC 38; Hadjee Esmail bin Kaim v Hussain BeeBee Binte Shaik Ali Bey (1911) 12 SSLR 74. See generally GW Keeton and LA Sheridan, The Comparative Law of Trusts in the Commonwealth and the Irish Republic (Barry Rose (Publishers) Limited 1976) ch 7. 11 This aspect was explored in Hang Wu Tang, ‘From Waqf, Ancestor Worship to the Rise of the Global Trust: A History of the Use of the Trust as a Vehicle for Wealth Transfer in Singapore’ (2018) 103 Iowa Law Review 2263. 12 It does, however, retain much significance in Hong Kong where these trusts still survive: see Rebecca Lee, ‘Marrying English Trusts Law with Chinese Customary Law? Historical Evolution and Modern Anomalies of the Tso/Tong in Hong Kong’, ch 3 in this collection. 13 Nuarrual Hilal bin Md Dahlan and Abdul Rani Kamarudin, ‘Wakaf in Malaysia: Its Legal Evolution and Development’ (2006) 1 Shariah Law Review 81. 14 See, eg, Shaik Zolkaffily Shaik Natar v Majlis Ugama Islam Pulau Pinang [1997] 4 CLJ 70.

Malaysia  95 global wealth management market where the trust is seen as a financial commodity marketed to international high net worth individuals. Labuan’s experience raises the intriguing question of how far innovative trusts laws on its own succeeds in attracting people to settle trusts in that jurisdiction. Or are there other non-legal factors which play a part in the success of that jurisdiction in attracting trusts business? The second part of this chapter investigates the development of the ‘hibah trust’, a unique adaptation of the trust in Malaysia, as a wealth management offering. In this part, the tension between the trust as a succession planning vehicle and the Islamic law of inheritance, presented by the use of the hibah trust for Muslim persons, is explored. In Malaysia, a Muslim person is subject to Islamic inheritance law where two-thirds of his or her estate must go to prescribed Syariah beneficiaries. Thus, there is uncertainty whether a hibah trust is inconsistent with Muslim inheritance law. This chapter explores how the hibah trust works and the reasons why institutions may be offering this hybrid instrument.

II.  Labuan: Malaysia’s Midshore Jurisdiction Located off the southwest coast of Eastern Malaysia is the island of Labuan, a Federal Territory where, in 1990, the Federal Government of Malaysia established an international offshore financial centre (IOFC).15 Compared with other traditional offshore jurisdictions, such as the Cayman Islands and the British Virgin Islands (BVI), Labuan is marketed as an attractive alternative for Asian investors operating in similar time zones.16 Perhaps due to the potential pejoration of the term ‘offshore’ in recent times, Labuan is now marketed as a midshore jurisdiction. Midshore jurisdictions are jurisdictions which combine offshore traits (low tax and confidentiality) and onshore features (sophisticated financial centres).17 Labuan’s location in the heart of Asia-Pacific and its extensive trade links through Malaysia to other countries, particularly ASEAN ­countries, make Labuan a potentially suitable base for companies seeking to expand into Asia.18 Additionally, Labuan’s expertise in Islamic wealth management,19 captive insurance, dedicated statutes and fiscal incentives for Syariah law-compliant ­transactions20 is marketed as a selling point for Middle Eastern funds and investors.21

15 Ernst & Young Trust Sdn Bhd, Labuan: International Offshore Financial Centre (1997) 2. On offshore jurisdictions see generally K Barnett, ‘Offshore Trusts in the South Pacific: How Far can the Concept of the Trust be Stretched before it Breaks?’ in YK Liew and M Harding (eds), Asia Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021) 355–56. 16 Ming Sun Yoon and Raymond Wong, ‘Labuan Offers Funds Another Offshore Option’ (2004) 23(9) International Financial Law Review 64, 64. 17 ‘Rise of the Midshores’ Economist (16 February 2013). 18 Labuan IBFC Inc, ‘Labuan International Business Financial Centre – The Midshore Jurisdiction’ (Mondaq Business Briefing, 15 November 2017); Errol Oh, ‘The Private Sector Speaks’ New Straits Times (Kuala Lumpur, 1 December 2001). 19 Johannes Ridu, ‘The Lure of Labuan’ Malaysian Business (Kuala Lumpur, 16 August 2009) 52; MENA Report, ‘Malaysia: Labuan IBFC, INCEIF in MoU Deal’ (London, 31 January 2014). 20 Farah Jaafar-Crossby, ‘Islamic Finance to be the Fulcrum of Labuan’s Inclusive Future’ (Mondaq Business Briefing, 24 November 2020). 21 Yoon and Wong (n 16) 64.

96  Hang Wu Tang Since its establishment, the Malaysian government has sought to avoid Labuan being labelled a ‘tax haven’ which, eventually, led to the rebranding of Labuan IOFC to Labuan International Business and Financial Centre (Labuan IBFC).22 Today, Labuan IBFC offers a full range of financial services including, trust business, captive insurance and fund management,23 which are distinct from that of Malaysia’s domestic offerings.24

III.  Labuan’s International Trusts Offerings Labuan has adapted many of the innovations found in the law of offshore trusts jurisdictions.25 Labuan’s advanced trusts law represents Malaysia’s attempt to capture the global wealth management market where the trust is seen as a financial commodity to be marketed to international high net worth individuals.26 To boost its competitiveness compared to other trusts jurisdictions, Labuan amended its trusts law.27 In this chapter, a brief overview of some aspects of Labuan’s trusts law will be explored.

A.  Powers Retained by the Settlor While retention of powers by settlors is dealt with in the case law under English trusts jurisprudence, Labuan, like many trusts jurisdictions, has specific legislation dealing with this issue. According to section 8B of the Labuan Trust Act 1996 (LTA 1996),28 the settlor may retain a wide range of powers over the trust and the trust property without affecting the validity of the trust or the trust instruments. This includes the powers: a. To revoke, vary or amend the terms of a trust or powers arising wholly or partly under the trust. b. To advance, determine, pay or apply income or capital of the trust property or to give directions for the making of such advancement, determination, payment or application. c. To act as, or to give binding directions as to the appointment or removal of, a ­director or officer of any corporation wholly or partly owned by the trust. d. To give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust property or the exercise of any powers or rights arising from such property.

22 ATX (MYS) Examining Team, ‘Labuan: A Comprehensive Look’ (ACCA), available at: www.accaglobal. com/an/en/student/exam-support-resources/professional-exams-study-resources/p6/technical-articles/ labuan---a-comprehensive-look.html. 23 Yoon and Wong (n 16) 64. 24 K Cookie, ‘Labuan: Offshore Allure’ (1995) 145 The Banker 62. 25 On the features commonly found in offshore jurisdictions, see Barnett (n 15). 26 Ridu (n 19). 27 ibid. 28 LTA 1996, s 8B.

Malaysia  97 e. f.

To appoint or remove any trustee, enforcer, protector or beneficiary. To restrict the exercise of any powers or discretion of a trustee by requiring that the powers shall only be exercisable with the consent of the settlor or any other person specified in the terms of the trust.

Similar provisions can be found in the relevant legislations of the Cayman Islands,29 Jersey,30 the Dubai International Financial Centre (DIFC),31 the Bahamas32 and Guernsey.33 In contrast, legislation in Singapore and Hong Kong only provide that a trust is not invalidated by the reservation of powers of investment or asset management to the settlor.34 While Labuan’s offer of extensive reserved powers may be attractive to settlors who prefer to exercise a higher degree of control over the trust and trust assets, these wide powers conferred on the settlor may make these trusts vulnerable to being attacked by third parties.35

B.  Perpetuity Period Another aspect of trusts law in Labuan that is different from English trusts law is the ability of the trust to exist in perpetuity.36 This feature is also available in Dubai,37 Guernsey,38 Jersey39 and Hong Kong.40 In comparison, the rule against perpetuities applies in Singapore and England to impose a limit of 100 years41 and 125 years,42 respectively, on the duration of trusts.

C. Protectors Legislation dealing with protectors is also common in many offshore jurisdictions. Following the 2010 amendments to the Labuan Trust Act, there is greater specificity to the powers that the terms of a trust may confer upon protectors.43 Such powers 29 Trust Law (Cayman Islands) s 14. 30 Trust (Jersey) Law 1984, art 9A. 31 Trust Law (DIFC Law No 4 of 2018) (Dubai) art 84. 32 Bahamian Trustee Act 1998, s 3. 33 The Trusts (Guernsey) Law 2007, s 15. 34 Trustees Act (Singapore) s 90(5); Trustee Ordinance (Hong Kong) s 41X. 35 See, eg, Webb v Webb [2020] UKPC 22, [2021] 2 NZLR 376. 36 Trusts established from 11 February 2010 are not subject to the rule against perpetuities: LTA 1996, s 16(2). 37 Trust Law (DIFC Law No 4 of 2018) (Dubai) art 26. 38 The Trusts (Guernsey) Law 2007, s 16(1). 39 Trust (Jersey) Law 1984, art 15. 40 Trusts established from 1 December 2013 are not subject to the rule against perpetuities: Trust Law (Amendment) Ordinance 2013 (Hong Kong) s 47. 41 Trusts established from 15 December 2004 are subject to a statutory period of 100 years or the fixed term specified in the trust instrument, whichever is shorter: Trustees Act (Singapore) s 89; Civil Law Act (Singapore) s 32. 42 Trusts established from 6 April 2010 are subject to a statutory period of 125 years or the fixed term specified in the trust instrument, whichever is shorter: Perpetuities and Accumulations Act 2009 (UK) s 5. 43 Chua Wei Min, ‘Malaysia: A Comparative Analysis of Labuan’s Wealth Management Offerings’ (Mondaq, 7 June 2016), available at: www.mondaq.com/trusts/498440/a-comparative-analysis-of-labuan39s-wealthmanagement-offerings.

98  Hang Wu Tang include the power to remove or appoint trustees, determine the proper law of the trust, change the place of administration of the trust, and withhold consent from specified actions of the trustees.44 These features allow protectors to act as ‘watchdogs’ on behalf of the beneficiaries.

D.  Right to Information Following the 2010 amendments to the Labuan Trust Act, a beneficiary’s right to information is restricted such that only a beneficiary with a vested interest in the trust may request information on the trust property and administration of the trust.45 Additionally, trustees are not liable to disclose any documents relating to, inter alia, the reasons behind the exercise of his functions or any material upon which the decision was made.46 Similar provisions can be found in Guernsey,47 Mauritius48 and Dubai.49 This curtailment of the beneficiary’s right to information is a significant restriction of the beneficiary’s common law right to information pursuant to the inherent powers of the court to supervise the trust.50

E.  Non-Charitable Purpose Trusts Like many offshore jurisdictions, the Labuan Trust Act also provides for the validity of non-charitable purpose trusts which is enforceable by an enforcer.51 Specific aspects in relation to enforcers are provided for in the Labuan Trust Act.52 The recognition of a non-charitable purpose trust is different from orthodox English trusts law which does not regard a purpose trust as valid unless it may be characterised as a Re Denley53 trust.54

F.  Registration of Trust An interesting feature of the Labuan trust, unlike the common law trust, is that there is a registration requirement for trusts settled pursuant to the Labuan Trust Act. 44 LTA 1996, s 35(3). 45 ibid s 41(1)(c); Chua (n 43). 46 LTA 1996, s 41(2); Chua (n 43). 47 The Trusts (Guernsey) Law 2007, s 38(1)(a). 48 The Trust Act 2001 (Mauritius) s 33(2)(c), (d), (e). 49 Trust Law (DIFC Law No 4 of 2018) (Dubai) art 66(2). 50 See Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709. See also L Ho, ‘Trustees’ Duties to Provide Information’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge University Press 2010) 355–56. 51 LTA 1996, s 11A. 52 ibid s 11C. 53 Re Denley [1969] 1 Ch 373. 54 On non-charitable purpose trusts see KFK Low, ‘Non-Charitable Purpose Trusts: The Missing Right to Forego Enforcement’ in RC Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018) 486.

Malaysia  99 Section 12(1)55 of the Labuan Trust Act provides that every Labuan trust created in accordance with the Labuan Trust Act may be registered with the Labuan Financial Services Authority. While this part of the Labuan Trust Act does not seem to require mandatory registration, section 12(8) of the Labuan Trust Act provides that any ­trustee who fails to comply with the registration requirements shall be guilty of an offence which is subject to a penalty of 10,000 ringgit.56 Currently, there are 14 registered trusts in Labuan57 (this number has remained unchanged since 2018) comprising six purpose trusts, three charitable trusts, two protective trusts and three private beneficiary trusts. The total assets held on trust are US$171.4 million with 76 per cent comprising real estate, 18 per cent cash and 6 per cent shares. The registration figures are interesting because there appears to have been a decrease in the number of trusts registered in Labuan as illustrated in Figure 1:58 Figure 1  Number of Trusts Registered in Labuan by Year 60 50 40 30 20 10 0

2012

2013

2016

2017

2018

2019

2020

Number of Registered Trusts

Presumably, some of the trusts originally registered in Labuan must have changed their choice of law clause from Labuan to another jurisdiction from 2016 to 2017.

55 LTA 1996, s 12. 56 ibid. 57 Labuan Financial Services Authority, ‘Market Report 2020’ (LabuanIBFC) 28, available at: www. labuanibfc.com/clients/Labuan_IBFC_78C2FF81-703A-4CAA-8926-A348A3C91057/contentms/img/ Labuan%20IBFC%20Market%20Report%202020.pdf?1620173158. 58 Labuan Financial Services Authority, ‘Annual Report 2012’ (LabuanIBFC) 13, available at: www. labuanibfc.com/clients/Labuan_IBFC_78C2FF81-703A-4CAA-8926-A348A3C91057/contentms/img/ resource_centre/publication/download/Labuan-Financial-Services-Authority-Annual-Report-2012. pdf?1628249011; Labuan Financial Services Authority, ‘Annual Report 2013’ (LabuanIBFC) 12, available at: www.labuanibfc.com/clients/Labuan_IBFC_78C2FF81-703A-4CAA-8926-A348A3C91057/contentms/ img/resource_centre/publication/download/Labuan-Financial-Services-Authority-Annual-Report-2013. pdf?1628250495; Labuan Financial Services Authority, ‘Annual Report 2016’ (LabuanIBFC) 10, available at: www.labuanibfc.com/clients/Labuan_IBFC_78C2FF81-703A-4CAA-8926-A348A3C91057/contentms/ img/resource_centre/publication/download/ANNUAL%20REPORT%202016.pdf ?1628250022; Labuan Financial Services Authority, ‘Annual Report 2017’ (LabuanIBFC) 55, available at: www.labuanibfc.com/ clients/Labuan_IBFC_78C2FF81-703A-4CAA-8926-A348A3C91057/contentms/img/Downloads/Resource_ Center/Labuan%20Financial%20Services%20Authority%20Annual%20Report%202017.pdf?1628250058; Jailani Hasan, ‘Labuan IBFC Continues to Grow Due to Non-Resident Businesses’ Bernama Daily Malaysian News (Kuala Lumpur, 25 March 2019); Labuan Financial Services Authority, ‘Market Report 2019’

100  Hang Wu Tang

IV.  Labuan’s Foundations Act Although a common law jurisdiction, Labuan introduced foundations, a civil law concept, through the Labuan Foundations Act 2010.59 While the status of a registered foundation as a legal entity differentiates it from a trust, foundations bear many similarities to trusts. In terms of establishment, a trust has a settlor who may reserve powers pursuant to the trust and a foundation has a founder who may similarly reserve rights over the management of the foundation.60 While a trust has a trustee(s) and is governed by a trust deed, a foundation has a council and officers, and is governed by a charter and articles or regulations.61 Additionally, both trusts and foundations in Labuan have beneficiaries and may exist in perpetuity.62 When enacting the Labuan Foundations Act 2010, many aspects of Labuan trusts law were imported and, consequently, many benefits of trusts and foundations overlap.63 For example, no foreign claim or court order will be enforced against a Labuan trust or foundation in respect of, inter alia: (a) the personal and proprietary consequences of marriage or the termination of marriage; (b) succession rights, whether testate or intestate; and (c) any claims by creditors pursuant to insolvency subject to relevant provisions.64 Notwithstanding their similarities, the option of foundations may attract individuals from civil law jurisdictions who are more familiar with this wealth management instrument. Furthermore, foundations may be an effective alternative to charitable trusts for wealthy Asian philanthropists who wish to implement a structure for giving according to their preferences.65 Notwithstanding, it should be noted that thus far, 85.6 per cent of foundations­ registered in Labuan are non-charitable in nature.66

V.  Reflections on Labuan as an International Trusts Centre: Do Widgets Matter? The review of Labuan’s innovative trusts law raises an intriguing question on whether legal widgets matter in relation to the success of a jurisdiction as an international trusts centre. By legal widgets, it is meant jurisdictions that offer many advanced features not (LabuanIBFC) 31, available at: www.labuanibfc.com/clients/Labuan_IBFC_78C2FF81-703A-4CAA-8926A348A3C91057/contentms/img/resource_centre/publication/download/2020/Market%20Report%20 2019_FinalV_27052020.pdf?1628250198; Labuan Financial Services Authority, ‘Market Report 2020’ (n 57) 29. 59 M Lea, ‘Labuan: Labuan Foundations – The Newest Variety’ (2011) 17 Trusts & Trustees 547, 547–48; Sino Media, ‘Managing Chinese Family Wealth via Labuan IBFC’ (Shanghai, June 2012); Hiu Chee Fatt, ‘The Foundation of Your Wealth; A Wealth Management Structure Available to All’ (Mondaq Business Briefing, 24 May 2012). 60 M Lea, ‘The Benefits of a Labuan Foundation’ (2014) 20 Trusts & Trustees 587, 587. 61 Lea, ‘Labuan Foundations – The Newest Variety’ (n 59) 548. 62 ibid. 63 Lea, ‘The Benefits of a Labuan Foundation’ (n 60) 589–90. 64 LTA 1996, s 10(1)(a), (b), (d); Labuan Foundations Act 2010, s 61(2)(a), (b), (d). 65 Hang Wu Tang, Man Yip and Vincent Ooi, ‘Philanthropic Structuring: The Asian Context’ (2020), available at: ink.library.smu.edu.sg/sol_research/3184/. 66 Labuan Financial Services Authority, ‘Market Report 2020’ (n 57) 28.

Malaysia  101 commonly found in traditional trusts law such as the non-charitable purpose trusts, lack of perpetuity periods, protectors and extensive retention of control by the settlor. Do these features contribute to the success of that jurisdiction becoming a major trusts centre? Mark Lea, a distinguished practitioner who advised the Malaysian government on formulating Labuan’s trusts law, posed this question in an unpublished paper, and concluded that perhaps they do not matter except when one or more of these features determine the choice of jurisdiction to settle the trust.67 Looking at Labuan’s experience in terms of the number of trusts actually registered, it seems that Lea’s conclusion is correct. As shown above, the number of registered trusts in Labuan has been limited – the highest number of registered Labuan trusts was between 2013 and 2016 when there were over 50 trusts, but the number dropped to 14 trusts and stayed constant up to 2020. This means that since 2018 no new trusts have been registered in Labuan. The drop in the number of registered trusts suggests that many of the pre-existing trusts must have activated their ‘flee clauses’ and transferred to another jurisdiction. An interesting unanswered question is what triggered these trusts to ‘flee’. One possible explanation is that between 2016 and 2018, Malaysia experienced political instability due to the 1MDB affair, a searing corruption scandal that rocked the country and which led to a change in government in 2018.68 Perhaps this explains the dramatic decrease in registered trusts in Labuan during that time and why no new trusts have been registered in Labuan since 2018. The upshot is that the array of features commonly associated with offshore trusts may not be the primary driving factor which encourages people to set up trusts in a particular jurisdiction. Rather, other non-legal factors such as the political stability of the jurisdiction is an important factor which is a prerequisite to success in attracting trusts business.

VI.  Introduction to the ‘Hibah Trust’ in Malaysia: A Hybrid Instrument Hibah trusts or the hibah amanah (amanah means trusts in Malay) or hibah takaful (takaful is a form of insurance policy) have become increasingly popular in Islamic estate management following their introduction in 2013 by Permodalan Nasional Berhad, a major Malaysian fund management company via Amanah Saham Nasional Berhad.69 Major organisations which are offering the hibah trust include banks like Maybank and CIMB, and Tabung Haji, the Malaysian hajj pilgrims board.70

67 Reported in Chan Sek Keong, ‘Trusts and the Rule of Law in Singapore’ (2013) 25 Singapore Academy of Law Journal 365, 375. 68 On 1MDB scandal see W Case, ‘Stress Testing Leadership in Malaysia: The 1MDB Scandal and Najib Tun Razak’ (2017) 30 The Pacific Review 633. 69 Nazrul Hazizi Noordin et al, ‘Re-evaluating the Practice of Hibah Trust in Malaysia’ (2016) 32 Humanomics 418, 427. 70 Mohd Yazid Zulkepli and Tajul Aris Ahmad Bustami, ‘The Grey Side of Hibah Amanah as Inheritance Instrument in Malaysia’ (2019) 24 Al-Sharjah Journal of Islamic Thought and Civilization of The International Islamic University Malaysia 267.

102  Hang Wu Tang Other hibah trust products have also been introduced in Malaysia by trust companies such as Amanah Raya Berhad.71 As will be explained below, the flexible structure of the hibah trust makes it particularly attractive as a wealth planning instrument.72 In order to understand the hibah trust, one must first unpack the concept of the hibah. ‘Hibah’ is derived from the Arabic root word, ‘wahaba’ which means to (unilaterally) express a benefit to others during one’s lifetime without any expectation of the possibility of return.73 Many academics have referred to hibah synonymously with an inter vivos gift74 which suggests that hibah is the English law equivalent of a gift. Only a person who has perfect title (milk al-tam) over the intended hibah property is allowed by Islamic law to execute the hibah.75 As an instrument of wealth management, the hibah is particularly useful as, unlike a testamentary bequest (wasiyyah), the hibah can be used to transfer a person’s property to the extent of even excluding the donor’s other legal Muslim heirs.76 This is because, traditionally, a hibah is executed during the lifetime of the donor.77 Once a hibah is executed, the hibah property is no longer part of the donor’s estate: upon his or her death, it will not be administered according to fara’id principles (Muslim inheritance law).78 Thus, since a hibah can comprise the donor’s entire estate, a hibah empowers the donor to decide for themselves who his or her property should be gifted to and in what proportion,79 unlike a testator under Muslim law. In contrast, the ­wasiyyah instrument (ie, a will) only permits the testator to bequeath up to one-third of his or her estate, with the rest of the estate going to prescribed fara’id beneficiaries. The major drawback to using the hibah is that the donor would have to relinquish the property during his or her lifetime. Understandably, donors may be reluctant to surrender all or part of their property during their lifetime out of concern that they may be neglected or abandoned by the hibah donees after the property is distributed.80 Such concerns

71 Noordin et al (n 69) 427. 72 Rusni Hassan and Nor Azdilah Mohamad Zaizi, ‘The Concept and Application of Hibah as a Financial Instrument from the Malaysian Legal Perspective: An Analysis’ (2020) 28(1) International Islamic University Malaysia Law Journal 227, 245. 73 ibid 229; Ahmad Khilmy Abdul Rahim, Azizi Abu Bakar and Mohd Mushidi Mohd Nor, ‘The Innovations of Hibahasan Instrument of Islamic Finance and Islamic Estate Management in Malaysia’ (2021) 18 Webology (Special Issue on Management and Social Media) 112, 114 referencing Ibn Manzur and Jamal al-Din Muhammad b Mukram, Lisan al-Arab, j9 (Kaherah, Dar al-Hadith). 74 Alias Azhar and Mohd Zakhiri Md.Nor, ‘Hibah in the Administration of Islamic Property: Ijtihadi Elements and Reality in Malaysia’ (2019) 10 Universiti Utara Malaysia Journal of Legal Studies 103, 103; Aini Hayati Musa, ‘Awareness on Hibah Concept: Towards Cultivating Islamic Estate/Wealth Management’ (International Social Sciences Academic Conference, Malacca, November 2016) 89; Rusnadewi Abdul Rashid, Siti Asishah Hassan and Noor Inayah Yaakub, ‘A Need for Legal Framework of Gift Inter Vivos (Hibah) in Malaysian Estate Planning’ (2013) 2(3) International Journal of Business, Economics and Law 29, 29. 75 Muhamad Muizz Abdullah et al, ‘Islamic Estate Planning in the Industrial Revolution Era 4.0: Issues and Challenges’ (2021) 9(2) Journal of Emerging Economics & Islamic Research 40, 41. 76 Badruddin Hj Ibrahim, ‘Hibah (Gift inter vivos) by Parent in Favour of Some Children to the Exclusion of the Others under Islamic Law’ (2017) 31 Arab Law Quarterly 54, 55 and 69. 77 Siti Asishah, ‘The Legal Rights and Duties of Administrators and Executors of Deceased Muslims’ Property in Malaysia’ (2014) 9(2) The Social Sciences 98, 99. 78 Hassan and Zaizi (n 72) 245. 79 Abdul Rashid et al (n 74) 30 referencing Imam al-Nawawi, Minhāj et-Tālibin: A Manual of Muhammadan Law According to the School of Shāfī (EC Howard, Law Publishing Co 1977). 80 Abdul Rashid et al (n 74) 30.

Malaysia  103 have contributed to the development of the hibah trust which ostensibly gives the donor control over the property during his or her lifetime while taking it out from the donor’s estate upon his or her death.81 The legal characterisation of a hibah trust appears to be a hybrid of a Muslim gift and the English conception of a trust. The steps involved in executing a hibah trust are:82 Step 1: The donor-settlor offers to transfer the hibah assets to the donee beneficiary without any consideration or expectation of return (ījāb). The donee beneficiary must accept this offer (qabūl). Step 2: The terms of the hibah as agreed upon between the donor and donee(s) are recorded in the Trust Deed, which also outlines the duties and responsibilities of the trustee(s). The Trust Deed also includes the donee’s consent to the donor using and enjoying the benefits of the hibah assets during his or her lifetime. Step 3: The donor ceases legal ownership over the hibah assets and transfers the assets to a trustee he or she appoints. This trustee will manage and administer the hibah assets as stated in the Trust Deed. Step 4: During the donor’s lifetime, the trustee manages and administers the hibah assets, pursuant to the Trust Deed. Step 5: Upon the donor’s demise (or following a period specified by the Trust Deed), the trustee will distribute and transfer legal ownership of the hibah assets to the donees, pursuant to the Trust Deed. Thus, a hibah trust involves a Muslim gift, ie, the hibah, from the donor to the beneficiaries declared during his or her lifetime. However, the assets constituting the gift do not vest directly with the beneficiaries. Instead, the assets will be held on trust by an appointed trustee and subsequently transferred to the beneficiaries pursuant to the trust deed following the donor’s death.83 Therefore, a hibah trust appears to be a combination of both the common law trust and Islamic hibah.84 The resultant effect of a hibah trust is the Islamisation of the equitable concept of the trust where Syariah law principles are expressly incorporated.

VII.  Why are Institutions Offering the Hibah Trust? The stated reason for the introduction of the hibah trust in the literature is the problem of unclaimed estates in Malaysia.85 Noordin et al report that as of March 2016, the 81 O Yaacob, ‘Pembentukan Trust Hibah Sebagai Alternatif Perancangan Harta’ [‘Trust Formation Grants as an Alternative Estate Planning’] in Siti Mashitoh Mahamood (ed), Harta Amanah Orang Islam di Malaysia: Perspektif Undang Undang dan Pentadbiran [Property Trust of Muslims in Malaysia: Perspectives and Administrative Law] (University Malaya 2006) 174–75. 82 Adapted from Noordin et al (n 69) 428. 83 ibid 426. 84 Asishah (n 77) 99. 85 Noordin et al (n 69) 420.

104  Hang Wu Tang estates of deceased people, worth an estimated RM60 billion, have not been claimed by their eligible heirs, of which it is believed that a substantial portion belongs to Muslim estates.86 It is speculated that the main factor which explains the magnitude of the phenomenon of unclaimed estates is that the management of Muslim estates is ‘perceived to be complex, inconvenient, tedious and expensive’.87 Prolonged inheritance disputes and Muslim heirs who cannot be located contribute to the delay in the distribution of Muslim estates. Furthermore, the cost of distributing estates is expensive. All these reasons are said to cause many estates to be unclaimed. Unsurprisingly, the wealth management industry has capitalised on this by offering the hibah trust which promises to be an efficient means of distributing the clients’ property upon his or her death without having to undergo an expensive and complicated court process. This is not a unique trend because one of the drivers to people settling a common law trust is to get around a complex and cumbersome probate process. Quite apart from getting around potential complications arising from navigating the court process upon death, the hibah trust offers some attractive features from the wealth and succession planning perspective. There appear to be three principal uses of a hibah trust. First, it functions as a will substitute in relation to unit trusts, hajj funds and bank accounts. Certainly, this is how the hibah trust functions in relation to Amanah Saham Nasional Berhad unit trusts, Tabung Haji hajj funds and bank accounts. The donor would nominate the donee as the recipient of the funds upon his or her demise pursuant to a hibah trust. When the donor dies, the funds will then be paid to the donee. Second, the hibah trust is used with a Muslim insurance known as takaful. This is sometimes known as a hibah takaful trust. Used in this way, the settlor will declare a hibah trust naming a bank or trust company as the trustee; the settlor will also purchase a takaful and service the premium. The takaful policy would be assigned to the trustees. Once the settlor dies, the takaful policy pay-out will be managed by the trustees for the beneficiaries of the hibah trust. Such hibah takaful trusts are offered as solutions for the maintenance of children, persons with special needs, elderly parents, adult spendthrift offspring and the furthering of philanthropic purposes. Third, the hibah trust involves the declaration of a portion of the settlor’s assets to be held on trust for certain beneficiaries. However, the hibah trust specifically reserves the donor’s right to use the property during his or her lifetime while taking the asset in question out of the donor’s estate upon his or her death. This allows the donor to either enlarge the shares a person may benefit from under Islamic inheritance law, or to benefit someone who is not entitled to inherit property under Muslim law. From a wealth planning viewpoint, a hibah trust enables the donor to achieve several objectives. First, a settlor-donor executing a hibah trust is not restricted by fara’id distribution principles while retaining the use of the property during his or her lifetime. In other words, the settlor-donor is not restricted by the rule that a testator may only dispose of one-third of his or her assets by way of a will.88 Thus, the hibah



86 ibid. 87 ibid. 88 ibid

421.

Malaysia  105 trust effectively grants the settlor-donor full testamentary freedom while enjoying the use of the assets during his or her lifetime by reason of the beneficiaries giving their consent to the hibah assets being used by the donor. The upshot of this is that the hibah trust is more advantageous as compared to an outright inter vivos gift, since the hibah assets are taken out of the Muslim person’s estate while reserving the use and enjoyment of the assets for the donor during the donor’s lifetime. Second, the hibah trust may be used to give assets to non-Muslim donees,89 something which is not possible pursuant to testamentary dispositions under fara’id principles.90 Thus, the use of the hibah trust might cater to Muslim converts (muallaf) who wish to benefit their non-Muslim family.91 Due to the fact that a hibah trust is ostensibly not restricted by the one-third rule, the use of hibah trusts has been criticised as a potential tool to ‘neglect one’s obligations to creditors and avoid fara’id’.92 In fact, Noordin et al have advocated for the hibah trust to be structured according to fara’id rules and that settlors/donors ought to nominate two-thirds of the beneficiaries of a hibah trust to legal heirs under fara’id in the spirit of protecting rightful Muslim heirs.

VIII.  Comparing the Hibah Trust with the Irrevocable English Discretionary Trust This section compares the hibah trust with the irrevocable English discretionary trust and explores the question whether the same objectives sought under the hibah trust could be achieved via the use of an English trust. The comparison does not involve hibah trusts in relation to unit trusts, hajj funds and bank accounts which essentially function as a form of will substitute. Instead, the comparison in this section involves a declaration of a hibah trust over a portion of the settlor’s assets or a takaful policy that is assigned to the trustee. Noordin et al have compared the hibah trust with a revocable living trust and suggested that there are some differences between the hibah trust and living trusts.93 According to the learned authors, the principal difference lies in the revocability of the living trust as compared to the hibah trust which is irrevocable. With respect, it is suggested that it is not meaningful to compare the revocable living trust with the hibah trust because the revocable living trust is used predominantly in the United States for estate planning purposes for a variety of perceived reasons94 and

89 See, eg, AmanahRaya’s ‘Trust’ brochure states that a donor may gift a hibah to a non-Muslim: AmanahRaya, ‘Trust’ (AmanahRaya), available at: www.amanahraya.my/wp-content/uploads/2018/09/Amanahraya_Trust_ ENG_CS6.pdf. 90 Noordin et al (n 69) 421. 91 Zulkepli and Bustami (n 70). 92 Noordin et al (n 69) 421 referencing MIM Razak et al, ‘The Awareness of Hibah as a Tool to Reduce Estate Planning Risk in Malaysia’ (2015) 3 International Journal of Economics, Commerce and Management 1558; SA Salman and SNN Htay, ‘Nomination and Hibah Issues in Malaysian Takaful (Islamic Insurance) Industry’ (2013) 1(12) International Journal of Multidisciplinary Research 5. 93 Noordin et al (n 69). 94 See, eg, R Gould, ‘The Living Trust: Fact v Fiction’ (2000) 15 Quinnipiac Probate Law Journal 133; A Braun, ‘Will-Substitutes in England and Wales’ in A Braun and A Röthel (eds), Passing Wealth on Death: Will-Substitutes in Comparative Perspective (Hart Publishing 2016) 53.

106  Hang Wu Tang not elsewhere in the Commonwealth. Instead, it may be more meaningful to compare the hibah trust with the irrevocable discretionary trust which is more commonly used in other Commonwealth jurisdictions. Upon closer scrutiny, it is suggested that almost all the central features of the hibah trust may be replicated with the standard irrevocable English discretionary trust commonly used in many Commonwealth jurisdictions. The common features of a standard discretionary trust95 used in modern wealth management are as follows: i. The beneficiaries of the trust are not fixed from the very start. Instead, there is a list of potential beneficiaries. ii. The trustee is given a very wide power of appointment as to who should enjoy the capital and income of the trust. There is usually no mandatory direction to exhaust the trust fund during the trust period. iii. The trustee is given a power to appoint new beneficiaries or to exclude current persons in the potential list of beneficiaries. Drafted in this form, the settlor might even be a potential beneficiary through an exercise of the trustee’s discretion.96 iv. If the trustee does not exhaust the trust fund during the trust period, the property will go to default or residuary beneficiaries. It is often made clear that the trustee does not have to consider the interests of the default or residuary beneficiaries in exercising the trustee’s power of appointment. v. There may or may not be an excluded list depending on the settlor’s familial circumstance, for example, the presence of an estranged spouse or children. vi. The settlor will issue a letter of wishes to the trustee. The letter of wishes is usually drafted as a non-binding expression of wishes. Over time, fresh letters of wishes may be issued. vii. The trust is usually used in connection with a company vehicle. Typically, the trust will hold 100 per cent of the shares in a company. Assets will be injected into the company and the settlor or settlor’s family members may be named as directors of the company. In some cases, there might be two layers of companies in this structure, ie, the trust will hold 100 per cent of the shares in a holding company which in turn holds the shares of the company that controls the assets. The trust deed would usually state that the trustee is not obligated to interfere with the affairs of the company.97 viii. The investment powers of the trust may in some cases be reserved by the settlor. ix. The trust might include a protector or a committee of protectors, ie, a third party who will have a role in the administration of the trust. 95 For examples of such discretionary trusts from around the world, see Zhang Hong Li v DBS Bank (Hong Kong) Limited) [2019] HKCFA 45, (2019) 22 HKCFAR 392; United States v All Assets Held in Account Number 80020796 299 F Supp 3d 121, 125–26 (D DC, 2018); Wibawa v Wibawa [2016] SGHC 109; Kan Lai Kwan v Poon Lok To Otto (2014) 17 HKCFAR 414 [61]–[65]; Charman v Charman [2007] EWCA Civ 503 [30]–[32]; Fonu v Merrill Lynch Bank & Trust Co [2011] UKPC 17 [12] (appeal taken from Cayman Islands). On secondary literature describing such trusts see generally, Tang (n 11); R Lee, ‘The Evolution of the Modern International Trust: Developments and Challenges’ (2018) 103 Iowa Law Review 2069; L Smith, ‘Massively Discretionary Trusts’ (2017) 70 Current Legal Problems 17. 96 See generally Charman (n 95) (where the settlor was the primary beneficiary during his lifetime). 97 This is known as the anti-Bartlett clause. See the discussion in Zhang Hong Li (n 95). See R Lee and M Yip, ‘Exclusion of Duty and the Irreducible Core Content of Trusteeship: A Re-Assessment’ (2020) 14 Journal of Equity 131.

Malaysia  107 Therefore, a standard English discretionary trust, especially one which is structured with a settlor’s reserved power of investment and an appropriate letter of wishes stating that the settlor is the primary beneficiary during his or her lifetime plus specific stipulations of the manner of distribution upon the settlor’s demise, should achieve the same effect as a hibah trust. In both structures, the settlor is able to continue to enjoy the benefit of the assets during his or her lifetime with distribution only happening upon death. The fact that the English discretionary trust may achieve the same objectives as a hibah trust then raises the next question: why is the hibah trust offered in Malaysia even though the irrevocable English discretionary trust is able to achieve the same result? It is to this question that the next section turns.

IX. The Hibah Trust: Institutional Actors Catering to Growing Religiosity Given that the irrevocable English discretionary trust could achieve the same effect as the hibah trust, this raises the question of why the hibah trust is offered as a form of wealth management vehicle in Malaysia. It is speculated that the main reason to explain this phenomenon is the growing religiosity of certain segments of the Malay Muslim population where ‘religious and ethnic identity are perceived as inextricably intertwined’.98 With growing religiosity amongst Muslims, it is unsurprising that there is the corresponding desire to abide by Muslim principles especially in the area of succession planning. Certainly, this is a trend which is witnessed in terms of Islamic banking in Malaysia where there is empirical evidence that consumers are motivated by religious considerations when choosing Islamic financial products.99 I am aware that this stated reason for the introduction of the hibah trust could be criticised as oxymoronic: if the Malay Muslim population is indeed becoming increasingly religious, then it could be argued that they would be more inclined to follow Syariah inheritance laws instead of attempting to circumvent the same by using the hibah trust. But I believe that there is no contradiction here. The fact of the matter is this: the hibah trust is marketed by various institutional actors, with edicts from Muslim experts engaged by these institutional actors, as a Syariah compliant instrument of succession planning. In other words, in the eyes of the lay consumer, what they are doing when using the hibah trust is perfectly acceptable under Islamic law. However, this line of reasoning may not be viewed as legitimate in the context of the use of an English discretionary trust which avoids the application of Muslim inheritance law. On the part of the settlor, there may be lingering uncertainty and unease that even though the English discretionary trust may technically take the assets out of a Muslim person’s estate, this is ultimately a breach of Syariah law. Thus, religious motivations explain why the hibah trust is offered instead of the English discretionary trust.

98 See Y Tew, ‘Stealth Theocracy’ (2018) 58 Virginia Journal of International Law 31, 47–49. 99 A Echabi and ON Olaniyi, ‘Malaysian Consumers’ Preferences for Islamic Banking Attributes’ (2012) 39 International Journal of Social Economics 859.

108  Hang Wu Tang Looking at Malaysia on a macro level, it is unsurprising to see the hibah trust being offered as a succession planning instrument instead of the English discretionary trust in this context. Public law scholars working on Malaysia have long written about the rise of an Islamic constitutional order, with Professor Yvonne Tew terming this as a form of ‘stealth theocracy’. Tew writes that what is happening in Malaysia involves ‘transformation towards a more religious constitutional order occur[ring] informally through the engagement of judicial and political actors, rather than through formal mechanisms of constitutional modification like amendment or replacement of the constitutional text’.100 Given that such a profound shift is happening within the broader Malaysian political-legal context, it is entirely predictable that a similar phenomenon is occurring in the sphere of private law. In other words, the organisations offering the hibah trust are institutional actors contributing towards a more Islamic-centric succession planning among the Muslim population. This drive towards using Islamic tools in terms of wealth management is also motivated by a corresponding demand from consumers due to growing religiosity amongst Muslims in Malaysia. However, in terms of ­absolute numbers, it is not clear whether many hibah trusts have been set up. In a study published in 2016 involving Melaka, a state in Malaysia, a trust company is reported to have settled a total of only four hibah trusts in 2013 and 2014 whereas in 2015 no hibah trust was set up.101 However, this study is not conclusive of the popularity of the hibah trust because it does not include the capital city, Kuala Lumpur, where the population is more affluent; and the study involves only one trust company and not the major bank trustees in Malaysia.

X. Conclusion This chapter has explored two contemporary uses of the trust in Malaysia – Labuan’s trusts law regime and the hibah trust. These aspects of the Malaysian story demonstrate the amazing versatility of the trust instrument as a means of wealth transfer. Whether Labuan may attract new registered trusts to its jurisdiction and the hibah trust will increase in its popularity as a wealth management vehicle, remain open questions, and only time will tell.

100 Tew (n 98) 33. See also J Neoh, ‘Islamic State and the Common Law in Malaysia: A Case Study of Lina Joy’ (2008) 8 Global Jurist, available at: www.degruyter.com/document/doi/10.2202/1934–2640.1269/html; L Thio, ‘Apostasy and Religious Freedom: Constitutional Issues Arising from the Lina Joy Litigation’ (2006) 2 Malayan Law Journal i; J Ling-Chen Neo, ‘Malay Nationalism, Islamic Supremacy and the Constitutional Bargain in the Multi-ethnic Composition of Malaysia’ (2006) 13 International Journal on Minority and Group Rights 95. 101 Khairiah Ahmad et al ‘Acceptance of Hibah as an Alternative Mechanism in Muslims Asset Management’ (2016) 36 SHS Web Conferences 00030, available at: www.shs-conferences.org/articles/shsconf/abs/2017/04/ shsconf_icga2017_00030/shsconf_icga2017_00030.html.

part iii Commercial Adaptation

110

7 Trust in a Trustless World: Crypto-Asset Custodians, Trusts and Trust Regulations in Taiwan YUEH-PING (ALEX) YANG*

I. Introduction The crypto world promises to handle crypto-asset trading in a trustless manner based on a distributed ledger system built on blockchain technology. So far, however, this promise is, at most, halfway there. In practice, crypto-asset trading relies heavily on the so-called ‘crypto-asset custodians’, including custodial wallet providers and centralised crypto-asset trading platforms. These crypto-asset custodians hold crypto-assets on their customers’ behalf by either holding the private keys of the crypto-asset or holding the customers’ crypto-asset in their wallets.1 This business practice raises the issues of whether crypto-asset custodians and their customers are in a trust relationship and whether crypto-asset custodians engage in trust businesses. Some jurisdictions have applied trust regulations to regulate crypto-asset custodians.2 Whether the business model of crypto custodians constitutes trusts varies in different jurisdictions, depending on the definition of trusts in each jurisdiction. In Taiwan, both court decisions and the Trust Act narrowly define trusts. Specifically, trusts in Taiwan contain an indispensable element: the transfer or disposal of a property right from the settlor to the trustee.3 A legal relationship cannot constitute a trust if it does not involve a transfer or disposal of a property right. Accordingly, to apply trusts laws to

* Associate Professor, Department of Law, National Taiwan University. The author is grateful to the research assistance provided by Hsiang-Ling Kung, Jhen-Teng Hong and Chin-Yun Peng on this chapter. This chapter is sponsored by the Emerging Young Scholars Research Program hosted by Taiwan’s Ministry of Science and Technology (No: MOST 110-2628-H-002-007). 1 For a comprehensive analysis of the practice of crypto custodians, see generally M Haentjens et al, ‘The Failed Hopes of Disintermediation: Crypto-Custodian Insolvency, Legal Risks and How to Avoid Them’ [2020] Singapore Journal of Legal Studies 526. 2 See below section II.B. 3 Trust Act (Taiwan) art 1.

112  Yueh-Ping (Alex) Yang crypto-asset custodians in Taiwan, establishing that crypto-asset custodians control the customers’ crypto-asset is not enough. We must further establish that customers, in a legal sense, transfer or dispose of their crypto-asset to crypto-asset custodians for their custody. However, Taiwanese courts would be more likely to find that customers remain the owner of their crypto-asset in the crypto-asset custodian relationship by referring to the settled case law addressing the investor–broker relationship in the capital market. If that is the case, the crypto-asset custodian relationship is not a trust relationship under Taiwanese laws. The narrow definition of trusts in Taiwan correlates with the stringent trust enterprise regulations in Taiwan. Historically, Taiwan introduced the concept of trusts for a bank-centred purpose, mainly for banks to conduct certain investment trust businesses such as investment funds. Accordingly, banks dominate the market of trust businesses in Taiwan. This historical context captures the trust enterprise regulation in Taiwan even today. The most notable instance is that the Trust Enterprises Act maintains extremely stringent qualification requirements for trust companies, including an extremely high capital requirement and an ownership requirement oriented towards financial institutions.4 Under these requirements, non-financial firms engaging in trustlike services would find it nearly impossible to obtain a trust company licence. If we define trusts broadly, these service providers might engage in unlicensed trust businesses, which is a criminal offence in Taiwan.5 To avoid this result, Taiwanese laws draw a fine distinction between trust businesses, in which customers transfer the property title to trustees, and other custodial businesses, in which customers merely assign the actual control of the property (such as possession) to custodians but maintaining the nominal title to the property. The latter case does not amount to a trust relationship as long as the property remains under the customer’s title. This practice, however, has a side effect. Regardless of whether the custodians are characterised as the titleholder of their customers’ property, they effectively control the said property. If they are free from trust business regulations, the risk of their abuse of power will increase, which reduces the public’s trust in these custodian businesses. This concern is particularly prominent in the case of crypto-asset custodians. To address this distortion, Taiwan needs an overhaul of its current trust enterprise regulations to adapt to the evolving need of trusts in Taiwan’s society. Besides cryptoasset custodians, other financial technology (FinTech) products, such as robo-advisers or decentralised finance (DeFi) projects, may also involve the use of trusts. Other areas, notably the caring trust for ageing people in Taiwan, also witness a rising demand for specialised trust companies beyond banks. The ‘Trust 2.0’ Initiative recently proposed by the Financial Supervisory Commission (FSC), which aims at increasing the variety of trust services in Taiwan, might be a starting point. To increase the variety of trust services, Taiwan needs specialised trust companies beyond banks, and relaxing the existing trust enterprise regulations would be the key. If the regulator opts for this direction, it would be more likely for Taiwan to envisage the redefinition of trust that shifts the focus away from a formalistic concept of property right towards a more ­functional concept of control.

4 See,

eg, Standards for the Establishment of Trust Enterprises (Taiwan) arts 3 and 5. Enterprise Act (Taiwan) arts 16, 33 and 48.

5 Trust

Taiwan  113 The structure of this chapter is as follows. Section II describes the business model of crypto-asset custodians and discusses the potential to characterise crypto-asset custodians as a trust business. Section III analyses whether the crypto-asset custodians fall within the narrow definition of trust under Taiwanese laws and how a negative finding is desirable in light of Taiwan’s stringent trust enterprise regulation. Section IV gives a historical account of the evolution of trusts laws and trust enterprise laws in Taiwan to illustrate why Taiwan adopts a stringent trust enterprise regulation. Section V concludes. By using the crypto-asset custodians as a touchstone, I anticipate that this chapter will illustrate the historical context of trusts laws in Taiwan, the interplay between the definition of trusts and trust enterprise regulations, and the direction for future adaptation of Taiwan’s trusts laws and trust enterprise laws.

II.  Crypto-Asset Custodians and Trusts A.  The Unfulfilled Promise of Blockchain Among the emerging technology, blockchain, or a broader concept of distributed ledger technology (DLT), has received enormous attention.6 In a nutshell, blockchain is a ledger technology that allows a distributed group of people instead of a centralised entity to administer and maintain a ledger. This distributed group of people does not need to know each other,7 resulting in a ‘trustless’ trust system. In theory, blockchain possesses the following three appealing characteristics: decentralisation, immutability and anonymity.8 By far, the most well-known application of blockchain is the crypto-asset. Bitcoin, the biggest crypto-asset by market capitalisation, is the pioneer that aims at creating a peer-to-peer payment system based on blockchain.9 On the other hand, Ethereum, known as the Crypto 2.0, creates an open-source blockchain system that permits a wide range of applications on it, which expands blockchain’s application to activities ­including initial coin offering (ICO), decentralised applications (DApps), DeFi, and the recent non-fungible token (NFT). Furthermore, to stabilise the price fluctuation of crypto-assets to develop a more accessible payment instrument, stablecoins have recently come into the picture and have become a real threat to the existing payment system after Facebook announced its plan to issue a global stablecoin.10 As a response, 6 For an introduction of the distributed ledger technology, see generally M Rauchs et al, ‘Distributed Ledger Technology Systems: A Conceptual Framework’ (2019), available at: papers.ssrn.com/sol3/papers. cfm?abstract_id=3230013. 7 This is especially the case for permissionless blockchains such as those adopted by Bitcoin or Ethereum. 8 For critics that qualify these features of blockchain, see, eg, KFK Low and E Mik, ‘Pause the Blockchain Legal Revolution’ (2019) 69 International & Comparative Law Quarterly 135. 9 Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (Bitcoin.org), available at: bitcoin. org/bitcoin.pdf. 10 For a recent summary of the global regulation of stablecoins, see, eg, Financial Stability Board, ‘Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Final Report and High-Level Recommendations’ (Financial Stability Board, 13 October 2020), available at: www.fsb.org/wp-content/ uploads/P131020-3.pdf; Financial Stability Board, ‘Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements: Progress Report on the implementation of the FSB High-Level Recommendations’ (Financial Stability Board, 7 October 2021), available at: www.fsb.org/wp-content/uploads/P071021.pdf.

114  Yueh-Ping (Alex) Yang an increasing number of sovereign central banks have begun to study whether to apply blockchain for issuing their central bank digital currency (CBDC).11 These developments, coupled with the world’s decreasing trust in sovereign monetary policies, drove a fever for ­crypto-asset, especially in 2020 and 2021. As of 23 February 2022, the market capitalisation of crypto-asset has reached US$140.98 billion.12 While advocates of crypto-asset and blockchain have repeatedly applauded the trustless nature of blockchain and attributed the ‘success’ of crypto-asset to the distributed, disintermediated and decentralised nature of blockchain, the real-world practice does not support their zeal. Taking Bitcoin as an example, on 22 February 2021, there were an estimated 665,860 transactions worldwide,13 but the transactions documented on Bitcoin’s blockchain were merely 260,265.14 In other words, more than 60 per cent of Bitcoin transactions did not take place through the blockchain ledger. The relatively rare use of blockchain ledger is because transactions via blockchain are more timeconsuming and costly than expected. Taking Bitcoin as an example, in February 2022, the average confirmation time for a Bitcoin transaction was 11.57 minutes, and the ­average cost per Bitcoin transaction was US$141.64.15 To accommodate the speed and cost disadvantages of blockchain, several new players have emerged in the crypto world. The most pivotal ones among them are crypto-asset trading platforms, also known as crypto-asset exchanges, which are facilities or systems that bring together multiple buyers and sellers of crypto-assets to complete transactions or trades.16 Crypto-asset trading platforms can be broadly categorised into centralised and decentralised platforms, depending on whether they hold crypto-assets on behalf of their clients and settle the transaction through their central limit order books (centralised) or not (decentralised).17 Because centralised platforms dominate the crypto-asset trading platform market,18 this chapter will focus on them.19 Centralised platforms facilitate the crypto-asset settlement by creating central limit order books to save the need for a blockchain settlement. Under this business model, when buying a crypto-asset on a centralised platform, investors do not thus become 11 For a recent study of CBDC, see, eg, Bank of Canada et al, Central Bank Digital Currencies: Foundational Principles and Core Features (Bank for International Settlements 2020); R Auer et al, ‘CBDCs beyond Borders: Results from a Survey of Central Banks’ Paper No 116, Bank of International Settlements 2021. 12 CoinMarketCap, ‘Today’s Cryptocurrency Prices by Market Cap’ (CoinMarketCap), available at: coinmarketcap.com/. 13 This is derived by dividing the transaction volume of Bitcoin ($US 25,493,150,450) by the closing price of Bitcoin ($US 38,286.03) on that day, which is a rough estimate. CoinMarketCap, ‘Historical Data for Bitcoin’ (CoinMarketCap), available at: coinmarketcap.com/currencies/bitcoin/historical-data/. 14 YCharts, ‘Bitcoin Transactions Per Day’ (YCharts), available at: ycharts.com/indicators/bitcoin_ transactions_per_day. 15 YCharts, ‘Bitcoin Statistics’ (YCharts), available at: ycharts.com/indicators/reports/bitcoin_statistics. 16 Board of the International Organization of Securities Commissions, ‘Issues, Risks and Regulatory Considerations Related to Crypto-Asset Trading Platforms: Final Report’ (OICV-IOSCO, February 2020) 4, available at: www.iosco.org/library/pubdocs/pdf/IOSCOPD649.pdf. 17 European Securities and Markets Authority, ‘Advice: Initial Coin Offerings and Crypto-Assets’ (ESMA, 9 January 2019) [36], available at: www.esma.europa.eu/sites/default/files/library/esma50-157-1391_ crypto_advice.pdf. 18 In 2020, centralised exchanges accounted for 99.48% of crypto-asset trading. TokenInsight, ‘2020 Cryptocurrency Spot Trading Annual Report’ (TokenInsight, January 2021) 10, available at: image.tokeninsight.com/levelPdf/2020_Cryptocurrency_Spot_Trading_Annual_Report.pdf. 19 For an introduction of decentralised trading platforms, see generally L Fang et al, How to DeFi: Advanced (CoinGecko 2021) 27–65.

Taiwan  115 titleholders of that crypto-asset on the blockchain ledger. The title, instead, falls under the centralised platform, while the platform holds this title on its investor’s behalf. Only when the platform transfers the crypto-asset to the investor at the investor’s request would the investor become the title-holder of the crypto-asset on the blockchain ledger. The story does not end here. The type of wallets used by investors also matters. Wallets are the devices for crypto-asset holders to hold their crypto-asset, which can be an online account/folder (the so-called ‘hot wallet’) or an offline account/folder or device (the so-called ‘cold wallet’).20 Most importantly, depending on whether wallet providers hold the crypto-asset on behalf of their customers, wallets can be categorised into custodial and non-custodial wallets. For custodial wallets, wallet providers provide wallets to their customers and hold the wallets’ private keys on their customers’ behalf.21 In this case, while investors are nominally the title-holder of the crypto-asset, wallet providers possess control over the crypto-asset stored in the wallet. In this chapter, I use the term ‘crypto-asset custodians’ to refer to both centralised crypto-asset trading platforms and custodial wallet providers, the two representative players that take custody of the crypto-asset of their customers. The emergence and prevalence of crypto-asset custodians denote the fundamental need for recentralisation in the crypto world and the illusory promise of a decentralised system made by ­blockchain advocates.

B.  The Rise of Crypto-Asset Custodians as a Trust Enterprise As crypto-asset custodians rise, the legal issues of how to characterise and regulate them become crucial. Several jurisdictions bypass this legal characterisation issue by designing a special regulatory regime for regulating crypto-asset custodians.22 That said, the issue of whether the business model of crypto-asset custodian services constitutes trusts and should be subject to the existing trust enterprise regulations also comes to the surface. In several jurisdictions, crypto-asset custodians may apply for a licence to engage in trust business. New York, for instance, has affirmed that crypto-asset businesses, including crypto-asset custodians, may apply for a charter under the New York Banking Law as a limited purpose trust company to conduct businesses.23 South Dakota, a state famous for its trust regulations in the United States, also awards several trust enterprise licences to some well-known crypto-asset custodians, such as Anchorage, Bitgo, Aegis, etc. Outside the United States, Malta also affirms that crypto-asset custodians may apply for the trust enterprise licence to provide crypto-asset custodian services.24 20 ESMA (n 17) [25]. 21 ibid [27]. 22 For instance, New York, Japan, Germany and Malta have designed special permits for crypto-asset custodians. In addition, Singapore, Malaysia and Thailand also have special permits for crypto-asset trading platforms. 23 New York State Department of Financial Services, ‘Virtual Currency: Information for Applicants’ (New York State Department of Financial Services), available at: www.dfs.ny.gov/apps_and_licensing/ virtual_currency_businesses/information_applicants. 24 Virtual Financial Assets Regulations 2018 (Malta) art 4(1)(o).

116  Yueh-Ping (Alex) Yang There is a good case for arguing that crypto-asset custodians engage in trust businesses.25 For centralised crypto-asset trading platforms, they hold the title to crypto-assets on their customers’ behalf on the blockchain ledger, which allows them to possess the actual power to control and dispose of the assets. For custodial wallet providers, while they do not hold the title to crypto-assets on the blockchain, they hold the private key, among others, of their customers’ wallets, which allows them to control and dispose of the crypto-assets stored in the wallet. In both cases, crypto-asset custodians possess the actual control over their customers’ crypto-asset, and the exercise of said control is governed by the trust relationship between crypto-asset custodians and their customers.

C. Summary After nearly a decade of development of blockchain and crypto-asset, we have witnessed the emergence of crypto-asset custodians as the pivotal intermediaries in the crypto world. Moreover, these crypto-asset custodians have obtained trust enterprise licences to operate their businesses in some jurisdictions, resulting in an ironic ‘trust in the trustless system’ phenomenon. Nevertheless, treating crypto-asset custodians as trust enterprises depends on how laws of an individual jurisdiction define ‘trusts’. As the definition of trusts is somewhat fluid from a comparative lens, trusts laws may or may not apply to crypto-asset custodians in different jurisdictions.26 Below I discuss whether crypto-asset custodians constitute trust enterprises and are thus subject to trust enterprise regulations in Taiwan.

III.  The Pitfalls of Applying Trusts Laws to Crypto-Asset Custodians in Taiwan As a civil law jurisdiction that adopts trusts laws, Taiwan stipulates a clear yet formalistic definition for trusts under the Trust Act, which has the potential to prevent 25 For literature holding this view, see, eg, D Chu, ‘Broker-Dealers for Virtual Currency: Regulating Cryptocurrency Wallets and Exchanges’ (2018) 118 Columbia Law Review 2323. For a more comprehensive analysis of the possible characterisation of the legal relationship involving crypto-asset custodians, see generally L Gullifer, H Chong and H Liu, ‘Client-Intermediary Relations in the Crypto-Asset World’ (2020) University of Cambridge Faculty of Law Research Paper No 18/2021. 26 For a US-focused discussion, see generally MH Krimminger, C Lloyd and S Rocks, ‘Custody and Transfer of Digital Assets: Key US Legal Considerations’ in J Dewey (ed), Blockchain & Cryptocurrency Regulation, 1st edn (Global Legal Insights 2019). For a Japan-focused discussion, see generally K Takahashi, ‘Cryptocurrencies Entrusted to An Exchange Provider: Shielded from the Provider’s Bankruptcy?’ in C Hugo (ed), Annual Banking Law Update 2018: Recent Legal Developments of Special Interest to Banks (Juta 2018). For a New Zealand-focused discussion, see generally M Solinas, ‘Investors’ Rights in (Crypto) Custodial Holdings: Ruscoe v Cryptopia Ltd (in Liquidation)’ (2021) 84 Modern Law Review 155. For an Italy-focused discussion, see generally R Mangano, ‘The Insolvency of Cryptocurrency Exchanges: Lessons from the BitGrail Case – Reification of Coins, Pari Passu Ranking, and Nominalism’ (2019) 35 Banking & Finance Law Review 197.

Taiwan  117 crypto-asset custodians from falling within the definition of trust. Nevertheless, crypto-asset custodians might favour this outcome to the extent that they may be free from Taiwan’s highly stringent trust enterprise regulations.

A.  Defining Trusts in Taiwan i.  A Formalistic Definition of Trusts The Trust Act of Taiwan provides a clear statutory definition for trusts. According to Article 1, a trust ‘refers to the legal relationship in which the settlor transfers or disposes of a right of property and causes the trustee to administer or dispose of the trust property according to the stated purposes of the trust for the benefit of a beneficiary or a specified purpose’.27 According to this definition, to constitute a trust, there must be a transfer or disposal of a property right (collectively, ‘transfer of property’) from the settlor to the trustee. Legal relationship without this transfer of property is, at most, a mandate28 or deposit29 relationship under the Civil Code, but it does not constitute a trust relationship under the Trust Act. This definition of trust has its roots in Taiwan’s case law. Taiwan’s civil trusts laws evolved from case law to statutory law. Before Taiwan promulgated the Trust Act to regulate trusts in 1996, Taiwanese people had widely used trusts to serve their civil or commercial purposes. Since the 1970s, Taiwan’s Supreme Court has explicitly acknowledged the practice of trust and defined trust as a legal relationship under which ‘the settlor transfers her property to the trustee to achieve certain purposes between the parties’.30 This definition indicates that Taiwan’s Supreme Court perceived the transfer of trust property as an essential element of trust. When promulgating the Trust Act, legislators thus followed suit, and the transfer of property thus becomes a necessary condition for trusts in Taiwan. The transfer of property has a specific legal meaning under Taiwan’s civil law system. Taiwan is a civil law jurisdiction that distinguishes legal conducts into the so-called ‘undertaking conducts’ (for example, right in personam conducts) and the so-called ‘disposal conducts’ (for example, rights in rem conducts). The transfer of property under the Trust Act refers specifically to disposal conducts, excluding undertaking conducts. When the subject property is a thing, including real property and personal property, the disposal conduct refers to the legal conduct that has the legal effect of creating, altering or losing the rights in rem of a thing, while the Rights in Rem Part of the Civil Code stipulates the specific types of rights in rem of a thing. Take the sale of land for instance. Under Taiwanese civil laws, when the seller reaches an agreement with the buyer to transfer the land to the buyer for an agreed price, this 27 Legislators stipulated this definition by taking reference from the Japanese Trust Act, Korean Trust Act and the Restatement (Second) of Trusts of the United States. Legislative Explanation of Trust Act (Taiwan) art 1, para 3 (1996) (emphasis added). 28 See Civil Code (Taiwan) arts 528–52. 29 See ibid arts 589–612. 30 See, eg, Taiwan Supreme Court 62-Tai-Shang-No 2996 Civil Precedent (1973); 66-Tai-Zai-No 42 Civil Precedent (1977); 67-Tai-Shang-No 507 Civil Precedent (1978) (emphasis added).

118  Yueh-Ping (Alex) Yang sale agreement amounts to an undertaking conduct under which the seller undertakes to transfer the land ownership to the buyer while the buyer undertakes to pay the agreed price to the seller. When the seller transfers the land ownership to the buyer, this land transfer amounts to a separate disposal conduct under which the land ownership, a right in rem, changes. A promise to transfer the land ownership is not a disposal conduct; the actual transfer of the land ownership is. In this legal context, the transfer of property element refers to a limited scope of acts. For instance, suppose that Party A entrusts Party B to manage her house and gives Party B full authority by transferring the house’s possession to Party B. Suppose also that Party A keeps the title of ownership to the house and Party B does not thus obtain any rights in rem to the house.31 Under Taiwanese laws, the legal relationship between both parties is not a trust because it does not involve any transfer of property in this case. Trusts laws, including the segregation of trust property, thus do not apply to this relationship.

ii.  An Unclear Relationship between Crypto-Asset Custodians and their Customers Based on the above definition of trust, whether crypto-asset custodians constitute ­trustees naturally depends on whether customers transfer the title to their crypto-asset to crypto-asset custodians. The answer to that question, however, can be complicated. The crypto-world might intuitively determine the title owner of the crypto-asset based on the records documented on the blockchain ledger of the crypto-asset. While one cannot find the exact name of the title owner of the crypto-asset on the blockchain ledger, one can find the address of the wallet storing the crypto-asset on the blockchain ledger. Since an address is linked to a wallet, the person who owns the wallet is objectively identifiable. Therefore, the crypto-world may find the title owner of the crypto-asset as the person whose wallet’s address stores the subject crypto-asset according to the blockchain ledger. This legal understanding may characterise different crypto-asset custodians differently. Centralised crypto-asset trading platforms, for instance, may constitute trustees because the transfer of property exists between them and their customers as their wallets store the subject crypto-asset. In contrast, custodian wallet providers may not constitute trustees because the property transfer does not exist between them and their customers as they merely take custody of their customers’ private keys. Taiwanese laws, however, do not necessarily adopt this legal understanding. Rights in rem laws in Taiwan stipulate clear public notice mechanisms for transferring rights in rem regarding things. For real property, the land registry’s registration records provide this public notice mechanism.32 For personal property,33 the possession of 31 As a background note, rights in rem conducts involving real property do not take effect until the real property registry completes the related real property registration: Civil Code (Taiwan) art 758. Therefore, a house owner can transfer the house’s possession to others but keep the ownership title. 32 Civil Code (Taiwan) arts 758 and 759-1. 33 Personal property as used throughout this chapter follows the definition of personal property under Taiwan’s Civil Code, which refers to any thing except real property: Civil Code (Taiwan) art 67. The term ‘personal property’ under Taiwanese laws includes both tangible and intangible things, but it excludes claims, rights or other intangible property such as intellectual property.

Taiwan  119 the property in question provides public notice of the transfer.34 In other words, no laws stipulate the records on blockchain ledgers as an authoritative public notice mechanism. Accordingly, unless court case laws find that customary laws acknowledge the authoritative effect of blockchain ledger records,35 Taiwanese laws may not determine whether a transfer of crypto-asset exists based on blockchain ledger records. Taiwanese courts are more likely to resort to the basic personal property laws to determine whether customers transfer their crypto-asset to crypto-asset custodians. Several lower civil courts have characterised crypto-assets (such as Bitcoin) as personal property.36 Although many Taiwanese scholars appear to disagree with this characterisation and prefer to characterise crypto-assets (at least the electronic records bearing the rights and obligations of crypto-assets) as a separate category of intangible property, they generally agree that personal property laws may apply to crypto-asset mutatis mutandis.37 Accordingly, we may apply the existing personal property laws to determine whether customers transfer their crypto-asset to crypto-asset custodians. Under Taiwanese laws, to transfer a proprietary right in personal property, two elements are required: (i) an agreement between the parties concerning the said transfer; and (ii) the transfer of possession of the personal property. It might be easier to find the latter element satisfied. After all, Taiwanese laws define possession as de facto control over a thing,38 and crypto-asset custodians typically obtain de facto control over their customers’ crypto-asset and thus obtain the possession of said cryptoasset. It is more problematic whether customers agree with crypto-asset custodians to transfer their crypto-asset ownership to crypto-asset custodians. Courts have to ascertain the real intention between the parties to determine whether the agreement exists. So far, no Taiwanese court has addressed the right in rem relationship between crypto-asset custodians and their customers. Predictably, however, Taiwanese courts are more likely to find that the parties do not intend to transfer the crypto-asset ownership. To begin with, crypto-asset investors largely believe in the decentralised and disintermediated nature of crypto-assets. Accordingly, they buy and hold crypto-assets with the belief that they directly own it without diving into the details of the business models adopted by crypto-asset custodians. In other words, regardless of whether the address of their wallets appears on the blockchain ledger or not, the perception of crypto-asset

34 Civil Code (Taiwan) arts 761, 801 and 948. 35 Art 757 of Taiwan’s Civil Code permits customs to create new rights in rem, and the customs under this article refer to customary laws: Legislative Explanation of Civil Code (Taiwan) art 757 (2009). 36 See, eg, Taiwan High Court Tainan Branch 108 Kang No 123 Civil Ruling (2019); Tainan District Court 106 Su No 1907 Civil Decision (2017). 37 See Tsai-Chuan Hsieh (謝在全), Rights in Rem Chapter of the Civil Code (I) (民法物權論(上)), 7th edn (Xinxuelin Publishing (新學林出版) 2020) 23; Rong-Chwan Chen (陳榮傳), ‘Private Money: What Thing is Bitcoin?’ (約定貨幣：問比特幣為何物？) (2020) 67 Cross-Strait Law Review (月旦民商法雜誌) 5; Yueh-Ping (Alex) Yang (楊岳平), ‘The Legal Characterisation of Crypto-Asset: Focusing on Civil Laws and Financial Laws’ (論虛擬通貨之法律定性──以民事法與金融法為中心) (2020) 301 Taiwan Law Review (月旦法學雜誌) 43, 54. 38 Civil Code (Taiwan) art 940.

120  Yueh-Ping (Alex) Yang investors is that the crypto-asset’s ownership falls under their title. On the other hand, as service providers, crypto-asset custodians would also respect their customers’ perceptions. In light of this implied mutual understanding, Taiwanese courts are more likely to find that customers remain the owner of crypto-assets, although crypto-asset custodians might be the direct possessor. To that extent, there is no transfer of crypto-asset rights in rem in the crypto-asset custodian relationship; thus, crypto-asset custodians and their customers are not in a trust relationship. The characterisation of the legal relationship between securities brokers and their customers can provide a reference here. Stock investors do not have direct access to stock exchanges and must rely on securities brokers to buy and sell their stock on their behalf, and the stock is centrally deposited at a central depository service provider. This practice similarly raises the issue of whether the central depository service provider, the securities broker, or the investor is the nominal owner of the subject stock. While several jurisdictions understand the central depository service providers as the nominal owners of the stock while investors are merely beneficial owners,39 the Supreme Court of Taiwan affirmed that the stock ownership rests on investors.40 Scholars also agree with this finding, justifying that this finding offers better protection to investors because investors may possess the right in rem over the stock instead of the right in personam against their securities brokers.41 Taiwanese courts are likely to follow a similar rationale when determining the legal relationship between crypto-asset investors and their custodians in the future.

B.  Operating Trust Businesses in Taiwan: A Tightly Controlled Business Crypto-asset custodians might be happy that their relationship with their customers is not a trust relationship. After all, if it is a trust relationship, the Financial Supervisory Commission (FSC), the competent authority in charge of trust enterprises, will find them engaging in trust businesses and subject them to a series of trust enterprise regulations. In that case, crypto-asset custodians will incur high compliance costs thanks to the stringent trust enterprise regulations in Taiwan. The following are examples of the trust enterprise regulations in Taiwan. The first is the licensing requirement. By definition, trust enterprises refer to enterprises approved by the FSC to conduct trust businesses,42 and enterprises that are not trust enterprises 39 UNIDROIT, ‘UNIDROIT Legislative Guide on Intermediated Securities Implementing the Principles and Rules of the Geneva Securities Convention’ (UNIDROIT) 16–27, available at: www.unidroit.org/ wp-content/uploads/2021/06/LEGISLATIVE-GUIDE-English.pdf. 40 Taiwan Supreme Court 96-Tai-Shang-No 1021 Civil Ruling (2007). 41 In-Jaw Lai (賴英照), The Latest Anatomy of Securities Exchange Laws (最新證券交易法解析), 4th edn (Author published 2020); Guo-Chuan Lin (林國全), ‘The Legal Relationship of Securities Central Deposits: Comments on the Supreme Court 96 Tai-Shang No 1021 Civil Ruling’ (有價證券集中保管之法律關係－ 最高法院九六年台上字第一○二一號民事裁定簡評) (2008) 104 Taiwan Law Journal (臺灣本土法學雜誌) 333, 338–39. 42 Trust Enterprise Act (Taiwan) art 2.

Taiwan  121 may not provide trust services to the public.43 Enterprises that violate this prohibition will be subject to a fixed term of imprisonment between three to ten years plus an applicable fine between NT$10 million to NT$20 million, imposed on the person(s) responsible for the enterprise’s said act.44 Therefore, to engage in trust businesses, an enterprise must obtain the FSC’s prior approval. The second is the qualification requirement. In Taiwan, banks, securities investment trust enterprises, securities investment consulting enterprises and securities firms may apply for the FSC’s approval to engage in trust businesses.45 Firms other than these financial institutions must obtain a ‘trust company’ licence to engage in trust businesses. As most crypto-asset custodians are not the financial institutions mentioned above, they must file for the trust company licence. The third is the minimum capital requirement. To obtain a trust company licence, an applicant must have at least NT$2 billion of minimum paid-in capital in cash,46 which is equivalent to US$72 million. This requirement is highly stringent compared with other jurisdictions.47 The fourth is the ownership structure requirement, which is primarily oriented towards financial institutions. At least 40 per cent of the shares of a trust company must be held by qualified banks, insurance companies or fund management institutions; alternatively, more than 50 per cent of the shares must be held by a financial holding company.48 On the other hand, shareholders who are not the financial institutions mentioned above may not hold more than 25 per cent of a trust company’s shares.49 Accordingly, even if an entrepreneur is willing to contribute more than NT$2 billion of capital to operate a trust company, he or she has to find the interested financial institution(s) to serve as the major shareholder of this trust company and share managerial power with them. The stringent requirements outlined above effectively discourage non-financial entrepreneurs from operating trust businesses, leaving only traditional financial institutions in the market. As at the end of February 2022, 55 trust enterprises operate trust businesses in Taiwan. Among them, 36 are local banks, 7 are foreign banks, 11 are securities firms and the remaining one is a credit cooperative. No non-financial firm has

43 ibid art 33. Certainly, trust enterprises are not only those that may serve as trustees under Taiwanese laws. Any person may serve as a trustee in a trust relationship. That said, if a person serves as a trustee as a business, he or she conducts trust business and then has to obtain a trust enterprise licence. 44 ibid art 48. 45 Standards for the Establishment of Trust Enterprises (Taiwan) art 9. 46 ibid art 3(1). 47 New York, for instance, only requires $US 2 million minimum capital for trust companies: New York State Department of Financial Services, ‘Organization of a Trust Company for the Limited Purpose of Exercising Fiduciary Powers’ (New York State Department of Financial Services), available at: www.dfs.ny.gov/apps_ and_licensing/banks_and_trusts/procedure_certificate_merit_trust_comp. South Dakota State requires even less: $US 0.2 million minimum capital for trust companies. South Dakota Department of Labor & Regulation, ‘Trust Companies’ (South Dakota Dept of Labor & Regulation), available at: dlr.sd.gov/banking/trusts/default. aspx. 48 Standards for the Establishment of Trust Enterprises (Taiwan) art 5(1). 49 ibid art 6(2).

122  Yueh-Ping (Alex) Yang yet obtained a trust company licence.50 Therefore, the whole trust business market in Taiwan is completely dominated by traditional financial institutions.

C. Summary Restrained by the stringent trust enterprise regulations, crypto-asset custodians in Taiwan can hardly follow their peers in New York or elsewhere to operate their businesses based on a trust company licence. On the contrary, if their business models constitute trust businesses under Taiwanese laws, they will face severe criminal punishments. Therefore, instead of obtaining a trust company licence, crypto-asset custodians in Taiwan aim to convince the FSC that they are not operating trust businesses. The narrow definition of trusts under Taiwanese laws offers a getaway for cryptoasset custodians. Although crypto-asset custodians possess unneglectable control over customers’ crypto-assets, they do not engage in trust businesses as long as the ownership and other property rights related to crypto-assets remain resting on customers. By constructing their legal relationship with customers carefully, crypto-asset custodians may avoid being characterised as trustees in this relationship and thus save the associated regulatory risks. The trade-off of this legal construction is that it suddenly frees crypto-asset custodians from any regulations. The rationale for regulating trust enterprises is that these enterprises provide trustee services to the public and thus control an enormous amount of property. Without proper regulations (for example, the earmark requirement, regular audits and inspection, etc), the risk that they misuse or appropriate customer property can be extremely high, resulting in the public’s property loss and further the financial system’s instability. In the case of crypto-asset custodians, even if they do not hold the nominal title of a customer’s crypto-assets in legal terms, they effectively control these crypto-assets and thus have the opportunity to misuse or appropriate the asset. Without proper regulations, customers face substantial risks and would thus have less incentive to invest in crypto-assets via crypto-asset custodians. In the long run, cryptoasset custodian businesses would have difficulty expanding their businesses to a larger public.

IV.  The Unshakeable Regulatory Model for Trust Enterprises in Taiwan The narrow definition of trust and stringent trust enterprise regulations, together, create a legal environment that discourages attempts to characterise a business model as a trust in Taiwan. This legal environment saves the regulatory costs incurred by

50 Trust Association of ROC, ‘Member’s List’ (Trust Association of ROC), available at: www.trust.org.tw/en/ members.

Taiwan  123 trust-like businesses, which appears to favour entrepreneurship in the short run. That said, it leaves customer risks completely unregulated, which is undesirable for the whole ­business in the long run. Below I explain the historical roots of this legal environment and the potential for breakthrough in the future.

A.  A Historical Account of Taiwan’s Development of Trust Enterprises and Trusts i.  The 1930s–90s: Trust Business Regulations as Part of the Banking Act The development of trusts in Taiwan originated from commercial trusts rather than private trusts. Legislators referred to trusts for the first time when promulgating the Code of Civil Procedure in 1930.51 However, details relating to trusts, including the ­definition, legal effect and those who may engage in trust businesses, were largely absent. Accordingly, for a long period until 1996 when Taiwan’s Legislative Yuan promulgated the Trust Act,52 Taiwanese courts undertook the central role in developing private trusts laws in Taiwan. In contrast with private trusts laws, commercial trusts laws received far more attention. As early as 1921, when the current government of Taiwan still ruled Mainland China, trust companies emerged.53 Banks also established trust departments to operate trust businesses. That said, the trust businesses then in Taiwan focused mainly on securities-related businesses, which departed significantly from traditional trust businesses in the West.54 Commercial trusts laws emerged mainly in the banking sector. In 1931, when legislators promulgated the Banking Act, they expressly stipulated that banks may not engage in trust businesses without the approval of the Ministry of Finance, the financial regulator then.55 This was the first time laws explicitly mentioned trust businesses. Since then, banks have obtained a clear legal mandate to engage in trust businesses and have become the major trust enterprises. In 1947, when legislators amended the Banking Act, they added a specific c­ hapter entitled ‘Trust Investment Companies’ to regulate trust companies. It referred to trust companies as those companies that receive, use, or manage money and property in the form of trust,56 including banks’ trust departments.57 This amendment appeared to admit non-bank firms to engage in trust businesses. Unfortunately, in practice,

51 Code of Civil Procedure (Taiwan) art 170 (1930). 52 The Legislative Yuan is the highest legislative body in Taiwan, which is equivalent to the American Congress. 53 Legislative Yuan, Meeting Document of the Second Term, Fifth Session, 30th Meeting (1995) 220. Strictly speaking, these ‘trust businesses’ resemble the securities brokerage business, which is not characterised as trust businesses under Taiwanese laws. 54 Chih-Cheng Wang (王志誠), Trust Laws (信託法), 7th edn (Wunan Book Publishing (五南圖書出版股份有限公司) 2018) 8. 55 Banking Act (Taiwan) art 29 (1931). 56 Banking Act (Taiwan) art 83(1) (1946). 57 ibid art 92.

124  Yueh-Ping (Alex) Yang these non-bank trust companies did not exist in Taiwan. Only banks operated trust businesses through their trust departments at that time.58 In the 1960s, to attract mid-term and long-term capital, the Taiwanese government thought of trusts, particularly investment trusts. Therefore, besides permitting the incorporation of some trust companies through special projects in the late 1950s, since 1969 the Executive Yuan59 has promulgated several guidelines and regulations for supervising trust investment companies. Based on these regulations, the Taiwanese government began to approve the application of trust investment companies in the 1970s.60 These companies, however, focused mainly on receiving trust funds for designated or undesignated purposes and providing securities services, including underwriting and securities investment trust businesses. These developments brought Taiwan’s commercial trusts laws towards investment trust businesses. The Banking Act amendment in 1975 further confirmed the exclusiveness of banks and trust investment companies in trust businesses. The amended Banking Act redefined trust investment companies as financial institutions that receive, manage and use trust funds and administer trust property according to specified purposes as trustees or engage in investment with specific purposes in capital markets as investment intermediaries.61 It further provided that unless otherwise provided by law, any person other than a bank may not be entrusted to manage the public’s property.62 Since then, Taiwanese laws officially confirmed that trust businesses were exclusive to banks, including trust investment companies as special banks. This amendment reflected that Taiwanese legislators then largely perceived trust businesses as a narrow scope of investment trust businesses.

ii.  The 2000s–Present: The Trust Enterprise Act Captured by Banks The above series of Banking Act amendments gradually shaped the trust enterprise regulations in Taiwan. Nevertheless, a codified trusts law as a foundation to regulate the legal relationship of trusts remained absent. The emergence of trust enterprises in the 1970s further highlighted this problem. To regulate trust enterprises, the Ministry of Finance started to draft the Trust Act in 1975 and 1985 and later passed the work to the Ministry of Justice, resulting in the promulgation of the Trust Act in 1996.63 In the meantime, the Ministry of Finance noted the problems inherent in the regulatory structure for trust enterprises under the Banking Act. After all, using the Banking Act and the regulatory structure for regulating banks to regulate trust businesses is rare.64 It might impose excessive regulations on trust enterprises considering that banks

58 Wang (n 54) 8. 59 The Executive Yuan is the highest executive body in Taiwan, which is equivalent to Cabinet and undertakes most executive functions. Other executive functions such as national defence or diplomacy are within the domain of the President. 60 Wang (n 54) 9. 61 Banking Act (Taiwan) art 100(1) (1975). 62 ibid art 29(1). 63 Legislative Yuan (n 53) 220–21. 64 Introduction to the Draft of Trust Enterprise Act (Taiwan) (2000).

Taiwan  125 are subject to highly stringent regulations. Besides, trust investment companies and banks’ trust departments mostly prioritised traditional banking business or securities businesses, resulting in an unclear division between trust enterprises and other financial institutions.65 These observations prompted the Ministry of Finance to draft a separate Trust Enterprise Act which has, since 1992, replaced the Trust Investment Company Chapter under the Banking Act. That said, the Ministry of Finance emphasised the financial nature of trust businesses. Moreover, considering that trust companies and banks were the two major trust enterprises when drafting the Trust Enterprise Act, the Ministry of Finance essentially referred to the provisions relating to the Banking Act when drafting provisions regarding the incorporation and supervision of trust enterprises. According to the Ministry of Finance, this approach may subject both trust companies and banks to a consistent set of regulations, maintaining supervisory fairness and consistency.66 The Legislative Yuan promulgated the Trust Enterprise Act in 2000, marking a new milestone of trust enterprise regulations in Taiwan. Under this Act, ‘trust enterprises’ refers to any institution that operates trust businesses as approved by the competent authority under this Act,67 including banks that operate trust businesses approved by the competent authority.68 Under this Act and the accompanying Standards for the Establishment of Trust Enterprises, only two entities may operate trust businesses: trust companies and banks. Moreover, non-trust enterprises that engage in trust businesses will be subject to criminal sanctions.69 While the Trust Enterprise Act appeared to permit non-bank firms to engage in trust businesses provided they obtain the trust company licence, the Ministry of Finance promulgated highly stringent requirements to incorporate trust companies. While the Ministry of Finance emphasised that these requirements were needed to ensure the supervisory consistency between trust companies and banks, the consequence was that no non-bank firms applied for the incorporation of trust companies after the promulgation of the Trust Enterprise Act. Thus, in the end, banks remained dominant in the trust business market in Taiwan.

iii. Summary The evolution of trust businesses in Taiwan reflects the bank’s dominance and capture of this market. Historically, non-banks emerged sporadically but largely disappeared after the Banking Act offered banks a clear mandate to engage in trust businesses. Later, to attract investment, the government adopted the special bank charter model to introduce trust investment companies, which guided Taiwan’s trust business market towards investment trusts. Even though the Trust Enterprise Act carved trust businesses out of the Banking Act in the 2000s, the financial regulator’s mentality did not change.



65 ibid. 66 ibid.

67 Trust 68 ibid 69 ibid

Enterprise Act (Taiwan) art 2 (2000). art 3. arts 33 and 48.

126  Yueh-Ping (Alex) Yang It still perceives trust businesses as a risky business and thus imposes stringent ­requirements on non-banks that plan to incorporate trust companies.70 To be fair, the financial regulator is not entirely unaware of the strictness of these trust company requirements, and is occasionally willing to relax the regulation. For instance, besides trust companies and banks, the Trust Enterprise Act, amended in 2008, permits securities firms, securities investment trust enterprises and securities investment consulting enterprises to operate specified types of trust businesses.71 The Standards for the Establishment of Trust Enterprises, amended in 2009, also reduces the minimum capital requirement to NT$1 billion for trust companies that only engage in real estate investment trust and real estate asset trust businesses and to NT$0.3 billion for those that only engage in real estate asset trust businesses.72 That said, these amendments only affect a limited number of trust businesses, which are mainly investment trusts.

B.  Potential Breakthrough under the Trust 2.0 Reform? The bank-oriented trust enterprise laws in Taiwan resulted in a trust business market highly oriented towards financial trusts. As a result, by the end of 2021, the total value of trust property entrusted to trust enterprises amounted to NT$11.11 trillion (equivalent to US$400 billion). Among them, money trusts represented nearly 46 per cent, and investment trusts represented another 43 per cent.73 These figures present a relatively unchanging trust business market in Taiwan. The bank-dominated trust business market in Taiwan also reveals some weaknesses. As the FSC observed, banks tend to use their trust departments to serve the need to sell financial products; other than that, they do not place the development of their trust departments as a priority. They are also reluctant to offer tailor-made trust products for their customers but prefer to focus on existing money trusts and investment trusts, mainly investment planning services.74 To the extent that other non-bank trust companies are absent in Taiwan, the variety of trust products available for Taiwanese consumers is limited. This problem has become more prominent in recent years as Taiwan proceeds into an ageing society. The aged need services more than investment planning, such as property maintenance, caring services, etc. Trusts can serve as a useful mechanism for providing these services. For instance, the aged may need long-term caring services when they fall sick or even lose consciousness. To prepare for that need, one may entrust his or her property to a trustee in advance, and the trustee may arrange caring services on his or 70 For instance, the Ministry of Finance justified the high minimum capital requirement by explaining that it is necessary to ensure that trust companies perform their fiduciary duty: Legislative Explanation of Standards for the Establishment of Trust Enterprises (Taiwan) art 3 para 1 (2003). 71 Trust Enterprise Act (Taiwan) art 3(2) (2008). 72 Standards for the Establishment of Trust Enterprises (Taiwan) art 3(1) (2009). 73 Trust Association of ROC, ‘Trust Business Statistics of Season 4 of 2021’ (民國一一○年度第四季信託業務統計) (Trust Association of ROC, 31 December 2021), available at: www.trust.org.tw/tw/info/related-statistics/0. 74 Financial Supervisory Commission, ‘Initiative for Promoting Trust 2.0 “Comprehensive Trust”’ (2020) 1.

Taiwan  127 her behalf utilising the trust property. The trustee may further be put under a duty to maintain the trust property, including real estate, investment, or even pets, during his or her sickness. However, these trust services require expertise or know-how beyond investment planning, while banks and other traditional financial institutions can hardly provide these trust services based on their current business models. In 2020, the FSC noted this problem and proposed the ‘Trust 2.0’ Initiative, anticipating that trust enterprises in Taiwan may reform their business models to provide more diversified trust services. In the ‘Trust 2.0’ Initiative, the FSC highlighted the importance of reforming the internal structure of existing trust enterprises, notably banks. For instance, it proposed to study the potential of using laws or self-regulation to guide banks to restructure their internal organisations to establish units for developing trust businesses and enhance their capacity in trust businesses so that banks may better combine trust businesses with financial instruments to provide comprehensive trust services. It also proposed that banks should revise the compensation policies and evaluation principles for their trust businesses, such as raising the weight of trust businesses in internal evaluation and revising the benchmarks for key performance indicators (KPIs) to consider better the contribution of employees to trust businesses.75 These initiatives focus mainly on reforming the incumbent trust enterprises to expand their businesses. On the other hand, the FSC also noted that existing trust enterprises are mostly banks or financial institutions that can hardly diversify their trust businesses and develop professionals in trust businesses due to their resource allocation, internal rotation of employees, etc. The FSC further noted that existing trust enterprises focus mainly on money trusts and selling financial instruments, but they can hardly offer trust products that satisfy their customers’ needs. Accordingly, the FSC also proposed to study the potential to develop other professional trust companies to change the business models of incumbent trust enterprises and develop various trust products tailor-made for customers.76 These initiatives inevitably entail the change of existing trust enterprise regulations, including the stringent capital requirement and ownership requirement mentioned above. Therefore, whether the Trust 2.0 Initiative may provide an opportunity for the future relaxation of trust enterprise regulations in Taiwan is worth close observation.

C. Summary In sum, the stringent trust enterprise regulations in Taiwan are historically rooted. Banks have dominated this market almost since the birth of trust enterprises, rendering trust enterprise laws in Taiwan a kind of special banking law centring on investment trusts. This historical background results in a bank-like trust enterprise regulation, which is highly stringent and limits the types of trust products available in this market.



75 ibid

4.

76 ibid.

128  Yueh-Ping (Alex) Yang In this regulatory environment, the narrow definition of trust under Taiwanese trusts laws provides a way out for many trust-like service providers. Even if they possess de facto control over customer property, they may avoid being considered as providing trust services as long as their customers maintain the title to their property. This narrow definition also offers room for the regulator to turn a blind eye to these trust-like service providers. For instance, when characterising the legal relationship between customers and service providers, the regulator may adopt a legal interpretation to the effect that the property title rests on customers to avoid the trust enterprise regulations from applying. Crypto-asset custodians are a good example, as discussed earlier.

V. Conclusion In this chapter, I have used crypto-asset custodians to illustrate the narrow definition of trusts in Taiwan and its historical roots. While several jurisdictions have characterised crypto-asset custodian services as trusts and have applied trust enterprise regulations to crypto-asset custodians, I have argued that it is less likely the case in Taiwan. In terms of legal interpretation, there is a convincing case to argue that crypto-asset investors remain in possession of the title to their crypto-assets in the crypto-asset custodian relationship, which prevents this relationship from constituting a trust relationship. In terms of regulatory policy, the regulator might be concerned that imposing the stringent trust enterprise regulations in Taiwan on crypto-asset custodians might inhibit this financial innovation. In light of these aspects, characterising crypto-asset custodian businesses as non-trust businesses based on the existing definition of trusts seems to be a fair compromise. The trade-off, however, is that customers undertake real risks. After all, regardless of whether crypto-asset custodians or customers are the nominal owners of a crypto-asset, crypto-asset custodians possess effective control over the crypto-asset. The narrow definition in Taiwan, thus, has its drawbacks. Less is not always more. Certainly, the narrow definition of trust and the stringent trust enterprise regulations in Taiwan do not necessarily have a logical connection. In theory, Taiwan can undoubtedly adopt a narrow definition of trusts, but relaxed trust enterprise regulation, or vice versa. Coincidentally, however, the narrow definition of trust and the stringent trust enterprise regulations coexist. Indeed, they even reinforce each other. Implicitly, the narrow definition of trusts relieves the negative effect of stringent trust enterprise regulation while stringent trust enterprise regulation justifies the narrow definition of trusts. Whether the Trust 2.0 Initiative, may break this self-reinforcing circle to adapt to the evolving need of trust services in Taiwan is something to be observed closely in the future.

8 Adaptation in a Civil Law and Sharia Context: Trusts and Foundations in the Gulf Region DAVID RUSSELL QC*

When incentive to acquire and obtain property is gone, people no longer make efforts to acquire any … Those who infringe upon property rights commit an injustice … If this occurs repeatedly, all incentives to cultural enterprise are destroyed and they cease utterly to make an effort. This leads to destruction and ruin of civilization. Ibn Khaldun (1332–1406): Muqaddimah

I. Introduction The trust, as the literature recognises, is a remarkable concept for many reasons, not the least of which is its flexibility. As will be seen, the trust concept is remarkably similar to, and may in fact have its origins in, the Islamic concept of waqf, an Arabic word whose meaning signifies detention. But for reasons discussed below, as an instrument of private wealth management the waqf concept fell into disuse until comparatively recently. Instead, wealth management arrangements tended to be based upon common law and formal civil law arrangements (trusts and foundations respectively), usually established under the laws of foreign countries. Recent years have seen the introduction of both arrangements to the Gulf region, as well as a revival of awqaf (the plural of waqf) in statutory form. In this chapter the introduction of those concepts, and the corresponding development of awqaf, involving adaptation of all three to changes in commercial conditions as adjustment to regional cultural values, is explored.

* Barrister at Law, Outer Temple Chambers, London and Dubai.

130  David Russell QC

II.  Trusts Laws In 2005, the Dubai International Financial Centre (DIFC) enacted the DIFC Trust Law 2005 – the first trusts legislation in the Gulf region – albeit one which provided for common law enclaves in the form of the financial free zones. The present DIFC Trust Law 2018 is in large part a re-enactment of the 2005 Trust Law. According to Professor WA Lee, ‘one of its advantages results from the fact that there is no (common law) equity court in Dubai so it was necessary for the DIFC to start from scratch’. The DIFC Trust Law covers the whole topic with which it seeks to deal, rather than simply addressing only part of the area leaving the rest for existing precedent and judicial elucidation, as is conventionally the case with statutes relating to trusts based on the English model. As a result, specific provision is made for matters that many common law jurisdictions leave to be regulated by the general law of trusts. The reason for this is that articles 9 and 10, and indeed the majority of the basic provisions of the Trust Law, are drawn from the American Uniform Trust Code (UTC), which was created by a National Conference of Commissioners on Uniform State Laws project. The UTC reached its present form in 2005 (although it was subject to minor amendments in 2010), broadly at the same time as the DIFC Trust Law was promulgated, and is strongly influenced by the Restatement of Trusts (2nd and 3rd) and the 1986 California trust statute (Division 9 of the California Probate Code). It has been adopted by approximately one-third of the American states but not always in the same terms as the model code which the Trust Law follows. This means that there is, and there will continue to be in the future, a body of US state law decisions which may be relevant to the interpretation and application of the Trust Law. Other significant sources of material in the Trust Law are the Trusts Law (2011) Revision (Cayman Islands), the Trusts (Guernsey) Law 2007 and the Trusts (Jersey) Law 1984. This means that this particular law is an unusual hybrid – formed as it is in a common law jurisdiction carved out of a Sharia law emirate and federal union, where in matters of personal status such as succession the Sharia remains paramount, while the trust statute itself is largely based on an American model that will be applied by a judiciary steeped in the common law as developed in England and Commonwealth jurisdictions.1 The terms of article 9 have the result that the articles in the Trust Law comprise a set of ‘default’ rules, which govern trusts subject to it ‘except as otherwise provided in the terms of the trust’. Article 9(1) and (2) provide that the Trust Law governs the duties and powers of and relations amongst trustees and the ‘rights and interests of a beneficiary’ (the term ‘beneficiary’ is widely defined in schedule 1 of the Trust Law), and probably extends to the objects of discretionary dispositive powers and persons who are potential objectives of such powers) except to the extent that the trust instrument provides otherwise. This approach reflects the position under English law. Armitage v Nurse is the leading decision in English trusts law on the validity of exemption clauses.2 In this case,

1 See

generally, A De La Rosa, ‘The DIFC Trust Law’ (2008) 14 Trusts & Trustees 480. v Nurse [1998] Ch 241.

2 Armitage

Gulf Region  131 the Court of Appeal held that English law trustee exemption clauses can validly exempt trustees from liability for all breaches of trust except fraud. In the leading judgment, Millett LJ observed: I accept the submission … that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient. As Mr Hill pertinently pointed out in his able argument, a trustee who relied on the presence of a trustee exemption clause to justify what he proposed to do would thereby lose its protection: he would be acting recklessly in the proper sense of the term.3

The Trust Law 2005 was the first comprehensive legislation for trusts in the Gulf Cooperation Council (GCC) region. It was subsequently followed by the Qatar Financial Centre (QFC) whose Trust Regulations 2007 in their initial form closely followed the DIFC Trust Law, the Abu Dhabi Global Market (ADGM) which has adopted the law of trusts applicable in England with modifications as to perpetuities4 and conflicts of law5 corresponding to those provisions of the DIFC Trust Law, and Bahrain whose comprehensive Trust Law 2016 applies throughout the whole of Bahrain. The 2018 re-enactment of the Trust Law introduced a number of innovations in the region – indeed in some cases in the world. These included: • Provision for correction of mistakes in establishing a trust and its administration, restoring the position as it was in England before the decision in Re Hastings-Bass6 was effectively overruled in Pitt v Holt7 (articles 23–29). • ADR mechanisms with compulsory arbitration possible (articles 30–32 and schedule 2). • Formal exclusion of English statute law (article 10(2)). • Enhancement of private international law rules (the so-called ‘firewall’: articles 13–16). • Enabling exclusion of challenging beneficiaries (article 48). • Court’s power to vary, and rectify, trust instrument enhanced (article 40). • Trust asset management powers clarified (article 84. cf British Virgin Islands VISTA trusts). • Trust recognition aligned with Hague Trust Convention (schedule 1 – definition of ‘foreign trust’). • Perpetuities (article 36). • Variation of trusts (article 40).



3 ibid

253–54. of English Law Regulations 2015 (ADGM) s 4. 5 Trusts (Special Provisions) Regulations 2016 (ADGM) ss 2 and 3. 6 Re Hastings-Bass [1975] Ch 25. 7 Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108. 4 Application

132  David Russell QC • • • • • •

Authorisation of dealings with trust property (article 41). Advisory trustees (article 57). Custodian trustees (article 58). Settlor control (article 84). Incapacitation of settlor or protector (article 85). Confidentiality of trustee deliberations (Article 66(2)).

III.  Foundations Laws Although foundations have traditionally been associated with Liechtenstein, where a foundation regime has been available since 1926, they are a form of legal entity which is known in most continental European jurisdictions, though in most cases their use is limited to charitable purposes (with the notable exceptions of Austria, Liechtenstein and the Netherlands). In the so-called offshore world, Panama was the first to introduce a foundation law in 1995. The Bahamas, Mauritius, Anguilla, St Kitts & Nevis have all followed suit, as have Jersey, Guernsey and the Isle of Man. In the European Union, Cyprus has introduced a foundations regime this century and most recently Luxembourg has drafted legislation for the introduction of a patrimonial foundation very similar to the Netherlands foundations regime, but it is still subject to parliamentary discussions and approval.8 In March 2018, the DIFC joined the QFC and ADGM in enacting legislation for establishment of foundations9 although the models diverge somewhat. In 2019, the Ras al Khaimah International Commercial Centre (RAKICC) also enacted Foundations Regulations largely based on the DIFC Foundations Law 2018. The QFC and ADGM Laws are very largely drawn on the legislation of the Crown Dependencies. The DIFC legislation and its RAKICC counterpart draw on European sources as well. In common with their ADGM, QFC and RAKICC counterparts, and ADGM and Bahraini trusts, DIFC foundations are protected from foreign judgments and laws, although to a somewhat greater extent. In terms of governance arrangements, there is little to distinguish between the alternative models. The role of the Court is somewhat more extensively defined, so as to facilitate particular transactions such as mergers and divisions. At that point greater differences emerge. Specifically, the following features of the DIFC Foundations Law have no counterpart in the legislation of either the ADGM or QFC: • The Courts have power to set aside transactions for mistake,10 along the lines of the jurisprudence which developed in England following the decision in Re Hastings-Bass prior to its limitation by the decisions of the Supreme Court in Pitt v Holt. 8 In summer 2013, the former Luxembourg government submitted to the Luxembourg Parliament a draft law on the ‘Fondation Patrimoniale’. Following the October 2013 elections, the approval process was delayed. 9 Foundations Law 2018 (DIFC); Foundations Regulations 2017 (ADGM); Foundation Regulations 2016 (QFC). 10 Foundations Law 2018 (DIFC) arts 50–53.

Gulf Region  133 The capacity to compulsorily settle intra-foundation disputes by arbitration.11 Redomiciliation of foundations,12 available also in the ADGM13 but not in the QFC. Recognition of foreign foundations.14 Conversion of DIFC private companies to foundations15 which is available to any company whose domestic law permits its redomiciliation to the DIFC as a preliminary step as the DIFC Companies Law permits that.16 • Provision for Depositary Certificates modelled on the Netherlands STAK (being the abbreviation in Dutch of ‘Stichting Administratiekantoor’). • • • •

The STAK structure separates legal ownership from the economic benefits of ownership. In the performance of this duty the STAK does not act in its own best interest, but rather in the interests of the depositary receipt holders as well as the assets themselves (for instance the continuity of the company in the capital of which the STAK holds shares in administration). As a general rule, a STAK structure is set up in order to separate control (over certain assets, typically shares in the capital of a company) from the financial interest (attributable to these assets). This separation is achieved by transferring assets to the STAK, in return for which the STAK issues depositary receipts in respect of these assets to the transferor. Upon transfer the STAK becomes the legal owner of the assets, but – due to a contractual relationship with the STAK – the STAK will hold these assets for the risk and the account of the holders of the depositary receipts of those shares (rather than for its own risk and account). As a result, the depositary receipt holders will have the economic benefit of the assets (through the depositary receipts), while – from a legal perspective – the STAK (as legal owner) will have full control over the assets. The separation of control and financial interest can be used for various purposes, such as for private wealth planning, for the protection of the continuity of the company, for anti-hostile takeover measures, for employee participation, and for purposes of privacy protection. Against this background the following assessment by Professor Paolo Panico is perhaps not surprising: [I]t is worth noting that the ‘torch’ of jurisprudential creativity and vision that in the mid1920s had permeated the Liechtenstein Personen und Gessellschaftrecht in the original conception of its authors, Wilhelm and Emil Beck, has been passed on in our times to the drafters of the DIFC Foundations Law 2017.17

A.  Awqaf In parallel to the development of the trust in common law countries, a remarkably similar structure developed in the Islamic world known as the waqf thrived, and

11 ibid

arts 54–55. arts 57–64. 13 Foundations Regulations 2017 (ADGM) ss 32–36. 14 Foundations Law 2018 (DIFC) art 65. 15 ibid art 66. 16 Companies Law 2018 (DIFC) arts 144–50. 17 P Panico, ‘The DIFC Foundations Law 2017’ (2017) 10 Trusts & Trustees 1051, 1065. 12 ibid

134  David Russell QC then declined.18 However, more recently, as great wealth has been created in many Islamic countries, and as a result of the Islamic tradition of philanthropy, there has been a revival in interest in the waqf structure, and increased resources are now being held on terms which seek to comply with the requirements of Islamic law. Awqaf existed for over five hundred years before the first identified English trust and, in the view of some commentators (for example, Gaudiosi19 and Hammadeh20) may have provided a model for it. The versatility of awqaf allowed their use by both Jews and Christians in Ottoman Palestine,21 a practice continued under the British Palestine Mandate and in the State of Israel.22 The understanding of the nature of awqaf in the modern context has developed to the point that Accounting Standards now exist promulgated by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)23 established in Bahrain in 1991. Its Standards24 provide a useful summary of the key features of a waqf. The discussion below relates to traditional Islamic jurisprudence: as will be seen this has been supported by statute within the United Arab Emirates. Within the UAE, laws in each of the Emirates of Sharjah25 and Dubai26 and at the UAE national level27 now provide a legal framework for awqaf (the translation used in the English versions of these laws is ‘Endowment’). Outside the UAE and Qatar, Ministries for Endowments (and thus regulatory structures) exist in the Kingdom of Saudi Arabia,28 Oman,29 Kuwait30 and Bahrain.31

IV.  Recent Developments One of the recommendations of the DIFC’s Wealth Management Review,32 which resulted in the enactment of the amended Trust Law and Foundations Law in 2018, was the submission of questions for interpretation of the law pursuant to article 5(B)(1)(b)

18 See P Stibbard, D Russell and B Bromley, ‘Understanding the Waqf in the World of the Trust’ (2012) 18 Trusts & Trustees 785. 19 MM Gaudiosi, ‘The Influence of the Islamic Law of Waqf on the Development of the Trust in England: The Case of Merton College’ (1988) 136 University of Pennsylvania Law Review 1231. 20 F Hammadeh, Family Business Continuity on the Middle East & Muslim World (BookBaby 2018) 107–08. 21 A Kaplan, Trusts and Estate Planning in Israel (Juris Publishing 2016) 141. 22 ibid 142–47. 23 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), ‘What We Do’ (AAOIFI), available at: aaoifi.com/?lang=en#. 24 AAOIFI, Shari’ah Standards: Full Text of Shari’ah Standards for Islamic Financial Institutions As at Safar 1439 AH – November 2017 AD (AAOIFI 2015); AAOIFI, ‘Governance Standard 13: Waqf Governance’ (AAOIFI), available at: aaoifi.com/governance-standard13-waqf-governance/?lang=en. 25 Endowments Law 2018 (Sharjah). 26 Law Regulating Endowments and Gifts 2017 (Dubai) (which in art 52 recognises the DIFC’s ‘Endowment provisions’). 27 Federal Law on Endowment 2018 (UAE). 28 Ministry of Islamic Affairs, Dawah and Guidance and General Authority of Awqaf. 29 Ministry of Endowment and Religious Affairs. 30 Ministry of Awqaf and Islamic Affairs. 31 Ministry of Justice, Islamic Affairs and Endowments. 32 Report of the DIFC Wealth Management Review Working Group (2016) recommendation 23.

Gulf Region  135 of the Judicial Authority Law33 to address a perceived lack of judicial precedent as to the operation of the original Trust Law 2005. That procedure effectively seeks an advisory opinion from the DIFC Court of Appeal. Corresponding provisions are to be found in the laws establishing other financial centres including the ADGM34 and the Astana International Financial Centre.35 That procedure having been adopted, the DIFC Court of Appeal has recently responded to the request with a comprehensive judgment dealing with the issues raised.36 Of particular interest were the Court’s confirmation that a DIFC foundation might act as trustee of a DIFC trust, and confirmation that the trust property might include property in a non-trust jurisdiction, in this regard. It was only very recently that this question had to be decided by the UK Supreme Court although there were earlier decisions such as Attorney-General v Jewish Colonisation Association37 and Duke of Marlborough v Attorney-General38 which involved that assumption. In Akers v Samba Financial Group,39 the reasons of Lord Sumption provide a succinct summary of the position: The question whether some species of proprietary interest is capable of existing is necessarily a question for the general law. Unless the general law recognises the possibility of such an interest, it is self-evident that the parties cannot create or transfer it. That necessarily provokes the question: the general law of which jurisdiction? Normally, it will be the lex situs. This would be obvious in the case of land, but is equally true of shares. Shares in a company are legal rights against that company, dependent on the law of its incorporation. The principle is the same as that which applies where a person assumes a contractual obligation to transfer an interest which is incapable of existing under the lex situs. It is stated in Anton’s Private International Law, 3rd ed (2011) at para 21.61, in a passage adopted by Lord Hodge in In Re Joint Administrators of Rangers Football Club Plc 2012 SLT 599, para 19: ‘while the contractual aspects of a contract to assign corporeal moveables are governed by the law applicable to the contractual obligation, the final question of proprietary right must be determined by the lex situs’. None of this, however, means that where a person assumes the liabilities of a trustee under an instrument governed by another law which recognises the concept, that instrument is void or cannot be enforced according to its terms. It remains effective to create personal rights against the trustee, who may be ordered to give effect to the trust, either by specifically performing it where that can be done, or making good his breach of duty financially. The law of Saudi Arabia will treat the trustee as the owner of the entire interest in the shares with all the rights that that entails, but equity will exercise its personal jurisdiction to compel him to deal with the shares in accordance with his trust. The same is true of equitable obligations in respect of property which are imposed by law, where the amenability of the defendant to the personal jurisdiction of the court has always been enough to justify the enforcement of his obligations.

At the end of 2020 the UAE Federal Government enacted a Trusts Law of general application within the UAE outside the financial free zones of the DIFC and ADGM. As will



33 Law in respect of the Judicial Authority at Dubai International Financial Centre 2004 (Dubai) as amended. 34 Law

concerning Abu Dhabi Global Market 2013 (Abu Dhabi) art 13(8). Court Regulations 2017 (Kazakhstan) art 26(12). 36 Re DIFCA’s Application (2021) DIFC CA-002-2020. 37 Attorney-General v Jewish Colonisation Association [1901] 1 QB 123. 38 Duke of Marlborough v Attorney-General [1945] Ch 78. 39 Akers v Samba Financial Group [2017] UKSC 6, [2017] AC 424 [84]–[85]. 35 AIFC

136  David Russell QC be seen, this is an initiative of a somewhat different character to the four existing Trusts Law regimes. It will be recalled that two of the existing regimes are based in the common law enclaves of the DIFC and the ADGM (although conceptually quite different) and subject to the jurisdiction of courts steeped in common law traditions. The other two, whilst being laws of general application within Qatar and Bahrain respectively, are not fully integrated with the local legal systems. The QFC Trust Regulations, whilst initially based on the DIFC Trust Law 2005, had a significantly different scope of operation because QFC laws and regulations ‘apply to The Contracts, Transactions and arrangements conducted by The entities established in, or operating from The QFC, with parties or Entities located in The QFC or in the State but outside The QFC, unless the parties agree otherwise’.40 The result is that that the enforceability of trusts is arguably limited to persons which are registered entities in the QFC. The Bahrain Trust Law is less limited in its potential applicability but, as with the QFC, makes registration a condition of its validity,41 and requires at least one licensed trustee. The Bahraini law adopts terminology adapted from the DIFC and other common law jurisdictions. Arguably the most significant provision of both is that, as with the ADGM and DIFC, judicial supervision is exercised by bodies outside the national courts.42 The UAE federal Trusts Law, on the other hand, has been consciously designed to be integrated with the national legal system and originally written in Arabic with the result translated into English, unlike the Bahraini Trust Law which reads as if it was originally written in English and then translated into Arabic for the purposes of enactment. This can lead to some use of terminology in the official English translation with which lawyers schooled in equity traditions may find unfamiliar. Thus a trust is defined as: The allocation of a property under the Trust Instrument, for the interest of a beneficiary or to achieve a charitable purpose or a special purpose in accordance with the provisions of this Decree Law, and the Trust is considered an Original in kind Right.43

Its legal nature is also stated in the following terms: The Trust shall acquire a legal personality and have financial and administrative independence and the right of litigation in this capacity, and shall be represented by the Trustee.44

At later points, the traditional common law position is clearly stated: The Trustee shall have full powers and authority over the Trust Property, and may manage, use and dispose the Trust property by all means of disposition, and may open bank accounts in the name of the Trust, unless such right is restricted by the Trust Deed or this Decree Law or any other relevant Laws.45

40 Qatar Financial Centre Law 2005 as amended by Law No 14 of 2009 (Qatar) art 18(3). 41 Trust Regulations 2007 (QFC) art 16A; Trust Law 2016 (Bahrain) ss 12(4)(j), 26. 42 In the QFC the QFC Courts (Trust Regulations 2007 (QFC) pt 14), in Bahrain the Bahrain Chamber for the Resolution of Economic, Financial and Investment Disputes (Trust Law 2016 (Bahrain) s 1 (definition of ‘Court’), as to which see BCDR, ‘BCDR Court’ (BCDR), available at: www.bcdr-aaa.org/bcdr-court/). 43 Decree-Law regarding Trusts 2020 (UAE) art 1. 44 ibid art 3. 45 ibid art 23(1).

Gulf Region  137 And: The trustee shall carry out the following – Commence to act, within a reasonable time of his appointment, with the transfer of powers and authorities in respect of the Trust Property to him and, when it is under his control, subject to the term specified in Article 13(1)(a) of this Decree Law.46 Perform his obligations and exercise his powers and authorities in accordance with the conditions of the Trust Instrument and the provisions of this Decree Law.47 Exercise his duties to promote the interest of the Beneficiaries and the Purpose of the Trust and shall preserve and increase the Trust Property and dispose of it in such way in the best interest of the Beneficiaries and further the Purpose of the Trust.48 Represent the interests of the Trust and any legal requirements relating to the Trust before all, including any competent authority for registration or recording any transaction relating to the Trust Property.49 Keep a record of all the Trust Property and keep the Trust Property separately from his personal properties and any other properties managed by him in a manner that allows identification of the Trust Property easily from his own properties or any other properties.50

This reflects the fact that the Arabic word used in article 3 does not connote legal personality in the sense of a body corporate under English law. It follows that a valid trust under the new Law clearly satisfies the requirements of the Hague Convention: 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) b) c)

the assets constitute a separate fund and are not a part of the trustee’s own estate; title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; 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.51

The Law reflects the predilection of the civil law for registration of rights in order that they be legally recognised, registration of trusts being a condition of validity.52 In perhaps the most significant departure from the other trust regimes, jurisdiction in trust matters will be exercised by the UAE courts. It may take some time for a local

46 ibid art 25(1). 47 ibid art 25(2). 48 ibid art 25(4). 49 ibid art 25(6). 50 ibid art 25(9). 51 Hague Convention on the Law Applicable to Trusts and their Recognition 1985, art 2. 52 Decree-Law regarding Trusts 2020 (UAE) art 48(2). The Operating Regulations 2018 (DIFC) provide an optional system of registration to facilitate trust activity outside the DIFC for the same reason.

138  David Russell QC jurisprudence to develop in the UAE courts, and the lesser precedential status of prior decisions in a civil law context may lead to perceived uncertainty in the context of the new Law similar to that which led to the DIFCA’s application to the Court of Appeal and noted in its reasons53 in relation to the DIFC Trust Law. This may be less of a problem in the Emirate of Abu Dhabi given the arrangements it has made for its courts to include judges with experience in common law jurisdictions54 than is the case in the other emirates. In most other respects, the federal Trusts Law contains the provisions which are to be expected in a comprehensive set of laws. Trusts can be established to benefit persons or purposes, both charitable and non-charitable. A trust instrument is required55 (which may include a will or other testamentary disposition),56 and the settlor must either have full capacity57 or have the settlement of property on a trust in his favour confirmed by the Court.58 The trust must have certainty of property,59 trustee60 and beneficiary (or purpose).61 The trustee’s powers,62 duties63 and liabilities64 are comprehensively detailed. Provision is made for the appointment and removal of trustees65 and the revocation, amendment, invalidity and termination of the trust.66 The Court has extensive powers of supervision,67 and in addition Protectors68 can be appointed with a supervisory role and the settlor can reserve extensive powers.69 Of particular interest are the provisions relating to the establishment of Special Trusts, whose operation will be subject to future cabinet decisions70 and whose purposes may include securities dealing and retirement funds.71 This suggests that the federal government sees its new Trusts Law as providing a platform for the further development of the UAE as a central participant in the capital markets in the region. The schedule below contains a comparative table of provisions of the Trusts Laws considered in this chapter.

53 Re DIFCA’s Application (n 36) [6]–[8]. 54 As to which see Esraa Ismail and Mohd Aamir, ‘Abu Dhabi Appoints American Judges in Commercial Courts’ (Emirates News Agency–WAM, 12 May 2019), available at: wam.ae/en/details/1395302762010. 55 Decree-Law regarding Trusts 2020 (UAE) art 5(1). 56 ibid art 5(2). 57 ibid art 6(1)(a). 58 ibid art 5(4). 59 ibid art 6(1)(f) and (g). 60 ibid art 6(1)(e). 61 ibid art 6(1)(c) and (d). Art 32(5) makes it clear that the requirements of art 6(1) in this respect are alternatives. 62 ibid arts 23 and 24. 63 ibid arts 25–29. 64 ibid art 30. 65 ibid arts 15–21. 66 ibid arts 40–43. 67 ibid art 39. 68 ibid arts 36–39. 69 ibid art 14. 70 ibid art 44. 71 ibid art 46.

Gulf Region  139

V.  Cross-Border Implications The development of regional capital markets makes the cross-border implications of the existing available legal structures of considerable importance. Over time it may well be the case that other jurisdictions in the region will adopt similar legislation. But in the meantime, the question arises whether the use of these structures is limited to their home jurisdictions, or is open to wider use within the region. Each of the ADGM, Bahrain, DIFC and QFC laws72 provides for the recognition of ‘foreign trusts’ within their own jurisdictions in substantially identical terms. Taking the DIFC model as the template, they provide: 86. Enforceability of a foreign trust (1) Subject to Article 86(2), a foreign trust shall be regarded as being governed by, and shall be interpreted in accordance with, its governing law. (2) A foreign trust shall be unenforceable in the DIFC: (a) to the extent that it purports: (i) to do anything which is contrary to DIFC Law; or (ii) to confer any right or power or impose any obligation the exercise of which is contrary to DIFC Law; or (b) to the extent that the Court declares that the trust is immoral or contrary to public policy in the DIFC. but otherwise shall be enforceable in accordance with its terms and its governing law.

The UAE federal Trusts Law departs from this model somewhat. It provides: (Article 2) The provisions of this Decree Law shall apply to any Trust created pursuant to its provisions. Financial Free Zones shall be excluded from the provisions of this Decree Law, if it has legislation to regulate and implement Trusts created therein. (Article 4) The provisions of this Decree Law shall apply to Foreign Trust to be enforced in the State in the following cases: 1. 2. 3.

If this is stipulated by the Trust Instrument. If it is allowed by the legislation under which the Foreign Trust is created. If the terms and conditions of the Foreign Trust are inconsistent with the mandatory provisions provided for in this Decree Law or the Public Policy.

Trusts established in either the ADGM or DIFC are excluded from the definition of a ‘foreign trust’.73 The implication is that these trusts will be regulated solely in accordance with their own laws. Whilst, unlike the provisions in relation to foreign trusts in the other laws discussed above, there is no express provision that a foreign trust shall 72 Trusts (Special Provisions) Regulations 2016 (ADGM) s 6; Trust Law 2016 (Bahrain) s 54; Trust Law 2018 (DIFC) art 86; Trust Regulations 2007 (QFC) art 62. 73 ‘A Trust created in accordance with the laws of a foreign state’. Decree-Law regarding Trusts 2020 (UAE) art 1 (definition of ‘Foreign Trust’).

140  David Russell QC (subject to certain exceptions) ‘be enforceable in accordance with its terms and its governing law’, that necessarily is implied by the terms of article 4(3), subject to exceptions similar to those in the other laws. The UAE, like the other countries in the region, is not a party to the Hague Convention. That does not preclude recognition of the trusts established under these laws in Convention jurisdictions as the Convention is an open convention: it applies in a jurisdiction which has adopted it irrespective of whether the trust in respect of which recognition is sought has been established in a Convention jurisdiction. As noted above, the DIFC Court of Appeal has confirmed that, in relation to DIFC trusts, the applicability of the DIFC Trust Law in relation to trust property outside the DIFC is not dependent upon the recognition of trusts in the jurisdiction in which the property is located,74 in this respect reaching the same conclusion as the UK Supreme Court in Akers v Samba Financial Group.75 But as the Court noted, it does not follow from that conclusion that enforcement of court orders in respect of such property will not be problematic, as indeed subsequent litigation in the Samba Financial Group matter demonstrated.76 In addition to the Hague Convention, there are a number of other relevant international agreements for recognition of judgments within the region – specifically the GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications,77 the Riyadh Arab Agreement for Judicial Cooperation,78 and the UAE India Judicial Co-operation Agreement.79 The DIFC Court of Appeal observed (in the context of intra-UAE enforcement of judicial decisions of the DIFC courts in relation to trusts and foundations) that there was no reason why the general provisions of article 7 of the Judicial Authority Law should not apply to orders made in a proceeding in the Court under the DIFC Trust Law or the DIFC Foundations Law80 and in principle there is no reason why the same should not apply under the judicial cooperation agreements. Enforcement of a judgment under any of these provisions requires, in addition to residence of the person against whom enforcement is sought or submission to jurisdiction, that the enforcement not be contrary to public policy (or, in the civil law context, public order) in the jurisdiction in which enforcement is sought.81

74 Re DIFCA’s Application (n 36) [120]–[129] 75 Akers (n 39) [84]–[85]. 76 Byers v Samba Financial Group [2021] EWHC 60 (Ch). 77 The GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications, available at: arbitrationlaw.com/files/free_pdfs/GCC%20Convention.pdf. 78 Riyadh Arab Agreement for Judicial Cooperation 1983, available at: www.refworld.org/docid/3ae6b38d8. html. 79 Agreement between Republic of India and UAE 1999, available at: legalaffairs.gov.in/agreement-betweenrepublic-india-and-uae-0. 80 Re DIFCA’s Application (n 36) [187]. 81 English courts have tended to regard these terms as interchangeable, particularly in the context of international arbitration. Thus in Lemenda Ltd v African Middle East Co [1988] QB 448, 453, Phillips J, referred to ‘order public’ in the Qatar Civil Law in the following terms: ‘The reference in these articles to “public order” is the equivalent of the more familiar English term public policy’. But civil law commentators have argued that the civil law term has a wider application. See, eg, K Murphy, ‘The Traditional View of Public Policy and Order Public in Private International Law’ (1981) 11 Georgia Journal of International & Comparative Law 591.

Gulf Region  141

VI.  Public Policy? This matter, too, was considered by the DIFC Court of Appeal in the context of references to public policy in both the Trust Law and the Foundations Law, which would have been grounds for invalidating a trust or an object of a foundation. Public policy in the UAE context needs to take into account the position of the DIFC (and ADGM) within a federation, as noted by HE Justice Al Sawaheli in Loralia Group LLC v Landen Saudi Company.82 But it could not invalidate a DIFC or ADGM trust or Foundation object simply on the basis that trusts (or foundations) were unknown to the UAE civil law. Indeed, as will be seen, there are broadly comparable provisions in the civil law parts of the UAE. But where enforcement of a common law trust or foundation is sought elsewhere in the GCC, it becomes necessary to consider what arguments might be put that such enforcement is contrary to public policy in those jurisdictions. For that purpose, it is instructive to consider whether the provisions of the trusts laws and foundations or endowments laws or the conduct for which they make provision significantly depart from legal principles applicable in the remaining jurisdictions. For present purposes it is relevant that each of the endowment laws referred to above permits the dedication of assets (in the case of the Sharjah Law limited to one-third of the endower’s estate) and provides for an endower to transfer property to a third party to be held on specified terms which may include the provision of benefits to family members, and promotion of purposes which may be either charitable or non-charitable. The endower may reserve powers to vary the terms of the endowment, and the conduct by the administrator/custodian of the affairs of the endowment is subject to external accountability. Each of the official translations of these laws describes the status of the administrator/custodian as a ‘trustee’.83 Despite the ancestry of awqaf in Islamic jurisprudence, it is not necessary for an endower to be a Muslim under any of these laws.84 And, as noted, each of the remaining regional jurisdictions makes provision for the activity of awqaf within its jurisdiction. The UAE Civil Code (which presumably reflects the local views of Sharia requirements) prior to the enactment of the federal Trusts Law recognised that trusts can exist in limited circumstances.85 The UAE Civil Code also recognises: (a) the validity of absolute gifts to specific donees;86 (b) the application of lex situs to dispositions of real property and the law of location of the property to dispositions of movable property,87 and the law of location of the property to determine its categorisation for these purposes;88 and 82 Loralia Group LLC v Landen Saudi Company [2018] DIFC ARB 004. 83 Federal Law on Endowment 2018 (UAE) art 16(1); Law Regulating Endowments and Gifts 2017 (Dubai) arts 21, 28B; Endowments Law 2011 (Sharjah) art 38. However they do not use the term’s equivalent in the Arabic versions. Trustee in Arabic is ‘Ameen’ whereas in the Endowment Laws the term used is ‘Naazir’ and the nearest translation to English for this word is ‘beholder’. 84 Federal Law on Endowment 2018 (UAE) art 1 (definition of ‘Endower’); Law Regulating Endowments and Gifts 2017 (Dubai) art 4. 85 See, eg, Civil Code (UAE) arts 235, 309, 566, 776, 966, 981, 983, 1002 and 1233. However, this observation is based on the most widely used translation of the Code and the Arabic terminology differs from this translation. 86 ibid arts 276–79. 87 ibid art 18(1). 88 ibid art 18(2).

142  David Russell QC (c) where contracting parties are residents of different states, the right of the parties to choose the law applicable to their contract89 except in cases involving real property to which the lex situs applies.90

‘Public order’ is defined in article 3 of the UAE Civil Code. It provides: Public order shall be deemed to include matters relating to personal status such as marriage, inheritance, and lineage, and matters relating to sovereignty, freedom of trade, the circulation of wealth, rules of private ownership and the other rules and foundations upon which society is based, in such a manner as not to conflict with the definitive provisions and fundamental principles of the Islamic Sharia.

The existence of trusts legislation in the ADGM,91 Bahrain92 and the QFC93 (the second and third of these applying generally in Bahrain and Qatar respectively and all of which recognise the validity of foreign trusts within their respective jurisdictions) and foundations legislation in the ADGM,94 QFC95 and RAKICC96 tells against the likelihood that the provisions of the laws here in question are contrary to public policy (or, in the civil law sense, public order) on the grounds of inconsistency with Islamic Sharia. The most likely area of difference between permitted conduct under the laws applicable within the trust and foundations jurisdictions and permitted conduct outside those jurisdictions is in the area of inheritance. Testamentary gifts present no difficulty because both the trusts laws and the foundations laws generally provide that the validity of testamentary gifts is determined by the law of the testator’s last domicile.97 Lifetime gifts of the whole of a Muslim’s property (apart from the period of death or illness) are not subject to restrictions on grounds related to inheritance subject (in the UAE) to compliance with article 361 of the Federal Law on Personal Status 2005: freedom of testamentary disposition is limited to one-third of the estate of the deceased.98 As noted by the DIFC Court of Appeal,99 no issue arises in relation to dispositions by non-Muslims. In the context of a disposition by a Muslim, a desire to be Sharia compliant will be respected by the DIFC courts by enabling correction of mistakes100 and use of Sharia advisory mechanisms is recognised as appropriate.101

89 ibid art 19(1). 90 ibid art 19(2). 91 Application of English Law Regulations 2015 (ADGM) s 4; Trusts (Special Provisions) Regulations 2016 (ADGM). 92 Trust Law 2016 (Bahrain). 93 Trust Regulations 2007 (QFC). 94 Foundations Regulations 2017 (ADGM). 95 Foundation Regulations 2016 (QFC). 96 Foundations Regulations 2019 (RAKICC). 97 eg, Foundations Law 2018 (DIFC) art 13(2)(c); Trust Law 2018 (DIFC) art 13(2)(c). The potential operation of art 14(1)(b) of each Law can be disregarded because, in relation to property outside the DIFC, the property will not be transferred to a trustee or foundation, and in respect of property inside the DIFC, a Muslim cannot utilise the DIFC Wills Registry so the transfer will be dependent on a court order obtained outside the DIFC. 98 Abid Hussain, ‘Islamic Laws of Inheritance’ (Islam101), available at: www.islam101.com/sociology/inheritance.htm. 99 Re DIFCA’s Application (n 36) [206]–[208]. 100 ibid [198]–[204]. 101 ibid [149]–[152].

Gulf Region  143 In principle, therefore, there should be no reason why use of trust or foundation structures should be regarded as objectionable on grounds of public policy or public order within the jurisdictions which do not have their own trusts and foundations laws. The conclusion is hardly surprising: not quoted in the Court of Appeal’s reasons, but highly relevant to this issue, were the following observations contained in the Sharia opinion provided to the Court: The Islamic Wealth Management (IWM) is an activity which is highly encouraged under Islam. In its holistic manner, IWM entails services which are in line with the 5 foundational goals of Maqasid al-Shariah which attach high importance to the preservation of: 1. Religion/Faith; 2. Life; 3. Lineage; 4. Intellect; and 5. Property/Wealth. IWM may broadly be defined under the preservation of property/wealth category although it may overlap with other categories in the broader sense. Muslims are highly encouraged to manage their wealth in a structured and efficient manner whether during his/her (collectively used as ‘his’) lifetime or for these purposes after his death. This will enable proper preservation and distribution of wealth, succession planning, socially impactful activities, etc which as part of the Muslim’s belief, will continue to contribute towards the deceased’s rewards in the afterlife. Absent the prudent management of wealth by Muslims (particularly in the context of family businesses) by applying among others the available arrangements in the DIFC, this may lead to various unfortunate negative consequences such as: 1.

control of the business may not be left to people with the appropriate skills, experience and ability; 2. family members may fight over decisions, or the wealth generally; 3. the family’s wealth may not survive and may well dissipate in the hands of the second generation; 4. family owned businesses may not be run properly and in such cases may not survive the transition to the next generation but will either be the subject of disputes or run to a standstill; 5. such lack of planning will also impact the family relationships negatively; and 6. the failure of such family businesses will also have a negative impact on the local economy. As such, relevant Islamic wealth management solutions are keys to ensuring the prudent management of the wealth of the Muslims at the earliest opportunity in accordance with their Shariah obligations.

The trusts and foundations laws discussed above have been enacted to provide clear supportive legislation in order to avoid the effects of the above-mentioned undesirable practices and consequences.

VII. Conclusion Collectively, these developments represent a major advance for the availability of trusts and foundations for residents of the GCC jurisdictions and the strengths of those legal

144  David Russell QC platforms for users from outside the region. Coupled with regional cultural traditions (particularly the respect for privacy) and favourable tax regimes, the result is a significant development for the regional economy and represents a major advance for trust and foundations law generally. All of this has been facilitated by the adaptation of the concept to local needs and cultural values where required, making this history a significant example of the flexibility of the trust concept. The following table displays the statutory provisions of the laws discussed in this chapter according to subject matter. Table 1  Provisions of the Trusts Laws in the Gulf Region Subject

DIFC

QFC

Citation

1

1

Legislative authority

2

Application

3

Scope of the law

4

Date of enactment

5

Commencement

6

Language

ADGM

2

3

8

Bahrain

UAE

68

2

73

4

Interpretation

7

Administration

8

Power to make rules

5 41 6

72

Default and mandatory rules

9

7

Common law and principles of equity

10

8

Governing law

11

9

3

Change of governing law

12

10

4

Matters determined by governing law

13

11

5

Limitations in foreign law

14

12

1

6

Heirship rights

15

13

2

8

Foreign judgments

16

14

3

9

Place of administration

17

15

Role of the Court

18

Jurisdiction of the Court

19

Application to Court and powers

20

Payment of costs

21

Interpretation of articles 22–28

22

58

10, 41 7

67–74

56, 57, 58

39

59 (continued)

Gulf Region  145 Table 1  (Continued) Subject

DIFC

QFC

Application of powers under articles 24–28

23

Power to set aside disposition for mistake

24

Power to set aside disposition for fiduciary error

25

Power to set aside exercise of powers for mistake

26

75

Power to set aside powers exercise for fiduciary error

27

75

Applications and orders under articles 24–27

28

Savings in respect of applications under articles 24–27

29

Articles 31, 32 and schedule 2: Interpretation

30

Arbitration of trust disputes

31

Powers of the Arbitral Tribunal

32

Creation of a trust

33

16

Requirements for creation

34

17

Trust purposes

35

18

Duration of a trust

36

19

Validity and invalidity

37

20

Charitable trust

38

Non-charitable or purpose trust

39

22

Variation and revocation of trust

40

Court power to authorise transactions

ADGM

Bahrain

UAE

12

11, 12

13

10

5, 6, 7

4*

41 21, 22

8, 44, 45

21, 23

8, 44, 46

23

15, 51

40

41

76

52

Failure or lapse of interest

42

24

Termination of a trust

43

25

Distribution of property

44

26

Beneficiaries

45

27

Disclaimer

46

Interest of beneficiary and dealings

47

Termination of trust on trust being challenged

48

4

48, 49

42 43

17, 18

32, 33

28

19

34

29

19(3)

(continued)

146  David Russell QC Table 1  (Continued) Subject

DIFC

QFC

Protective trusts

49

30

ADGM

Bahrain

UAE

20

Creditors’ claims

50

31

Accepting etc trusteeship

51

32

35

Vacancy and appointment

52

33

Resignation

53

34

27

18

Removal

54

35

28

18, 19

Position of outgoing trustee

55

36

29

Remuneration of trustee

56

37

39

Advisory trustees

57

Custodian trustees

58

Duty to administer

59

38

30

Duties of trustees

60

39

30

25, 26

Duties of co-trustees

61

40

31

16

Impartiality of trustee

62

41

Cost of administration

63

42

Enforcement and defence claims

64

43

Collecting trust property

65

44

Duty to inform and report

66

45

42

27, 28, 51

Powers of trustee

67

46

34

23

Specific powers of trustee

68

47

35

Power of accumulation and advancement

69

48

40

Delegation by trustee

70

49

37

How a corporate trustee may act

71

Combination and division

72

50

Liability for breach

73

51

43

Remedies for breach of trust

74

52

47

Damages in absence of breach

75

53

Legal fees and costs

76

54

59

Limitation of action against trustee

77

55

64

55

Reliance on trust instrument

78

56

Exculpation of trustee

79

57

44

31

Beneficiary’s consent, release or ratification

80

58

50

Limitation on personal liability of trustee

81

59

45

25, 26

15, 17 20, 21

22

29

24

36 30

(continued)

Gulf Region  147 Table 1  (Continued) Subject

DIFC

QFC

Protection of persons dealing with trustee

82

60

Trustees of more than one trust

83

Reservation of powers to settlor

ADGM

46 61A

5

84

Incapacitation of protector or settlor

85

Enforceability of foreign trust

86

62

6

Interpretation

Sch 1

77

7

Definitions

Sch 1

78

Trust registration

14, 23

38

#

54 1 2

3

16

9

61

24

16A

25 32

Conflict of interest

33

Appointment etc of trust property

38

Nature of trustee’s interest in trust property

60

Tracing of trust property

61

Bankruptcy of trustee

62 64

66

The competent Court

67

Licensing and supervision of trustees

69

Cooperation with foreign authorities

70

Limitation of (Central Bank) liability

71 63

Involvement in contraventions

65

Imposition of financial penalties

66

Anti-money laundering

47, 48, 49

30(6)

65

Corporate (criminal) liability

Prescribed forms

4 1

Disclosure of trustee’s interest

Offences

14 36, 37

Trust property Protector

UAE

32, 63

Reserved and restricted powers

Nature of trust, recognition of trust onshore

Bahrain

52, 53, 54

66A

ADGM Law is the Trusts (Special Provisions) Regulations 2016 apart from Duration of trust, which is section 4 of the Application of English Law Regulations 2015. # Note article 52 of Dubai Endowments Law.

148

9 Adaptation of Offshore Trusts in the South Pacific: Tension between Commercial and Social Needs KATY BARNETT*

I. Introduction In volume one of the Asia-Pacific Trusts Law series, I considered the laws surrounding the offshore trusts regimes in the Cook Islands, Western Samoa and Niue.1 In my view, ‘offshore’ trusts constitute the most extreme adaptation of the institution of the trust possible, the ne plus ultra of the contractualisation of the trust. Indeed, in my previous chapter, I gave an account of how offshore trusts in those jurisdictions threatened to stretch the institution of the trust so far that it was not recognisably a trust, such was the control that a settlor, beneficiary and/or protector could maintain over trust assets. In this chapter, I continue that exploration, seeking to outline the history and context of the development of offshore trusts more generally, and to explore why the three jurisdictions chose to adapt the institution of the trust in this way. South Pacific legal adaptations will be placed in a broader sociological and historical context. It is worth noting at the outset that the distinction between ‘offshore’ and ‘onshore’ jurisdictions is a spectrum rather than a dichotomy. Offshore jurisdictions are often (not always) small islands formerly colonised by Britain or associated with other Commonwealth nations. Hence, they have inherited both the common law and the trust. ‘Onshore’ jurisdictions are typically large or economically powerful Commonwealth countries with trusts and complex taxation regimes. However, the distinction is not a simple binary, and is not dictated solely by geography. Some ‘onshore’ jurisdictions have ‘offshore’ aspects, leading some to suggest that there is an intermediate category of

* Professor, Melbourne Law School, University of Melbourne. Thank you to Lusina Ho, Rebecca Lee, Hang Wu Tang and ‘Lorenzo’ M Warby for their comments on earlier drafts, and David Marks QC for alerting me to the enactment of the International Relationship Property Trust 2021 in the Cook Islands. 1 K Barnett, ‘Offshore Trusts in the South Pacific: How Far can the Concept of the Trust be Stretched before it Breaks?’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021).

150  Katy Barnett ‘midshore’ jurisdictions. In this collection, Meytal Liberman describes how Israel offers tax advantages lasting 10 years to immigrants who wish to seek to use the Israeli equivalent of the trust,2 to encourage immigration; David Russell’s chapter describes how the Gulf States have adopted trusts regimes;3 and Hang Wu Tang describes similar developments in Labuan.4 Hong Kong and Singapore have also adapted their trusts law to access a greater share of the international finance market.5 These jurisdictions bill themselves as ‘midshore’ jurisdictions with more reliable banking options, and higher transparency than ‘offshore’ jurisdictions. Even some onshore jurisdictions have adapted the trust in ways identical to the ‘offshore’ jurisdictions. Relevant to the current discussion, 17 States of the United States of America have adopted the ‘asset protection trust’, an institution first legislated for in the Cook Islands, which has the explicit aim of shielding the settlor’s assets from creditors.6 ‘Offshore financial law’ is described by Rose-Marie Belle Antoine as: [L]egislation, legal practices and law concerned with investment, financial arrangements and entities created by non-residents of a particular jurisdiction but structured within their jurisdiction. Such investments or arrangements are usually focussed on some business advantage, tax avoidance, protection from creditors and judgment debtors or privacy.7

The offshore trust tends to be one part of a suite of possible offshore entities, including offshore companies and foundations. Often, investors make use of multiple jurisdictions to ensure that their assets are unreachable or invisible to others. Ideally, offshore jurisdictions tend to have the following characteristics: • Politically stable government. • Stable economy. • Geographical accessibility insofar as time zones are concerned.

2 See Meytal Liberman, ‘Adaptation Throughout History: The Journey of the Israeli Trust from a Charitable Trust to an Estate Planning Instrument’, ch 14 in this collection. 3 See David Russell, ‘Adaptation in a Civil Law and Sharia Context: Trusts and Foundations in the Gulf Region’, ch 8 in this collection. 4 See Hang Wu Tang, ‘Innovations within Malaysian Trusts Law: Labuan’s Trusts Law and the Hibah Trust’, ch 6 in this collection. Labuan markets itself as a ‘midshore’ jurisdiction. 5 See, eg, L Ho, ‘“Breaking Bad”: Settlors’ Reserved Powers’ in R Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018); L Ho and R Lee, ‘Trusts in Hong Kong: Historical Application and Current Practice’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021); R Lee, ‘The Evolution of the Modern International Trust: Developments and Challenges’ (2018) 103 Iowa Law Review 2069; Hang Wu Tang, ‘From Waqf, Ancestor Worship to the Rise of the Global Trust: A History of the Use of the Trust as a Vehicle for Wealth Transfer in Singapore’ (2018) 103 Iowa Law Review 2263; Hang Wu Tang, ‘Teaching Trust Law in the Twenty-First Century’ in E Bant and M Harding (eds), Exploring Private Law (Cambridge University Press 2010). 6 West Virginia (2016), Mississippi (2014), Ohio (2013), Virginia (2012), Hawaii (2010), New Hampshire (2009), Tennessee (2007), Wyoming (2007), Missouri (2005), South Dakota (2005), Oklahoma (2004), Utah (2003), Nevada (1999), Rhode Island (1999), Delaware (1997), Alaska (1997), Michigan (2016). See A Ebeling, ‘Comparing Domestic Asset Protection Trust States’ Forbes (6 July 2016), available at: www.forbes.com/sites/ ashleaebeling/2016/07/06/comparing-domestic-asset-protection-trust-states/; and A Ebeling, ‘Onshore Asset Protection with the Selfie Trust’ Forbes (6 July 2016, appearing in 26 July 2016 edition of Forbes), available at: www.forbes.com/sites/ashleaebeling/2016/07/06/onshore-asset-protection-with-the-selfie-trust/. 7 R-M Belle Antoine, Offshore Financial Law: Trusts and Related Tax Issues (Oxford University Press 2005) [1.12], adopted in Re Asia Credicom Ltd (Sup Ct, BVI) No 20 of 1999, decided 30 July 1999.

Pacific Islands  151 • • • • • • • •

A wide choice of reputable banks and other institutions. Modern, reliable communications. A low tax or tax-free environment. An appropriate official language (often English). Excellent support services, including a choice of legal and accounting firms. Sensible and effective regulation and supervision. High ethical standards in government, the professions and commerce. Laws that are clear and fair, applied by a competent judiciary.8

However, a series of data leaks have disclosed the use of offshore jurisdictions, showing a less savoury side to the offshore finance industries, including the ‘Panama Papers’ in 2015, the ‘Paradise Papers’ in 2017, and most recently, the ‘Pandora Papers’ in 2021.9 This has led to an increasing interest in offshore trusts and other structures in the South Pacific region. Here, I briefly discuss the geography and colonial history of the South Pacific, as this is relevant to my later discussion of how the trust has been adapted and by whom. The South Pacific consists of a group of scattered islands across the Pacific Ocean. The history of European colonisation is writ large across the area. The French, for example, claim French Polynesia and New Caledonia as colonies. Vanuatu was jointly administered by the English and the French and gained independence in 1980.10 American Samoa is a territory of the United States and the Marshall Islands is a selfgoverning nation in free association with the United States.11 Samoa was at one time a German colony, but it was then taken by New Zealand from 1914 until 1962, when Samoa gained independence.12 Both the Cook Islands and Niue are self-governing countries in free association with New Zealand.13 Nauru had been a UN Trust Territory under Australian administration prior to gaining independence in 1968.14 The largest ‘onshore’ nations in the vicinity are Australia, New Zealand and Papua New Guinea (all Commonwealth nations and former British colonies). From 1969 to 2006, the South Pacific had offshore finance centres not only in Samoa, Niue and the Cook Islands, but also in Vanuatu, Nauru, Tonga and the Marshall 8 B Harrington, Capital without Borders: Wealth Managers and the One Percent (Harvard University Press 2016) 130–31. 9 Michael Janda, ‘Pandora, Paradise and Panama: Offshore Structures Exposed by Leaks Explained’ (ABC News, 5 October 2021), available at: www.abc.net.au/news/2021-10-05/offshore-companies-trusts-tax-andsecrecy-explained/100514250. 10 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Vanuatu 2011: Phase 1: Legal and Regulatory Framework (OECD Publishing 2011) 10. 11 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Marshall Islands 2012: Phase 1: Legal and Regulatory Framework (OECD Publishing 2012) 10. 12 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Samoa 2012: Phase 1: Legal and Regulatory Framework (OECD Publishing 2012) 10. 13 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Cook Islands 2015: Phase 2: Implementation of the Standard in Practice (OECD Publishing 2015) 13–15; OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Niue 2016: Phase 2: Implementation of the Standard in Practice (OECD Publishing 2016) 13. 14 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Nauru 2013: Phase 1: Implementation of the Standard in Practice (OECD Publishing 2013) 10.

152  Katy Barnett Islands. Pressure from bodies such as the Financial Stability Forum (now the Financial Stability Board (FSB)),15 the Financial Action Task Force (FATF),16 the Organisation for Economic Co-operation and Development (OECD),17 and pressure from large nations such as Australia and the United States have forced these nations to close their offshore centres.18 Nauru was the most notorious of the South Pacific offshore jurisdictions in the 2000s,19 but it has now been largely closed down.20 Indeed, even of the regimes considered in this chapter, while its trusts law is still extant, Niue’s offshore activity has mostly ceased since 2005, and most business has moved from Niue to Samoa.21 New Zealand, a large and regionally economically powerful ‘onshore’ jurisdiction, was previously also a venue for trusts with an offshore flavour (known as ‘foreign trusts’) from 1988 to 2016. However, the release of the Panama Papers in 2015 sparked media allegations that New Zealand foreign trusts were being used for tax evasion, aggressive tax planning, money laundering and hiding of assets.22 As a consequence, in 2017, New Zealand’s ‘foreign trusts’ law was repealed, and a new regime requiring registration of existing foreign trusts was enacted.23 Although it is difficult to get information, Littlewood observed that of the 11,750 foreign trusts in New Zealand, fewer than 3,000 had chosen to register after the new regime came into operation, and another 3,000 had indicated that they would not register. Another 6,000 or so trusts did not make any communication with the government. It seems likely that the 9,000 who indicated that they would not be registered or did not say anything moved to other offshore jurisdictions.24 It is also worth noting the continued involvement of citizens of the United States, New Zealand and Australia in trusts law developments in the South Pacific. The

15 Financial Stability Board, ‘About the FSB’ (Financial Stability Board, 16 November 2020), available at: www.fsb.org/about/. 16 Financial Action Task Force, ‘Home’ (FATF), available at: www.fatf-gafi.org/. 17 Organisation for Economic Co-Operation and Development, ‘OECD Home’ (OECD), available at: www. oecd.org/. 18 The pressure of the OECD and FATF also plays a part in Pakistani legislative attempts to regulate the trust, outlined by Z Abbasi, ‘Pakistan’s New Trusts Act 2020: Adaptation to Regulatory Overkill’, ch 12 in this collection. Whether this regulation will be successful in preventing terrorism and money laundering is unclear. 19 See AB van Fossen, ‘Money Laundering, Global Financial Instability, and Tax Havens in the Pacific Islands’ (2003) 15 The Contemporary Pacific 237, 244–51 for an account of Nauru’s involvement with the Bank of New York Scandal, where it was alleged that billions of dollars from Russian oligarchs and criminals was laundered in the South Pacific, particularly Nauru. 20 OECD, Nauru: Phase 1 (n 14) 15–16; OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Nauru 2019 (Second Round): Peer Review Report on the Exchange of Information on Request (OECD Publishing 2019) 19. 21 OECD, Niue: Phase 2 (n 13) 15. 22 The history of this is described in M Littlewood, ‘Foreign Trusts, the Panama Papers and the Shewan Report’ [2017] New Zealand Law Review 59. The notorious case of Low Hock v Rothschild Trust (Schweiz) AG [2017] NZHC 25, [2017] NZAR 288, described later in this chapter, involving allegations that New Zealand foreign trusts had been used to facilitate corruption and money laundering, would surely have also contributed to the decision. 23 Littlewood, ‘Foreign Trusts, the Panama Papers and the Shewan Report’ (n 22). See also OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes: New Zealand 2018 (Second Round): Peer Review Report on the Exchange of Information on Request (OECD Publishing 2018) 63–64. 24 M Littlewood, ‘Using New Zealand Trusts to Escape Other Countries’ Taxes’ (2017) 31 Trust Law International 113, 135.

Pacific Islands  153 adaptations of the trust do not come from a vacuum; the presence of larger, more economically powerful neighbours is pivotal. Expatriate advisers often come from these neighbours, as do customers who choose to make use of offshore structures. Australian courts, legislatures and government agencies have consistently resisted adapting their domestic trusts law in ways which mimic the offshore trust. By contrast, the position of New Zealand and the United States has been far more equivocal, as both these jurisdictions have at times adapted their trusts law in ways which mimic offshore trusts, although New Zealand has now turned away from this. I proceed by explaining the nature of the legal adaptations made to the trust. I then explain why South Pacific nations may choose to enact this kind of legislation, and who encourages them to do so. Finally, I consider the downsides of enabling this kind of adaptation: the risk of the ‘finance curse’, where an oversized financial sector leads to economic capture and political capture of a country, to the detriment of locals who live there.25

II.  What is the Nature of the Adaptations Made to the Trust? In my previous chapter, I outlined how the traditional onshore trust operated. Again, in describing the adaptations made in the South Pacific, I will use the Australian onshore trust as a comparator to the offshore trusts in the Cook Islands, Niue and Samoa. I will discuss how the law of the onshore Australian express trust works, and then note what legal adaptations have been made. While all the offshore jurisdictions inherited the common law notion of the trust, these adaptations have been made by statute by the legislatures of the Cook Islands,26 Niue27 and Samoa.28 In fact, in a very real sense, the sovereign power of these nations, and their ability to legislate, is an asset they seek to leverage to gain a share of the international finance market.

25 N Shaxson, The Finance Curse: How Global Finance is Making us All Poorer (The Bodley Head 2018). See also B Harrington, ‘Why Tax Havens are Political and Economic Disasters’ The Atlantic (29 July 2016), available at: www.theatlantic.com/business/archive/2016/07/tax-haven-curse/491411/. 26 International Trusts Act 1984 (Cook Islands) (as amended by the International Trusts Amendment Act 1985 (Cook Islands)); International Trusts Amendment Act 1989 (Cook Islands); International Trusts Amendment Act (No 2) 1989 (Cook Islands); International Trusts Amendment Act 1991 (Cook Islands); International Trusts Amendment Act 1995–96 (Cook Islands); International Trusts Amendment Act 1999 (Cook Islands); International Trusts Amendment Act 2004 (Cook Islands); and the International Trusts Amendment Act 2013 (Cook Islands). At the end of 2021, the Cook Islands created another form of International Trust, the International Relationship Property Trusts Act 2021 (Cook Islands), specifically to deal with relationship breakdown. Trusts formerly registered under the International Trusts Act 1984 (Cook Islands) can now be registered as an International Relationship Property Trust pursuant to s 27 of the International Relationship Property Trusts Act. 27 Trusts Act 1994 (Niue). 28 Trusts Act 2014 (Samoa).

154  Katy Barnett

A.  Adaptation of the Basic Structure: The Introduction of the Protector Traditionally, a trust exists when a legal owner of property (the trustee) must deal with specified property (the trust property) for the benefit of another person or persons (the beneficiary or beneficiaries), or for the advancement of certain purposes (generally charitable). The trustee has legal title, and with a fixed express trust, the beneficiary has beneficial or equitable ownership – that is, the right in equity to enjoy the fruits of the property. A trust is said to separate the management of property from the beneficial enjoyment of that property. The settlor or creator of the trust generally relinquishes any right to manage the trust property, and even if there are no express rules against settlor control, the adverse taxation consequences of retained settlor control in onshore jurisdictions ensure this.29 It is also generally accepted in onshore trusts law that the trustee is a fiduciary and is subject (at least) to an ‘irreducible core’ of obligations to carry out the terms of the trust in good faith.30 The general structure of an onshore trust is adapted in offshore trusts, including those in the South Pacific. The first adaptation involves the role of the trustee being supplemented by other roles. Offshore trusts usually allow a settlor to maintain control over trust property by various legal means.31 A ‘protector’ or ‘enforcer’ is appointed under the trust instrument to direct or restrain the trustees in relation to their administration of a trust. The directions are issued by means of ‘letters of wishes’ which explain what the settlor really wants (which is otherwise not evident from the express terms of the trust instrument). Settlors of offshore trusts wish to retain control given that the trust often holds a great deal of their wealth in a small, distant country, and hence settlors will want to direct the trustee and maintain some control.32 The notion of the protector sits uneasily with the traditional conception of the onshore trust, as it undermines the role historically filled by the trustee.33 Typically, in onshore trusts, the trustee has a non-delegable duty to carry out the terms of trust in good faith as part of the ‘irreducible core’, including to approve distributions to beneficiaries, another non-delegable duty.34 By contrast, the role of the protector encompasses a spectrum of ‘watchdog’ roles: on the strong end, a protector can dictate the exercise of administrative and dispositive powers by the trustee; and on the weak end, the trustee

29 M Bennett, ‘Competing Views on Illusory Trust: The Clayton v Clayton Litigation in its Wider Context’ (2017) 11 Journal of Equity 48, 57–58; D Waters, ‘Trusts: Settlor Reserved Powers’ (2005) 25 Estates, Trusts & Pensions Journal 234, 235–36. In Australia see, eg, Income Tax Assessment Act 1936 (Cth) s 102. 30 Armitage v Nurse [1998] Ch 241, 253 (Millett LJ). See JSC Mezdhunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch) [170]–[173] (Birss J). cf JE Penner, ‘Exemptions’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing 2002) 245, who disputes this interpretation of the decision. The ‘irreducible core’ is discussed in the context of Thailand in Surutchada Reekie and Adam Reekie, ‘Trustee Duties in Thailand’s Statutory Trusts’, ch 11 in this collection. 31 For useful discussions of settlor control, see Waters (n 29); Bennett (n 29); T Barkley, ‘The Content of the Trust: What Must a Trustee Be Obliged to Do with the Property?’ (2013) 19 Trusts & Trustees 452; J Palmer, ‘Controlling the Trust’ (2011) 12 Otago Law Review 473; Ho (n 5) 34. 32 Ho (n 5) 36–39. 33 cf M Hubbard, Protectors of Trusts (Oxford University Press 2013) [2.25]–[2.27] (a protector is distinct from a trustee). 34 Armitage (n 30) 253 (Millett LJ).

Pacific Islands  155 simply has to consult the protector before exercising powers, but is not bound to follow the protector’s wishes.35 Emily Campbell et al note, ‘Where, as is usual, the protector is given power to hire and fire trustees and to veto decisions, it is not unrealistic to regard the ultimate power as lying with the protector’.36 It is also unclear whether protectors owe fiduciary duties to beneficiaries (although in practice, many trust instruments expressly state that they do).37 In the Cook Islands and Niue, the retention of control or benefits by a settlor does not affect the validity of an offshore trust.38 The protector may also be a settlor, trustee or beneficiary of the trust.39 In the Cook Islands, the settlor can retain control and benefits in an international trust, including powers of revocation, disposition, amendment, acquisition, removal or appointment of trustees or protectors, and direction of a trustee or protector.40 In Samoa41 and Niue,42 it is specifically noted that the settlor, beneficiary or protector of a trust may direct the trustee to perform the functions of the trust by means of a letter or memorandum of wishes. The Cook Islands, Niue and Samoa allow for trust instruments to create the office of protector of a trust.43 Samoa also allows for trust instruments to create the office of an enforcer.44 In the Cook Islands, unless the trust instrument otherwise provides, the protector is not liable or accountable as a trustee or as any other person having a fiduciary duty in relation to any act or omission in performing the function of a trust.45 In Niue, the protector is not regarded or accountable as a trustee,46 but subject to the terms of the trust, the protector will owe fiduciary duties.47 It is specified that for noncharitable purpose trusts, the enforcer is the protector.48 In Samoa, the powers of the protector are said to include (subject to the terms of the trust) the power to: remove and to appoint new or additional trustees; add or remove any person as a beneficiary of the trust; create any excluded person; change the law of the trust; and change the forum of administration of the trust.49 There is no mention of the protector being a fiduciary, but certain exculpatory provisions which apply to trustees 35 E Campbell, R Ham QC, J Hilliard and M Tennet QC, ‘Protectors’ in D Hayton (ed), The International Trust, 3rd edn (Jordan Publishing Ltd 2011) [4.2]. 36 ibid [4.4]. 37 ibid [4.5]–[4.11]. See also Davidson v Seelig [2016] EWHC 549 (Ch) [55]; Pugachev (n 30) [181]–[189]; and M Conaglen and E Weaver, ‘Protectors as Fiduciaries: Theory and Practice’ (2012) 18 Trusts & Trustees 1. 38 International Trusts Act 1984 (Cook Islands) s 13C; International Relationship Property Trusts Act 2021 (Cook Islands) s 93. 39 International Trusts Act 1984 (Cook Islands) s 20(3); International Relationship Property Trusts Act 2021 (Cook Islands) s 64(3); Trusts Act 1994 (Niue) ss 10 and 18. 40 International Trusts Act 1984 (Cook Islands) s 13C(a)–(f). 41 Trusts Act 2014 (Samoa) s 43. 42 Trusts Act 1994 (Niue) s 14. 43 International Trusts Act 1984 (Cook Islands) s 20(1); International Relationship Property Trusts Act 2021 (Cook Islands) s 64; Trusts Act 1994 (Niue) s 17(1); Trusts Act 2014 (Samoa) ss 21 and 22. 44 Trusts Act 2014 (Samoa) ss 21 and 22. 45 International Trusts Act 1984 (Cook Islands) s 20(4); International Relationship Property Trusts Act 2021 (Cook Islands) s 65. 46 Trusts Act 1994 (Niue) s 17(4). 47 ibid s 17(5). 48 ibid s 28(4). 49 Trusts Act 2014 (Samoa) s 21(6)(a)–(f).

156  Katy Barnett are said also to apply to protectors.50 Samoan law also provides that it is necessary to have an enforcer for non-charitable purpose trusts created pursuant to section 66 of the Trusts Act 2014 (Samoa).51 Again, the exculpatory provisions which apply to trustees apply equally to enforcers under Samoan law.52 Of course, as Kelvin Low has pointed out,53 subjecting the enforcer to fiduciary obligations does not solve the problem of enforcement. On the one hand, if the enforcer owes fiduciary obligations to the trustee, this becomes circular, with each owing fiduciary duties to the other. On the other hand, if the enforcer owes fiduciary obligations to the settlor, this may subject the settlor to unwelcome fiscal implications. Ultimately, it is not clear to whom the enforcer owes duties at all.

B.  Adaptation of Certainty of Objects: Relaxation of Certainty Required for Trusts for Persons Onshore trusts law requires a trust to comply with the ‘three certainties’: certainty of intention to create a trust on the part of the settlor,54 certainty of subject matter (trust property),55 and certainty of objects (including persons, charitable purposes and limited non-charitable purposes). This section deals with the way in which offshore jurisdictions have adapted the rule of certainty of objects required for express trusts for persons, and the next section deals with certainty of objects for trusts for purposes (both charitable and non-charitable). Even in onshore trusts law, the certainty of object rule regarding trusts for persons has been progressively loosened. At first all trusts for persons required settlors to comply with ‘list certainty’: in other words, it was necessary for a court to be able to compile a comprehensive list of beneficiaries for fixed trusts, discretionary trusts (also known as trust powers) and mere powers. The list certainty test still applies to fixed trusts.56 But Re Gulbenkian’s Settlement Trusts57 and McPhail v Doulton58 loosened the test for powers of appointment, so that a description of objects is deemed sufficiently certain if it complies with the ‘criterion certainty’ test (namely, whether it is possible to say definitively whether an individual falls within the criterion which specifies the objects), with an added ‘loose class’ test to ensure administrative workability for trust powers.59 These developments allowed for the creation of large-scale pension trusts to benefit employees and dependants, where beneficiaries could not always be certainly ascertained in a list

50 ibid s 73. 51 ibid s 22. 52 ibid s 74. 53 KFK Low, ‘Non-Charitable Purpose Trusts: The Missing Right to Forego Enforcement’ in R Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018) 490–94. 54 Paul v Constance [1977] 1 WLR 527; Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253. 55 Palmer v Simmonds (1854) 2 Drew 221, 61 ER 704; Re Golay’s Will Trusts [1965] 1 WLR 969. 56 Inland Revenue Commission v Broadway Cottages Trust [1955] Ch 678; Kinsela v Caldwell (1975) 132 CLR 458. 57 Re Gulbenkian’s Settlement Trusts [1970] AC 508. 58 McPhail v Doulton [1971] AC 424. 59 ibid 457 (Lord Wilberforce).

Pacific Islands  157 format.60 Discretionary objects do not have a right to trust property unless an appointment is made to them by the trustee; otherwise they have a mere expectation.61 That being said, it has been strongly argued by Jessica Hudson that discretionary objects have a right to due administration, notwithstanding the lack of a right to trust property.62 Lionel Smith has noted that offshore trusts tend to be ‘massively discretionary’, in that the beneficiaries of offshore trusts are not well defined, and (as described above) the trusts are subject to control by a settlor or protector, who exercises discretions often not set out in the trust instrument itself.63 Like the discretionary beneficiaries of an onshore trust, the discretionary beneficiaries of an offshore trust do not have rights to trust property unless an appointment is made to them by the trustee.64 Hang Wu Tang, however, has observed that even onshore trusts can be massively discretionary if the trust is drafted to make them so.65 Re Manisty’s Settlement holds that the objects of a discretionary mere power do not need to comply with an administrative workability test, as long as the power is not ‘capricious’ (in the sense of negativing any sensible intention by the settlor, and any sensible power of selection on the part of the trustee).66 Even a ‘hybrid’ power benefiting anyone except a small handful of persons will fulfil the criterion certainty test. Moreover, as Re Manisty confirms, the trustees may add or remove further beneficiaries pursuant to an intermediate power.67 Thus, onshore trusts which contain discretionary mere powers may equally confer massive discretion on a trustee. In fact, as Tang has noted, such massively discretionary trusts are the norm in modern wealth management.68 Sometimes, offshore trusts may be ‘orphan structures’ holding the shares of a company, where there is no real defined beneficiary at all.69 Alternatively, offshore trusts may be so-called ‘Red Cross’ trusts, where there is a defined ‘residuary beneficiary’, often a charity, but the real persons intended to benefit from the trust are mere objects of discretionary powers. As Schmidt v Rosewood Trust Ltd70 vividly illustrates, this may cause difficulties where the real objects of a power are so encased in secrecy that they

60 Although the High Court of Australia has not yet considered Re Gulbenkian or McPhail in Australia, these decisions have consistently been applied in State courts, as noted by P Creighton, ‘Certainty of Objects of Trusts and Powers: The Impact of McPhail v Doulton in Australia’ (2000) 22 Sydney Law Review 93. 61 Gartside v Inland Revenue Commission [1968] AC 553. See D De Cogan, ‘Gartside v IRC (1967): “This Decision Involved a Small Point”’ in B Sloan (ed), Landmark Cases in Succession Law (Hart Publishing 2019), for a discussion of how this decision led to legislative developments which made the formation of onshore trusts disadvantageous. 62 J Hudson, ‘Mere and Other Discretionary Objects in Australia’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021). See also United States v All Assets Held in Account No 80020796 in the Name of Doraville Property Corp at Deutsche Bank International Ltd in Jersey, Channel Islands, and All Interests, Benefits or Assets Traceable Thereto et al (Civil Action No 13-1832) (5 March 2018, United States District Court of Columbia) 16–17 (the Sani Abacha case). I am grateful to Hang Wu Tang for providing me with a copy of this. 63 L Smith, ‘Massively Discretionary Trusts’ (2017) 70 Current Legal Problems 17. 64 Gartside (n 61). 65 Tang, ‘Wealth Transfer in Singapore’ (n 5) 2284–85. 66 Re Manisty’s Settlement [1974] Ch 17. See also Re Hay’s Settlement Trusts [1982] 1 WLR 202. 67 Re Manisty (n 66). 68 Tang, ‘Wealth Transfer in Singapore’ (n 5) 228690. He cites Wibawa v Wibawa [2016] SGHC 109 as an example of how such trust structures are used. 69 Tang, ‘Teaching Trust Law’ (n 5) 133. 70 Schmidt v Rosewood Trust Ltd [2003] 2 AC 709.

158  Katy Barnett are unable to be ascertained. A court in Guernsey allowed the collapse of a ‘Red Cross’ trust with a sole charitable beneficiary pursuant to the Guernsey statutory power under the rule in Saunders v Vautier (which I will discuss shortly).71 It is doubtful the charity was really intended to benefit under this trust!

C.  Adaptation of Certainty of Objects: Relaxation of Certainty Required for Trusts for Purposes In onshore trusts law, trusts for purposes are generally only allowed if those purposes are charitable. The relevant charitable purposes are outlined in Pemsel’s Case,72 and include trusts for the relief of poverty, the advancement of religion, the advancement of education and other purposes beneficial to the community, within the spirit and intendment of the 1601 Statute of Charitable Uses. Although a charitable purpose trust may now be valid even if it is coupled with a non-charitable purpose, generally purely non-charitable purpose trusts are only allowed in extremely narrow and exceptional circumstances (particularly for the maintenance of animals or tombs) and where there is a ‘taker-in-default’.73 Conversely, in offshore jurisdictions, the requirements for charitable purposes are vastly diluted. In the Cook Islands, the legislation provides that a trust shall be charitable where it is ‘substantially’74 for the purposes of relief of poverty, advancement of education, advancement of religion or other purposes beneficial to the community.75 Cook Islands law also seems to remove or dilute the requirement for a charitable purpose trust to be for the benefit of the public, although it may not get rid of the requirement altogether. It is ultimately unclear how this works.76 In Niue and Samoa, the situation is slightly different. The law stipulates that charitable purposes include relief of poverty, advancement of education, advancement of religion, protection of the environment, the advancement of human rights and fundamental freedoms, the advancement of amateur sport and any other purposes beneficial to the community.77 A purpose will not be regarded as charitable unless it is for the benefit of the community or a substantial section of the community having regard to the purpose.78 In Niue, the enforcer of charitable trusts is the Minister of Justice.79 71 Rusnano Capital AG v Molard International (PTC) Ltd [2019] GRC 011. 72 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531, 583 (Lord Macnaghten). There has been some legislative expansion of charitable purposes: see, eg, Trusts Act 1973 (Qld) s 103 (sporting facilities). The High Court in Aid/Watch Inc v Commissioner of Taxation [2010] HCA 42, (2010) 241 CLR 539 held that agitation for legislative change was now an allowable charitable purpose (cf Bowman v Secular Society Ltd [1917] AC 406). The Commonwealth government has enacted the Charities Act 2013 (Cth) but this has not affected the operation of trusts law. 73 See Re Astor’s Settlement [1952] Ch 534, 547 (Roxburgh J). 74 It seems that this is intended to water down charitable trusts law, but the use of the word ‘substantially’ is difficult: see A Doyle and M Carn, ‘Purpose Trusts’ in D Hayton (ed), The International Trust, 3rd edn (Jordan Publishing Ltd 2011) [5.263]. 75 International Trusts Act 1984 (Cook Islands) s 12(1). 76 Doyle and Carn (n 74) [5.624]–[5.266]. 77 Trusts Act 1994 (Niue) s 15(1); Trusts Act 2014 (Samoa) s 65(1). 78 Trusts Act 1994 (Niue) s 15(2); Trusts Act 2014 (Samoa) s 65(1). 79 Trusts Act 1994 (Niue) s 28(4).

Pacific Islands  159 In offshore jurisdictions, it is also possible to have trusts for non-charitable purposes, whereas such trusts would be impossible under onshore laws such as Australia. This adaptation allows for orphan structures and the like to be created. The Cook Islands provides that a trust will not be void or voidable simply because it is held for a purpose which is not charitable.80 There is no necessity for the settlor of a non-charitable purpose trust to appoint a protector or an enforcer, nor is there any requirement that a trustee must be a ‘designated person’ who can enforce the trust.81 However, there are provisions for replacement of enforcers in the subsections which follow.82 Niue and Samoa also provide that non-charitable purpose trusts can be created as long as the purpose is reasonable and capable of fulfilment, the purpose is not contrary to public policy, and the terms of the trust provide for the appointment of a protector and a successor (in the case of Niue) or an enforcer (in the case of Samoa) who can enforce the trust.83 It is also stipulated that a trust for the benefit of a beneficiary is valid, whether or not the beneficiary is yet ascertained or in existence.84 However, on the other hand, a trust will be invalid if it has no beneficiary who is identifiable or ascertainable,85 excepting in the case of trusts for purposes.

D.  Adaptation of Liability of Trustees: Ability to Contract Out of Trustees’ Duties. As noted above, in onshore trusts, the trustee has a non-delegable duty to carry out the terms of trust in good faith as part of the ‘irreducible core’, including to approve distributions to beneficiaries, another non-delegable duty. However, as Langbein notes, there has been an increasing tendency to ‘contractualise’ the trust, making that irreducible core smaller.86 Nonetheless, there are still irreducible duties from which an onshore trustee cannot exculpate herself. In comparison, South Pacific offshore trusts allow extensive abilities to contract out of liability on the part of trustees. In the Cook Islands, any exculpatory provision within an international trust deed appears to be enforceable. While trustees must exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of another,87 this is qualified by a sub-provision which suggests that these duties and obligations only apply to the extent that a contrary intention is not expressed in the trust instrument.88 A later provision 80 International Trusts Act 1984 (Cook Islands) s 12(2). 81 cf British Virgin Islands: Trustee Amendment Act 1993 (BVI) ss 84(2)(c) and 84A(3)(c). 82 International Trusts Act 1984 (Cook Islands) s 12(3) and (4). 83 Trusts Act 1994 (Niue) s 16(1); Trusts Act 2014 (Samoa) s 66(1). 84 Trusts Act 1994 (Niue) s 3(a). 85 ibid s 8(2)(a); Trusts Act 2014 (Samoa) s 10(2)(c). s 11(3) of the Niue Act and s 16 of the Samoa Act outline the rules regarding ascertaining the beneficiaries of trusts for persons. 86 JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625, 627. It has been questioned whether arguments about the increased contractualisation of the trust have been overstated: see Low, ‘Non-Charitable Purpose Trusts’ (n 53) 488–89. 87 International Trusts Act 1984 (Cook Islands) s 19A(1) and (2): lay trustees and professional trustees respectively. 88 ibid s 19A(3).

160  Katy Barnett provides that any limitation of the liability of a trustee is valid and effective, ‘and every such provision shall be given a fair, large and liberal interpretation so as to give full effect to its tenor, notwithstanding any rule of law or equity to the contrary’.89 Interestingly, the position of the newly developed Cook Islands International Relationship Property Trusts (discussed in detail below) is slightly different. In section 41(1), the Act provides that it is the duty of trustees to act honestly, in good faith and to exercise care in the circumstances.90 While it is possible for the trust instrument to limit trustees’ duties by the trust instrument,91 trustees cannot be relieved of the power to intervene when the trustee becomes aware of dishonesty, wilful misconduct, or when it is necessary to protect the interests of beneficiaries.92 When a trustee of a International Relationship Property Trust receives a ‘separation notice’ (meaning that the settlors’ relationship has broken down) she must review the administration, management, conduct and control of trust property, and take certain actions (such as engaging professional advice) in the best interests of beneficiaries.93 Further, the terms of the trust instrument must not limit or exclude liability for a breach of trust arising from the trustee’s own dishonesty, wilful misconduct, or breach of duty under section 41(1) of the International Relationship Property Trusts Act 2021 (Cook Islands).94 Neither of the other two jurisdictions have provisions as broad as the Cook Islands International Trust Act 1984 (Cook Islands). Samoa has some compulsory duties, including the duty to make application to the court for directions,95 to carry out the terms of the trust,96 to keep proper accounts and records,97 to keep trust property separate,98 and to ensure there is a proper enforcer for a purpose trust.99 Certain other duties apply but may be overturned if the terms of the trust provide otherwise, including preserving and enhancing the value of the trust,100 not profiting from the trust or causing someone else to profit from the trust,101 joining in performing the trust if there is more than one trustee,102 only exercising a power if there are multiple trustees if all trustees agree,103 dissenting in writing if the trust allows a majority decision and the trustee dissents,104 and being impartial and not exercising powers for the benefit of one beneficiary or purpose over another.105 A trustee must also exercise reasonable care and skill, a standard which depends on whether the trustee is a professional or not.106



89 ibid

s 19E.

90 International

Relationship Property Trusts Act 2021 (Cook Islands) s 41(1)(a)–(c). s 42. 92 ibid s 43. 93 ibid s 44. 94 ibid s 45. This is subject to s 46, which allows trustees to exclude liability for the actions of agents. 95 Trusts Act 2014 (Samoa) s 29(2)(a). 96 ibid s 29(2)(b). 97 ibid s 29(3)(a). 98 ibid s 29(3)(b). 99 ibid s 29(3)(c). 100 ibid s 29(4). 101 ibid s 29(5). 102 ibid s 29(6). 103 ibid s 29(7). 104 ibid s 29(8). 105 ibid s 29(9). 106 ibid s 30. 91 ibid

Pacific Islands  161 However, this rule is qualified by the Schedule to the Act, which states in paragraph 4 that the duty to exercise reasonable care and skill applies only to the extent that the trust deed indicates, by its terms, that it should apply.107 This appears to contemplate the possibility of a wide exculpatory clause. Niue’s position most closely approximates to the onshore position. Trustees have general duties, including to act with due diligence, to act with good faith, to act to the best of their skills and abilities, to exercise the standard of care of a reasonable and prudent businessman,108 to carry out the terms of the trust,109 as well as owing a fiduciary obligation to the beneficiaries of a trust or the purpose for which the trust was created.110 It is not possible to draft an exclusion clause to exclude liability arising from the trustee’s own fraud or wilful misconduct.111 A trustee may be relieved of liability by the court if it appears that she has acted honestly and reasonably.112

E.  Adaptation of Perpetuity Periods: Long or Non-Existent Perpetuity Periods Most onshore trusts, including discretionary trusts,113 are subject to the law against perpetuities, unless they are charitable purpose trusts. The rationale behind this rule is that property should not be tied up indefinitely. It should be noted, however, that several jurisdictions in Canada and the United States have effectively abolished the rule,114 as has the state of South Australia.115 In offshore jurisdictions, including South Pacific jurisdictions, legislation provides for very long perpetuity periods or no perpetuity period at all. This ensures that assets can be tied up for lengthy periods of time. Thus, in the Cook Islands and Samoa, the rule against perpetuities is abolished,116 unless the trust instrument specifies a set period.117 In Niue, the rule against perpetuities is said to be abolished,118 but it is stated that the maximum duration of a trust shall be 120 years from the date of its creation, unless it is a purely charitable trust.119

107 ibid Schedule, para 4. 108 Trusts Act 1994 (Niue) s 28(1). 109 ibid s 28(2). 110 ibid s 28(3). 111 ibid s 51(6). 112 ibid s 55. 113 J Glover, ‘The Rule against Perpetuities and its Application to Discretionary and Unit Trusts’ (2007) 14 Australian Property Law Journal 255. 114 L Smith, ‘Give the People What they Want: The Onshoring of the Offshore’ (2018) 103 Iowa Law Review 2155, 2166 fn 69. 115 Law of Property Act 1936 (SA) s 62. See also Matthew Harding, ‘Trusts and Statutes in the Australian Federation’, ch 10 in this collection. 116 International Trusts Act 1984 (Cook Islands) s 6(1), (3); International Relationship Property Trusts Act 2021 (Cook Islands) s 88; Trusts Act 2014 (Samoa) s 14(1) and (2). 117 International Trusts Act 1984 (Cook Islands) s 6(2), (4), (5), (6); International Relationship Property Trusts Act 2021 (Cook Islands) s 88(2); Trusts Act 2014 (Samoa) s 14(3) and (4). 118 Trusts Act 1994 (Niue) s 7(3). 119 ibid s 7(1) and (2).

162  Katy Barnett In each of the Cook Islands, Samoa and Niue, the rule against accumulations is abolished.120 The Cook Islands also abolishes the rules regarding double possibilities for international trusts.121

F.  Adaptation of the Rule in Saunders v Vautier: No Power in Beneficiaries to Wind up a Trust Onshore trusts may be wound up by unanimous agreement of the beneficiaries if all the beneficiaries are ascertainable and over the age of 18 years. Indeed, it has been said that the rule in Saunders v Vautier122 is essential for a valid express trust, because otherwise there is no one who can wind up the trust.123 By contrast, in offshore jurisdictions, the rule in Saunders v Vautier is often abrogated or abolished, so that beneficiaries have no rights to end the trust. In the Cook Islands, for international trusts, the rule in Saunders v Vautier is amended so that where a trust instrument empowers a trustee to accumulate income or refrain from making a distribution, the trustee does not have to follow any direction from a beneficiary where the law would otherwise require it.124 For International Relationship Property Trusts, the rule in Saunders v Vautier does not apply,125 and again, the trustee does not have to follow any direction from a beneficiary in accordance with the rule in Saunders v Vautier unless it is consistent with the trust instrument.126 The trust instrument may include provisions for trustees to distribute income or capital on a specified date, or not to distribute income,127 and the trustee is obliged to comply with these provisions.128 In Niue and Samoa, it is provided that where all beneficiaries are in existence, ascertainable, of age and full capacity and agree to do so, they may require the trustee to terminate the trust and distribute the trust property.129 However, this rule does not apply where there is a ‘protective’ or ‘spendthrift’ trust.130

120 International Trusts Act 1984 (Cook Islands) s 9; International Relationship Property Trusts Act 2021 (Cook Islands) s 90; Trusts Act 2014 (Samoa) s 15; Trusts Act 1994 (Niue) s 7(4). 121 International Trusts Act 1984 (Cook Islands) s 8. 122 Saunders v Vautier (1841) Cr & Ph 240, 49 ER 282. 123 J Palmer and C Rickett, ‘The Revolution and Legacy of the Discretionary Trust’ (2017) 11 Journal of Equity 157, 162. However, some onshore jurisdictions have abolished or abrogated the rule in Saunders v Vautier. The United States has almost totally abolished the rule, in Shelton v King 229 US 90, 33 St Ct 686 (1913), approving Clafin v Clafin 149 Mass 19, 20 NE 454 (1889). Some Canadian provinces have also statutorily abolished the rule: see Alberta Trustee Act (Cap T8, 2000 rev ed) s 42; Manitoba Trustee Act (CCSM c T160) s 59 and it has been declared inapplicable in the instance of Canadian statutory pension trusts in Bushau v Rogers Communications Inc [2006] 1 SCR 973, 269 DLR (4th) 1. 124 International Trusts Act 1984 (Cook Islands) s 10. 125 International Relationship Property Trusts Act 2021 (Cook Islands) s 91(1). 126 ibid s 91(4). 127 ibid s 91(2)(a) and (b). 128 ibid s 91(3). 129 Trusts Act 1994 (Niue) s 48(1); Trusts Act 2014 (Samoa) s 77(d). 130 Trusts Act 1994 (Niue) s 48(2).

Pacific Islands  163 As noted earlier, despite the existence of such provisions, it is sometimes possible for beneficiaries of a ‘Red Cross’ trust to wind up a trust, as occurred in Rusnano Capital AG v Molard International (PTC) Ltd.131 Under section 53(3) of the Trusts (Guernsey) Law 2007, ‘notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained … they may require the trustees to terminate the trust and distribute the trust property among them’. Further, section 53(4)(b) provides that the Royal Court may ‘make such other order in respect of the termination of the trust and the distribution of the trust property as it thinks fits’. McMahon, Esq, Deputy Bailiff, held that, although more potential beneficiaries might be appointed to the trust, this had not occurred yet, and thus ‘all the beneficiaries’ were in existence and ascertained.132 Accordingly, the applicant in that case (the sole presently named beneficiary) was entitled to ask the Court to terminate the trust and distribute its assets.

G.  A Distinctively South Pacific Adaptation: The ‘Asset Protection Trust’ Most express trusts (whether onshore or offshore) are designed to protect assets in some way, and indeed, this could be said to be the raison d’etre of the trust. As Kent Schenkel has argued, the trust effectively performs a ‘magic trick’: the trust allows the beneficial owner of property to offload the costs of benefiting from property onto others.133 American onshore trusts law has always allowed ‘spendthift trusts’: trusts which prevent the beneficiary from alienating trust property, either voluntarily or involuntary (thus, creditors and other third parties cannot access trust property).134 While all American states permit spendthift trusts,135 settlors cannot create spendthrift trusts of which they are also the beneficiary, reflecting a concern such trusts will be used to defraud creditors.136 The Cook Islands, Niue and Samoa all provide for the creation of ‘protective or spendthrift trusts’.137 In essence, these trusts may be subject to termination or restriction upon alienation of or dealing with trust property if certain stipulated events occur. The intention is to allow settlors to protect assets from creditors, spouses and profligate heirs. There is no limitation against settlors being beneficiaries. However, the Cook Islands and Samoa also utilise the ‘asset protection trust’. The level to which offshore trusts protect assets is higher and perhaps more unabashed than in the onshore trust. ‘Asset protection trusts’ are specifically designed to prevent creditors

131 Rusnano Capital (n 71). 132 ibid [23]–[34]. 133 KD Schenkel, ‘Exposing the Hocus Pocus of Trusts’ (2012) 45 Akron Law Review 63, 69–70. 134 ibid 70–73. 135 ibid 71–73. 136 A Hofri-Winogradow, ‘Stripping of the Trust: From Evolutionary Scripts to Distributive Results’ (2014) 75 Ohio State Law Journal 529, 542. See, eg, Texas Property Code, §112.035. 137 Trusts Act 1994 (Niue) s 13; Trusts Act 2014 (Samoa) s 64; International Trusts Act 1984 (Cook Islands) ss 13E and 13F; International Relationship Property Trusts Act 2021 (Cook Islands) s 95.

164  Katy Barnett from accessing assets, which is achieved by amending the rules regarding fraudulent conveyances. As noted earlier, subsequent to the development of the ‘asset protection trust’ in the Cook Islands, 17 American states amended their laws to allow ‘domestic asset protection trusts’.138 Among other things, these regimes allow self-settled spendthrift trusts, and the regimes target mainly out-of-state settlors.139 The Cook Islands was the front-runner in the development of the ‘asset protection trust’, and its ‘international trust’ regime has been replicated to a large degree in Samoa. The Cook Islands regime and its complications will be explained first. The Cook Islands provides for the creation of ‘international trusts’ which are registered under the International Trust Act 1984. There are certain requirements as to the identity or status of the trustees, and the beneficiaries must at all times be non-residents.140 Neither an international trust nor a disposition to an international trust shall be void or voidable in the event that the settlor is bankrupt, insolvent or in liquidation.141 It is worth noting that the Cook Islands has a comprehensive registration system for international trusts, whereas Niue and Samoa do not. It has been suggested that Niuean law should be amended to allow for registration.142 In the Cook Islands any ‘international trust’ is valid even though it may be invalid according to the law of the settlor’s domicile, place of ordinary residence or place of incorporation.143 Similarly, in Samoa, any ‘Samoan trust’ is valid even though it may be invalid according to the law of the settlor’s domicile, place of ordinary residence or place of incorporation.144 And, as explained earlier, settlor-created ‘international trusts’ in which settlors retain extensive control are not invalid. Both Cook Islands law and Samoan law state that offshore trusts or dispositions to offshore trusts will only be open to claims by creditors in very narrow circumstances. In the Cook Islands, even if the action brought by creditors alleges fraud, deceit, unconscionable conduct, inequitable conduct or unjust enrichment against any person regarding the settlement of or a disposition to an international trust, the remedies are limited to those set out in the Act in section 13B(1) which hinge upon whether there was an intention to defraud.145 Importantly, in both the Cook Islands and Samoa, it is deemed that there is no intention to defraud in certain circumstances.146 Thus a settlement or disposition is deemed not to be fraudulent if it took place before the date on which the cause of action accrued,147 or if it took place more than two years after the date on which the cause of action accrued.148 138 See above text to fn 6. 139 Hofri-Winogradow (n 136) 542–43. 140 International Trusts Act 1984 (Cook Islands) s 2. 141 ibid s 13A. 142 J Molea, ‘Niue Trusts Act: A Potential Tax Evasion Mechanism?’ (2018) Laws 542: Offshore Trusts Paper, Victoria University of Wellington, available at: researcharchive.vuw.ac.nz/xmlui/bitstream/handle/ 10063/7940/paper_access.pdf?sequence=1. 143 International Trusts Act 1984 (Cook Islands) s 5(2); Trusts Act 2014 (Samoa) s 9(3). 144 International Trusts Act 1984 (Cook Islands) s 5(2); Trusts Act 2014 (Samoa) s 9(3). 145 International Trusts Act 1984 (Cook Islands) s 13B(9). 146 ibid s 13B(8); Trusts Act 2014 (Samoa) s 12(7)(a) and (b). 147 International Trusts Act 1984 (Cook Islands) s 13B(4); Trusts Act 2014 (Samoa) s 12(4). 148 International Trusts Act 1984 (Cook Islands) s 13B(3)(a); Trusts Act 2014 (Samoa) s 12(3)(a).

Pacific Islands  165 In the Cook Islands, a settlement or disposition is also deemed not to be fraudulent if it took place less than two years after the date on which the cause of action accrued, but the creditor has not commenced action within one year from the date of settlement or jurisdiction,149 or if it took place less than two years after the cause of action accrued and the creditor has commenced proceedings within one year in a court of competent jurisdiction but has not commenced proceedings within two years of the date of settlement or disposition in Cook Islands courts.150 In both the Cook Islands and Samoa, if a creditor can leap the relevant ‘deeming’ hurdles involving the timing of the cause of action, he or she may be entitled to a limited remedy, but only if he or she can establish ‘beyond reasonable doubt’ that an international or Samoan trust was established with the ‘principal intent’ to defraud that creditor,151 and that when the settlement or disposition took place, the money could have been used to satisfy the creditor’s claim.152 A court must not impute an intent to defraud a creditor upon a settlor solely because the settlement or disposition took place within two years of the cause of action accruing, or because the settlor is a beneficiary.153 Additionally, in the Cook Islands, the settlor is not deemed to have imputed to him or her an intent to defraud because the settlor retained any powers or benefits, because the settlor is a trustee or protector, or because the settlor settled or disposed of the property at a time when proceedings had already been commenced.154 In the Cook Islands also, the onus of proof is on the creditor to show an intent to defraud.155 In both the Cook Islands and Samoa, the relevant provisions operate to the exclusion of any other remedy or rule of law acting in any other jurisdiction.156 In the Cook Islands alone, the fraud section operates even if a trust is no longer registered.157 A creditor can only enforce a claim on a foreign judgment if it can demonstrate to the High Court of the Cook Islands that it has exhausted all remedies against the settlor’s remaining property and all rights of appeal against the foreign judgment.158 Punitive, exemplary or vindictive damages are not available,159 unless an award has been made at the time of settlement or disposition,160 and the burden of proof will be on a creditor to prove damages are not punitive.161 This relates to the fact that the object of offshore trusts is often to pre-emptively avoid liability for large damages awards. As will be discussed in greater detail later, several notorious individuals from the United States have set up Cook Islands trusts where they have been found to have committed medical negligence, insurance fraud, securities fraud or the like.162 149 International Trusts Act 1984 (Cook Islands) s 13B(3)(b). 150 ibid s 13K(1). 151 ibid s 13B(1)(a); Trusts Act 2014 (Samoa) s 12(1)(a). 152 International Trusts Act 1984 (Cook Islands) s 13B(1)(b); Trusts Act 2014 (Samoa) s 12(1)(b). 153 International Trusts Act 1984 (Cook Islands) s 13K(6); Trusts Act 2014 (Samoa) s 12(5)(a) and (b). 154 International Trusts Act 1984 (Cook Islands) s 13K(6). 155 ibid s 13B(7). 156 ibid s 13B(10); Trusts Act 2014 (Samoa) s 13. 157 International Trusts Act 1984 (Cook Islands) s 13B(11), subject to s 16(6) on the consequences of deregistration. 158 ibid s 13B(13)(a) and (b). 159 ibid s 13B(14). 160 ibid s 13B(16). 161 ibid s 13B(15). 162 See discussion below at section III.A.

166  Katy Barnett A creditor’s remedy in both the Cook Islands and Samoa is limited because the creditor will only be entitled to satisfaction of her claim to the extent that the property would have been available but for the settlement or disposition occurring, and only to the extent of the settlor’s interest in the property.163 In determining whether any settlement of or disposition to an international trust has rendered a settlor insolvent for the purposes of a claim by a creditor, the fair market value of the property at the time of settlement or disposition is used.164 A separate legislative provision holds that foreign judgments are not enforceable.165 In Niue, the legislation provides that if a trust is created under the law of Niue, the court is not to recognise any claims against the trust property from a court of another jurisdiction in respect of ‘the personal or proprietary consequences of marriage or the termination of marriage’, ‘succession rights (whether testate or intestate) including the fixed shares of spouses or relatives’ and ‘the claims of creditors in an insolvency’.166 This appears to be an attempt to create a limited asset protection trust, albeit not of the strength of the Cook Islands or Samoa. There are no deeming provisions.

H.  A New Cook Islands Adaptation: The International Relationship Property Trust In December 2021, the Cook Islands Parliament legislated for the creation of a new trust structure: the International Relationship Property Trust (IRPT). This trust is intended to ensure that judges in the settlor’s home jurisdiction cannot divide up property upon a couple’s separation. These trusts are restricted to non-residents of the Cook Islands.167 The Cook Islands promotional material explains that the rationale behind the new Act is that there should be mechanisms for keeping family assets intact in the wake of a relationship breakdown.168 Among other things, the trust instrument of an IRPT must declare the trust as such, identify the relationship of the settlors, include a ‘relationship agreement’, identify the relationship property and the vested and contingent interests, include a signed certificate from each settlor’s legal adviser stating that they have been provided with independent legal advice and consent to the settlement and terms of the trust, and specify that Cook Islands law is chosen as the governing law for parts or all of the trust.169 The ‘relationship agreement’ involves an agreement between two persons concerning ‘relationship property’ that affirms, modifies or waives rights or obligations in a wide range of circumstances, including contemplation of a marriage or civil union, while the 163 International Trusts Act 1984 (Cook Islands) s 13B(6); Trusts Act 2014 (Samoa) s 12(1). 164 International Trusts Act 1984 (Cook Islands) s 13B(2); Trusts Act 2014 (Samoa) s 12(2). 165 In the Cook Islands see: International Trusts Act 1984 (Cook Islands) s 13D. See also s 13I which provides that foreign law is expressly excluded. In Samoa see: Trusts Act 2014 (Samoa) s 13. 166 Trusts Act 1994 (Niue) s 8(6)(a), (b) and (c). 167 International Relationship Property Trusts Act 2021 (Cook Islands) s 18. 168 Cook Islands Finance, ‘Fact Sheet: Cook Islands International Relationship Property Trust’ (Cook Islands Finance), available at: www.cookislandsfinance.com/post/a-new-initiative-in-trust-law-internationalrelationship-property-trust. 169 International Relationship Property Trusts Act 2021 (Cook Islands) s 9(a), (c), (d), (h), (i) and (j).

Pacific Islands  167 persons are in a relationship, when persons separate and upon the occurrence or nonoccurrence of any other event.170 The IRPT must be registered according to the requirements of the Act.171 Once it is registered, it must be administered and managed in accordance with the trust instrument.172 If the settlors separate, the relationship property must be held intact,173 managed in accordance with the trust instrument,174 and must not be divided and distributed among the beneficiaries175 unless the trust instrument so provides.176 A settlor who becomes separated from the other settlor must give notice of the separation in writing to the other settlor and the trustees.177 Interestingly, Part 5 of the Act specifically covers relationship property comprising a family business, so there is clearly a desire on the part of at least some settlors to ensure that their succession plans for their businesses are not scuppered when a relationship breaks down.178 Hence, section 34 states that the trust instrument may provide for the retention of a family business by trustees indefinitely or for a set period of time, and that the division or distribution of a family business may be prohibited by the trust instruments. Like the asset protection trust, the IRPT is designed to ensure that assets held on trust can only be managed or accessed by trustees and settlors in accordance with trust terms, to the exclusion of non-settlor beneficiaries or third parties. A settlor may commence proceedings in court in relation to an IRPT on only four grounds:179 if her consent was involuntary;180 if she did not receive the required full disclosure of the property, income and liabilities from the other settlor;181 if she did not have independent legal advice regarding a waiver or the settlement and terms of the trust instrument;182 and if the relationship agreement or a term of it was unconscionable at the date of settlement.183 The first three grounds, but not the fourth, may lead to the court declaring the trust void184 In all instances where a settlor commences proceedings under any of the four grounds, the court may adjust the beneficial shares of the beneficiaries,185 or direct the trustee in the administration and management of the trust,186 as long as it is not inconsistent with the trust instrument.187 If a provision is invalid, unenforceable or illegal, this does not affect the legality of the trust instrument, and the provision may be modified or severed 170 ibid s 12. 171 ibid ss 18–21. 172 ibid s 16(a). 173 ibid s 16(b)(i). 174 ibid s 16(b)(iii). 175 ibid s 16(b)(ii) 176 ibid s 17. 177 ibid s 36. There are provisions for the settlors to withdraw a separation notice and notify the trustee that they have resumed a relationship: s 38. 178 ibid ss 33–35. 179 ibid s 75(2). 180 ibid s 75(1)(a). 181 ibid s 75(1)(b). 182 ibid s 75(1)(c). 183 ibid s 75(1)(d). 184 ibid s 76. 185 ibid s 76(3)(a). A trustee may apply for an adjustment of shares in certain instances: s 77. 186 ibid s 76(3)(c). 187 ibid s 76(3)(b).

168  Katy Barnett from the trust instrument as long as the general intent remains the same.188 The court may also order that the status quo in relation to an international relationship property trust should be maintained in order to avoid prejudice to a party.189 Other than that, all other remedies, principles or rules of law are excluded, whether they derive from statute, common law or equity.190 Constructive trusts reallocating the proprietary interests of the parties are evidently a particular concern; these are explicitly excluded to ‘avoid doubt’.191

I.  Adaptation of the Application of Foreign Laws and Judgments: Limitation of Enforceability and ‘Firewall’ Provisions Mark Bennett and Adam Hofri-Winogradow have noted that all trusts (onshore or offshore, fixed or discretionary) have the capacity to subvert the liabilities that attach to ownership of property, and that offshore trusts have the further advantage of repelling anti-subversive rules adopted by onshore jurisdictions.192 Forum choice clauses in trust instruments help achieve this by stipulating that any dispute will be resolved in an offshore court. All the South Pacific offshore trust regimes have ‘firewall’ provisions which state that foreign laws and judgments are not enforceable in relation to offshore trusts.193 Among other things, this is designed to prevent legitimate judgment creditors from other jurisdictions from enforcing their claims, although it also allows offshore trusts to be shielded from other laws such as tax laws, prudential laws, company laws, heirship laws194 and the like. Considering the differences between onshore and offshore trusts, we may question how far onshore regimes should allow recognition of offshore trusts where an offshore trust would be invalid according to an onshore regime. This raises issues of private international law and the Hague Trusts Convention.195 The Convention provides for choice of law rules, but also provides for jurisdictions that have ratified it to recognise trusts from other jurisdictions, including recognition of choice of law clauses within trust deeds.196 The only Asian-Pacific jurisdictions to have ratified the Convention are

188 ibid s 78. 189 ibid s 79. 190 ibid s 81(1). 191 ibid s 81(2). 192 M Bennett and A Hofri-Winogradow, ‘The Use of Trusts to Subvert the Law: An Analysis and Critique’ (2021) 41 Oxford Journal of Legal Studies 692, 698–99. 193 International Trusts Act 1984 (Cook Islands) s 13D; International Relationship Property Trusts Act 2021 (Cook Islands) ss 82, 83 and 84; Niue Act 1966 (NZ) s 95(2); Trusts Act 2014 (Samoa) s 13. 194 The International Relationship Property Trusts Act 2021 (Cook Islands) has a specific section preventing the application of local heirship rules: s 94. 195 Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition (entered into force 1 January 1992) (Hague Trusts Convention). In the context of Asia-Pacific, see R Garnett, ‘Identifying an Asia-Pacific Private International Law of Trusts’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing, 2021) and Ying Khai Liew, ‘Trust Choice of Law Rules in Asia-Pacific: Adapting to the Future’, ch 19 in this collection. 196 Hague Trusts Convention (n 195) art 6.

Pacific Islands  169 Australia and Hong Kong.197 This makes it difficult when someone seeks to enforce an offshore trust which is contrary to the public policy or the trusts law of the home jurisdiction. It is still unclear whether the Convention requires signatories to recognise foreign trusts which are not recognised under local law.198

III.  The Multi-Trillion-Dollar Question: Why Adapt the Trust in this Way? The purpose of this chapter is not just to describe the legal adaptations made to trusts law in South Pacific offshore jurisdictions, but to trace the broader social and political pressures that create these adaptations. As Brooke Harrington has noted, the wealth management industry is driven by the triad of families, states and markets.199 These adaptations occurred because first, there was a demand for such structures, and secondly, there was perceived to be some advantage for offshore jurisdictions to adapt their trusts law in this way. To fully understand the history of South Pacific developments, it is necessary to step back and look at the broader development of the offshore finance industry. Offshore finance hubs began to develop in earnest in the late 1960s to early 1970s, stemming from a desire by the London banking industry to find new ways to gain tax cuts. Without a central onshore hub, there would be no offshore industry. The offshore finance industry started with the Crown Dependencies (Jersey, Guernsey and the Isle of Man) and British territories in the Caribbean and elsewhere, including Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands.200 Other jurisdictions followed, typically adapting the trust they had inherited from British colonial law for use as one in a suite of offshore finance vehicles. Vanuatu became a small offshore centre in 1971, nine years before it gained its independence.201 Many other South Pacific Island nations and territories then followed suit, including Nauru (1972), the Cook Islands (1981), Tonga (1984), Samoa (1988), the Marshall Islands (1990) and Niue (1993). As previously noted, New Zealand (a nation which would typically be regarded as ‘onshore’) also instituted the ‘foreign trust’ in 1988. This latter point shows the difficulty of distinguishing between onshore and offshore jurisdictions. Several of the jurisdictions listed above are no longer significant offshore finance centres, including Nauru, Tonga, the Marshall Islands and New Zealand. Vanuatu retains a small offshore industry, but has not legislated for the creation of trusts, instead relying on the common law it inherited from Britain.202 New Zealand previously administered Samoa and maintains a free association with the

197 In Australia, see Trusts (Hague Convention) Act 1991 (Cth); in Hong Kong, see Recognition of Trusts Ordinance 1990 (Cap 76) (HK). 198 Smith, ‘Give the People What they Want’ (n 114) 2163. 199 Harrington, Capital without Borders (n 8) 15–18. 200 Shaxson, The Finance Curse (n 25) 58. 201 N Shaxson, Treasure Islands: Tax Havens and the Men who Stole the World, 2nd edn (Vintage 2016) 16. 202 OECD, Vanuatu: Phase 1 (n 10) 31–33.

170  Katy Barnett Cook Islands and Niue. Hence, it retains strong links with all the countries whose laws have been explored in this chapter. The lobbying of South Pacific politicians and elites by international finance professionals has been pivotal in the development of the South Pacific offshore finance industry. The Cook Islands International Trusts Act 1984 was specifically intended to attract American clientele with its asset protection trust. The legislation was drafted by a lawyer from Denver, who had been unable at that time to persuade US jurisdictions to adopt it.203 Samoa was persuaded to become an offshore centre in 1988 by Asiaciti, an offshore firm associated with Australian accountant Graeme Briggs.204 The Niue Trusts Act was introduced in 1994 upon the suggestion of the Panamanian law firm, Mossack Fonseca, which was later subject to the ‘Panama Papers’ leak.205

A.  Who Uses Offshore Jurisdictions and Why? The first question is why there is a demand for these jurisdictions. Shortly, these jurisdictions are attractive to so-called ‘high-net-worth individuals’.206 There are many reasons why these individuals might want to put money and assets offshore, including tax avoidance or evasion, secrecy, a desire to avoid local laws such as mandatory inheritance laws, the avoidance of creditors or ex-spouses, fraud, concealment of crime, money laundering and the protection of assets in a jurisdiction more secure than their own. In recent years, fear of social media ‘cancellation’ might motivate some public or semi-public figures to put some assets offshore.207 Often there is a desire to keep money ‘in the family’ (and implicitly, prevent that money from being redistributed to the state or to creditors) and to attempt to control the use which is made of it.208 Indeed, the Cook Islands’ recent statute creating an International Relationship Property Trust regime (with its concern about keeping family assets and family businesses together) is an adaptation which presumably responds to a demand for a product which specifically achieves this aim.209 Allowing property to be tied up offshore can have deleterious consequences for global society more generally. The justification for allowing high net-worth individuals to utilise low or no tax jurisdictions is that there are ‘trickle down’ benefits for society

203 Leslie Wayne, ‘Cook Islands: A Paradise of Untouchable Assets’ New York Times (14 December 2013), available at: www.nytimes.com/2013/12/15/business/international/paradise-of-untouchable-assets.html. 204 Mario Christodoulou, Elise Worthington and Ben Sveen, ‘The Secret Keeper’ (ABC News, 6 October 2021), available at: www.abc.net.au/news/2021-10-04/pandora-papers-australian-accountant-asiaciti-graemebriggs-leak/100482936. 205 Liam Fox, ‘Niue, Samoa Money Laundering History Looms Large in Panama Papers’ (ABC, 4 April 2016), available at: www.abc.net.au/radio-australia/programs/pacificbeat/niue,-samoa-moneylaundering-history-looms-large/7298164. 206 See T Molloy, ‘High-Net-Worth Trusts in the Twenty-First Century: Confiscatory Taxes and Duties?’ in R Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press, 2018). 207 This has been anecdotally reported to me as a motive to use offshore jurisdictions by several individuals. I do not know if this is a widespread phenomenon. 208 Harrington, Capital without Borders (n 8) 15–19. 209 See International Relationship Property Trusts Act 2021 (Cook Islands).

Pacific Islands  171 in allowing the wealthy to become wealthier, which offset the taxation benefits which could otherwise have been obtained. However, there can be no ‘trickle down’ in the onshore jurisdiction when assets are hoarded offshore by family dynasties, potentially tied up for generations because the lack of perpetuity periods in these jurisdictions.210 As Harrington has observed, some motives for creating an offshore trust are more palatable to the public than others. There is a distinction between two classes of settlors: those from the developing world, and those from the developed world.211 If an individual has amassed a fortune in an unstable jurisdiction in the developing world where the state or others may confiscate those assets at a whim, for example, it would be understandable that the individual might wish to put the money somewhere safer, where her money cannot be accessed, and an offshore trust provides a safe haven.212 As noted at the beginning of the chapter, one important quality for an offshore jurisdiction is a stable and fair system of law and a competent government where assets will be safe, and if one’s home jurisdiction cannot provide that, another can. That being said, if the settlor comes from a jurisdiction where there is no familiarity with the common law and trusts law, problems can arise.213 In Schmidt v Rosewood Trust Ltd, for example, a Russian oligarch had encased the real objects of a trust power in so much secrecy that they were unable to be ascertained after his death, despite the efforts of his son to ascertain them (he was presumably meant to be the real object).214 However, there is also a risk that offshore trusts may be used to conceal proceeds of crime, and effect money laundering by corrupt politicians or individuals, who often target jurisdictions where the government and the judiciary are under-resourced or afflicted by corruption. The secrecy of these trusts, and the difficulty in accessing the money in them and working out who the true owner is, can make them attractive vehicles for fraud and embezzlement. Asiaciti’s clients, for example, included Eduardo Cunha, a Brazilian politician sentenced to 15 years in prison in 2017 for corruption, tax evasion and money laundering, businessman Thirukumar Nadesan, a member of the Sri Lankan Prime Minister’s family who has been charged with misappropriating public funds, but is yet to stand trial, Du Shuanghua, a Chinese billionaire who admitted in 2010 to paying a $9 million bribe to a Rio Tinto employee, and Nigerian senator Abubakar Atiku Bagudu, who was alleged to have helped former Nigerian president, Sani Abacha, steal billions of dollars from his country.215 The United States sought forfeiture of Sani Abacha’s assets gained through corruption, seeking to trace through highly discretionary trusts Sani Abacha had formed in Singapore.216 Low Hock v Rothschild Trust (Schweiz) AG217 is a New Zealand case raising issues of forfeiture, corruption, money laundering and trusts. It may have contributed to New Zealand’s decision to step away from foreign trusts, as it arose around the same 210 Molloy (n 206) 530. See generally, Shaxson, Treasure Islands (n 201) and Shaxson, The Finance Curse (n 25). 211 Harrington, Capital without Borders (n 8) 140–60. 212 ibid 140–49. 213 JD Davies, ‘Integrity of Trusteeship’ (2004) 120 Law Quarterly Review 1, 3. 214 [2003] UKPC 26, [2003] 2 AC 709. 215 Christodoulou, Worthington and Sveen (n 204). 216 The Sani Abacha case (n 62). 217 Low Hock (n 22).

172  Katy Barnett time as concerns about the Panama Papers were aired in the media. A Malaysian national, Jho Low, set up several foreign trusts in New Zealand, which included assets situated in the United States worth about US$265 million: a Bombardier Global 5000 jet aircraft, a hotel in Beverley Hills and other real estate in New York and Los Angeles. The US government commenced proceedings in California seeking forfeiture of the assets situated in the United States, alleging that the assets were derived from an international conspiracy to launder money misappropriated from an investment and development company wholly owned by the government of Malaysia (known as the Malaysia Development Berhad fund or 1MDB). In response, the beneficiaries of the trust pointed to a statement by the then Attorney-General of Malaysia attesting to their innocence, in an attempt to counter the US government’s allegations.218 However, the trustees of the foreign trusts indicated that they did not intend to resist the forfeiture actions or resign, and hence the beneficiaries of the trust sought to replace them with trustees who would resist. Toogood J did not consider the merits of the US proceedings,219 nor the merits of the trustees’ refusal to resist the forfeiture actions or to resign.220 He found that it was necessary and expedient to allow the beneficiaries to replace the trustees pursuant to section 51 of the Trustee Act 1956 (NZ) then in force.221 In the event, this small win before the New Zealand courts did not avail the beneficiaries or others involved with the scheme. As a result of his involvement with the 1MDB scandal, Malaysian Prime Minister Najib Razak lost the 2018 Malaysian election, and in 2020 was jailed for 12 years for corruption.222 Jho Low had used the money to lavish gifts on Hollywood stars and celebrities, including giving a custom-built see-through grand piano and US$8 million jewellery to his sometime-girlfriend, former supermodel Miranda Kerr. Kerr surrendered the jewellery to US authorities in 2017, but other assets proved harder to recover. The see-through grand piano cannot be extracted from her home without ruining either the piano, or her home, as a room was built around it. The $35 million Bombardier jet was grounded, but it needed an engine test costing up to $25,000 before the authorities could get it to fly again. Meanwhile, Jho Low is purportedly a fugitive in mainland China,223 and further allegations about the misuse of misappropriated funds to influence US presidential elections have surfaced.224 Of course, as Harrington has quipped, for high-net-worth individuals in developed nations, the difficulty may be quite different from those faced in developing nations: namely, that the government works a little too well and efficiently in extracting taxation, and ensuring judgment creditors, ex-spouses and disgruntled heirs get their portion.225 218 ibid [15]. 219 ibid [4], [40]. 220 ibid [25]. 221 ibid [41]–[42]. 222 ‘Najib Razak: Malaysian ex-PM Gets 12-Year Jail Term in 1MDB Corruption Trial’ (BBC News, 28 July 2020), available at: www.bbc.com/news/world-asia-53563065. 223 Elizabeth A Harris and Alexandra Stevenson, ‘A Yacht, a Monet, a See-Through Piano: The US Collects on a Fugitive’s Shopping Spree’ New York Times (9 December 2018), available at: www.nytimes.com/2018/12/09/ arts/jho-low-1mdb-assets-piano.html. I am indebted to Hang Wu Tang for telling me to look further into the developments from this case. 224 ‘1MDB: Jho Low Faces New Charges in Scheme Involving Trump’ (BBC News, 14 June 2021), available at: www.bbc.com/news/business-57464964. 225 Harrington, Capital without Borders (n 8) 149.

Pacific Islands  173 Some jurisdictions are subject to certain mandatory laws regarding finance or inheritance, such as Sharia law (which prohibits the use of interest, and mandates certain inheritance laws which mean that all children inherit in set proportions, and daughters get half of what sons get).226 An offshore trust may offer ways around these laws, and in jurisdictions which are subject to Sharia law, the similarity of the trust to the Islamic waqf is reassuring.227 Indeed the use of awqaf and measures used to get around the forced inheritance rules of Sharia law has been discussed by several other chapters in this collection, including Hang Wu Tang’s chapter on Malaysian trusts law,228 Meytal Liberman’s chapter on Israeli law,229 David Russell’s chapter on the law in the Gulf states230 and TT Arvind’s chapter on Indian trusts law231 Conversely, as Anton Cooray has explained in his chapter, the inapplicability of forced inheritance arising from Sharia law in Sri Lanka has meant that there has been no need for Muslim individuals to resort to trusts.232 Hence, there is clearly a market for vehicles to get around forced heirship rules, and it seems clear that the IRPT developed by the Cook Islands is intended to be a new vehicle which can be adapted or used for this purpose, given that there is a specific provision saying forced heirship rules will not be applied to IRPTs, and that a settlor’s capacity must not be questioned because the trust has the effect of bypassing forced heirship rules.233 Sometimes, individuals use offshore trusts to get around double taxation laws (where they are taxed in two jurisdictions simultaneously).234 However, sometimes individuals use offshore jurisdictions to avoid paying tax altogether: typically, taxation rates in these jurisdictions are either low or non-existent.235 It is for this reason that the Australian Tax Office often encourages taxation or transparency treaties with offshore jurisdictions. Often, those who can most afford to pay taxation are also those who can afford complex structures which enable them to avoid it, and the burden of taxation falls disproportionately on middle income earners. On the other hand, those who encourage use of offshore finance hubs argue that attempts to close ‘tax competition’ between jurisdictions stifles innovation and corporate initiative.236 Prominent individuals such as celebrities and politicians may use offshore trusts for secrecy. Many former and current world leaders have been shown by the recent Pandora Papers to have used offshore jurisdictions, including King Abdullah II of Jordan, President Ali Bongo of Gabon, former Prime Minister of Great Britain Tony

226 ibid 166–67. 227 ibid 111–12. 228 Tang, ‘Innovations within Malaysian Trusts Law’ (n 4). 229 Liberman (n 2). 230 Russell (n 3). 231 TT Arvind, ‘Religious Endowments and Trusts Law in Colonial India’, ch 4 in this collection. 232 Anton Cooray, ‘Adaptation of the Law of Trusts to Regulate Administration of Places of Religious Worship in Sri Lanka’, ch 5 in this collection. 233 International Relationship Property Trusts Act 2021 (Cook Islands) s 94. 234 Harrington, Capital without Borders (n 8) 153–54. 235 ibid 150–53. 236 See, eg, Daniel Mitchell and Jason Clemens, ‘Stop the Tax Cartel’ (The Fraser Institute, 14 October 2003), available at: www.fraserinstitute.org/article/stop-tax-cartel. See also the discussion in Harrington, Capital without Borders (n 8) 236–43.

174  Katy Barnett Blair, former Chief Executive of Hong Kong, CY Leung and others.237 In the age of the paparazzi, the desire for secrecy may be understandable; but at other times, there may be reasons why scrutiny should be applied to the assets of politicians, as can be seen from the tale of Najib Razak. Sometimes, individuals use offshore trusts to hide assets from ex-spouses238 or creditors.239 Thus, someone can be technically bankrupt, but still have access to the assets in the trust via directions to the trustee through letters of wishes. The asset protection trust is the ultimate device designed to serve this purpose. The Marketing Director of the Cook Islands Financial Services Development Authority says that the legislation came about as a result of ‘demand from US attorneys to strengthen the position of their US resident high net worth clients who were finding their wealth at risk to certain socioeconomic factors’, said to include ‘frivolous and vexatious litigation’, ‘vexatious plaintiffs, over-zealous personal injury lawyers and permissive juries seeking an opportunity re-distribute wealth’, ‘unavailability of insurance’ and ‘deep pocket defendants’ being targeted by contingency fee lawyers.240 While use of a Cook Islands asset protection trust is not invariably an indicator of nefarious activity, the picture painted in reality is less rosy than the marketing suggests: these trusts have also been used by an unsympathetic parade of people, including convicted fraudsters, Ponzi scheme operators, ticket scalpers and criminally negligent doctors.241 Of course, the rebuttal to this may be that, whether an express trust is onshore or offshore, express trusts have always been used to conceal assets from creditors and ex-spouses, avoid inheritance laws and enable dynastic planning. These aspects are a feature, not a bug, of the express trust, and explain the continued attraction of the express trust to the wealthy. As an aside, the advantage to the financial advisers, bankers and lawyers who advise high-net-worth clients is, of course, pecuniary, but as Harrington has outlined, sometimes these professionals become confidantes of high-net-worth individuals who cannot trust anyone else (even their own family members) and the relationship can become very close, and provide satisfaction.242

B.  Why do Offshore Jurisdictions such as the Cook Islands, Samoa and Niue Choose to Adapt the Trust like this? Sociologist Brooke Harrington has conducted an extraordinary in-depth study of offshore finance regimes, including the firms and professionals which create and 237 International Consortium of Investigative Journalists, ‘The Power Players’ (ICIJ), available at: www.icij. org/investigations/pandora-papers/power-players/. 238 Harrington, Capital without Borders (n 8) 162–64. See also S Wong, ‘Tapping into Trust Assets for Redistribution upon Divorce in England and Wales’ in R Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018); R Lee, ‘The Vulnerability of Trusts in Divorce’ in R Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018). 239 Harrington, Capital without Borders (n 8) 155–58. 240 A Taylor, ‘Trust Matters in the Cook Islands’ (2017) 24 Journal of International Tax, Trust and Corporate Planning 209, 210. 241 Wayne (n 203). 242 Harrington, Capital without Borders (n 8) 79–89, 120–22.

Pacific Islands  175 administer them, the people who seek to create such structures, and the reaction of locals to the transformation of their home nation into an offshore financial centre.243 She herself undertook training to become an offshore finance provider to gain insight into the industry, as well as the people who both provide and seek its services. She spent six years interviewing them. Harrington notes in an article in The Atlantic: Many [offshore finance jurisdictions] … are former colonial states struggling to stay fiscally viable; the ‘resource’ they discover is human capital, in the form of a population literate and numerate enough to provide financial services, such as the filing and compliance tasks linked to offshore corporations, trusts, and foundations. For these economically and politically fragile countries, the influx of cash provided by involvement in international finance seems like an unmitigated blessing, offering jobs and revenues for a relatively small investment in infrastructure, such as high-speed internet access.244

Moreover, as Michael Janda has recently noted in relation to the Pandora Papers leak, ‘[f]or many smaller jurisdictions … the “ticket-clipping” corporate registry and professional services fees they can collect for hosting shell companies and trusts’ are attractive,245 particularly for local elites and politicians.246 It is argued that becoming an offshore financial centre makes a country rich, contributes to taxes, jobs and growth, and that small ex-colonies and islands have no other options.247 Certainly, the wealth management industry contributes 10 to 15 per cent of the Cook Islands’ GDP and it has become more reliant upon it after the Cook Islands’ pearl industry was decimated by disease in 2000 (it had previously provided a similar proportion of the GDP).248 Presumably in the wake of Covid-19, the Cook Islands’ other main source of revenue, tourism, has plummeted, so the share may be even greater. The story is similar in Samoa. The Australian Broadcasting Corporation (ABC) was one of many journalistic organisations involved in the investigation into the Paradise Papers leak. In that context, journalists spoke to Tuifaasisini Sieni Tualega-Voorwinden, the head of the Samoan International Finance Authority, who said that the country depended on foreign aid, and wanted to stand on its own two feet. Tualega-Voorwinden explained: If you can appreciate a small jurisdiction like someone with limited natural resources. You know, it was critical for the government to think outside the box and so it was decided that Samoa would venture into this business, which is offshore finance business. … Right now, if we look at the numbers, the offshore industry has contributed over 200 million to Samoa’s government’s budget.249

243 ibid. 244 Harrington, ‘Why Tax Havens are Political and Economic Disasters’ (n 25). 245 Janda (n 9). 246 AB von Fossen, ‘Offshore Financial Centres and Internal Development in the Pacific Islands’ (2002) 17 Pacific Economic Bulletin 38, 60. 247 Nicholas Shaxson and John Christensen, ‘The Finance Curse: How Oversized Financial Centres Attack Democracy and Corrupt Economies’ (Tax Justice Network) 21–23, available at: www.taxjustice.net/cms/ upload/pdf/Finance_Curse_Final.pdf. 248 Harrington, Capital without Borders (n 8) 158. 249 Mario Christodoulou and Ben Sveen, ‘Untouchable Assets: Part 1’ (ABC News, 4 October 2011), available at: www.abc.net.au/radionational/programs/backgroundbriefing/untouchable-assets-part-one/13567504.

176  Katy Barnett In South Pacific jurisdictions such as Samoa, resentment is felt about the role of large nations pressuring small offshore centres to close offshore finance centres, when their own jurisdictions retain offshore trusts. Tualaga-Voorwinden continued: Jurisdictions like Samoa contribute less than two percent to what countries and what the European Union are saying they are losing. And if you look at some other countries, like the US who probably have the biggest offshore finance centres right in their backyard with places like Nevada, Wyoming and then you have this small jurisdiction who is a speck of dust on the atlas.250

There is some substance to her allegations. As noted earlier, 17 American states allow asset protection trusts. Harrington notes that there is an argument to be made that many of the states complaining about harmful international tax competition, particularly from offshore financial centers, are culpable in the creation of the problem. Their responsibility is a matter of both omission (failing to keep their taxation models current) and commission (relaxing currency controls and sponsoring the development of the offshore system). To many wealth management practitioners, this gives the OECD and other institutions seeing to crack down on tax avoidance the air of hypocrisy.251

There might even be an uncomfortable post-colonial aspect to this: we could ask why former colonisers should deny post-colonial countries the chance to use the legal systems the colonisers have imposed upon them to seek their fortune. On the other hand, there are clearly risks involved with encouraging offshore finance for these nations. While Niue’s trusts law is still in force, its offshore financial activity has mostly ceased since 2005, and most business has moved from Niue to Samoa.252 In 2002, Niue repealed the International Banking Act 1997 (Niue) and closed the International Banking Registry. In 2006, it repealed the International Business Companies Act 1994 (Niue), resulting in the dissolution of international business companies on 31 December 2006, unless such companies requested restoration pursuant to the new Companies Act 2006 (Niue).253 A press release from the government of Niue said that it had taken these actions in response to concerns about unlawful activity and money laundering.254

C.  What are the Possible Problems with Adapting the Trust in this Way? I have discussed the legal problems with adapting the trust in my previous chapter on this topic.255 I argued that one problem is that the institution of the trust can be adapted 250 ibid. 251 Harrington, Capital without Borders (n 8) 239, 246–47. 252 OECD, Niue: Phase 2 (n 13) 15. 253 ibid. 254 Government of Niue, ‘Information on Niue’s Repeal of Offshore Company Formation Laws And Compliance with Taxation Sharing Agreements: Niue No Longer a Secrecy Haven’ (Government of Niue, undated), available at: www.gov.nu/wb/media/PRESS%20RELEASES%202017/Niue%20No%20Longer%20a%20Secrecy%20 Haven.pdf. 255 Barnett (n 1). cf Tang, ‘Wealth Transfer in Singapore’ (n 5) 2289–91, who has a less jaundiced view of these trusts.

Pacific Islands  177 to such an extent that it is arguably not a trust any more – it is either illusory or a sham – such is the control retained by settlor-protector-enforcer-beneficiaries. Recently, Bennett and Hofri-Winogradow have gone further, and argued that the supposed benefits of autonomy in the use of property, or subverting injustice in jurisdictions which do not have trusts law, cannot justify the use of the trust to subvert the law generally.256 They conclude that anti-subversive rules should be built into trusts law itself.257 However, my interest in this chapter is more in the wider societal problems these trusts produce for those societies which choose to adopt these adaptations. Nicholas Shaxson and John Christensen developed the idea of the ‘finance curse’, which tends to afflict offshore jurisdictions and other jurisdictions dependent upon finance.258 They argue that where the finance industry disproportionately influences a country, financial interests can effectively capture the country in two different ways. First, it produces economic capture, where finance industries crowd out other industries, and grow so rapidly that they dominate the economy. Second, it produces political capture, where financial interests effectively control the workings of the legislature. Harrington has also noted that offshore financial centres across the world often suffer from a crisis of state legitimacy, resulting in a hollowing out of civil society and distrust in government and the judiciary.259 The government is seen by some locals as an instrument of foreign financial powers, thus undermining local belief in democracy and the freedom of the judiciary. Shaxson describes how residents of Jersey who voiced dissatisfaction or raised ethical concerns with the offshore finance industry, or the behaviour of local elites or politicians, were ostracised and, in some instances, had to leave altogether; in a small island community, the pressure to conform and acquiesce to offshore financial industry demands can be intense.260 This is as true of the South Pacific jurisdictions as it is of other places. An anecdote reported by Harrington gives a glimpse into the attitude of one local fisherman from the Cook Islands. She notes that offshore financial centres have been suffering from increasing economic fragility along with political corruption and social decline, as evidenced by a rise in crime and violence. I experienced the latter in my own research on the global wealth-management industry: In the course of visiting 18 tax havens in every major region of the world, I encountered this social decay directly through a number of experiences, including being robbed at Pae Moana in the Cook Islands. A local fisherman I met afterwards said the rise in burglary and violent crime in the islands began with the growth of the offshore industry. Not only the wealth it brought in, but also the new value system focused on exploitation and greed, meant that ‘everyone calls us the “Crook Islands” now’. The finance industry had begun to eat away at the nation’s democratic institutions: Referring to a recent political-corruption scandal, the fisherman said, ‘They’ve got our government in their pockets. I hate what they’ve done to my country’.261

256 Bennett and Hofri-Winogradow (n 192) 708–13. 257 ibid 718. 258 Shaxson and Christensen (n 247) 17. 259 ibid. 260 Shaxson, Treasure Islands (n 201) 228–40 (describing the experiences of whistle-blowers in Jersey). 261 Harrington, ‘Why Tax Havens are Political and Economic Disasters’ (n 25). See also Harrington, Capital without Borders (n 8) 247.

178  Katy Barnett Niue clearly decided that the benefits of such an industry were outweighed by the detriments and backed away from the offshore finance industry after demands by the OECD and Australia. It has largely ceased being an offshore venue. The Samoan offshore legislation was largely instituted by a firm named Asiaciti, developed by Australian accountant Graeme Briggs.262 The Pandora Papers provide a vivid example of how closely offshore firms are interlinked with the governments of the countries in which they are based. The leaked documents showed that Asiaciti spent 10 years trying to persuade Samoa to maintain its offshore industry, and to resist Australian and OECD demands to increase transparency and reduce tax haven status. Asiaciti even threatened to reduce its presence in Samoa if the country didn’t participate in its marketing campaigns.263 But even more startlingly, Graeme Briggs acted as the Honorary Consul for Samoa in Singapore for 25 years, demonstrating the extent to which he and his firm were intertwined with the workings of the Samoan government.264 He has now retired from running Asiaciti. On 28 September 2021, in relation to allegations of improper behaviour by Asiaciti, he stated that his firm had attempted to comply with all relevant laws and regulations.265 Allowing one individual to have influence over a legislature can be dangerous for these jurisdictions. Harrington recounts the sad experience of Antigua: The problem of state capture was exemplified by the American financier R Allen Stanford, who essentially bought Antigua – in some cases through, an indictment alleged, outright bribes, but more often with a series of quid-pro-quo moves. As the country’s former prime minister said of Stanford, “This man has a lien on our whole country”. For example, The Guardian reported in 2009, Stanford gave the Antiguan government $30 million to build a new hospital, and let the regime take credit publicly for the move, ensuring the goodwill of voters. In return, according to The Guardian, the regime gave Stanford and his firm enormous legal and financial concessions, enabling Stanford’s personal fortune to reach $2.2 billion – nearly double the GDP of the island. To complete his capture of the island’s economy and government, Stanford became the second-largest employer in the country, and the owner of its primary newspaper. As a result, he exerted a controlling influence over both the livelihoods and political discourse of most Antiguans. Throughout this process, Antigua’s own political leaders enriched themselves through association with Stanford, while maintaining their positions of public authority by seeming to invest in public goods that were covertly being funded by Stanford. The perils of this strategy became apparent when Stanford was convicted of fraud and sentenced to a prison term of 110 years. When his $7 billion investment scheme collapsed, it wasn’t just a personal failure: He took an entire country down with him. Overnight, Antigua lost 10 percent of its GDP, and – perhaps surprisingly – 25 percent of its tourism revenues. It wasn’t just ruined as an offshore financial center, but tainted in such a way that its main alternative source of economic survival was damaged as well.266 262 Christodoulou, Worthington and Sveen (n 204). 263 Christodoulou and Sveen, ‘Untouchable Assets: Part 1’ (n 249). 264 ibid. 265 ibid; Mario Christodoulou and Ben Sveen, ‘Untouchable Assets: Part 2’ (ABC News, 5 October 2021), available at: www.abc.net.au/radionational/programs/backgroundbriefing/untouchable-assets-part-two/13567526; Mario Christodoulou and Ben Sveen, ‘Untouchable Assets: Part 3’ (ABC News, 6 October 2021), available at: www.abc.net.au/radionational/programs/backgroundbriefing/untouchable-assets-part-three/13567536. 266 Harrington, ‘Why Tax Havens are Political and Economic Disasters’ (n 25); Harrington, Capital without Borders (n 8) 260–61.

Pacific Islands  179 One advantage of the Cook Islands and Niue is surely that they are effectively backed by an ‘onshore’ jurisdiction, New Zealand, from which their judiciary and many of the expatriate professionals hail. Samoa, too, has an historical association with New Zealand. This may mean that they are ‘backed’ by a large jurisdiction in a way that some other offshore jurisdictions are not. Notwithstanding this, Niue evidently decided it was not worth it, whereas the Cook Islands and Samoa have ‘doubled down’, all the while attempting to keep the OECD and FATF from the door. Indeed, the Cook Islands continues to try new adaptations with the IRPT. Another possibility is that, as ‘onshore’ and ‘midshore’ jurisdictions increasingly allow trusts to be drafted with ‘offshore’ characteristics, the investors will move to these jurisdictions. As Tang has pointed out, it is not necessary to have legislation to mimic offshore jurisdictions: in many midshore, offshore and even onshore jurisdictions, it is enough for trust deeds to contain offshore features.267 Midshore and onshore jurisdictions are far more able to resist international pressure, because they do not only rely upon international finance, and perhaps do not suffer the finance curse to the same degree. Certainly, the Singaporean efforts to secure a greater share of the offshore finance industry, for example, trade upon its reputation as a legally secure and trustworthy jurisdiction with many other advantages.

IV.  Is it Worth it? At the end of all this, one is left to wonder if the adaptations to trusts law contained in offshore trusts legislation are worth the trouble they create for these jurisdictions. On the one hand, they generate income for these nations, particularly for politicians and other elites and professionals. On the other hand, they tend to undermine local industry and trust in government. The historical survey in this chapter has shown that the Cook Islands and Samoa are South Pacific hold outs. Indeed, the Cook Islands has continued its attempts at adaptation. Conversely, the Niuean offshore industry is mostly dead, despite the legislation allowing for offshore trusts. The Vanuatu legislature has declined to legislate to provide for offshore trusts. It is understandable that small island nations wish to move from subsistence to a greater reliance on other outlets, but by relying on international finance markets, they are subject to the vagaries of taxation laws and trends in international finance.268 The offshore trust is not invariably used for nefarious purposes: one might be able to understand, for example, a desire to get around forced inheritance, or to protect one’s assets in a safe place if one lives in an unstable jurisdiction where the rule of law is not present. However, offshore jurisdictions may attract criminal operation, and international opprobrium which they are too small to counter. As Harrington notes: Whatever benefits the tax-haven business might bring to a country, it seems to be a Faustian bargain. There may well be impressive economic growth, as the cases of Luxembourg and 267 Tang, ‘Wealth Transfer in Singapore’ (n 5) 2284–85. Tang has a useful list of nine ‘global trust’ characteristics at 2285–86. 268 A van Fossen, ‘Offshore Financial Centres and Internal Development in the Pacific islands’ (2002) 17 Pacific Economic Bulletin 39, 60.

180  Katy Barnett Panama illustrate, but the wealth created generally goes directly to expat workers in the financial-services industry or to corrupt local politicians. These gains don’t just bypass local people, but are often made at their expense, in the form of rising prices for housing, food, and other necessities; locals are also hit hard by regressive taxes on consumption, imposed to make up for losses from low or nil taxes on income and investments. As for politics, the rights of local people are often curtailed, lest they interfere with the preferences of transnational capital and its agents.269

It might also be queried if some of the adaptations are ultimately in the interests of global society. The asset protection trust in particular, with its express aim of stashing money away from creditors, could threaten the ability of individuals and nations to enforce their laws and to obtain adequate remedies. The ability of a litigant to obtain adequate remedies is essential to vindication of legal rights and enforcement of legal duties. In Bennett and Hofri-Winogradow’s terms, these trusts have the potential to subvert the law and should not be encouraged.270



269 Harrington, 270 Bennett

‘Why Tax Havens are Political and Economic Disasters’ (n 25). and Hofri-Winogradow (n 192) 708–13.

part iv Statutory Adaptation

182

10 Trusts and Statutes in the Australian Federation MATTHEW HARDING*

I. Introduction In this chapter, I explore some questions raised by the interaction of judge-made and statutory law in relation to trusts in the Australian federation. This interaction highlights important ways in which Australian trusts law has adapted over time to meet social, economic and political challenges and objectives. In section II, I look at charitable purpose trusts, exploring how the legal conception of charity in judge-made trusts law migrated into tax law after federation but has recently been decoupled from federal tax and regulatory law to some extent. I argue that there are reasons to welcome this divergence given the different public policy objectives underpinning trusts law and tax and regulatory law respectively. In section III, I turn to trusts of family assets. I consider how the High Court of Australia adapted trusts law doctrine to respond to family asset disputes between unmarried couples at a time when legislation dealing with such disputes was absent. I then explore a more recent High Court decision that sits uneasily with the current legislative framework for the resolution of family asset disputes in circumstances of bankruptcy. In section IV, I examine trading trusts, and in particular the problems that arise when the corporate trustee of a trading trust is insolvent and competing claims are made to trust assets. I argue that in this setting courts have been compelled to refine trusts law doctrine in ways that might not have been achieved had the Parliament legislated to address the problems in view. Here, the interaction of judge-made and statutory law has been complex and protracted, but also ultimately productive. Before exploring these questions in more detail, I should set the scene by saying something briefly about Australia’s federal system of government. In 1901, the six British colonies then situated on the Australian continent came together to form * Professor of Law, University of Melbourne. My sincere thanks to Ken Zhunwye Kiat for his outstanding research assistance, and to Ying Khai Liew for his helpful comments on drafts. In November 2021 I presented a version of this paper at a National University of Singapore Private Law Research Group seminar, and I am grateful to James Penner for organising and hosting that seminar and to all who attended and provided comments, especially Jessica Hudson, Hans Tjio and Weiming Tan.

184  Matthew Harding a federation. This was achieved through the enactment of the Commonwealth of Australia Constitution Act 1900 by the British Parliament, which established a federal system of government for Australia.1 Among other things, this Constitution established a federal Parliament with power to legislate for the whole Commonwealth in respect of certain enumerated matters.2 The parliaments of the Australian states – as the colonies became upon federation – retained power to legislate in respect of all other matters, and the parliaments of the Australian territories that have been created since federation also exercise legislative power in certain matters. Meanwhile, the Commonwealth Constitution established a federal judiciary with jurisdiction in respect of federal matters.3 This federal judiciary sits alongside the Supreme Courts of the states and territories of Australia, which enjoy a jurisdiction that has existed since colonial times. The implications of this federal system of government for trusts law are complex. On the one hand, equity – and therefore much of trusts law – falls within the jurisdiction of the Supreme Courts of the states and territories and is a matter of state and territory law. In theory this means that equity might develop in distinctive ways in different states and territories. However the High Court of Australia – established by the Commonwealth Constitution as Australia’s apex court for all purposes – has made clear that there is one common law (including equity) in Australia and that state and territory courts should aim for consistency and coherence in the development of judge-made law.4 Meanwhile, state and territory parliaments might enact their own legislation affecting trusts, and indeed each state and territory Parliament has done precisely that.5 Moreover, the federal Parliament might also enact legislation affecting trusts, in the exercise of its legislative powers under the Commonwealth Constitution. The High Court has emphasised that ‘[t]he Constitution, the federal, State and territorial laws, and the common law in Australia together constitute the law of this country and form “one system of jurisprudence”’.6 Nonetheless, as I hope to show in what follows, when it comes to trusts law, this juristic aspiration to unity and coherence has not always been reflected in reality.

II.  Charitable Purpose Trusts Prior to federation, the colonies of Australia adopted English common law including equity. The English law of trusts was thus brought into Australian law. This included the law relating to charitable purpose trusts. The centrepiece of the law of charitable purpose trusts is the legal conception of charity which a purpose trust must satisfy if it is to be recognised as valid and enforceable in law. In English law, this legal conception of 1 For the historical narrative and context, see generally C Saunders and A Stone (eds), The Oxford Handbook of the Australian Constitution (Oxford University Press 2018) pt I. 2 Australian Constitution ss 1, 51. 3 ibid ch III. 4 Lange v Australian Broadcasting Corporation (1997) 189 CLR 520, 563; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89 [134]–[135]. 5 In the state of Victoria, see, eg, Trustee Act 1958 (Vic) and Charities Act 1978 (Vic). 6 Lange (n 4) 564, quoting Starke J in McArthur v Williams (1936) 55 CLR 324, 347. Equity’s role in this unified legal system is an interesting and complex question: see further M Leeming, ‘Equity: Ageless in an “Age of Statutes”’ (2015) 9 Journal of Equity 108.

Australia  185 charity developed incrementally from the seventeenth century with reference to the preamble of the Statute of Charitable Uses of 1601, which listed a number of ‘charitable and godly’ purposes considered to be of public benefit in late Tudor England.7 In the early nineteenth century, in the landmark case of Morice v Bishop of Durham, Sir William Grant MR stated a principle according to which purpose trusts are valid and enforceable only where their purposes fall within the ‘spirit and intendment’ of the Elizabethan preamble, and Lord Eldon LC confirmed this approach on appeal.8 Later, towards the end of the nineteenth century, in Commissioners for Special Purposes of Income Tax v Pemsel, Lord Macnaghten famously rationalised the spirit and intendment of the preamble into four ‘heads’ of charity: the relief of poverty, the advancement of education, the advancement of religion, and other purposes beneficial to the community.9 The legal conception of charity worked out by English courts over centuries and articulated in general terms in Morice and Pemsel was part of the trusts law of the colonies of Australia at the time of federation. And it continues to be part of the trusts law of the states and territories of Australia today. Since the time of federation, judges deciding the question whether or not a purpose trust is valid and enforceable have built on the English legacy to develop a legal conception of charity that in some respects now differs from that which applies for the purposes of trusts law in England itself. One excellent example of this, dating from soon after federation, is the decision of the High Court of Australia in Nelan v Downes.10 There, the High Court unanimously recognised as charitable a gift for the purpose of saying masses for the souls of named individuals. Such a purpose was not then recognised as a charitable purpose in English law. However, the Court reasoned that the public policy considerations underpinning the English doctrine of superstitious uses were not present in Australia and that Australian trusts law should depart from the trusts law of England to that extent.11 But despite cases such as Nelan v Downes, the overall picture of judge-made law relating to charitable purpose trusts in Australia is one of continuity with the English legacy. In 1891, the question that led the House of Lords to hand down its landmark decision in Pemsel was one that brought to the surface the interaction of judge-made trusts law and statutory law. In that case, the House of Lords had to determine the meaning of the phrase ‘charitable purposes’ in section 61 of the United Kingdom Income Tax Act 1842, a provision that made available a charitable income tax exemption. The Commissioners of Income Tax argued that the phrase should be given something like

7 The preamble referred to the following purposes: ‘the relief of aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars of universities; the repair of bridges, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock or maintenance of houses of correction; marriages of poor maids; supportation, aid and help of young tradesmen, handicraftsmen and persons decayed; the relief or redemption of prisoners or captives and the aid or ease of any poor inhabitants concerning payments of fifteens, setting out of soldiers and other taxes’. 8 Morice v Bishop of Durham (1804) 9 Ves 399, 405; 32 ER 656, 659 (Sir William Grant MR); Morice v Bishop of Durham (1805) 10 Ves 522, 541; 32 ER 947, 954 (Lord Eldon). 9 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531, 583. 10 Nelan v Downes (1917) 23 CLR 546. 11 ibid 550 (Barton J). In New Zealand, similar departures from English precedent have been driven by distinctive local public policy concerns: Latimer v Commissioner of Inland Revenue [2002] 3 NZLR 195, 208 (Blanchard J).

186  Matthew Harding its lay meaning with a focus on the relief of poverty. The trustees of the trust argued that the meaning of ‘charitable purposes’ in the Act was the same as the legal conception of charity worked out in trusts law by English judges over hundreds of years and articulated in general terms in Morice. By a slender majority, the House of Lords ruled that the statutory phrase took its meaning from extant judge-made trusts law and was thus much broader than simply the relief of poverty.12 Lord Macnaghten, who delivered the leading judgment, stated that ‘[i]n construing Acts of Parliament, it is a general rule … that words must be taken in their legal sense unless a contrary intention appears’.13 In adopting this approach, the House of Lords aligned the legal conception of charity in judge-made trusts law with the meaning of ‘charitable purposes’ in the British income tax statute. However, it is worth noting that two of the Law Lords dissented, and would have given the statutory phrase a meaning closer to its lay meaning.14 The question of the alignment of the legal conceptions of charity in trusts law and tax law came before the High Court of Australia in the years following federation. In Chesterman v Federal Commissioner of Taxation, the Court was required to interpret the phrase ‘charitable purposes’ in section 8(5) of the federal Estate Duty Assessment Act 1914–1916.15 Despite the ruling in Pemsel, a majority of the Court preferred an interpretation that gave the phrase something like its lay meaning, in part because section 8(5) used a disjunctive phrase, ‘religious, scientific, charitable or public educational purposes’, that was most easily reconciled with a narrow meaning of ‘charitable’.16 This put Australian tax law on a different path from English trusts law. Nonetheless, as in Pemsel, two members of the Court dissented in Chesterman, preferring a broad reading of ‘charitable purposes’ and endorsing Lord Macnaghten’s approach to statutory interpretation.17 Moreover, the jurisprudential innovation of Chesterman was shortlived, with the Privy Council overturning the Court’s decision a couple of years later and unequivocally affirming Lord Macnaghten’s approach.18 The use of one legal conception of charity for the purposes of both trusts law and tax law was, until recently, firmly established in Australia in the wake of the Privy Council decision in Chesterman. Nonetheless, the practice of maintaining a unified legal conception of charity for trusts law and tax law has, at times, been challenged. In the 2006 case of Central Bayside General Practice Association Limited v Commissioner for State Revenue, a majority of the High Court affirmed Lord Macnaghten’s approach to the

12 Pemsel (n 9) 573. 13 ibid 580. 14 ibid 553–54 (Lord Halsbury LC), 567–68 (Lord Bramwell). 15 Chesterman v Federal Commissioner of Taxation (1923) 32 CLR 362. 16 ibid, 382–83 (Isaacs J), 397–98 (Rich J), 399 (Starke J). The minority were not bothered by this disjunction: at 377 (Knox CJ), 392–93 (Higgins J). 17 ibid 376–77 (Knox CJ), 394 (Higgins CJ). 18 Chesterman v Federal Commissioner of Taxation (1925) 37 CLR 317, 319–20. See also Ashfield Municipal Council v Joyce [1978] AC 122. The Commonwealth Parliament acted in the wake of the Privy Council’s decision, legislating to make tax deductions for charitable donors available only in the case of gifts to a subset of charities with purposes focused on the benevolent relief of disadvantage or distress: see Income Tax Assessment Act 1997 (Cth) s 30.45 and the discussion in A O’Connell, Taxation of Charities and Not-for-Profits (LexisNexis 2020) ch 6.

Australia  187 interpretation of the word ‘charitable’ in tax statutes.19 However, Kirby J reasoned that Lord Macnaghten’s approach should be revisited: [T]here is no reason, in principle, why the problem of statutory interpretation presented by the present appeal should be approached in a way different from other cases involving statutory interpretation, considered by this Court in recent times. The starting point is the statute. This includes its language but also the context of the contested phrase; the given reasons for the introduction of the particular provision; the light thrown on its meaning by surrounding provisions; the general purpose and object of the statute viewed in its time; and the constitutional context of the enactment of a law imposing taxation by which a State government, proposing that law, is rendered accountable to the electors.20

And in 2008, in Federal Commissioner of Taxation v Word Investments Ltd, Kirby J returned to this theme, reflecting that ‘[m]y own attempt to drag this body of law into the twenty-first century, in conformity with modernity and the applicable general principles, came to nothing’.21 Meanwhile, in some cases, Australian judges have expressed disquiet with the restricted scope of the legal conception of charity in trusts law. The reasoning in these cases has typically pointed to considerations other than the public policy objectives underpinning tax statutes, suggesting that the alignment of legal conceptions of charity for trusts law and tax law purposes is an uneasy one. For example, in Royal National Agricultural and Industrial Association v Chester,22 the High Court of Australia declared that a testamentary trust for the purpose of breeding and racing pigeons was invalid because its purpose was beyond the spirit and intendment of the Elizabethan preamble. In reasoning to this conclusion, the Court regretted ‘what now appears as an unnecessary restriction imposed by law upon the capacity of a testator to support with his bounty purposes which seem good to him and do not offend against the law’.23 This statement recognised the importance of settlor autonomy as a value underpinning the legal conception of charity for the purposes of trusts law. If public policy objectives justify a jealous approach to the boundaries of the legal conception of charity in tax law, cases such as Chester suggest that the same may not be true in respect of the legal conception of charity in trusts law. In 2013, the interaction of Australian judge-made and statutory law in respect of charitable purpose trusts was put on a new footing thanks to the enactment of a federal Charities Act, which sets out a new legal conception of charity. But because of the constitutional limitations on the powers of the federal Parliament, the legal conception of charity in the Act applies only for the purposes of federal law. This includes the federal income tax law and federal regulatory law directed specifically at charities.24

19 Central Bayside General Practice Association Limited v Commissioner for State Revenue [2006] HCA 43, (2006) 228 CLR 168, 178, fn 28 (Gleeson CJ, Heydon and Crennan JJ), 222 (Callinan J). 20 ibid 200. 21 Federal Commissioner of Taxation v Word Investments Ltd [2008] HCA 55, (2008) 236 CLR 204, 240. 22 Royal National Agricultural and Industrial Association v Chester [1974] 48 ALJR 304. 23 ibid 306. 24 See, respectively, Income Tax Assessment Act 1997 (Cth) div 50 and Australian Charities and Not-for-Profits Commission Act 2012 (Cth).

188  Matthew Harding It does not include trusts law which, as I mentioned earlier, is a matter of state and territory law. Nor does it include the statutory law of the states and territories extending tax preferments to charities. As a result of the Act, then, charitable purpose trusts in Australia are now subject to two legal conceptions of charity: the conception set out in the judge-made and statutory law of the states and territories, and the conception set out in the federal Act.25 Questions of validity and enforcement (and, for that matter, the availability of state and territory tax preferments for charities) demand recourse to the judge-made and statutory law of the states and territories: questions about eligibility for federal income tax exemptions or susceptibility to federal regulation demand recourse to the federal Act. None of this would be of much interest if the Charities Act 2013 simply restated the legal conception of charity at large in state and territory judge-made and statutory law. Certainly, the legislative intention behind the Act was to consolidate and build on extant law: the preamble to the Act talks of ‘ensuring continuity by utilising familiar concepts from the common law’. Nonetheless, the meaning of the Charities Act 2013 has not, to date, been tested in any federal court and so remains to some extent unknown. Moreover, certain provisions of the Act seem, on their face, to depart from state and territory law, creating the very real possibility of points of difference between the legal conception of charity that applies for federal purposes, and that which applies for the purposes of trusts law. For example, the heads of charity in section 12 of the federal Act include ‘promoting reconciliation’, ‘promoting human rights’ and ‘advancing the security or safety of Australia’, none of which finds an obvious analogue in the legal conception of charity built around the spirit and intendment of the Elizabethan preamble.26 Equally, section 12(1)(l) recognises political advocacy purposes as charitable purposes, but only where the advocacy relates to some established head of charity. In this way, section 12(1)(l) may be more limited in scope than the 2010 ruling of the High Court of Australia in Aid/Watch Incorporated v Federal Commissioner of Taxation, in which the Court declared that political advocacy purposes could be charitable but left open the question whether such purposes unrelated to established heads of charity should be so recognised.27 Another provision of the Charities Act 2013 that might reveal a divergence from the legal conception of charity in state and territory law is section 6. This is the section of the Act that sets out the public benefit requirement of the legal conception of charity as it applies for the purposes of federal law. Under section 6, a decision-maker required to make a determination of public benefit with respect to some putative charitable purpose must ‘have regard to all relevant matters, including … benefits (whether tangible or

25 In fact, matters are even more complex because in some cases state and territory legislation appears to stipulate legal conceptions of charity that differ from that in the federal Charities Act 2013 and from that in judge-made trusts law: see further I Murray, ‘The Taming of the Charitable Shrew: State Roll Back of Charity Tax Concessions’ (2016) 27 Public Law Review 54. 26 See Charities Act 2013 (Cth) s 12(1)(f), (g), (h). 27 Aid/Watch Inc v Federal Commissioner of Taxation [2010] HCA 42, (2010) 241 CLR 539 [47]–[48] (French CJ, Gummow, Hayne, Crennan and Bell JJ).

Australia  189 intangible) … and … any possible, identifiable detriment from the achievement of the purpose to the members of … the general public; or … a section of the general public’. The provision seems to demand an exhaustive enquiry into all possible relevant benefits and detriments. In contrast, judge-made law suggests that the path to a finding of public benefit might, in certain cases, be much more straightforward. For example, in Aid/Watch, a majority of the High Court reasoned that the public benefit of political advocacy purposes was to be found in the contribution that such advocacy makes to the system of representative and responsible government established by the Commonwealth Constitution. Enquiries into benefits and detriments associated with the ends sought to be advocated for are not necessarily required in order to demonstrate public benefit.28 Thus, it seems possible that a charitable purpose trust with a political advocacy purpose might establish public benefit as a matter of trusts law by appealing to the contribution it makes to political culture, while as a matter of federal law it must demonstrate that the full range of relevant benefits and detriments balances in its favour. That said, as with so much of the Charities Act 2013, this point is yet to be tested in a court. What should we make of this sort of divergence? Earlier, I mentioned that the High Court of Australia has emphasised the sense in which common law (including equity) combines with federal, state and territory statute law to make one unified legal system under the Commonwealth Constitution. From this standpoint, it might seem desirable to harmonise legal conceptions of charity across state, federal and territory law, and across judge-made and statute law, much in the way the House of Lords did in Pemsel in 1891.29 Where legal conceptions of charity are used for the purposes of tax and regulatory law at both state and territory, and federal, levels, this sort of harmonisation might make sense, although the extent to which this is the case might depend on the content of the various public policy objectives that state and territory legislators pursue in their respective tax and regulatory laws. In contrast, where the legal conception of charity in trusts law is in view, it seems far from obvious that harmonisation is desirable. As I suggested earlier, the public policy objectives underpinning the law of trusts seem manifestly different from those underpinning tax and regulatory law. In the case of trusts, the value of settlor autonomy points in the direction of a broad, accommodating legal conception of charity, although the desirability of maintaining charity as a distinctive mode of social action suggests that some limitations on what counts as charitable should be maintained.30 In the case of tax and regulatory law, the importance of maintaining the integrity and justice of the tax and transfer system, and of subjecting to regulatory oversight only those organisations that receive state subsidies and are

28 See, eg, ibid [45]. 29 In 2016, the Australian Charities and Not-for-Profits Commission released a discussion paper addressing the question of harmonisation: Lina Caneva, ‘ACNC Moves on Single Charity Definition’ (Pro Bono Australia, 25 August 2016): probonoaustralia.com.au/news/2016/08/acnc-moves-single-charity-definition/. The discussion paper is no longer archived at the Commission’s website. 30 I argue to this effect in M Harding, Charity Law and the Liberal State (Cambridge University Press 2014); M Harding, ‘Independence and Accountability in the Charity Sector’ in J Picton and J Sigafoos (eds), Debates in Charity Law (Hart Publishing 2020); and M Harding, ‘Charity and Law: Past, Present and Future’ [2020] Singapore Journal of Legal Studies 564.

190  Matthew Harding accountable to the public, suggest a more rigorous, parsimonious, approach to the legal conception of charity.31 The interaction of judge-made and statutory law in respect of charitable purpose trusts has been complex and multifaceted in the Australian federation. The story of that interaction has entailed both efforts to harmonise legal conceptions of charity across different bodies of law, and legislative and judicial interventions introducing divergence between state and federal law. The proper resolution of the resulting tension turns on the public policy objectives underpinning the different bodies of judge-made and statutory law that affect charitable purpose trusts in Australia. And those objectives suggest that divergence might be the appropriate path, at least to the extent that a legal conception of charity in trusts law performs very different work from that done by its analogues in tax and regulatory law.

III.  Trusts of Family Assets Before exploring the interaction of Australian judge-made and statutory law in relation to trusts of family assets, some historical and social context seems helpful. The period following the Second World War was for Australia, as for many nations, one of economic prosperity and growth.32 Moreover, economic benefits were distributed relatively widely among the population, which was at the same time growing thanks to post-War migration.33 Among other things, many Australians became homeowners during this time, and the mechanism by which this home ownership was – and still is – typically achieved was bank borrowing secured by a mortgage over the home. Widespread home ownership financed by mortgage borrowing remains the norm in Australia, although recently dramatic increases in the price of land and rapidly growing wealth inequality portend the end of that state of affairs.34 Another post-War development in Australian 31 There is arguably a further point to be made here about the division of labour entailed in pursuing these various public policy objectives. Values, such as autonomy, that are typically associated with private law seem appropriately pursued by courts. In contrast, values to do with the justice of the tax system and the efficacy of regulatory schemes are arguably best pursued by the legislature. I raise this possibility here without necessarily taking a position on it. 32 See, eg, Commonwealth of Australia, ‘Australia’s Century since Federation at a Glance’ in Economic Roundup: Centenary Edition (2001), available at: treasury.gov.au/publication/economic-roundup-centenaryedition-2001; Reserve Bank of Australia, ‘The Spectre of Inflation’ (Reserve Bank of Australia Museum), available at: museum.rba.gov.au/exhibitions/make-your-money-fight/spectre-of-inflation/. 33 Two million immigrants arrived in Australia between 1945 and 1965, after the Australian government decided to ‘open up the nation’: National Museum Australia, ‘Defining Moments: Postwar Immigration Drive’ (National Museum Australia, 23 July 2021), available at: www.nma.gov.au/defining-moments/resources/ postwar-immigration-drive. 34 See, eg, Australian Institute of Health and Welfare, ‘Home Ownership and Housing Tenure: Snapshot’ (Australian Institute of Health and Welfare, 30 June 2021), available at: www.aihw.gov.au/reports/australiaswelfare/home-ownership-and-housing-tenure. Within the space of two decades, from 1997–98 to 2017–18, the percentage of Australian households that own their own home with a mortgage increased from 31% to 37%, while those without a mortgage decreased from 40% to 30%: Australian Bureau of Statistics, ‘Housing Occupancy and Costs: 2017–18’ (Australian Bureau of Statistics, 17 July 2019), available at: www.abs.gov.au/ statistics/people/housing/housing-occupancy-and-costs/2017-18#key-statistics. See also Diana Warren and Lixia Qu, ‘Housing’ (Australian Institute of Family Studies 2020). Recent trends indicate that the proportion of renting households in Australia is growing, increasing to 32% in 2017–18, which is up from 27% in 1997–98:

Australia  191 society – especially from the 1960s – has been the relative decline of the traditional marriage as the chosen foundation of the family unit. Increasingly, unmarried couples have chosen to cohabit and purchase family homes,35 and until very recently same-sex couples had no choice but to organise their affairs on this basis as they were not permitted to marry.36 In Australia, widespread mortgage-financed home ownership coupled with growing diversity in family life have given rise to particular problems for judgemade and statutory law relating to trusts. The problems in question have arisen at the point where the relationship between a couple breaks down and there is a dispute about the allocation of family assets on separation. In 1975, the federal Parliament enacted the Family Law Act, which introduced no-fault divorce for married couples along with a statutory scheme for the allocation of marital assets on divorce. Under section 79 of the Act, courts exercising family law jurisdiction were empowered to make orders with respect to marital assets that they considered just and equitable in the circumstances.37 In exercising these powers, the Act envisaged that courts would have regard to a range of factors including past contributions to a relationship and the future needs of the parties and their children. But because of the constitutional limitations on the powers of the federal Parliament, the Family Law Act applied only to married couples,38 and it had nothing to say about the allocation of family assets where unmarried couples separated. In 1975, this was dealt with as a matter of state and territory law, and because at that time there was no statutory law at state or territory level dealing with the breakdown of the relationships of unmarried couples, this meant that trusts law doctrines had to be adapted to respond to asset disputes arising out of such relationship breakdowns. Thus, in 1984, in Calverley v Green, the High Court of Australia applied trusts law doctrines in resolving an asset dispute between a separating unmarried couple.39 The couple had taken legal title to the family home as joint tenants, and jointly borrowed two-thirds of the purchase price secured by a mortgage over the property. The man had contributed the other third of the purchase price from his own funds and had also made loan repayments over time; the woman had covered household expenses from her earnings. In determining the beneficial ownership of the family home, the Court

Australian Bureau of Statistics, ‘More Households Renting as Home Ownership Falls’ (Australian Bureau of Statistics, 17 July 2019), available at: www.abs.gov.au/articles/more-households-renting-home-ownershipfalls. At the same time, the weighted average price of residential real estate in Australia’s eight capital cities rose 21.7% over 12 months in 2020–21: Australian Bureau of Statistics, ‘Residential Property Price Indexes: Eight Capital Cities’ (Australian Bureau of Statistics, September 2021), available at: www.abs.gov.au/statistics/ economy/price-indexes-and-inflation/residential-property-price-indexes-eight-capital-cities/latest-release. 35 Cohabitation has increased steadily across census years in Australia. This figure was at 18% in 2016, compared with 12% in 2001. Additionally, 81% of marriages in 2017 were preceded by cohabitation, compared with 16% in 1975: see Lixia Qu, ‘Couple Relationships’ (Australian Institute of Family Studies 2020). 36 Same-sex marriage was enabled in Australia by the Marriage Amendment (Definition and Religious Freedoms) Act 2017 (Cth). 37 The ‘just and equitable’ requirement confers on courts exercising family law jurisdiction a wide discretion including as to whether to make any orders at all: Stanford v Stanford [2012] HCA 52, (2012) 247 CLR 108; and see the discussion in B Fehlberg and L Sarmas, ‘Australian Family Property Law: “Just and Equitable” Outcomes?’ (2018) 32 Australian Journal of Family Law 81. 38 Australian Constitution s 51(xxi), (xxii). 39 Calverley v Green (1984) 155 CLR 242.

192  Matthew Harding applied resulting trusts principles,40 concluding that the legal title was held on trust for the parties in shares that reflected their respective contributions to the purchase price: two-thirds for the man, and one-third for the woman. The fact that the man had made loan repayments from his earnings was not taken into account in determining beneficial interests under the trust, but the Court nonetheless thought that the woman might be required to account to the man in respect of those repayments, which were in discharge of a joint liability.41 The woman’s contribution to household expenses was not considered relevant to the dispute. In these ways the Court arrived at a resolution of the asset dispute that was sensitive to the fact that the parties had purchased the family home together and that they had financed the purchase with a loan secured by a mortgage. However, the full range of contributions to the household were not taken into account in resolving the dispute. In 1985, in Muschinski v Dodds, the High Court was once again presented with an asset dispute arising out of the relationship breakdown of an unmarried couple.42 The couple had purchased land, and legal title was transferred to them as tenants in common in equal shares. The couple had planned to develop the land for family and business purposes but these plans never eventuated. The woman had paid the purchase price, and the man had made some contributions to the improvement of the property, but these were modest. Rather than applying resulting trust principles to the question of beneficial ownership of the land, the Court emphasised the fact that the land had been purchased by the couple in furtherance of a joint endeavour that had since failed in circumstances where neither party was to blame. For the man now to assert his legal title in circumstances where his planned contribution to the joint endeavour would never be realised was unconscionable.43 Thus, the Court declared that legal title to the land was held by the couple on constructive trust; under the terms of this trust, any debts incurred in improving the land were to be repaid, respective contributions to purchase and improvement were to be refunded to the parties, and any value left over was to be distributed to the parties in equal shares.44 For present purposes, the significance of Muschinski v Dodds lies in the Court’s willingness to look to the wider circumstances surrounding the purchase and use of a family asset. The Court tried to fashion a remedy that would be sensitive, not only to the question of who contributed to the purchase price of the asset, but also to the character of the separating couple’s relationship and

40 That said, the Court was divided on what the applicable principles were. Gibbs CJ thought that the presumption of advancement was raised given that the couple were in a marriage-like relationship, but that the presumption was rebutted by evidence of contrary intention at the time of purchase: at 246. Mason and Brennan JJ (at 260), and Deane J in a separate judgment (at 267–68), thought that the presumption of resulting trust was raised given that the couple were not married, and that it was not rebutted on the evidence. Murphy J dissented and would have allocated beneficial ownership of the family home in accordance with the legal title which was held jointly: at 264–65. 41 ibid 253 (Gibbs CJ), 263 (Mason and Brennan JJ). 42 Muschinski v Dodds (1985) 160 CLR 583. 43 ibid 610–11 (Deane J). 44 ibid 624 (Deane J). It has been argued that this unusual remedial device was not a trust at all, but rather a lien securing the repayment of respective contributions to purchase and improvement: E Bant, ‘Trusts, Power and Liens: An Exercise in Ground-Clearing’ (2009) 3 Journal of Equity 286, 309; Ying Khai Liew, ‘“Joint Endeavour Constructive Trust” Doctrine in Australia: Deconstructing Unconscionability’ (2021) 42 Adelaide Law Review 73, 93–94.

Australia  193 plans. In this, the Court in Muschinski v Dodds moved trusts law principles more into alignment with the prevailing approach to the allocation of marital assets in the Family Law Act. This trend towards aligning trusts law principles with the statutory principles in the Family Law Act was even more pronounced in the High Court’s 1987 decision in Baumgartner v Baumgartner.45 The dispute, again between an unmarried couple, was over beneficial ownership of the family home, built on land held in the sole name of the man. The man contributed to the purchase price and borrowed the balance of the funds on security of a mortgage over the land. The couple’s practice was to pool their earnings and other resources, and this pool was used to make loan repayments and meet other household expenses. The Court considered this pooling practice significant and held that the man held legal title in the land on trust for himself and the woman in shares reflecting their respective contributions to the pooled fund and the man’s separate contribution to the purchase price.46 In Baumgartner, the Court recognised a range of financial contributions the parties had made to the household, including contributions to the repayment of the loan used to finance the purchase. And cases since Baumgartner have confirmed that the notion of ‘pooling’ at the core of the reasoning in that case applies, in principle, to non-financial contributions as well, thus expanding even further the range of application of the approach from Baumgartner.47 Recall that the trio of cases I have just described all reached the High Court of Australia during the 1980s, at a time when the federal Family Law Act dealt with the allocation of marital property upon divorce but there was no state or territory legislation dealing with this same question upon the separation of unmarried couples. During the 1980s, this picture began to change. In 1984, the New South Wales Parliament enacted the Property (Relationships) Act, setting out a statutory scheme in respect of unmarried couples.48 And the other states and territories followed suit, so that by the early twenty-first century there was a statutory scheme in place for unmarried couples in each state and territory. In 2008, as a result of a referral of power from state parliaments to the federal Parliament,49 the federal Parliament enacted the Family Law Amendment (De Facto Financial Matters and Other Measures) Act, extending the Family Law Act’s scheme for the allocation of family assets upon the breakdown of a relationship to unmarried couples. These legislative developments have left little work for trusts law doctrines to do in the setting of asset disputes between separating couples. To that extent, the jurisprudential developments of the High Court in the 1980s may be viewed with hindsight as a creative judicial response to changing social conditions and concerns that was needed at the time in the absence of legislative action, but is no longer needed now that legislation covers the field. 45 Baumgartner v Baumgartner (1987) 164 CLR 137. 46 ibid 149–50 (Mason CJ, Wilson and Deane JJ). 47 See, eg, Parij v Parij (1997) SASR 153, 163 (Debelle J). 48 This statute was enacted after the cases of Calverley, Muschinski and Baumgartner came before the Supreme Court of New South Wales and therefore did not affect the determination of those cases. 49 A referral of power is contemplated by Constitution s 51(xxxvii). Western Australia did not participate in this scheme, and so in that state asset disputes between unmarried couples are still dealt with under the Family Court Act 1997 (WA). The two Australian territories were brought within the scheme without a referral of power as the Commonwealth Parliament enjoys plenary legislative power in respect of those territories: Australian Constitution s 122.

194  Matthew Harding This assessment is true only to an extent. For even after the enactment of the 2008 Act bringing unmarried couples within the purview of the Family Law Act, there remains work for trusts law doctrines to do in the settling of disputes over family assets. Questions about the beneficial ownership of family assets may arise in circumstances where family members do not enjoy the sort of couple relationship that attracts the operation of the Family Law Act,50 or where one partner to a relationship dies or becomes bankrupt. Such questions cannot usually be resolved by the application of section 79 – and since the 2008 reforms section 90SM – of the Family Law Act. In these cases, trusts law doctrines continue to operate. The continuing relevance of trusts law doctrines to the resolution of disputes over family assets is illustrated by the 2006 decision of the High Court of Australia in The Trustees of the Property of Cummins v Cummins.51 Mr and Mrs Cummins had taken legal title to their family home as joint tenants, but Mrs Cummins had contributed around three-quarters of the purchase price. The couple had lived in the family home for many years and raised a family there. A dispute over the beneficial ownership of the family home arose when Mr Cummins was declared bankrupt, owing the Australian Taxation Office millions of dollars in unpaid taxes. Against the claim of the trustees in bankruptcy to a half share of the beneficial interest in the property reflecting the joint tenancy at law (which was severed by the bankruptcy), Mrs Cummins – who was also divorcing Mr Cummins – argued that the couple held the family home on resulting trust, and that the beneficial interests under that trust reflected respective contributions to the purchase price.52 The High Court found in favour of the trustees in bankruptcy. And in doing so, they arguably adapted trusts law doctrine in a new way, demonstrating that in cases where statutory law is not activated, judge-made trusts law might still respond to social settings and concerns. In Cummins, the High Court considered that, from the fact that a married couple have purchased a family home as joint tenants, an inference may be drawn that the couple intended at the time of purchase to share equally in the beneficial ownership of the home, subject to a right of survivorship in equity as well as law.53 The Court thought that this same inference might also be drawn in the case of an unmarried couple who are nonetheless ‘parties to a lifetime relationship’.54 And the Court suggested that in the case of a married couple, an inference of joint beneficial ownership might be drawn not only where legal title is held as joint tenants, but also where it is held in the name of one spouse.55 Moreover, in all these cases, the Court thought that an inference of joint beneficial ownership might be drawn irrespective of unequal contributions to the

50 In some circumstances, such family members may register their relationships under state or territory law, thus triggering the operation of asset distribution mechanisms in state or territory legislation: see, eg, Relationships Act 2008 (Vic) s 45. 51 The Trustees of the Property of Cummins v Cummins [2006] HCA 6, (2006) 227 CLR 278. 52 Mrs Cummins also argued that some years after the purchase, Mr Cummins had transferred his legal and equitable interests in the home to her. The High Court rejected this argument, on the basis that this transfer was carried out to frustrate the claims of Mr Cummins’ creditors and was therefore void against the trustees in bankruptcy under s 121 of the Bankruptcy Act 1966 (Cth): see ibid, 292–97. 53 ibid 301–03. 54 ibid 302. 55 The situation where legal title is held as tenants in common was not addressed.

Australia  195 purchase price of the family home:56 ‘[t]o fix merely upon the unequal proportions in which the purchase moneys were provided for the calculation of the beneficial interests in the … property … would produce a distorted and artificial result, at odds with practical and economic realities’.57 The Court did not elaborate on the content or character of these ‘practical and economic realities’ but seems to have had in mind the sense in which married couples contribute to their asset base in an unplanned, ‘accidental’, way.58 Does Cummins represent another instance of judges invoking trusts law to respond to social circumstances and concerns in the face of parliamentary inaction? I think the answer to this question is ‘no’. In 2005, the federal Parliament enacted the Bankruptcy and Family Law Legislation (Amendment) Act, making amendments to the Bankruptcy Act 1966 and the Family Law Act. Pursuant to these amendments, where a couple is separating and one of the partners is bankrupt, the trustee in bankruptcy of the bankrupt partner may be joined to the family law proceedings and asset disputes between the trustee in bankruptcy and the non-bankrupt partner may be determined in accordance with section 79 or section 90SM of the Family Law Act. As I mentioned earlier, the allocative principles of these provisions focus on past contributions and future needs and are subject to a general requirement that any order made must be ‘just and equitable’ in the view of the court.59 Thus, the federal Parliament acted in 2005 to establish a statutory scheme for the resolution of disputes over family assets in circumstances such as those that generated the Cummins case. This statutory scheme was not directly applicable in Cummins itself, because Mrs Cummins had commenced family law proceedings prior to the enactment of the 2005 amendments. Nonetheless, the 2005 amendments had been enacted by the time Cummins was decided by the High Court, yet there was no mention of them in the High Court’s judgment, nor any effort in that judgment to render the development of trusts law doctrines consistent with them. As a result of the High Court’s decision in Cummins, where family law proceedings have commenced and a dispute over family assets then arises between a trustee in bankruptcy and the non-bankrupt partner to the relationship, the dispute may be resolved in accordance with the Family Law Act’s principles of allocation and its overarching demand that any order made be considered by the court ‘just and equitable’. In contrast, where there are no family law proceedings on foot and a family asset dispute arises because of the bankruptcy of one partner to the relationship, the trusts law doctrine articulated in Cummins applies, potentially generating very different results from the enquiry required under the Family law Act. Critically, in the Family Law Act context, 56 Cummins (n 51) 303. 57 ibid 300. 58 ibid 302–03, quoting A Scott, The Law of Trusts, 4th edn (Little Brown 1989) vol 5, 197–98, 239 and saying ‘[t]here is no occasion for equity to fasten upon the registered interest held by the joint tenants a trust obligation representing differently proportionate interests as tenants in common. The subsistence of the matrimonial relationship … supports the choice of joint tenancy with the prospect of survivorship … The range of financial considerations and accidental circumstances in the matrimonial relationship referred to by Professor Scott answers [a further] concern … namely the disproportion between quantum of beneficial ownership and contribution to the acquisition of the matrimonial home’. 59 Indeed, one of the policy objectives of the Bankruptcy and Family Law Legislation (Amendment) Act 2005 was to ensure that ‘both financial and non-financial contributions’ of the non-bankrupt partner are taken into account in cases such as Cummins: Explanatory Memorandum to the Bankruptcy and Family Law Legislation (Amendment) Act 2005 (Cth) para 12.

196  Matthew Harding contributions to the purchase price of the family asset in dispute will be taken into account in working out a just and equitable allocation; under the Cummins doctrine, such contributions may not be considered relevant.60 This divergence between judgemade trusts law and statutory bankruptcy and family law might be justified if one set of public policy considerations obtain where a family asset dispute arises out of the combination of family law proceedings and a third-party bankruptcy claim, and another set of public policy considerations obtain where the third-party bankruptcy claim is asserted in the absence of family law proceedings. However, it is not clear why different public policy objectives would obtain in these two types of case; indeed, it is hard to see why a non-bankrupt partner’s contributions to family assets should be noticed only on separation and not also during the life of the couple’s relationship. At the outset I noted the High Court’s emphasis on the unity of federal, state and territory judge-made and statutory law under the Australian Constitution. To the extent that courts adapt judge-made trusts law to bring it more into alignment with statutory law, in the absence of specific statutory responses to the social circumstances and concerns that the courts are presented with, it may be argued that the courts serve this overarching aspiration to unity. This, I think, is a plausible way to interpret the High Court’s adaptation of trusts law doctrines in cases of disputes over family assets in the 1980s. On the other hand, where courts develop trusts law in ways that diverge from statutory law, and in the face of specific relevant statutory interventions, it might be argued that the aspiration to unity remains unfulfilled. On this score, Cummins presents as a troubling decision.61

IV.  Trading Trusts A distinctive feature of the Australian business sector is the widespread use of so-called ‘trading trusts’. Such trusts first emerged in the 1960s for reasons that appear to be related to tax avoidance and they have since been a popular form for organising business activities. Trading trusts are arrangements in which business activities are conducted through a trust of which the trustee is a limited liability company. It is estimated that there are over 300,000 trading trusts in Australia, as a subset of over 600,000 trusts with corporate trustees.62 Because they combine the corporate form with the form of the trust, trading trusts generate interesting questions and problems at the intersection of judge-made trusts law and statutory company law; these questions and problems are so intricate and challenging that Harold Ford once memorably described trading 60 That said, the correct or even prevailing judicial approach to making ‘just and equitable’ orders when family law proceedings are conjoined with bankruptcy proceedings remains unclear: see further L Sarmas and B Fehlberg, ‘Bankruptcy and the Family Home: The Impact of Recent Developments’ (2016) 40 Melbourne University Law Review 288. 61 The troubles are compounded by the fact that, since Cummins was handed down, courts in bankruptcy proceedings have not applied it consistently: see further L Sarmas, ‘Trusts, Third Parties and the Family Home: Six Years Since Cummins and Confusion Still Reigns’ (2012) 36 Melbourne University Law Review 216; Sarmas and Fehlberg, ‘Bankruptcy and the Family Home’ (n 60) 317–18. 62 See Australian Government Treasury, ‘Clarifying the Treatment of Trusts under Insolvency Law’ (15 October 2021), available at: treasury.gov.au/sites/default/files/2021-10/c2021-212341.pdf, 4.

Australia  197 trusts as ‘commercial monstrosities’.63 One example relates to the position of the beneficiaries of trading trusts: given that the trading trust is the functional equivalent of the limited liability company insofar as it is used as the vehicle for business activities, should trading trust beneficiaries enjoy rights within the business structure similar to those enjoyed by the shareholders of limited liability companies? This question has arisen in recent years in Australia in the form of debate about whether trading trust beneficiaries should have access to the ‘oppression remedies’ of sections 232 and 233 of the federal Corporations Act 2001.64 Another challenging interaction of judge-made trusts law and statutory company law in relation to trading trusts concerns the rights of indemnity enjoyed by corporate trustees of such trusts. Where a trustee incurs debts in the performance of the trust, the trustee is personally liable for the discharge of these debts: this personal liability is entailed in trusteeship given that the trust is a relationship between trustee and beneficiary rather than an entity with legal personality.65 As a matter of trusts law, the trustee is entitled to an indemnity from trust assets in respect of such debts: the trustee may either discharge the debts from her own funds and then seek reimbursement from the trust assets after the event (the right of reimbursement) or have recourse to the trust assets to pay trust debts directly, thus exonerating her of personal liability for those debts (the right of exoneration).66 The nature and implications of a trustee’s rights of indemnity in respect of trust debts have been much debated by Australian courts over many years. And the debate has mattered greatly for trading trusts, because trustees’ rights of indemnity can have significant consequences upon the insolvency of the corporate trustee of a trading trust. Australia’s Corporations Act makes extensive provision for the distribution of the ‘property’ of an insolvent company.67 In particular, part 5.6D of the Act spells out the priorities in respect of creditor claims when a company is wound up, including the claims of unpaid employees of the company, and then provides (in section 555) that claims that do not enjoy priority rank equally and must be paid out proportionately once priority claims have been satisfied. Where an insolvent company holds assets on trust, as a general rule these assets are not considered company property available for distribution on a winding up and so fall outside the scheme in part 5.6D of the Act.68 However, matters might be otherwise in respect of trust assets subject to a corporate trustee’s rights of indemnity. To the extent that a corporate trustee, in virtue of its rights of indemnity, enjoys a beneficial interest in the trust assets, that beneficial interest might

63 HAJ Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1, 1. 64 Note the differing recommendations in Victorian Law Reform Commission, ‘Trading Trusts: Oppression Remedies’ (Report, January 2015), available at: www.lawreform.vic.gov.au/wp-content/uploads/2021/07/ VLRC_Trading_Trusts_Report_Web.pdf; and New South Wales Law Reform Commission, ‘Laws Relating to Beneficiaries of Trusts’ (Report No 144, May 2018), available at: www.lawreform.justice.nsw.gov.au/ Documents/Publications/Reports/Report%20144.pdf. 65 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367; Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20, (2019) 268 CLR 524 [24]. 66 These rights existed in equity but are now provided for by state and territory legislation: see Carter Holt (n 65) [131] (Gordon J). 67 ‘Property’ is defined broadly in Corporations Act 2001 (Cth) s 9. 68 See the discussion in Carter Holt (n 65) [24]–[26] (Kiefel CJ, Keane and Edelman JJ).

198  Matthew Harding fall within the property of the corporate trustee available for distribution to creditors on a winding up. In a dispute between trust beneficiaries and creditors – whether trust creditors or non-trust creditors of the corporate trustee – the proper characterisation of the trustee’s rights of indemnity thus assumes great importance. This question of how to characterise the trustee’s rights of indemnity arose in the recent case of Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth.69 A company, Amerind, was the trustee of a trading trust. Amerind had borrowed from the Bendigo and Adelaide Bank pursuant to facilities that gave the Bank securities over Amerind’s fixed and circulating assets. After Amerind failed to meet repayment obligations, the Bank appointed receivers under the Corporations Act; those receivers sold fixed and circulating assets of Amerind and, after they had paid themselves, they held a surplus of around $1.6 million. The dispute in Carter Holt was in respect of this $1.6 million. Under section 433 of the Corporations Act, a receiver holding company property that is subject to a circulating security interest must distribute that property in accordance with the priorities set out in the Act; among other things, this means that employee claims must be paid out in priority to the claims of other creditors.70 And in the case of Amerind, there were employee claims in view; the Commonwealth had paid entitlements to Amerind’s employees pursuant to a statutory scheme designed to protect the employees of insolvent companies, and under section 560 of the Act the Commonwealth now claimed the priority those employees would otherwise have enjoyed. The case then turned on the question whether the $1.6 million was company property subject to a circulating security interest: if it was, the Commonwealth had a priority claim to it; if it was not, the receiver could apply it in satisfaction of the claims of other creditors. In Carter Holt, in order to work out the implications of section 433 of the Corporations Act the High Court had to clarify some basic principles of trusts law. First, the Court explained the nature of the trustee’s right of exoneration as one manifestation of the broader rights of indemnity that trustees enjoy. The Court held that a trustee, in virtue of the right of exoneration, enjoys a beneficial interest in the trust assets. The right of exoneration is not a power to direct the application of trust assets in the satisfaction of trust debts.71 It is, rather, a right to draw on the trustee’s own property in the trust to satisfy debts that the trustee has incurred in the performance of that trust.72 This right is sometimes described as giving rise to a lien over trust 69 Carter Holt (n 65). 70 See Corporations Act 2001 (Cth) s 566. 71 This view had been put forward by Ford (n 63) and subsequently endorsed by judges in some cases: see, eg, Lane v Deputy Commissioner of Taxation [2017] FCA 953, (2017) 253 FCR 46 [43] (Derrington J); Commonwealth v Byrnes and Hewitt [2018] VSCA 41, (2018) 54 VR 230 [283] (Ferguson CJ, Whelan, Kyrou, McLeish and Dodds-Streeton JJA). For a different sort of powers analysis, arguing that trustee reimbursement entails trustees using their powers of ownership of trust assets in ways authorised by trust terms, see J Hudson and C Mitchell, ‘Trustee Recoupment: A Power Analysis’ (2021) 35 Trust Law International 3. Although Hudson and Mitchell explicitly state that their analysis is focused on reimbursement and does not address exoneration, that analysis seems to align with at least some of what the High Court said about exoneration in Carter Holt. 72 See also Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 [50]–[51] (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ); CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) [2005] HCA 53, (2005) 224 CLR 98 [51] (Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ); Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2009] HCA 32, (2009) 239 CLR 346; The Honourable Chief Justice James Allsop AO, ‘The Intersection of Companies and Trusts’ (2020) 43 Melbourne

Australia  199 assets, but it is better described as arising ‘endogenously as an incident of the office of trustee’,73 and as a right that generates, for the trustee, property in the trust assets.74 Second, the beneficial interest in trust assets that the right of exoneration gives a trustee is limited to what is necessary to discharge trust debts. The right of exoneration does not entitle a trustee to use trust assets to discharge debts owed to non-trust creditors.75 Given that the right is an incident of the office of trusteeship, it makes sense that it is also bounded by the trustee’s mandate and powers. In clarifying these two fundamental principles of trusts law, the Court in Carter Holt resolved debates that had been active in case law and academic commentary for some 40 years. This clear understanding of the nature of the trustee’s right of exoneration was the analytic precursor in Carter Holt to a set of further difficult questions about the interplay of judge-made trusts law and the Corporations Act. One such question arose because, according to section 433 of the Act, receivers were required to conform to statutory priorities only when dealing with company property subject to a circulating security interest. The applicant in the case – which presented as a secured creditor – argued that the right of exoneration was not subject to a circulating security interest and therefore fell outside the boundaries of section 433. However, the Court explained that the right of exoneration was not itself the relevant company property; rather, the relevant company property was the $1.6 million, the proceeds of the sale of the company’s fixed and circulating assets in exercise of the right of exoneration by the receiver.76 Those proceeds were trust assets in which the corporate trustee had a beneficial interest, and they were circulating assets within the meaning of section 433.77 A further question about the interaction of judge-made trusts law and the Corporations Act that the Court had to determine in Carter Holt relates to the availability of company property generated by the right of exoneration to satisfy the claims of non-trust creditors. As I mentioned above, in Carter Holt the Court ruled clearly that as a matter of trusts law the beneficial interest in trust assets that a trustee enjoys in virtue of the right of exoneration is limited to what is necessary to discharge trust debts. Does this place trusts law at odds with the insolvency provisions of the Corporations Act, which do not on their face distinguish between company property available to meet the claims of creditors generally and company property available to meet only the claims of trust creditors? Does it reflect some failure to adapt trusts law to generate desired consistency with statutory objectives? The Court thought not. In their judgment, Kiefel CJ, Keane and Edelman JJ considered section 555 of the Corporations Act, the provision University Law Review 1128, 1151 (‘To exercise the right of exoneration is to take and use property which is that of the company, the proprietary beneficial interest (in the nature of a lien or charge) separate from and prevailing over the beneficial interests of the beneficiaries’). 73 Carter Holt (n 65) [83] (Bell, Gageler and Nettle JJ). 74 ibid [140] (Gordon J). 75 ibid [42]. The view that company property generated by the right of exoneration was available to discharge the debts of non-trust creditors had been taken by the Full Court of the Supreme Court of Victoria in Re Enhill Pty Ltd [1983] 1 VR 561. 76 A receiver or liquidator is subrogated to a corporate trustee’s right of exoneration: Octavo (n 65) 367, 370 (Stephen, Mason, Aickin and Wilson JJ); Carter Holt (n 65) [34] (Kiefel CJ, Keane and Edelman JJ), [132] (Gordon J). 77 Carter Holt (n 65) [49]–[52] (Kiefel CJ, Keane and Edelman JJ), [108] (Gordon J, describing the right of exoneration as the ‘gateway’ to the sale of circulating assets).

200  Matthew Harding that sets out the general approach to satisfying the claims of creditors without priority on insolvency. They did not think that limiting the use of company property generated by the right of exoneration to the satisfaction of claims by trust creditors was at odds with the text or purpose of this provision. Rather, Kiefel CJ, Keane and Edelman JJ considered that section 555 applies only to the extent that company property is available to meet creditor claims, and where the property has been generated by the right of exoneration it is only available to meet some such claims and not all of them.78 Bell, Gageler and Nettle JJ, and Gordon J in a separate judgment, focused on the statutory priorities picked up in section 433 and set out fully in section 556, and took the view that these priorities apply to the distribution of company property generated by the right of exoneration to trust creditors just as much as they do to the distribution of other company property to non-trust creditors. Thus, company property generated by the right of exoneration should be distributed to trust creditors according to the Corporations Act scheme, and equally other company property should also be so distributed.79 And where a company is the trustee of multiple trading trusts, it may be necessary to administer separate pools of company property generated by the exercise of the rights of exoneration entailed in each trust and apply the Corporations Act scheme separately to each such pool. Such arrangements may generate complexity, but this complexity may nonetheless be worked through with the assistance of the court.80 In Carter Holt, then, the High Court of Australia took the view that there is no sense in which a corporate trustee’s right of exoneration generates trusts law consequences at odds with the ambitions of part 5.6D of the Corporations Act.81 In this field, the interaction of judge-made trusts law and statutory company law is, on a proper understanding of the doctrines and rules involved, a harmonious and coherent one.82 There is no need to adapt trusts law doctrine to bring it into alignment with statutory objectives. This harmony and coherence took decades to achieve; as I mentioned earlier, prior to Carter Holt there had been disputes in the case law and the academic literature both about the proper understanding of trustees’ rights of indemnity and about the interaction of those rights with statutory company law. Nonetheless, in Carter Holt the High Court appears to have achieved it, and in doing so clarified some important fundamental points of trusts law about the nature of the trustee’s own interest in trust assets. In 1988, the Australian Law Reform Commission produced a report which contained recommendations for statutory law reform to address the problems associated with the insolvency of corporate trustees. These recommendations were never acted on by the federal Parliament. Had they been enacted, the recommendations would have clarified the statutory treatment of trust creditors and non-trust creditors on the insolvency of a corporate trustee. However, they would not have clarified the fundamental points of trusts law that were addressed in Carter Holt. The legislative 78 ibid [44] (Kiefel CJ, Keane and Edelman JJ). 79 ibid [91]–[92] (Bell, Gageler and Nettle JJ), [172] (Gordon J). 80 ibid [97] (Bell, Gageler and Nettle JJ), [172] (Gordon J). 81 The Court also took the view that the policy objectives of the Corporations Act 2001 (Cth) were consistent with the Court’s understanding of the insolvency implications of the right of exoneration: ibid [58] (Kiefel CJ, Keane and Edelman JJ), [144] (Gordon J). 82 Allsop (n 72) 1153 suggests that prior to Carter Holt there may have been an unjustified ‘assumption that the statute was in a different universe of discourse to the operation of equitable principle’.

Australia  201 powers of the Commonwealth Parliament do not extend to trusts law, which is, as I discussed earlier, a matter for state and territory judge-made and statutory law.83 Arguably, then, Carter Holt demonstrates that in resolving difficulties associated with the interaction of judge-made and statutory law, judicial effort might sometimes yield better results than legislative reform, at least where that effort is applied by the apex High Court of Australia. This point is worth bearing in mind at the present time as the Australian federal Treasury has recently released a discussion paper on the question whether the law relating to trading trusts and insolvency requires further legislative clarification.



83 Australian

Government Treasury (n 62).

202

11 Trustee Duties in Thailand’s Statutory Trusts ADAM REEKIE* AND SURUTCHADA REEKIE**

I. Introduction Despite a long-standing prohibition on the establishment of trusts,1 in 2008 Thailand’s Trusts for Transactions in Capital Markets Act (TTCMA)2 came into force, making possible the formation of new trusts in the kingdom for the first time in nearly a century.3 The stated reasons for the change in policy were to use the trust as a supplement to the existing investment vehicles available,4 appearing to offer a superior governance and monitoring structure, among other advantages.5 In 2018, the Cabinet approved a draft bill which would expand the use of trusts to personal asset management, allowing natural persons to be settlors and trusts to be established through a will as well as inter vivos.6 The draft bill was withdrawn from the legislative process in 2021 following a request from the Ministry of Finance.7 The reasons for its withdrawal were to

* Assistant Professor, Faculty of Law, Thammasat University. ** Assistant Professor, Faculty of Law, Chulalongkorn University. 1 s 1686 of the Thai Civil and Commercial Code, which was introduced in 1935, prohibited the creation of new trusts in the kingdom. 2 The Trust for Transactions in the Capital Market Act BE 2550, Government Gazette, vol 125 pt 9a (14 January BE 2551 (2008)). 3 For a discussion of the history of Thailand’s common law trusts, at least some of which survived the prohibition in 1935, see S Reekie and A Reekie, ‘The Surviving Legacy of English Trust Law and Trusts in Thailand’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021); A Reekie, S Reekie and K Ruengsrichaiya, ‘Legal Landscape of Trust Law in Thailand: The Fading Twilight of Common Law Trusts and the Sunrise of Statutory Trusts’ (2021) 27 Trusts & Trustees 830. 4 Legislative Note at the end of the TTCMA. 5 See Special Session 31/2550 of the National Legislative Assembly on the Draft Bill on Trusts for Transactions in the Capital Market (Report of the Meetings of the National Legislative Assembly: Special Session 31 (Thursday 20 June BE 2550 (2007)) (Thai language) 71/3–79/2, available at: library2.parliament. go.th/giventake/content_nla/r062050.pdf. 6 Cabinet Resolution on the Draft Bill on Trusts for the Purpose of Personal Asset Management (10 July 2018) (Thai language), available at: resolution.soc.go.th/?prep_ id=99329034 (draft bill). 7 Cabinet Resolution Approving the Withdrawal of the Draft Bill on Trusts for the Purpose of Personal Asset Management (9 March 2021) (Thai language), available at: resolution.soc.go.th/?prep_id=403291;

204  Adam Reekie and Surutchada Reekie reconsider the rationale, to move its emphasis away from the prevention of movement of assets abroad and to focus instead on the provision of asset management options for individuals who lack legal capacity, the elderly and those who wish to have their assets managed by experts; in other words, targeting small- and medium-sized private investment funds.8 As discussed elsewhere by the authors, the wording of the draft bill was heavily i­ nfluenced by the TTCMA.9 Against this background, this chapter performs an analysis of trustee duties under the TTCMA. In an influential book chapter published in 1996, David Hayton proposed a view of the trust focusing on the central duty of confidence imposed on a trustee.10 As discussed below, Hayton suggested that the duty to account and the duty to act in good faith represent a minimum content of trustee duties, the exclusion of which would be inconsistent with the use of the trust vehicle. This concept of the ‘irreducible core’ has been used as an analytical framework for trustee duties in other jurisdictions, including Asian civil law jurisdictions.11 This chapter adopts this concept as a starting point for discussing trustee duties under the TTCMA. The analysis does not aim to find the minimum permissible scope of trustee duties under Thai law: as discussed below, the TTCMA is prescriptive about the baseline content of trustee duties. Rather, the irreducible core is used as the starting point to understand the adaptation of the trust concept into Thai law, as well as to situate the conception of trustee duties in Thai law into the regional and global dialogue about the reception and adaptation of trusts law. In addition, this analysis may offer lessons for the revision of the draft bill, if and when it returns to the legislative process. This chapter argues that the TTCMA has adapted the trust concept to suit the context and the objectives of the policymakers: to offer a vehicle for investment supplementary to those already on offer, incorporating advantages offered by the trust structure, within the civil law system. The trust is adapted, as discussed below, through its adoption of concepts analogous to public limited companies, with a broad role granted to Thailand’s Securities Exchange Commission (SEC) as the regulator. Trust property is conceived as a separate patrimony created through obligations imposed on the trustees. The relevant legal concepts blend in existing Thai law concepts including good faith, honesty and property rights. However, it is to be seen whether these concepts, and this adaptation of the trust, will be appropriate in the context of the draft bill. This chapter will proceed as follows. The next section will briefly set out the concept of the irreducible core, providing an analytical framework for trustee duties in Thai law. The following section will analyse trustee duties in the TTCMA using this framework. The fourth section will draw together implications for understanding the adaptation of

Document Gor Kor 1007/1901 (3 February 2021) of the Ministry of Finance (Thai language). At the time of writing (February 2022), it has not returned to the legislative process. 8 Document Gor Kor 1007/1901 (3 February 2021) of the Ministry of Finance (Thai language) para 1.2.1. 9 See discussion in Reekie, Reekie and Ruengsrichaiya (n 3) 843–44. 10 D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Clarendon University Press 1996). 11 See, eg, J Lee, ‘The Irreducible Core of Trustee Duties in East Asian Trusts’ (2021) 27 Trusts & Trustees 302; R Lee, ‘Convergence and Divergence in the Worlds of the Trust: Duties and Liabilities of Trustees under the Chinese Trust’ in L Smith (ed), The Worlds of The Trust (Cambridge University Press 2013).

Thailand  205 the trust concept into Thai law via the TTCMA and propose lessons which may inform the revision of the draft bill. The final section concludes.

II.  Trustee Duties and the Irreducible Core In ‘The Irreducible Core Content of Trusteeship’,12 Hayton set out a view of the trust as centring on ‘a duty of confidence imposed on a trustee in respect of a particular property, and positively enforceable in a Court of Equity by a person’.13 In response to considerations of how far settlors and trustees could go to restrict liability to beneficiaries, Hayton’s argument is an attempt to set the limits on the extent to which trustee duties can be excluded from the trust relationship without being ‘inconsistent with, or repugnant to’,14 that relationship. From his analysis of this irreducible core of the trust, two fundamental duties emerge: the duty to account (‘[t]he beneficiaries’ right to enforce the trust and make the trustees account for their conduct’)15 and the duty to act in good faith, the exclusion of which ‘would make a nonsense of the trust relationship as an obligation of confidence’.16 From these core obligations flow other duties and correlative rights, such as the beneficiaries’ rights of access to information. Exclusion of this right would impinge on the trustee’s duty to account and therefore would be repugnant to the concept of the trust.17 The concept of the irreducible core was adopted judicially in English law by Millett LJ in Armitage v Nurse,18 the court ruling that there was nothing in the nature of trust obligations – the core of which were conceived as beneficiaries having ‘rights enforceable against the trustees’19 and the duty to ‘perform the trusts honestly and in good faith for the benefit of beneficiaries’20 – that prevented a settlor excluding liability for a trustee’s simple or gross negligence. However, this judgment has received academic criticism including, notably, by James Penner who argues that this confuses the way in which the trustee performs duties imposed by the terms of the trust with the minimum essential kinds of duty which give the trust substance. In other words, it ‘confuses the nature of duty with the nature of liability’.21 Indeed, Penner points out that these discussions of core trustee duties and trustee liability implicitly adopt an obligational view of the trust in which trust property is conceived as forming a separate patrimony in respect of which only particular rights or duties of the trustee attach.22 Moreover, as a separate patrimony, there is no requirement

12 Hayton, ‘The Irreducible Core Content of Trusteeship’ (n 10). 13 ibid 47. 14 ibid 48. 15 ibid 47. 16 ibid 57. 17 See also C Mitchell, ‘Good Faith, Self-Denial and Mandatory Trustee Duties’ (2018) 32 Trust Law International 92. 18 Armitage v Nurse [1998] Ch 241. 19 ibid 253. 20 ibid. 21 JE Penner, ‘Exemptions’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing 2002) 250. 22 ibid 254.

206  Adam Reekie and Surutchada Reekie for it to belong to someone else. On this ‘multi-patrimonial’ view of the trust, which arguably is more easily compatible with notions of property in civil law jurisdictions,23 the core trustee duties give effect to the idea that the trust property is not the trustee’s own: the duties ensure that it does not form part of her general patrimony, and therefore neither forms part of her estate on death nor is available to her creditors. By contrast, Penner argues that a robust proprietary view of the trust, with the starting point that someone else other than the trustee is the owner of trust property, still has a part to play. This view, he contends, better explains certain features of the trust, including aspects of the principle in Saunders v Vautier, automatic resulting trusts and the rule against purpose trusts.24 This chapter adopts Hayton’s conceptual framework of the irreducible core as a starting point for discussing trustee duties under the TTCMA. As argued below, the irreducible core duties find their counterparts in the TTCMA but have been adapted to merge with existing analogous Thai legal concepts. However, Penner’s criticism is important for drawing implications from this understanding of Thai law’s adaptation of the trust concept, as a reminder that the conception of the trust oscillates between the obligational and the proprietary view.25 Indeed, as argued below, Thai law’s approach to trustee duties, when held up against Hayton’s irreducible core, presents a firmly obligational, multi-patrimony view of the trust and in some ways, due to the mode of its adaptation, even presents a fresh take on certain aspects of the trust which, as argued by Penner, do not fit well with this view.

III.  Trustee Duties under the TTCMA Before analysing trustee duties using the concept of the irreducible core and exploring how the classic conceptualisation of trustee duties is adapted into the Thai context, this section will give a brief overview of trustee duties under the TTCMA. It should be noted that the analysis in this chapter is based on the only authoritative version of the Act, which is in the Thai language; the translation by the authors may differ from any unofficial English translation that may be available.26 An initial point to note is that potential trustees must obtain approval from the SEC to undertake trust business.27 The list of those eligible for such approval is limited to commercial banks, financial institutions and other types of juristic person as may be specified by SEC notifications.28 Therefore, from the outset it should be emphasised that trustees under the TTCMA are drawn from a relatively narrow category of juristic persons engaged in professional finance, rather unlike trustees in many other

23 D Hayton, ‘The Developing European Dimension of Trust Law’ (1999) 10 King’s Law Journal 48, 56. 24 Penner, ‘Exemptions’ (n 21) 267. 25 ibid. 26 An unofficial translation of the TTCMA, provided by the SEC, is available at: www.sec.or.th/EN/ Documents/ActandRoyalEnactment/Act/act_trust2007.pdf. 27 TTCMA s 54. 28 ibid s 55.

Thailand  207 jurisdictions. Indeed, as trustees under the TTCMA are juristic persons, trustee duties are imposed on the juristic person of the trustee alone; the directors, managers or other natural persons responsible for the operation of the trustee are instead potentially liable to administrative sanctions29 and various criminal penalties under the Act.30 The starting point for trustee duties under the TTCMA is section 18, which sets out the rights and duties of settlors, trustees and beneficiaries that arise when a trust is created. Under section 18(2) the trustee has legal rights over ‘trust property’31 as owner of the property and has the duty to manage the trust property in accordance with the trust instrument and the Act. In addition, section 17 states that no provision in a trust instrument may contravene the TTCMA; any that purport to do so will be void. The effect of these sections is a clear exclusion of the application of freedom of contract principles or, more generally, to borrow a phrase from Hayton, the freedom for ‘a settlor to generate his local law for his autonomous trust’.32 The fact that this is somewhat at odds with the obligational view of the trust may perhaps be explained by the focus on the governance structure of trusts as a major advantage for adopting the concept in Thailand, which could be threatened by routine exclusion of trustee duties or liabilities in trust instruments. The result is that trustee duties under the TTCMA are not susceptible to exclusion or modification other than in a few instances where this is explicitly allowed by the Act, such as the prohibition on delegating trustee duties, which may be excluded by the trust instrument.33 There is no concept of the division of mandatory and default duties, such as in the New Zealand Trusts Act 2019, for example.34 The substantive duties are set out in Chapter 3 of the TTCMA, comprising sections 30–43. By way of a summary, the statutory framework of trustee duties is as follows: General duty to manage trusts for the highest benefit of beneficiaries, with honesty and the care of a professional with expertise, providing fair treatment to beneficiaries (section 30 para 1)35 and the power of the SEC to make further specifications regarding the details of this general duty (section 30 para 2). Duty not to act in conflict of interest (section 31). Prohibition against set-off of personal obligations owed by the trustee to a third party against obligations owed by the third party to the trust (section 32). Duty to notify third parties that they are acting in the capacity of trustees (section 33).

29 ibid s 71. 30 eg, ibid ss 85–88. 31 ‘Trust property’ (กองทรัสต์) is defined in s 3 of the TTCMA as property (ทรัพย์สิน) which is specified in the trust instrument, and is interpreted to include the property (ทรัพย์สิน), interest, debts and liabilities arising from management according to the trust instrument or the Act. As such, it should be noted that the term ‘trust property’ has a specific meaning which differs from the definition of the term ‘property’ (ทรัพย์สิน) in the Thai Civil and Commercial Code. In this chapter, the terms used are ‘trust property’ for ‘กองทรัสต์’ and ‘property’ for ‘ทรัพย์สิน’. 32 Hayton, ‘The Irreducible Core Content of Trusteeship’ (n 10) 48. 33 TTCMA s 37, para 1. 34 G McLay, ‘How to Read New Zealand’s New Trust Act 2019’ (2020) 13 Journal of Equity 325, 337–38. 35 s 30, para 3 prohibits an exclusion of liability arising out of a breach of such duty, whether intentionally, dishonestly or grossly negligent.

208  Adam Reekie and Surutchada Reekie Duty to prepare separate accounts of, and segregate, trust property (section 34), and legal presumptions in cases of commingling resulting from a breach of this duty (sections 35 and 36). Prohibition of delegation of trustee duties, except in specified circumstances (section 37). Duty to delegate carefully and to supervise delegees in such circumstances (section 38). Duty to jointly manage the trust where there are multiple trustees unless the trust instrument separates responsibilities between trustees (section 39). Duty of an incoming replacement trustee to claim damages caused by breaches of duty of the outgoing trustee and to trace any property disposed of in breach of trust (section 40). Duty to indemnify the trust for losses caused by a failure to manage the trust in accordance with the trust instrument or the Act (section 43).36

Given the outline of trustee duties above, this chapter will now analyse trustee duties under the TTCMA in more detail, using Hayton’s concept of the irreducible core as the analytical framework. We will first examine the duty to account and then the duty to act honestly and in good faith.

A.  Duty to Account The first of the two core duties of trustees, from Hayton’s conception, is ‘the duty to account which affords the beneficiaries a correlative right to have the court enforce the trustees’ fundamental obligation to account’.37 Necessary ingredients of this duty are (i) the duty to inform beneficiaries of the existence of the trust, ie, ‘to take all reasonable steps to inform beneficiaries that they are beneficiaries’38 so that they may hold the trustees to account; and (ii) a right for beneficiaries to information revealing what the trustees have done with trust property, including the right to see all documents relating to the management and administration of trusts by the trustees (other than sensitive discretions or confidential matters, such as a letter of wishes),39 resulting in a duty to give beneficiaries full and accurate information about the state of trust property and permit inspection of accounts.40 The duty to account, as adapted by the TTCMA, is significantly different in content from that in Hayton’s classic conception. First, the TTCMA does not require trustees to inform the beneficiaries of the existence of the trust or that they are beneficiaries. Indeed, this is unnecessary given the context: trusts under the TTCMA are used for investment purposes, with beneficial entitlements bought and sold. Accordingly, it is unlikely that a beneficiary would be unaware of the existence of the trust or their status as a beneficiary.

36 With an exception of acts done with the SEC’s prior approval, in good faith and for the best interest of the trust (TTCMA s 43, para 2). 37 Hayton, ‘The Irreducible Core Content of Trusteeship’ (n 10) 49–50. 38 ibid 62. 39 ibid 52. 40 DJ Hayton et al (eds), Underhill and Hayton: The Law Relating to Trusts and Trustees (LexisNexis 2010) [56.1].

Thailand  209 Second, regarding the beneficiaries’ right to receive full and accurate information so that they may monitor the trustees’ management of the trust, the traditional English trusts law’s relationship of the corresponding duties and rights of trustees and beneficiaries is placed in a new context of a closely regulated investment sector. While the TTCMA does impose duties on the trustees to ensure that the beneficiaries receive appropriate information,41 it appears from many other provisions of the TTCMA that the beneficiaries are, in reality, unlikely to be the ones holding trustees to account for failure to perform their duties. Rather, the SEC has extensive powers to supervise and monitor trustee behaviour, through the issue of rules and notifications,42 the approval of trustees,43 the amendment of the required content of trust instruments,44 supervision of the business operation of trustees,45 disclosure of financial statements,46 the power to direct trustees to take, and to prohibit trustees from taking, particular actions,47 as well as an extensive range of administrative sanctions for failure to comply with trustee duties.48 Indeed, when analysed against Hayton’s duty to account, the status of a beneficiary under the TTCMA is conceived very differently from the general conception of beneficiaries of a private trust in many common law jurisdictions. Beneficiaries under the TTCMA have very limited, if any, proprietary interest in trust property. Indeed, section 18(3) states only that beneficiaries have the right to receive benefits arising from the management of trust property, and any rights specified in the trust instrument or the Act.49 This is in contrast to the trustee, who is stated to have ‘legal rights over the trust property in the position of owner of property or a person with rights over property’.50 In other words, it is made clear that beneficiaries have no direct ownership interest in trust property, only the rights to receive benefits from its management.51

41 Such as the duty to prepare accounts of trust property, income, expenses, debts and other related accounting aspects of the trust (ss 34 and 57(3)); the duty to provide a corresponding right to beneficiaries to inspect and make copies of accounts of trust property or any document as specified in SEC notifications (s 47); and obligations concerning the submission of audited trust accounts to the SEC, which the SEC may disclose or direct the trustee to make public (s 59). There are also corresponding rights of the beneficiaries to apply to the court to enforce the trustee’s duty to account in s 44, para 1, which states that a beneficiary has the right to demand that a trustee manage the trust in accordance with the trust instrument or the Act, and to claim compensation for the benefit of the trust in cases of breach. 42 eg, TTCMA ss 8 and 9. 43 ibid ss 54–56. 44 ibid s 15. 45 ibid ss 57–58. 46 ibid s 59. 47 ibid s 60. 48 ibid s 9, para 1(2) and s 67. See also s 70(2) for the list of trustee duties, a breach of which amounts to the administrative sanctions under s 67. 49 ibid s 18(3). s 44, para 2 and s 45 grant beneficiaries the right to trace trust property transferred in breach of trust and claim compensation for the benefit of the trust. Although this is a property right, as it binds third parties, it is limited since it does not apply where the transferee receives the property in good faith, for value and without constructive or actual knowledge of breach of trust. Furthermore, this may be seen as a right which can be exercised to maintain the integrity of the trust where the trustee fails to do so, thus protecting the beneficiaries’ right to receive benefits arising from management of trust property only, rather than as creating a direct ownership interest in trust property. As explicitly stated in s 18(2), the trustee has legal rights in the position of owner of property. 50 ibid s 18(2) (translation by second author). 51 By way of example, a contrast may be drawn with English law, in which beneficiaries have equitable or beneficial ownership of trust property, conceived as the right to all the benefit and enjoyment of the property,

210  Adam Reekie and Surutchada Reekie This is further emphasised by the fact that, on termination of the trust, the trust instrument may specify persons other than the beneficiaries who will receive the residue after the trust’s debts are paid: beneficiaries only receive the residue in the absence of other arrangements.52 On this basis, the trustee’s duty to account appears founded on an obligational or ‘contractual’ basis, or, more broadly, on the basis of consent-based obligations: the duty to account arises because the beneficiaries have a right to enforce the trustee’s voluntarily accepted undertakings rather than being founded on a proprietary basis, arising from rights for beneficiaries to protect against interference with a proprietary interest granted to them by the settlor through the declaration of trust.53 When these factors are taken together, the conception of beneficiaries under the TTCMA are, arguably, more comparable to shareholders of a listed company in Thai law than a classic conception of beneficiaries in a private family trust in many common law jurisdictions.54 For example, the default rules in the TTCMA are that decisions relating to amendments to the trust instrument, removal and appointment of trustees and termination of the trust must be made by the approval of beneficiaries with interests representing at least three-quarters of the trust property.55 Claims against a trustee for breach of duties, or tracing claims, can, however, be brought by any single beneficiary.56 These rules are analogous to those relating to shareholders of public limited companies, which require a three-quarters majority vote for amendments to articles of association,57 removal of directors58 and dissolution of the company;59 derivative claims against directors may be made by shareholders holding at least 5 per cent of the company’s shares.60 However, in spite of the fact that the beneficiaries under the TTCMA have rights to hold trustees to account and to make major decisions, the Act appears to anticipate that they will act as passive investors, and that the SEC will play the role of the de facto enforcer of trustee duties, through its extensive powers to supervise and monitor discussed above. Indeed, it may be argued that this is a fitting way of presenting the notion of the beneficiary in this context. As the TTCMA was intended to complement the existing options available to investors, to adapt the notion of the beneficiary to create a concept analogous to those already available in the jurisdiction – for example, shareholders of public limited companies – seems a logical approach to appeal to the investing public. Furthermore, from a conceptual standpoint, this represents an interesting perspective on the principle in Saunders v Vautier. This principle, that the beneficiaries are

separate from the right to control which is the trustee’s legal ownership: P Jaffey, ‘Explaining the Trust’ (2015) 131 Law Quarterly Review 377, 387. 52 TTCMA s 53, para 3. 53 Jaffey (n 51) 385. 54 Note however, the comparison that may be made with trading trusts in Australia for example, in respect of which the analogy between beneficiaries and shareholders has received consideration: see M Harding, ‘Trusts and Statutes in the Australian Federation’, ch 10, section IV in this collection. 55 TTCMA s 49(1). 56 ibid s 49(2). 57 Public Limited Companies Act BE 2535, Government Gazette, vol 116 pt 123a (4 December BE 2535 (1999)) s 31 (PLC Act). 58 ibid s 76t. 59 ibid s 154t. 60 ibid ss 85(2) and 86, para 2.

Thailand  211 entitled to treat property as their own, including the right to dispose of property as they wish, seems closely tied to a proprietary view of the trust. For example, as Penner argues, [t]his power cannot derive from the obligations of the trustee under the trust or the trustee’s legal ownership of the trust property, for by its exercise it specifically defeats those obligations and that ownership … No similar rights can be spelled out of the multi-patrimonial obligational trust.61

However, in the TTCMA, arguably such a power and such rights have been created through conceptualising beneficiaries in a manner analogous to shareholders. Shareholders have the right to make major decisions about a company, including its dissolution, without the necessary implication that they have a proprietary right over the company’s assets. Indeed, the TTCMA appears to draw on the concept by analogy to create a position similar to the principle in Saunders v Vautier but without compromising the obligational, multi-patrimonial conception of the trust.

B.  Duty of Honesty and Good Faith The second core trustee duty is the duty of honesty and good faith. Hayton states that the duty to ‘act in good faith (ie honestly and consciously)’62 cannot be excluded, because this would be incompatible with the trust relationship as an obligation of confidence. Millett LJ in Armitage v Nurse formulated this as the ‘duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries’,63 which was necessary but sufficient for the trust relationship. For both Hayton and Millett LJ, liability in respect of the duty of care and skill may be excluded,64 for both negligence and gross negligence, although Hayton argues that liability for recklessness – a deliberate ‘couldnot-care-less’ attitude – could not be excluded, since this would enable trustees to act in bad faith.65 Charles Mitchell, writing from an English law standpoint, points out that the concepts of honesty and good faith, although sometimes treated by the courts as the same, are overlapping but not co-extensive.66 From the cases concerning equitable duties, he argues that good faith generally requires a power-holder to make a ‘sincere and serious commitment’67 to the purposes for which her power has been given, which may require her to give proper regard, if not priority, to the interests of those affected by the exercise of the power. Compliance is measured by an objective standard, unlike honesty: ‘it is possible for an honest person to breach the duty if she falls below the court’s standards of behaviour’.68



61 Penner,

‘Exemptions’ (n 21) 255. ‘The Irreducible Core Content of Trusteeship’ (n 10) 57. 63 [1998] Ch 241, 254. 64 Hayton, ‘The Irreducible Core Content of Trusteeship’ (n 10) 58–59; Armitage v Nurse (n 18) 253–54. 65 Hayton, ‘The Irreducible Core Content of Trusteeship’ (n 10) 59. 66 Mitchell (n 17). 67 ibid 96. 68 ibid. 62 Hayton,

212  Adam Reekie and Surutchada Reekie Turning to Thai law, the TTCMA confers trustee duties broadly analogous to both the duty of honesty and good faith and the duty of care and skill in English trusts law. The trustees’ duty to act in an honest manner is provided in section 30 paragraph 1, which states that a trustee has the duty to manage a trust with ‘honesty’ (ความซื่อสัตย์สุจริต) and with ‘the level care of a professional and with expertise’ (ความระมัดระวังเยี่ยงผู้มีวิชาชีพ รวมทั้งด้วยความชำ�นาญ), treating beneficiaries fairly, for the ‘greatest benefit of the beneficiaries’ (เพื่อประโยชน์สูงสุดของผู้รับประโยชน์).69 In addition, the second paragraph of this section provides the power to the SEC to specify further details concerning the performance of this duty. Finally, the third paragraph of this section prohibits a trust instrument from excluding the trustee’s liability for failure to perform the duty through intention (โดยเจตนา), bad faith (โดยไม่สุจริต), or gross negligence (โดยประมาทเลินเล่ออย่างร้ายแรง). However, it will be demonstrated that the content of these duties under the TTCMA is more strongly informed by existing Thai law relating to investment in listed public companies than by the conceptualisations of the duty of good faith and honesty, and the duty of care, under English trusts law.

i.  Duty of Honesty The word used for the relevant duty in the TTCMA is ‘ความซื่อสัตย์สุจริต’ or ‘honesty’, as seen in section 30 paragraph 1. Notably this term is not used at all in the Thai Civil and Commercial Code (TCCC), which governs potentially analogous legal relationships to trustees-beneficiaries, such as principals-agents, brokerages, partnerships, directorships of private limited companies and management of affairs without mandate. By contrast, the TTCMA does not mention good faith, central to Hayton’s second core trustee duty. The concept of ‘good faith’ (หลักสุจริต) is prevalent in Thai private law. Explicitly codified in section 5 of the TCCC, there is a broad duty imposed on every person, in the exercise of her rights and the performance of her obligations, to act in good faith and there is a corresponding presumption in section 6 that every person acts in good faith. Indeed, it has been described as the jus cogens of Thai private law – a foundational principle on which Thai private law rests.70 Precise comparison with the concept of good faith in English law equitable duties may not be easily made: it represents a legal borrowing from civil law jurisdictions, mainly the Swiss Civil Code and the German Civil Code,71 and its analysis is rarely conceptualised in terms of its subjectiveness and objectiveness. However, it is arguably aligned with an objective conception of good faith, from an English law viewpoint, since it allows the courts to consider and measure

69 It bears repeating that the only authoritative version of the Act is in the Thai language, and the English translation here represents the authors’ own. Other unofficial translations may adopt different English terms such as ‘integrity’ instead of ‘honesty’. 70 See Y Saeng-Uthai, General Introduction to Law (Thammasat University Press 1976) 79 (Thai language); and P Khowilaikul, Civil Law: General Principles. Commentary on the Civil and Commercial Code, Sections 4–14 (Nititham 2011) (Thai language) 153. 71 K Prokati, Good Faith and Supervening Events (Winyuchon 2012) (Thai language) 60; K Khopuangklang, ‘The Doctrine of Good Faith in Scots and Thai Law: Comparative Perspectives’ (2019) 46(3) Thammasat Law Journal 830 (Thai language) 842–43.

Thailand  213 the behaviour of a party against the standard of behaviour which, in the courts’ opinion, is required by law.72 It is arguable that good faith is not specifically referenced in the TTCMA since trustees must, and are presumed to, act in good faith in any case, in accordance with the general requirements in sections 5 and 6 of the TCCC which universally apply to all fields of Thai private law. However, the TTCMA has adopted the term ‘honesty’ (ความซื่อสัตย์สุจริต) seemingly with the intention of adapting the trust concept directly into the context of business and investment law, linking the legal concept of trustee duties to those of directors of public limited companies. Section 85 of the Public Limited Companies Act BE 2535 (PLC Act) states that the directors of a public limited company must perform their duties in accordance with the law, the articles of association and resolutions of the general meeting of shareholders, with ‘honesty’ (ความซื่อสัตย์สุจริต) and due care in the protection of the interests of the company. Furthermore, the Securities Exchange Act BE 2535 (SEA), which applies to public limited companies that are listed on the Stock Exchange,73 also uses this word several times in relation to directors’ duties. Section 89/7 states that directors and executives must perform their duties with responsibility, due care and ‘honesty’ (ความซื่อสัตย์สุจริต). In addition, section 89/10 gives further details about when a director will be deemed to have satisfied the requirement to act with ‘honesty’: when acting (i) in good faith (สุจริต) for the best interests of the company (เพื่อประโยชน์สูงสุดของบริษัทเป็นสำ�คัญ); (ii) with proper purpose; and (iii) not in significant conflict with the interests of the company. Honesty, in relation to public limited companies, thus appears to require directors, when making decisions, not to take into account their own interests, or those of any other party, and only consider the interests of the company.74 In this context, this appears something rather unlike the subjective honesty of English trusts law, but more akin to the duty of loyalty – a duty to subordinate one’s interests to the interests of the principal and to subordinate others’ interests to those of the principal.75 Indeed, it is notable here that the phrase translated as ‘best interests’ of the company in section 89/10 of the SEA is the same as that used in the TTCMA, where trustees are obliged to act in the best interests of the beneficiaries.76 In addition, in relation to the ‘safe harbour’ provision in the TTCMA – by virtue of which trustees are permitted to contravene the trust instrument provided that they have obtained advance approval of the SEC77 – the same phrase is used once again: the trustees will be relieved from liability if the approved acts are done ‘in good faith and for the best interests’ of the beneficiaries. 72 Professor Prasit Khowilaikul explains that ‘the duty of good faith is jus cogens … and also jus aequum, meaning that the provisions of the law empowers the judges to exercise their discretion in deciding a case. In other words, it is the provision which enables the judges to use their discretion and judgment on a case-bycase basis in order to achieve a ruling according to the aim of justice’. (Khowilaikul (n 70) 153, translation by the second author). Moreover, Thai courts have also applied general good faith to impose a contractual duty on a party and to dictate a standard of actions of contracting parties. See M Pongsapan, ‘The Roles of “Good Faith” and “Good Commercial Practice” in Interpreting a Contract in Thailand’ (2018) 8 Thammasat Business Law Journal 272, 288–89. 73 Securities Exchange Act BE 2535, Government Gazette, vol 109 pt 22 (16 March BE 2535 (1999)) s 89/1. 74 N Lertnuwat, General Understanding of Public Limited Companies (Thammasat University Press 2019) (Thai language) 282. 75 Mitchell (n 17) 94. 76 TTCMA s 30. 77 ibid s 43, para 2.

214  Adam Reekie and Surutchada Reekie As a result, the TTCMA appears to draw an analogy to duties of directors of listed public companies under the SEA instead of, for example, adopting the nature of duties owed by those managing affairs for others under the TCCC. This perhaps indicates that trustee duties under the TTCMA are not intended to be conceptualised as fitting within, or as an extension of, the general rules relating to those managing the affairs of others: there is no attempt to create a Thai law functional equivalent of a fiduciary in many common law jurisdictions, for example. Rather, trustee duties under the TTCMA may be better viewed as belonging, conceptually, to business and investment law under the purview of the SEC, and to be interpreted using analogous legal principles and jurisprudence.

ii.  Standard of Care The standard of care required by trustees under the TTCMA represents a clear illustration of an adaptation of a classic institution of English trusts law in a different context, leading to the emergence of a new legal concept. As discussed above, Hayton and Millett LJ in Armitage v Nurse concluded that a standard of care in performing trustee duties was not part of the ‘irreducible core’; therefore, even liability for negligence may be excluded by the trust instrument. However, the TTCMA has not adopted this approach, but rather states that trustees must manage trust property with ‘the level of care of a professional with expertise’ (ความระมัดระวังเยี่ยงผู้มีวิชาชีพ รวมทั้งด้วยความชำ�นาญ).78 Furthermore, the TTCMA prohibits a trust instrument from excluding a trustee’s negligence for failure to perform its duties through intention, dishonesty or gross negligence.79 In a similar manner to the word ‘honesty’ as described above, section 30 paragraph 1 of the TTCMA uses phrasing that is close to the SEA, specifically in section 89/8 which states that directors and executives must act in the same way as a person conducting the same kind of business would in the circumstances, and section 89/21, which states that a director or executive cannot be released from liability by shareholder or board ratification for loss to the company caused by acts or omissions in bad faith (โดยไม่สุจริต) or gross negligence (โดยประมาทเลินเล่ออย่างร้ายแรง). However, the standard of care adopted in the TTCMA is a different from that in the SEA; the TTCMA uses the standard of ‘a professional with expertise’. This choice of phrasing is notable because it seems to suggest that the TTCMA has created the concept of a ‘professional trustee’, with an associated standard of care, whereas such profession did not exist within the jurisdiction prior to the Act. This is clear when considering section 37 paragraph 1(2), which states that a trustee shall not delegate its duty except when it involves a transaction that is not personal in nature and does not require the exercise of the capacity of ‘a professional trustee’ (วิชาชีพเยี่ยงทรัสตี). With this, the TTCMA also indirectly imports the existing jurisprudence on standards of professional care into the area of trusts law. Typically, the level of care that is



78 ibid 79 ibid

s 30, para 1. s 30, para 3.

Thailand  215 required by a non-professional person is the objective standard of care which a reasonable person in that situation should have exercised, given the nature and circumstances of such situation.80 It thus follows that a professional person is required to exercise a higher standard of care appropriate for the profession in the exercise of her professional duties. Under section 30 paragraph 2, the TTCMA explicitly grants the right to the SEC to determine the details of the manner in which trustees must carry out their duties in reference to section 30 paragraph 1, stating: ‘In furtherance of the performance of the trustee’s duties under the first paragraph, the SEC shall have the power to specify in detail the trustee’s duties’.81 Therefore, it can be seen that the TTCMA both creates the new concept of a ‘trustee profession’ and grants the SEC the power to develop the standards and codes of conduct which apply to this profession. Although the courts will ultimately be called upon to determine the application of the content and level of the trustee’s professional standard of care to relevant facts,82 the SEC, pursuant to section 30 paragraph 2, will have significant influence ex ante. To date, the SEC has not made any notifications in this regard. Overall, the analysis of the duty of honesty and good faith, in comparison to the ‘irreducible core’ concept, highlights some important aspects of the nature of trustee duties in Thai law that represent an interesting adaptation of traditional trusts law concepts in a new setting. First, there is no explicit incorporation of the duty of good faith: indeed, as discussed above, such reference would arguably be incongruous in Thai law, since a general duty of good faith is interpreted to run throughout Thai private law. By contrast, the duty to manage a trust with ‘honesty’ (ความซื่อสัตย์สุจริต) sets up notable connections within other areas of Thai private law. Rather than intersecting with instances of persons managing the affairs of others under the TCCC, the use of this word creates a clear analogy with the duties of directors of listed public limited companies under the SEA. This tends to reinforce the argument made in section III.A above: the TTCMA has adapted the concept of the trust to incorporate concepts similar to existing investment options, such as shares of listed companies, so that trusts present to investors an easily comprehensible and comparable alternative. It is perhaps ironic that the duties of company directors arguably serve as inspiration for trustee duties in the TTCMA, given that duties of good faith and loyalty of company directors in English law, for example, were developed by the courts through analogy with duties of trustees.83 However, this analysis also raises questions over the suitability of employing these concepts to the kinds of trusts that are envisaged to be created pursuant to the draft bill, to which this chapter will now turn.

80 See J Tingsaphat, Civil and Commercial Code Part 2 Sections 354–452 on Sources of Obligations, 5th edn (Ruankeaw Karnpim 1983) (Thai language) 180. 81 This translation is based on the unofficial translation of the TTCMA, provided by the SEC (n 26). 82 Thai courts have been called upon to contemplate the professional level of care in various areas, for instance, the medical profession (see, eg, Dika Number 6092/2552 of 2009) and the trading profession (see, eg, Dika Number 4844/2545 of 2002). 83 See, eg, P Davies and S Worthington, Gower’s Principles of Modern Company Law, 10th edn (Sweet & Maxwell 2016) [16]–[21].

216  Adam Reekie and Surutchada Reekie

IV.  Implications of Analysis for Understanding of Trusts and the Draft Bill The analysis above leads to a view of trusts under the TTCMA which, although on the surface containing similar duties to the irreducible core concept expounded by Hayton, is markedly different from that in traditional common law trust jurisdictions. Furthermore, the analysis above also highlights some aspects of the way trusts and trustee duties have been adapted under the TTCMA that may be not be appropriate in the context of the types of trusts contemplated by the draft bill. This section will therefore discuss first the implications of the analysis above for understanding trusts under the TTCMA, and then for the revision of the draft bill.

A.  Implications for Understanding Trusts under the TTCMA From the analysis of core trustee duties above, there are three areas in the TTCMA which stand out as presenting notable departures in the adaptation of the trust from its conception in traditional common law trust jurisdictions: the intersection of trustee duties with law relating to listed public limited companies; the role of the SEC; and the conception of beneficiaries. These will be discussed in turn.

i.  Intersection of Trustee Duties with the Law Relating to Listed Public Limited Companies As discussed above, the duty of honesty and the duty of care under the TTCMA, through choices of language used in the drafting of the relevant sections, do not appear to intersect with other instances of legal relationships in Thai private law where one person manages the affairs or assets of another, such as principal–agent relationships, brokerages, partnerships etc, under the TCCC, which represent functional equivalents of fiduciary relationships in some common law jurisdictions, although it should be stressed that this concept is not present in Thai law. Rather, trustee duties under the TTCMA are conceptualised in a way that is analogous to duties of directors of listed public limited companies, and therefore are more closely linked to business and investment law. It would be, therefore, more useful to understand and interpret trustee duties under the TTCMA in accordance with applicable principles and jurisprudence of the more specific statutes in this field. It is notable, however, that there have, to date, been no Thai Supreme Court decisions concerning directors’ duties under the SEA which might provide guidance for analogous interpretation of trustee duties under the TTCMA. Indeed, this may be one reason why the TTCMA gives the power to the SEC to make announcements concerning the standards of conduct expected of trustees: development of standards through regulatory action may be seen as preferable to waiting for litigation to allow development through decisions of the Supreme Court in this area which, though highly influential, do not create precedents.

Thailand  217

ii.  Role of the SEC The second notable difference from the conception of trusts in traditional common law jurisdictions is the role of the SEC. Beneficiaries have mechanisms under the TTCMA to hold trustees accountable for the breach of their duties, including the right to access accounting information in relation to the trust, as discussed above. However, these rather pale in comparison to the powers given to the SEC. In addition to the wide array of administrative sanctions described above, the SEC is empowered with broad authority. The SEC may: issue rules, regulations, notifications, orders, or directives in the performance of its duty to supervise trusts under the TTCMA;84 set the financial conditions, operating system and qualifications required for approval to undertake trust business;85 specify conditions for undertaking trust business where necessary to maintain the integrity and trustworthiness of the system;86 specify rules relating to the powers and duties of trustees to promote the interests of beneficiaries or protect third parties;87 direct a trustee to act or refrain from acting if it fails to perform its duties or manages trust property inappropriately. Moreover, as discussed above, it also has the power to specify the details of the trustee’s duties of honesty and good care. The result of these broad powers is that the SEC is likely to be the entity holding the trustees to account for the performance of their duties, rather than beneficiaries, who have less ease of access to information and fewer legal powers available to them. Therefore, the implication flowing from the analysis of the duty to account is that trustees under the TTCMA can indeed be held accountable for breaches of their duties; however, the party best placed and empowered to do so is arguably the SEC. Furthermore, it is likely that the SEC will be instrumental in developing the concept of the ‘trustee profession’ and its accompanying standard of care, rather than leaving this to be developed by the courts.

iii.  Conception of Beneficiaries: Obligational View of the Trust Third, the conception of beneficiaries under the TTCMA is strikingly different from that of beneficiaries in, for example, family trusts in traditional common law jurisdictions. There is a clear statement, as discussed above, that beneficiaries under the TTCMA do not own trust property, only rights to receive the benefits of its management, and they do not necessarily receive trust property upon winding up of the trust: this is the default, but it may be altered in the trust instrument. Indeed, beneficiaries appear conceptually analogous to shareholders of listed public limited companies, with management of their investment delegated to trustees (analogous to directors) who owe them similarly conceived duties concerning that management, and with statutory rights to make major decisions, including amendment of constitutional documents, removal of trustees and



84 TTCMA

s 8. s 55, para 2. 86 ibid s 56. 87 ibid s 58. 85 ibid

218  Adam Reekie and Surutchada Reekie dissolution by three-quarters majority votes in an analogous manner to shareholders of listed public limited companies. These aspects are important for understanding the conception of trusts under the TTCMA. The Act appears to have adopted a clearly obligational, multi-patrimony view of the trust, to borrow Penner’s terminology. The beneficiaries are not considered the owners of the trust property.88 Instead, trust property is explicitly owned by the trustee, and the various obligations concerning segregation of property89 ensure that it does not form part of the trustee’s general patrimony, but forms a separate patrimony. Penner, as discussed above, points out that a purely obligational, multi-patrimony view does not sit well with the rule in Saunders v Vautier, automatic resulting trusts and the rule against purpose trusts. However, when we analyse the TTCMA’s position on these issues, the outcome is quite different from that in traditional common law trust jurisdictions. First, the principle in Saunders v Vautier – that a sui juris beneficiary of an absolute interest under a trust may call for the trustees to transfer legal title of trust property that represents the interest to her90 – appears to have been incorporated by adapting concepts from company law: the beneficiaries vote to take major decisions affecting the structure of the trust, including its dissolution, in a similar manner to shareholders voting in a general meeting. This conception allows beneficiaries control over trust property perhaps on the basis that they are the ‘residual claimants’91 (to borrow a concept from company law scholarship) of trust property, rather than seeking a justification based on a proprietary ownership which the TTCMA explicitly denies. Second, the TTCMA simply does not include the concept of automatic resulting trusts. The trust instrument is viewed as a contract92 which has particular formal requirements: where these are not present, the trust instrument is void.93 Consequently, the usual legal rules for return of property in the case of a void contract would apply: in this case the TCCC refers to the concept of unjust enrichment for parties to return the property received pursuant to a void transaction.94 Conceptualised this way, under the TTCMA, a failure to comply with any of the required formalities for a trust instrument results in a failure to establish a trust; an automatic resulting trust, with the conceptual complexities and conflicts with the obligational view that this arguably entails, is thus rejected as a legal mechanism. However, it may be queried whether the TCCC’s unjust enrichment provisions are appropriate in the context of trusts, whether they would

88 Note a similarity to the conception of beneficiary rights and the separate trust fund in South Korea, as discussed in Ying-Chieh Wu, ‘Trusts in South Korea: Towards an Independent Fund Mechanism’, ch 16 in this collection. 89 Specifically, under the TTCMA, s 32 (prohibition of set-off) and s 34 (duty to keep separate accounts and segregate trust property), with ss 35 and 36 dealing with the consequences of failure to segregate. 90 JE Penner, The Law of Trusts (Oxford University Press 2016) 81–82. 91 See, eg, EF Fama and MC Jensen, ‘Separation of Ownership and Control’ (1983) 26 Journal of Law & Economics 301, 302. 92 TTCMA s 11. 93 TTCMA ss 14, 16 and 17. 94 s 172, para 2 of the TCCC states that the return of property received pursuant to a void juristic act will be governed by the provisions relating to unjust enrichment under the Code. For unjust enrichment, see TCCC ss 406–19.

Thailand  219 deliver a fair outcome to all parties,95 or whether the TTCMA should provide its own mechanism in this situation. Finally, in a similar way to automatic resulting trusts, purpose trusts are not possible under the TTCMA due to the trust’s formal requirements. However, especially given the broad role of the SEC to enforce trustee duties, it would seem that objections based on the lack of a person to enforce the trust would be weak in this context. Rather, purpose trusts would be anathema to the objective of the TTCMA which, as discussed above, is to provide a vehicle for investment. However, this leads us to consider the position under the draft bill, which contemplates different uses for the trust structure.

B.  The TTCMA and the Draft Bill: Small Variations on a Theme Looking to the future, will this view of the trust be appropriate in the context of the use of trusts envisaged by the draft bill? The draft bill has been withdrawn from the legislative process for revision, and therefore comments can only be made on the publicised draft from which the next iteration, if any, may differ substantially. However, it is submitted that useful gleanings can be taken from the draft bill of the proposed direction of drafting, and therefore the analysis of the TTCMA above may be applied to it in the hope of informing the revision of the draft bill. Section 5 of the draft bill limits the purposes of trusts which may be established to the management of personal assets, prohibiting trusts taking investment from the public, trusts to which the TTCMA applies, and trusts relating to businesses which are governed by specific laws. Settlors may be natural persons or juristic persons,96 although potential trustees continue to be financial professional juristic persons approved by the SEC.97 The majority of the provisions discussed above in relation to the TTCMA appear in identical, or almost identical, terms in the draft bill, including: the basic rights of beneficiaries, which appear to exclude proprietary rights in trust property;98 the duties of trustees to manage trust property honestly, with the standard of a professional with expertise, for the highest benefit of the beneficiaries, with a prohibition on limitation of liability for trustee breaches by intention, dishonesty or gross negligence;99 and the same structure for beneficiaries to make important decisions about the trust through a threequarters majority vote, and to pursue claims against the trustee for breach of duty and tracing claims individually.100 These provisions point to a similar concept of the trust as discussed above under the TTCMA – obligational, multi-patrimonial and analogous in some respects to a Thai listed public limited company. However, there are a few points of difference.

95 For instance, the application of s 412 of the TCCC would mean that a purported trustee who receives the property in good faith is only required to return what is left at the time when restitution is demanded. 96 Draft bill (n 6) s 9. 97 ibid s 72. 98 ibid s 12. 99 ibid s 24. 100 ibid s 52.

220  Adam Reekie and Surutchada Reekie First, there are some differences in the information rights for beneficiaries: there is an explicit requirement for trustees to notify beneficiaries that they are beneficiaries;101 and there is an obligation to send annual financial information to beneficiaries.102 On the one hand, it may be argued that these requirements are not present in the TTCMA due to the different context in which the trusts will be used: financial statements of trusts under the TTCMA must be submitted to the SEC for public disclosure,103 and the investment context means that beneficiaries are unlikely to be unaware that they are beneficiaries. However, it is notable that these additional requirements dovetail with the aspects of Hayton’s duty to account discussed at section III.A above. Second, the draft bill contains provisions assisting beneficiaries to hold trustees to account, and provides further incentives on trustees to perform their duties. Under section 42 of the draft bill, executives and those with managerial authority within the juristic person of a trustee may be jointly liable with the trustee to indemnify for losses to trust property arising from breaches of trustee duties if they acted intentionally or with gross negligence. Therefore, the individuals who are the decision-makers in the trust organisations are exposed to personal liability to pay compensation, rather than under the TTCMA which focuses on administrative penalties and criminal sanctions for individuals. Furthermore, the litigation costs of an unsuccessful suit brought by a beneficiary against a trustee for a breach of duty will be borne by the trust, unless the suit is brought in bad faith.104 This latter provision is notable, since it appears more easily justifiable on a proprietary view of the trust than an obligational view – the funds in the trust are available for beneficiaries to use in litigation against a trustee, win or lose, because they are considered, on the proprietary view, to belong to the beneficiaries. Finally, the draft bill has not included an equivalent to section 17 of the TTCMA which provides that any provisions in a trust instrument that contravene the TTCMA will be void. This implies that there may be more room for ‘freedom of trust’ – the ability for a settlor to vary some of the default rules under the draft bill – than under the TTCMA. Indeed, if this is the case when, and if, the draft bill returns and is passed into law, the question of which provisions may be excluded or varied by the settlor in the trust instrument may come into focus, and the concept of the ‘irreducible core’ may also be debated in relation to Thai trusts. In summary, there is some evidence in the draft bill of small variations to the conception of trusts under the TTCMA, and even hints at aspects which fit better with the proprietary view of the trust. However, the fundamentals of the draft bill remain heavily obligational and still contain many of the concepts which are analogous to those of Thai listed public limited companies. Since the only potential trustees are juristic entities engaged in professional finance, to impose the same standards as under the TTCMA may not be overly problematic. Alternatively, these duties may change if the requirements relating to the identity of trustees also change during the drafting process. However, the close connection with the TTCMA seems to indicate that the draft bill



101 ibid

s 46, para 2. s 31. 103 ibid s 59. 104 ibid s 43. 102 ibid

Thailand  221 anticipates trusts being used for wealth management, perhaps for trust-based financial products offered to settlors by commercial bank-trustees, rather than for bare trusts or family trusts familiar to common law jurisdictions. In such context, the conception of beneficiaries as something akin to shareholders in a listed company and the adoption of the concept of a trustee profession may be appropriate. However, if the latter types of trusts are contemplated, it is submitted that the draft bill will require significant revision in relation, among other aspects, to trustee duties.

V. Conclusion This chapter has performed an analysis of the duties of trustees under the TTCMA based on the concept of the ‘irreducible core’ of trustee duties developed by Hayton, and used in academic discussion in relation to other Asian civil law jurisdictions,105 consisting of the duty to account and the duty of honesty and good faith. The analysis has identified counterparts to these core duties in the TTCMA. However, the detail of these counterparts has implications for understanding the adaptation of the concept of the trust by the TTCMA, and lessons which may inform the revision of the draft bill. First, the analysis reveals that trustee duties under the TTCMA – revolving around the concepts of the duty of honesty and the standard of care – are situated within a legal system with a different view of good faith from that of traditional common law trust jurisdictions, and a different concept of honesty deriving from an analogy to duties of directors in listed public limited companies under the SEA. Second, the powers granted to the SEC mean that, in practice, it is more likely for the regulator, rather than the beneficiaries, to be the party that holds trustees to account. Indeed, the SEC will also likely play a leading role in developing the standards relating to the ‘trustee profession’ that is created by the TTCMA. Finally, the conception of beneficiaries reveals a strongly obligational, multi-patrimony view of the trust, with trustee duties conceived as arising through voluntary acceptance of the ‘contractual’ obligations and the necessity of maintaining trust property as a separate patrimony rather than as arising by force of the equitable ownership of the beneficiaries. Furthermore, beneficiaries under the TTCMA are conceived in an analogous manner to shareholders of public limited companies, which provides an interesting perspective on matters which are often thought better explained by the proprietary view of the trust, such as the principle in Saunders v Vautier. This analysis has some implications for the draft bill which, at the time of writing, has been withdrawn from the legislative process for revision. The draft bill draws heavily on the TTCMA in many aspects, including trustee duties and the conception of beneficiaries and their interests in trust property. It may be queried whether this similarity is appropriate. As discussed, the TTCMA appears, in its adaptation of the trust, to situate it conceptually with business and investment law; the assets to be held by trusts contemplated under the draft bill may be of a different character, and the beneficiaries may not have identical needs or expectations to beneficiaries of TTCMA trusts. Indeed,



105 See

above n 11.

222  Adam Reekie and Surutchada Reekie if the qualifications of potential trustees are widened, many of the provisions relating to trustee duties may need to be revised: this may require a shift away from the concept of the trustee profession and the duty of care to a greater focus on the duty to act honestly, for example. Finally, it appears that the draft bill would give a greater scope for ‘freedom of trust’, where the settlor would be able to depart, at least to some extent, from the statutory requirements, than currently allowed under the TTCMA. If that is the case in the final version, a different view may then emerge of the irreducible core of trustee duties in Thai trusts.

12 Pakistan’s New Trusts Acts 2020: Adaptation to Regulatory Overkill MUHAMMAD ZUBAIR ABBASI*

I. Introduction The legal regime for trusts has witnessed a great transformation in Pakistan because of global pressure. In 2020, Pakistan introduced a stringent regulatory regime for trusts to curb terrorism financing and money laundering to comply with the recommendations of the Financial Action Task Force (FATF).1 Rather than adapting the ‘enabling regime’ under the Trusts Act 1882, which primarily laid down the rights, duties and powers of trustees and beneficiaries, the new Trusts Acts 2020 have superimposed a stringent regulatory regime that primarily focuses on the monitoring and control of trusts through unbridled bureaucratic authority. Under the new regulatory regime, the very institution of the trust is viewed with suspicion as a vehicle for money laundering. This ‘regulatory overkill’ is likely to impinge on the growth and development of trusts in Pakistan. Sensing its likely negative consequences, the banking and financial industry has reacted swiftly, and an exception from the stringent regulatory regime has been created for ‘specialised trusts’ for investment in two provinces: Sindh and Khyber Pakhtunkhwa.2 Similar amendments are likely to occur in other provinces and the federal capital Islamabad. The charitable and philanthropic trusts, however, continue to fall within the purview of the stringent regulatory regime.

* Lecturer, Bradford University. 1 G7 leaders established the Financial Action Task Force (FATF) in 1989. The FATF guidance has impacted the international regulatory authorities over the years across many jurisdictions. The French financial services regulator amended their Bitcoin regulations to align with the FATF standards in early 2020. Similarly, Germany, Zimbabwe and South Korea took steps around the same time to amend their regulatory legislation to conform to the FATF international standards. India regulated the cryptocurrency transactions based on FATF guidelines. J Ferwerda, IS Deleanu and B Unger, ‘Strategies to Avoid Blacklisting: The Case of Statistics on Money Laundering’ (2019) 14 PLOS One 1. 2 Specialised trust is defined as: ‘Specialised Trust means a trust created for the establishment of collective investments schemes, collective investment vehicles, private funds, pensions funds, real estate investment trust, exchange traded funds, private equity and venture capital funds, debt securities trust, trust in relation to any security issued by the Federal or any Provincial Government through capital markets, provident funds,

224  Muhammad Zubair Abbasi The Trusts Act 1882, which was based on general principles of English trusts law, provided an ‘enabling regime’ that catered towards the functioning of trusts. It primarily laid down the rights, duties and powers of trustees and beneficiaries. This Act did not set up any regulatory body to register, monitor or control trusts. Only the courts were given an oversight on public trusts under the Code of Civil Procedure 1908.3 In the absence of a stringent regulatory regime, the institution of trust flourished in South Asia. It was used for both entrepreneurial and charitable purposes. The famous Tata enterprise organised itself under the umbrella of trusts.4 In Pakistan, while many traditional organisations such as Hamdard laboratories utilised waqf and foundation models,5 others such as Meezan Bank established the Ihsan Trust to undertake philanthropic activities.6 Trusts are one of the most popular vehicles for philanthropic organisations in Pakistan along with foundations registered under the Societies Registration Act 1890. One of the primary reasons for the widespread use of trusts was the enabling legal regime under the Trusts Act 1882. The ‘enabling’ regime under the Trusts Act 1882 has been superimposed with a strict regulatory regime in 2020. In the context of the global war on terror, global actions have been undertaken against terror financing through money laundering. Corporate vehicles, including trusts and companies, along with some financial instruments, for example hawala, have been used for money laundering.7 Pakistan is pressurised through the FATF to curb terrorism financing. In this context, the four provincial legislatures and the central legislature promulgated the new Trusts Acts in 2020.8 The main objective of these Acts is to establish regulatory authorities to register trusts and to monitor their activities.9

gratuity funds, pension funds, employee benefit trust or any other trust administered by the Regulator as notified by Government in the Gazette’. The Khyber Pakhtunkhwa Trust (Amendment) Act 2021, s 2(iii); and The Sindh Trust (Amendment) Act 2021 s 2(v). 3 The Code of Civil Procedure 1908 s 92. 4 The website of Tata describes its history: Tata Trusts, ‘History’ (Tata Trusts), available at: www.tatatrusts. org/about-tatatrusts/our-history-1839–1905. 5 Hamdard, ‘Legacy and Historical Timelines’ (Hamdard), available at: www.hamdard.in/businesses/ history-timelines/. N Hayat and A Naeem, ‘Corporate Waqf: A Case of Hamdard (Waqf) Pakistan’ (2014), available at: papers. ssrn.com/sol3/papers.cfm?abstract_id=2487713. 6 A Ali Siddique and O Usmani, ‘Islamic Banking: A Case Study of Meezan Bank’ (2014, special edn) Journal of the Institute of Bankers Pakistan 12. 7 Financial Action Task Force, ‘The Misuse of Corporate Vehicles, Including Trust and Company Service Providers’ (FATF, 13 October 2006), available at: www.fatf-gafi.org/publications/methodsandtrends/documents/themisuseofcorporatevehiclesincludingtrustandcompanyserviceproviders.html. After the tragic event of 9/11, Al-Rasheed Trust (ART) came into the limelight as the financier of al-Qaeeda and other international terrorist organisations. ART was based in Karachi, the biggest city in Pakistan. The Trust was blacklisted by the US in 2001 and subsequently listed as a financial facilitator of terrorists by the UN in 2001: United Nations Security Council, ‘Al-Rashid Trust’ (UN, 7 Sep 2010), available at: www.un.org/securitycouncil/ sanctions/1267/aq_sanctions_list/summaries/entity/al-rashid-trust. 8 In 2010, the Parliament introduced the 18th Amendment to the Constitution of Islamic Republic of Pakistan 1973. As a result of this amendment, the powers of provincial legislatures have been expanded to legislate on areas that were previously included within the power of the federal legislature. 9 The new Acts require all the existing trusts to be freshly registered within six months of the commencement of such laws. The provision of ‘fresh registration’ is listed in four new Acts except for the Sindh Trusts Act 2020.

Pakistan  225 In addition, several other legislative and regulatory instruments relating to companies and trusts have been passed. The Securities and Exchange Commission of Pakistan issued a circular dated 29 August 2018, making it mandatory for companies to file information regarding their ultimate beneficial owners.10 A similar amendment was made to the Foreign Companies Regulations 2018 on 28 September 2020.11 Under these amendments, an ultimate beneficial owner is a natural person who, directly or indirectly, through at least 25 per cent shareholding exercises control or holds interest in the company.12 Pakistan also passed the Securities and Exchange Commission of Pakistan (Anti Money Laundering and Countering Financing of Terrorism) Regulations 2018, which provide detailed procedures and requirements for obtaining beneficiary ownership information pertaining to trusts. These amendments were made in the light of the FATF’s decision to put Pakistan on its grey list in June 2018. Thus, trusts are not the only forms of organisation being targeted under the laws to curtail terrorism financing and money laundering, but trusts are the main target of state regulation because they help beneficiaries to hide their identities. In this chapter, I first describe the background to the new stringent regulatory regime under the Trusts Acts 2020 and highlight their main features. Then I evaluate the changes in the duties and liabilities of trustees under the new Acts which require that only natural persons are entitled to be trustees and beneficiaries and remove investment options from trustees. Finally, I describe the amendments that have been brought into the new regulatory regime that create an exemption for ‘specialised trusts’ for investment. At the end of the chapter I have provided an appendix that compares the Trusts Act 1882 with the five new Trusts Acts, listing the key amendments that have been made.

II.  Regulation of Money Laundering and Terrorism Financing through Trusts Laws The main purpose of the new Trusts Acts is to curb terrorism financing and money laundering. The legislature has introduced several new laws to achieve this purpose. One of the major changes that the new Trusts Acts introduced is that they bring trusts under the regulatory control of ‘competent authorities’. The regulating authorities are established as ‘the oversight bodies’ under the Anti-Money Laundering Act 2010.13 There are minor differences in the definitions of ‘competent authorities’ or ‘authorities’ under the five Acts. But all definitions refer to the ‘investigating or prosecuting agency’ and ‘the Financial Monitoring Unit’ established under the Anti-Money Laundering Act 2010. Similarly, a reporting entity is set up for trusts, and it is established under Anti-Money Laundering Act 2010.14 10 The Securities and Exchange Commission of Pakistan, Circular No 16 of 2018 on 29 August 2018. 11 The Securities and Exchange Commission of Pakistan, SRO 926(I)/2020 on 28 September 2020. 12 The Securities and Exchange Commission of Pakistan, Circular No 16 of 2018 on 29 August 2018. 13 Sindh Trusts Act 2020, s 2(f); Punjab Trusts Act 2020, s 3(c); Islamabad Capital Territory Trust Act 2020, s 2(d); Khyber Pakhtunkhwa Trust Act 2020, s 2(e); Balochistan Trust Act 2020, s 2(e). 14 ibid.

226  Muhammad Zubair Abbasi Pursuant to this purpose of regulation of trusts, the Acts have a new Chapter III, which is titled ‘Administration of Trusts’. This chapter lays down mandatory requirements to be fulfilled prior to the creation of a trust. It is now mandatory to register every trust with the relevant authorities.15 The trustee is required to provide details of any natural person exercising ultimate effective control over the trust ‘to the satisfaction’ of the relevant authority.16 The subjective standard of ‘to the satisfaction’ of the relevant authority provides unchecked executive authority and discretionary control over the registration of trusts. Moreover, the authorities can prescribe any additional detail if they so require. It means no judicial remedy is available in cases where the competent authorities refuse to register trusts because they are not ‘satisfied’ with the person who exercises ‘ultimate effective control’. The new Acts provide many grounds for refusal of registration. These grounds include: (i) where the purpose of the trust is unlawful or the trust proceeds are suspected to be proceeds of crime; (ii) where any of the members of the trust are proscribed by the Home Department or associated with the proscribed organisations under the Anti-Terrorism Act 1997 or under the United Nations Security Council Act 1948; (iii) where the District Intelligence Coordination Committee considers the trust a threat to national security; and (iv) where the author of the trust, trustee, beneficiary, or any person acting on their behalf fails to provide the complete personal details for the registration and functioning of the trust.17 Regulatory authorities have also been given the power to summon and inspect records of the trust relating to its assets and beneficiaries.18 If a trustee fails to provide such information, they may be punished with the imposition of fines as well as imprisonment of up to six months.19 It is evident that these grounds mostly relate to curbing terrorism financing. Not only may the relevant authority refuse the registration, but in appropriate circumstances, it is obligated to report cases to law enforcement agencies for prosecution of individuals who are blacklisted or if the trust is serving an illegal purpose. The grounds are not limited to those mentioned above. The government is authorised to add any other grounds by making new rules based on subordinate legislation. If at any point in time the government deems it fit that a new ground should be added to refuse registration, then it can add such new grounds. In this way, the new Acts give the executive wide and unchecked powers over the registration and operations of trusts. The new Trusts Acts contain many of the provisions of the Trusts Act 1882 but with significant changes. In Chapter II, the new Acts describe the lawful purposes of a trust.

15 The registration authorities differ in each province. In Punjab, it is the Assistant Commissioner; in Sindh, the Assistant Director for each District under the Industries and Commerce Directorate of the Department; in Baluchistan, the Director General, Baluchistan Charities (registration, Regulation and Facilitation Authority) through the Religious Affairs Department; in Khyber Pakhtunkhwa, the Director of Directorate; and in the Islamabad Capital Territory, the Directorate of Labor and Industries. 16 Sindh Trusts Act 2020, s 13; Punjab Trusts Act 2020, s 16; Islamabad Capital Territory Trust Act 2020, s 13; Khyber Pakhtunkhwa Trust Act 2020, s 13; Balochistan Trust Act 2020, s 13. 17 Sindh Trusts Act 2020, s 16; Punjab Trusts Act 2020, s 17; Islamabad Capital Territory Trust Act 2020, s 16; Khyber Pakhtunkhwa Trust Act 2020, s 16; Balochistan Trust Act 2020, s 16. 18 Sindh Trusts Act 2020, s 17; Punjab Trusts Act 2020, s 18; Islamabad Capital Territory Trust Act 2020, s 17; Khyber Pakhtunkhwa Trust Act 2020, s 18; Balochistan Trust Act 2020, s 17. 19 ibid.

Pakistan  227 These purposes are a verbatim reproduction of the old provision but with one significant difference: the new Acts do not provide for severability in cases where the trust has multiple purposes. If one purpose is unlawful, then the whole trust is void.20 The main objective behind this provision is to strictly counter money laundering and terrorism financing. Furthermore, section 4 of the Trusts Act 1882 provided that the trust is unlawful when forbidden by the law. The explanation in the section described ‘law’ as the law of the country where the property is situated. The new Acts do not provide this explanation. This means that the law could be interpreted to mean the law of Pakistan even where the subject matter of the trust is situated outside Pakistan. This might also be a major deviation from the set principles of Private International Law, according to which the law governing immovable property is usually the law of the country where it is situated, ie, the lex situs. The new Acts therefore give the Pakistani authorities more extensive control over trusts. The provincial governments are given powers to make rules under the new Acts for carrying out the purposes of the Acts. The Sindh Trusts Act gives the government the power to issue orders necessary to remove any difficulties and to achieve the purposes of the Act, provided such orders are not inconsistent with the provisions of the Act.21 The Islamabad Capital Territory Trusts Act and the Khyber Pakhtunkhwa Trusts Act go a step further and vest the ‘interpretative’ authority of the Act in the executive head, the Chief Commissioner, to clarify any confusion relating to the interpretation of the provisions of the Act by exercising ‘arbitrary powers’.22 In this way, the Acts seem to encroach upon the interpretative functions of the judiciary. However, a proviso states that nothing shall be interpreted against the judgments of the superior courts of Pakistan.23

III.  Duties and Liabilities of Trustees under the New Acts The new Acts specifically provide that a ‘legal person’ can neither be a beneficiary nor a trustee.24 The Trusts Act 1882 did not impose such limitation. The new Acts also make many changes in the duties and liabilities of trustees. The new Acts have added a requirement that the trustee must provide an affidavit that they have read and understood the duties and liabilities of the trustee as mentioned under the Act.25 Moreover, the new Acts have added a 60-day limitation period under which the trustee must

20 Sindh Trusts Act 2020, s 4; Punjab Trusts Act 2020, s 4; Islamabad Capital Territory Trust Act 2020, s 4; Khyber Pakhtunkhwa Trust Act 2020, s 4; Balochistan Trust Act 2020, s 4. 21 Sindh Trusts Act 2020, s 119. 22 Islamabad Capital Territory Trust Act, s 110; Khyber Pakhtunkhwa Trust Act 2020, s 117. However, while exercising this power, the official must: (a) refer to the illustrations or explanations mentioned in the Trusts Act 1882; and (b) consult the Law, Parliamentary Affairs and Human Rights department. 23 ibid. 24 Sindh Trusts Act 2020, ss 7 and 9; Punjab Trusts Act 2020, ss 9 and 11; Islamabad Capital Territory Trust Act 2020, ss 7 and 9; Khyber Pakhtunkhwa Trust Act 2020, ss 7 and 9; Balochistan Trust Act 2020, ss 7 and 9. 25 Sindh Trusts Act 2020, s 10; Punjab Trusts Act 2020, s 12; Islamabad Capital Territory Trust Act 2020, s 10; Khyber Pakhtunkhwa Trust Act 2020, s 10; Balochistan Trust Act 2020, s 10.

228  Muhammad Zubair Abbasi disclaim the trust if they so wish.26 In cases where there were multiple trustees, if one trustee disclaimed to be a trustee, the Trusts Act 1882 automatically vested the trust in the other trustees. But the new Acts provide that there will be no automatic vesting of the trust in the other trustees; rather, the author of the trust will have two options: either (a) to explicitly allow the co-trustees to proceed in the case of disclaimer by any of the members; or (b) to write a new trust deed.27 The new Acts also add other new provisions regarding the duties of the trustees to the state. All trustees are bound to disclose the fact that they are trustees when entering into a business relationship or carrying out an occasional transaction with a reporting entity.28 Furthermore, the trustee is obligated to keep information of the author, co-trustee (if any), beneficiaries of the trust, and any other natural person exercising ultimate effective control over the trust to the satisfaction and requirement of the department, before executing the trust.29 The trustee also needs to collect and hold basic information about the other service providers to the trust such as investment advisers or managers, accountants or tax advisers and must provide the updated information to officials.30 The trustee shall inform the provincial government or the director and law enforcement agencies if they have knowledge of any illegal utilisation of trust money by the beneficiaries, after or during the execution of the trust.31 The trustee is also required to get accounts of the trust audited by a third party at least once every year, submit financial reports to officials in every financial year and keep a record of all the information for a period of five years.32 These provisions of collecting information and keeping updated records are in line with Recommendation 25 of the FATF Guidance Report.33

26 Sindh Trusts Act 2020, s 11; Punjab Trusts Act 2020, s 13; Islamabad Capital Territory Trust Act 2020, s 11; Khyber Pakhtunkhwa Trust Act 2020, s 11; Balochistan Trust Act 2020, s 11. 27 ibid. 28 Sindh Trusts Act 2020, s 23; Punjab Trusts Act 2020, s 23(4); Islamabad Capital Territory Trust Act 2020, s 22; Khyber Pakhtunkhwa Trust Act 2020, s 25; Balochistan Trust Act 2020, s 23. 29 Sindh Trusts Act 2020, s 24; Punjab Trusts Act 2020, s 24; Islamabad Capital Territory Trust Act 2020, s 23; Khyber Pakhtunkhwa Trust Act 2020, s 26; Balochistan Trust Act 2020, s 24. 30 ibid. 31 ibid. 32 Sindh Trusts Act 2020, s 32; Punjab Trusts Act 2020, s 32; Islamabad Capital Territory Trust Act 2020, s 31; Khyber Pakhtunkhwa Trust Act 2020, s 34; Balochistan Trust Act 2020, s 32. 33 The FATF Guidance Report recommends that trusts law should require the trustees of any express trust governed under their law to obtain and hold adequate, accurate and current beneficial ownership information regarding trusts. This information should be kept as accurate, current and up to date as possible by updating it within a reasonable period following any change. It is not necessary for countries to include these requirements in legislation, provided that appropriate obligations to such effect exist for trustees (eg, through common law or case law). For this reason, Recommendation 25 places specific requirements on all countries, irrespective of whether the country recognises trusts law. In particular, all countries should implement the following measures: (a) require that trustees disclose their status to financial institutions and Designated Non-Financial Business and Professions (DNFBP) when forming a business relationship or carrying out an occasional transaction above the threshold. The trustee needs to actively make such disclosure (and not only upon the request of a competent authority). Trustees should not be prevented from doing this even if, for example, the terms of the trust deed require them to conceal their status. The only source of information on the trustee often available comes from the business relationship of a financial institution/DNFBP and the trustee; (b) require professional trustees to maintain the information they hold for at least five years after their involvement with the trust ceases. Countries are also encouraged to extend this requirement to nonprofessional trustees and the other relevant authorities, persons and entities. Financial Action Task Force, ‘FATF Guidance: Transparency and Beneficial Ownership’ (FATF, October 2014), available at: www.fatf-gafi. org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf.

Pakistan  229 The new laws are likely to stifle trusts. This is evident from the provisions of the new Acts that have limited the investment options for trustees. Only two options have been retained from the Trusts Act 1882, and the rest have been removed.34 The two options are to invest in (a) promissory notes, debentures, stock or other securities of a provincial or federal government; or (b) any other security expressly authorised by the instrument of trust, or by any rule which the High Court may prescribe. This is ironic as almost all previous amendments to the Trusts Act 1882 relate to the investments of trusts money. These amendments were introduced in 1908, 1916, 1994 and 1998. These amendments increased the options of investment available to trustees in addition to the already available debenture, stocks and securities. The Trusts Act 1882 had also allowed trustees to obtain charge over the property in respect of the expenses they incurred. The new Acts have omitted this provision. Regarding the discharge of trustees and the extinction of trusts, under the new Acts the trustees can also be discharged by executive order if any of the trustees (a) is convicted by a court in a criminal case; (b) fails to fulfil any of the duties or obligations required under the new Acts; or (c) has been penalised for failing to comply with official orders concerning the inspection of trust records and regulatory compliance.35 As regards the extinction of trusts, under the Trusts Act 1882 one of the grounds for this was when there was an unlawful purpose. This has been replaced: extinction now occurs when the officials consider and have sufficient reason to believe that the activities of the trust are falling under the same grounds on which registration of trust are refused.36

IV.  Industry Reaction to the New Regulatory Regime and Amendments Businesses in Pakistan use trusts not only for investment purposes such as pension funds, but also as a security device for financial transactions. The new Trusts Acts have taken away most of the investment options of trust funds from trustees. Similarly, businesses are also deprived of the use of trusts as a security device. In long-term projects which involved vast amounts of finance, multiple banks have been engaged to finance projects. In such transactions, trusts are used as a device for security. Usually, trusts are created among banks to keep collateral as common security for all banks involved in financing the project. However, this can only be possible if the beneficiaries of the trusts are legal persons. The new Acts do not allow this any more: a beneficiary must now be a natural person. Thus, the new Acts curtail both the investment and financing modes of trusts. The banking and financial industries reacted quickly to the new stringent regulatory regime. The provincial legislature in Sindh, where the headquarters of most banks are based, amended the Sindh Trusts Act 2020 in March 2021 to remove its negative



34 Sindh 35 Sindh 36 Sindh

Trusts Act 2020, s 33; Punjab Trusts Act 2020, s 33. Trusts Act 2020, s 89; Punjab Trusts Act 2020, s 86. Trusts Act 2020, s 97; Punjab Trusts Act 2020, s 92.

230  Muhammad Zubair Abbasi consequences. The new amendments introduced three important changes. First, the requirement that only natural persons can be the beneficiaries of trusts is removed.37 Second, a ‘Specialised Trust’ for investment is introduced, and it is exempt from the stringent regulatory regime. Finally, the government is empowered to set up a separate Regulator for ‘specialised trusts’. Similar changes have been introduced in another province, Khyber Pakhtunkhwa38 and these changes are also expected to take place soon in other provinces and the federal capital territory Islamabad.

V. Conclusion Several countries have changed their trusts laws, including the United Kingdom, by taking regulatory measures to curb the abuse of ‘beneficial ownership’ for money laundering and terrorism financing in the context of the war on terror and the global financial crisis.39 Lawmakers in Pakistan, however, have taken drastic measures against trusts and other types of organisations in their efforts to bring the country out of the grey list of the FATF.40 The new trust regime in Pakistan tends to regard trusts with suspicion. As a result, the new laws have laid down stringent requirements for the registration and operation of trusts. Even when trusts may be created for legitimate purposes, the new laws have limited the investment options of trustees. As a result of the reaction of the banking and financial industry, ‘specialised trusts’ for investment have been exempted from the new stringent regulatory regime in two provinces, Sindh and Khyber Pakhtunkhwa. It is likely that similar exemptions will be introduced in other provinces and the federal capital Islamabad. But charitable and philanthropic trusts will continue to fall under the stringent regulatory regime.

37 Sindh Trusts (Amendment) Act 2021, ss 4 and 5. 38 Khyber Pakhtunkhwa Trust (Amendment) Act 2021. 39 Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, SI 2020/991. 40 Interviews with lawyers in Lahore reveal that currently the officials do not register new societies under the Societies Registration Act 1890 for charitable purposes to comply with the FATF recommendations.

Appendix 1  Table of Comparison Trusts Act 1882 Preamble

Islamabad Capital Territory Punjab Trusts Trust Act 2020 Act 2020 Preamble Preamble

Section 1: Section 1 Short title Commencement Local extent Savings Section 3: Section 2 Inter­pretation clause Section 4: Lawful Section 4 purpose

Section 1

Section 9: Who may be beneficiary

Section 7

Section 3

Section 2

Section 2

Section 2

Many new terms are added. They mostly relate to regulating authorities.

Section 4

Section 4

Section 4

Section 4

Section 9

Section 7

Section 7

Section 7

Section 11

Section 9

Section 9

Section 9

Section 15

Section 12

Section 12

Section 12

The new Acts do not allow for separability of the lawful purpose of the trust from the unlawful purpose. The new Acts have only allowed a natural person to be a beneficiary. In Sindh and Khyber Pakhtunkhwa, this requirement is removed. The new Acts hold that only a natural person can be a trustee. Makes registration of trust mandatory. Failure will render the trust non-functional. (continued)

Pakistan  231

Section 10: Who Section 9 may be trustee N/A Section 12

Khyber Balochistan Sindh Trusts Pakhtunkhwa Trust Act Act 2020 Trust Act 2020 2020 Comments Preamble Preamble Preamble Financial monitoring added as a purpose of the Act. Section 1 Section 1 Section 1 Only the Punjab Trusts Act has omitted from its scope ‘distribution of prizes taken in war among the captors’.

Trusts Act 1882 N/A

N/A

Section 13: Registration of Trust Property

Islamabad Khyber Balochistan Capital Territory Punjab Trusts Sindh Trusts Pakhtunkhwa Trust Act Trust Act 2020 Act 2020 Act 2020 Trust Act 2020 2020 Comments Section 13 Section 16(1)–(2) Section 13 Section 13 Section 13 Outlines the information required at the time of registration. This includes information regarding the purpose, author of the trust, details of the trustees, beneficiaries of the trust, and any other natural person exercising ultimate effective control over the trust. Section 14 Section 16(3)–(4) Section 14 Section 14 Section 14 The trust needs to be verified by the investigating or prosecuting agencies/authorities within 14 days of receipt of application for registration. After the report of the investigating or prosecuting agencies a Certificate of Registration is to be issued. Section 15 Section 14 Section 15 Section 15 Section 15 All trust properties to be registered under the Registration Act 1908 with some additional information such as details of authors of the trust, beneficiaries,trustee, co-trustees, if any, and any other natural person exercising ultimateeffective control over the trust.Previously only immovable property was required to be registered and no further information was required other than that needed under the Registration Act 1908. The Punjab Trusts Act does not require the additional information.

232  Muhammad Zubair Abbasi

(Continued)

N/A

Section 16

Section 17

Section 16

Section 16

Section 16

N/A

Section 17

Section 18

Section 17

Section 18

Section 17

N/A

Section 18

Section 19

Section 18

Section 19

Section 18

N/A

Section 19

Section 20

Section 19

Section 20

Section 19

N/A

Section 20

Section 21

Section 20

Section 21

Section 20

N/A

Section 21

Section 22

Section 20

Section 22

Section 20

Section 11: Trustee to execute trust

Section 22

Section 23

Section 23

Section 25

Section 23

Lists grounds on which refusal can be made for registration of trusts. Gives authorities power to inspect, record and ensure compliance. Punishment is also laid out in case of violation. Also expresses that nothing in this section shall take away the right to fair trial and appeal. Gives authorities the power to obtain registration records. The authorities shall maintain the register of trusts. The authority may at any time require the information relating to trust from trustee which the trustee is bound to give. A trust may hold, sell, or purchase trust property under its name through the trustee. The new Acts have added the new provision that all trustees are bound to disclose the fact that they are trustees when entering into a business relationship or carrying out an occasional transaction with a reporting entity. (continued)

Pakistan  233

Trusts Act 1882 N/A

Islamabad Capital Territory Punjab Trusts Trust Act 2020 Act 2020 Section 23 Section 24

Khyber Balochistan Sindh Trusts Pakhtunkhwa Trust Act Act 2020 Trust Act 2020 2020 Comments Section 24 Section 26 Section 24 This is a new provision added in the new Acts. It places further obligations upon the trustee regarding collecting and holding information relating to the trust. This information includes: (a) Information of the author co-trustee, if any, beneficiaries of the trust, and any other natural person exercising ultimate effective control over the trust. (b) Information about the other service providers to the trust, eg, investment and tax advisers.

Section 19: Accounts and information

Section 31

Section 32

Section 32

Section 34

Section 32

Moreover, the trustee must keep updating this information, and if an illegal utilisation of trust money comes to their knowledge they must report to the provincial government. Various new obligations have been added on trustees. These include: (a) Updating information in a timely manner, (b) Getting accounts audited by a third party at least once a year. (c) Submitting a financial report to the relevant authority. (d) Maintaining the information collected under this section for at least five years.

234  Muhammad Zubair Abbasi

(Continued)

Section 20: Investment of trust money

Section 32

Section 21: N/A Mortgage of land pledged to government under Act XIX of 1883 Section 32: Section 44 Right to reimbursement of expenses Right to be recouped for erroneous overpayment Section 34: Right Section 46 to apply to court for opinion in management of trust property

Section 33

Section 35

Section 33

Investment by the trustee has been greatly limited. Now only two options have been provided to the trustee and the rest have been omitted. Section omitted in the new Acts.

N/A

N/A

N/A

N/A

Section 45

Section 47

Section 47

Section 45

The right of a trustee to have a charge over the trust property if they have paid expenses from their own pocket has been taken away.

Section 47

Section 49

Section 49

Section 47

The trustee enjoyed a protection that if they filed a petition in which, stating in good faith the facts in that petition, seeking the court’s advice and then acting upon the opinion, advice or direction given by the court then it would be deemed that the trustee had discharged their duty as such trustee in the subject matter of the application. This protection is omitted in the new Acts. (continued)

Pakistan  235

Section 33

Trusts Act 1882 Section 40: Power to vary investments

Islamabad Capital Territory Punjab Trusts Trust Act 2020 Act 2020 Section 52 Section 54

Khyber Balochistan Sindh Trusts Pakhtunkhwa Trust Act Act 2020 Trust Act 2020 2020 Comments Section 56 Section 56 Section 53 The trustee is given discretion in varying investment.

Section 60: Right to proper trustees

Section 72

Section 75

Section 78

Section 76

Section 74

Section 71: Discharge of trustee

Section 83

Section 86

Section 89

Section 87

Section 85

The proviso that stated if the beneficiary is competent to contract then their consent in writing is required has been omitted in the new Acts. Explanation II, which stated that when the administration of the trust involves the receipt and custody of money, the number of trustees should be two, has been omitted in the new Acts. This section deals with discharge of a trustee. The following provision is added in all the new Acts: (f) By the executive order of the Director if any of the trustee –

(i) is convicted by a court in criminal case; (ii) fails to fulfil any of the duties or obligations required under this Act; or (iii)  has been penalised under section 17(3) and (4). (This is differently numbered for each Act. This provision is from the Sindh Trusts Act.)

236  Muhammad Zubair Abbasi

(Continued)

Section 77: How trusts are extinguished

Section 89

Section 92

Section 97

Section 95

Section 93

This section lays out circumstances in which trusts are extinguished. Earlier sub-clause 2 provided when the ‘purpose has become unlawful’. This sub-clause has been replaced with: ‘When the Director considers and has sufficient reasons to believe that the activities of the Trust are included in the section 16(2) of this Act and records reasons in the order to extinct the trust’. (Section 16(2) is the same section that allows for refusal of application for registration of a trust. So the grounds for both extinction by the Director and refusal of application by the Director are similar.)

Section 80: Where obligation in nature of trust is created

Section 92

N/A

Section 100

Section 98

Section 96

Moreover, where the trust is extinguished for the reason that the fulfilment of its purpose becomes impossible by destruction of the trust property or otherwise, a reasonable defence opportunity has been given to the trust and a right to appeal to the Department has also been granted in the new Acts. Lists the circumstances in following sections as those under which a constructive trust is formed.

Pakistan  237

(continued)

Trusts Act 1882 Section 81: Where it does not appear that transferor intended to dispose of beneficial interest Section 82: Transfer to one for consideration paid by another Section 83: Trust incapable of execution or executed without exhausting trust property Section 84: Transfer for illegal purpose Section 85: Bequest for illegal purpose

Islamabad Capital Territory Punjab Trusts Trust Act 2020 Act 2020 Section 93 Section 95

Khyber Balochistan Sindh Trusts Pakhtunkhwa Trust Act Act 2020 Trust Act 2020 2020 Section 101 Section 99 Section 97

Section 94

Section 96

Section 102

Section 100

Section 98

Section 95

Section 97

Section 103

Section 101

Section 99

Section 96

Section 98

Section 104

Section 102

Section 100

Section 97

Section 99

Section 105

Section 103

Section 101 Originally the section also provided that where property is bequeathed and revocation is prevented by coercion a trust is formed. In the Sindh Trusts Act 2020 this is a separate section, section 106. In the KPK Act 2020 this is a separate section, section 104.

Comments

238  Muhammad Zubair Abbasi

(Continued)

Section 98

Section 100

Section 107

Section 105

Section 102

Section 99

Section 101

Section 108

Section 106

Section 103

Section 100

Section 102

Section 109

Section 107

Section 104

Section 101

Section 103

Section 110

Section 108

Section 105

Section 102

Section 104

Section 111

Section 109

Section 106

Section 103

Section 105

Section 112

Section 110

Section 107

(continued)

Pakistan  239

Section 86: Transfer pursuant to rescindable contract Section 87: Debtor becoming creditor’s representative Section 88: Advantage gained by fiduciary Section 89: Advantage gained by exercise of undue influence Section 90: Advantage gained by qualified owner Section 91: Property acquired with notice of existing contract

Trusts Act 1882 Section 92: Purchase by person contracting to buy property to be held on trust Section 93: Advantage secretly gained by one of several compounding creditors Section 94: Constructive trusts in cases not expressly provided for Section 95: Obligator’s duties, liabilities and disabilities Section 96: Saving of rights of bona fide purchasers

Islamabad Capital Territory Punjab Trusts Trust Act 2020 Act 2020 Section 104 Section 106

Khyber Balochistan Sindh Trusts Pakhtunkhwa Trust Act Act 2020 Trust Act 2020 2020 Section 113 Section 111 Section 108

Section 105

Section 107

Section 114

Section 112

Section 109

Section 106

Section 108

Section 115

Section 113

Section 110

Section 107

Section 109

Section 116

Section 114

Section 111

Section 108

Section 110

Section 117

Section 115

Section 112

Comments

240  Muhammad Zubair Abbasi

(Continued)

13 The Trusts Law Legislation Project in New Zealand JESSICA PALMER*

I. Introduction The creation of trusts to safeguard family assets has been wildly popular in New Zealand in the past half-century.1 Estimated figures include one trust for every 12 people2 and between 300,000 and 500,000 trusts in total.3 Arguably, this attraction to trusts has been accompanied by a significant lack of appreciation for the rights and responsibilities that trusts entail. This has manifested itself in a range of ways including poor or nonexistent administration of trust accounts and records;4 poor decision-making practices by trustees;5 the use of ‘primary’ and ‘secondary’ classes of discretionary beneficiaries to prioritise certain beneficiaries and potentially deny others effective means of accountability; and the inclusion of substantial powers of control vested in the settlor or trustee enabling apparently unfettered removal of trustees and beneficiaries and, in some instances, authorising the appointor to act in a self-interested manner without regard for the interests of the other beneficiaries.6 In 2009, the New Zealand Law Commission began a substantial review of the existing Trustee Act 1956 with a view to modernising it and, in light of the large numbers of lay trustees, making the law of trusts more accessible. The resulting Trusts Act was

* I thank my research assistant, Alex Thompson, and Adam S Hofri-Winogradow, who shared with me a draft copy of his forthcoming paper, ‘The Irreducible Core(s) of Trustee Obligation: One Core or Many?’ that assisted to clarify my own thinking. 1 See discussion of the New Zealand trusts landscape in my chapter in the first volume in this series: J Palmer, ‘A Lament for Trust Principles in New Zealand’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021) 41–43. 2 (24 July 2019) 739 NZPD 12573. 3 (5 December 2017) 726 NZPD 706 (‘First Reading of the Trusts Bill’). 4 See, eg, Official Assignee v Wilson [2008] NZCA 122, [2008] 3 NZLR 45. 5 See, eg, Spencer v Spencer [2013] NZCA 449, [2014] 2 NZLR 190; Hamilton v Murrell [2014] NZSC 162, [2015] NZFLR 45. 6 See, eg, The Financial Markets Authority v Hotchin [2012] NZHC 323; Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551.

242  Jessica Palmer enacted in 2019 and came into force in January 2021. In addition to refreshing the language of the old statute, the new Act contains two significant features responding to the evolving trusts practice in New Zealand, predominantly in relation to family trusts, and intended to provide greater clarity to settlors and trustees and greater protection to beneficiaries. First, the statute sets out mandatory and default trustee duties; and second, the statute provides new disclosure rules. Both of these aspects of the statute are new to trusts legislation in New Zealand and are not commonly included in trusts legislation in other common law countries, having always been understood as being part of the common law of trusts. They are a significant adaptation of traditional trusts law but whether or not they are a change of substance or merely of form is debatable. This chapter will evaluate these two developments and consider what they tell us about the state of trusts law in New Zealand.

II.  Reform Process and Scope of New Statute The New Zealand Law Commission began work on a full-scale review of trusts law in 2009. An earlier report of the Law Commission7 had given rise to a bill that was subsequently rejected by a select committee for not having been sufficiently comprehensive in its scope.8 Originally, the scope of the most recent review was to cover trusts law in three discrete stages: first, the core institution of the trust; second, a review of charitable and purpose trusts; and third, a review of statutory trustee companies and other corporate trustees. Changing priorities for the Commission in response to the New Zealand government’s legislative agenda meant that only the first stage of the project was in fact carried out. The Commission undertook significant consultation, engaging with the legal profession, trustee corporations and the general public. It produced five preliminary papers,9 a preferred approach paper for public consultation10 and a final report in 201311 with proposed legislation to replace the Trustee Act 1956. The Ministry of Justice received and considered the report and in 2016 produced an exposure draft that was the subject of further consultation, and then, in August 2017, a bill was introduced to Parliament and eventually enacted in 2019.

7 Law Commission, Some Problems in the Law of Trusts (NZLC R79, 2002). 8 Justice and Electoral Committee, Trustee Amendment Bill (Report, 9 July 2008). 9 Law Commission, Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2010); Law Commission, Some Issues with the Use of Trusts in New Zealand (NZLC IP20, 2010) – second issues paper focusing on family trusts; Law Commission, Perpetuities and the Revocation and Variation of Trusts (NZLC IP22, 2011) – third issues paper; Law Commission, The Duties, Office and Powers of a Trustee (NZLC IP26, 2011) – fourth issues paper; Law Commission Court Jurisdiction, Trading Trusts and Other Issues (NZLC IP28, 2011) – fifth issues paper. 10 Law Commission, Review of the Law of Trusts: Preferred Approach (NZLC IP31, 2012). 11 Law Commission, Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013).

New Zealand  243

III.  General Themes in New Zealand’s Statutory Reform of Trusts The stated purpose of the Trusts Act 2019, contained in section 3, is to restate and reform New Zealand trust law by– (a) (b) (c) (d)

setting out the core principles of the law relating to express trusts; and providing for default administrative rules for express trusts; and providing for mechanisms to resolve trust-related disputes; and making the law of trusts more accessible.

At the first reading in Parliament, the then Minister of Justice emphasised the last point, describing the legislation as ensuring that core trust law principles are clear and accessible to all. To achieve this, the bill brings common law principles into the legislation. The bill doesn’t seek to alter central principles of the common law where those principles are sound. Instead, including those principles in the legislation using clear and modern language supports the people that use trusts to be able to find and understand the law.12

The Act includes a ‘principles section’ that provides that each trust should be administered in a way that is consistent with its terms and objectives and avoids unnecessary cost and complexity.13 Criticisms of the new Act have often centred on two main themes. First, that in pursuing the objective of making the existing law more accessible particularly to large numbers of lay trustees, it has in fact, albeit unintentionally, substantially changed and restricted the common law of trusts and thus risks preventing the law from continuing to develop in the flexible way that equity traditionally allows.14 A contrary view is taken by Geoff McLay, a legal academic and one of the Commissioners responsible for the reform project within the Law Commission, who sees the statute as consistent with equity’s concern for substance over form by employing a principled and flexible approach. According to McLay, a close and detailed application of the wording of particular provisions in the Act should be avoided in favour of a broader contextual and purposive interpretation, one that continues to put the trust deed at the centre of the enquiry.15 In his view, the statute’s ‘open-ended drafting’ supports and should be read in light of a flexible equity.16 The general purpose and principles sections referred to above are intended to ‘do a lot of the work in the Act’.17 The second criticism is that the statute too heavily favours beneficiary protection. Peter Watts QC said of the Law Commission’s proposals, which were in large part accepted and legislated, that they ‘[buy] into the modern tendency, both academic and curial, to replace settlor-supremacy (putting the settlor first) with beneficiary-supremacy



12 ‘First

Reading of the Trusts Bill’ (n 3). Act 2019 (NZ) s 4. 14 H Dervan, ‘“Trusts” Law Reform: Do We Need a Statutory Straitjacket?’ (2014) 20 Trusts & Trustees 673. 15 G McLay, ‘How to Read New Zealand’s New Trust Act 2019’ (2020) 13 Journal of Equity 325, 329. 16 ibid 326. 17 ibid 329. 13 Trusts

244  Jessica Palmer (putting the beneficiary first) in explicating the trust. Beneficiary-supremacy inevitably expands the judiciary’s role in private lives’.18 These are quite different reactions to the statute and it will be some time before there will be a sufficient corpus of new case law against which to confirm or reject these critical views, at least as a matter of the judicial interpretation of the Act. Underlying the opposing positions are different philosophies about what the law of trusts is about and the appropriate role of legislation. At one extreme is an approach largely analogous to contracts that prioritises the autonomy and intent of the settlor, and that accordingly requires only a light regulatory touch in the form ideally of a default framework. At the other, the tri-lateral effect of the trust is emphasised and gives rise to the need for the trust construct to articulate the rights and obligations of the parties. Mechanisms to protect the beneficiaries, who are the objects of the trust but who do not have bargaining rights at the outset, ought to be expected in a developed law of trusts. The former position would demand a largely facilitative approach to the law of trusts, while the latter would pursue a more normative construct. The question of whether there is an ‘irreducible core’ applicable to every trust and just what constitutes that core underlies this debate and continues to produce scholarly contributions.19 The new statute affirms a law of trusts that requires a clear minimum level of trustee accountability to beneficiaries, by way of mandatory duties, and provides enhanced enforceability, by way of a statutory presumption of disclosure. The permissive approach often seen, for example, in the offshore jurisdictions, is not adopted. However, the appearance of a reasonably rigid regime that is predominantly protective of beneficiaries is tempered in the detail. The statute endorses the highly contextualised nature of trusts and allows for the particularities of a relevant trust’s purpose to influence the extent of accountability and enforceability to which the trustees will be subject under the Act, as will be explained below. In this way, the statute provides for core principles of trusts law, but reflects principles that remain significantly adaptable to the settlor’s objectives and the contextual circumstances of a given trust.

IV.  Trustee Duties and Liability One of the most striking features of the new Act is its inclusion of trustee duties and their classification into mandatory and default duties. Directors’ fiduciary duties were incorporated in the New Zealand Companies Act in 1993 so the inclusion of equitable duties in legislative form is not entirely new.20 However, the identification and 18 P Watts, ‘Yet More Expansion of the Role of Courts in Private Lives’ NZLawyer (25 January 2013) 18, 18. 19 D Hayton, ‘The Irreducible Core Content of Trusteeship’ in AJ Oakley (ed), Trends in Contemporary Trust Law (Clarendon Press 1997); L Ho, ‘Trusts: The Essentials’ in L Smith (ed), The Worlds of the Trust (Cambridge University Press 2013); D Coshott, ‘To Benefit Another: A Theory of the Express Trust’ (2020) 136 Law Quarterly Review 221; D Fox, ‘Non-Excludable Trustee Duties’ (2011) 17 Trusts & Trustees 17; AS Butler and DJ Flinn, ‘What is the Least We Can Expect of a Trustee? Exclusion of Trustee Duties and Exemption of Trustee Liability’ [2010] New Zealand Law Review 459; T Barkley, ‘Conceptions of the Fiduciary in Trust Law’ (2019) 13 Journal of Equity 23. 20 See further J Palmer, ‘Understanding the Director’s Fiduciary Obligation’ (2006) 12 New Zealand Business Law Quarterly 315

New Zealand  245 categorisation of trustee duties is not a straightforward exercise and has implications for defining what a trust is.

A.  The Trusts Act Provisions The Act lists five mandatory duties that cannot be modified or excluded: • • • •

Know the terms of the trust (section 23). Act in accordance with the terms of the trust (section 24). Act honestly and in good faith (section 25). Act for the benefit of the beneficiaries or to further the permitted purpose of the trust (section 26). • Exercise powers for a proper purpose (section 27).

Ten duties are subsequently categorised as default duties21 which can be modified or excluded by the express or implied terms of the trust.22 They include the fiduciary duties of no conflict, no profit, no benefit and no reward; a general duty of care; the duty of prudent investment; and the requirements to consider exercises of power, not to bind future discretions, and to act impartially and unanimously. In addition, the Act extends the common law prohibition of exemptions or indemnities for trustee dishonesty and wilful misconduct to include gross negligence.23 A trustee’s conduct will be grossly negligent where it was ‘so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee’.24 In determining gross negligence, the court is directed to consider several factors: (a) (b) (c) (d) (e)

the circumstances, nature, and seriousness of the breach of trust; the trustee’s knowledge and intentions relating to the breach of trust; the trustee’s skills and knowledge that are relevant to the role of trustee; the purpose for which the trustee was appointed; any other circumstances, including whether the trustee has been remunerated for the role, or characteristics of the trustee that are relevant to the role of trustee; (f) the type of trust, including, without limitation, the degree to which the trust is part of a commercial arrangement, the assets held by the trust, how the assets are used, and how the trust operates; (g) the purpose of the trust, including, without limitation, what the trust is intended to achieve, and whom the trust is intended to benefit and in what ways; and (h) any other factor the court considers relevant.25

The Law Commission referred to the educative value of including the duties and the hope that it ‘may encourage improved standards among trustees because of the greater prominence given to the duties in the law’.26 The Trusts Act was intended ‘to provide

21 Trusts

Act 2019 (NZ) ss 29–38. ss 5(4) and 28. 23 ibid ss 40–44. 24 ibid s 44(2). 25 ibid s 44(3). 26 Law Commission, A Trusts Act for New Zealand (n 11) [5.4]. 22 ibid

246  Jessica Palmer a baseline of the obligations that apply whenever the express trust form is used’.27 Certainly, practitioner commentary on the changes suggests this message from the reform was clearly received by legal advisers.28 In evaluating the extent to which the statutory list of duties represents any change for New Zealand trusts law, it is important to bear in mind the overall effect of the Act provided for in section 5(8) that it is not to be an exhaustive code for express trusts, but is instead ‘intended to be complemented by the rules of the common law and equity’. The Law Commission also emphasised in its final report that the wording used in the legislation served to summarise the general principle of each duty and recourse to case law and recognition of different applications in different circumstances was anticipated.29

B.  Mandatory Duties The distinction between mandatory and default duties and the permitted scope of exemption and exclusion clauses in the statute is an evolution of Millett LJ’s well-known formulation of the irreducible core of trustee obligations in Armitage v Nurse30 that was drawn from the work of Professor David Hayton.31 Millett LJ stated that if ‘beneficiaries have no rights enforceable against the trustees there are no trusts’ and that ‘the minimum necessary to give substance to the trusts’ was ‘the duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries’.32 This conception of the trustee’s core duty continues to be well accepted,33 but it is not itself sufficient. The duties of honesty and good faith for the benefit of the beneficiaries do not inform us as to what the trustee must do, but only as to how they must do it. For the core to be effective, it requires a performative duty and not simply duties regarding the standard of behaviour required. As Charles Mitchell states, Millett LJ’s formulation runs the trustees’ duty to adhere to the trust terms together with their duty of honesty and good faith, producing the dubious proposition that in order to bring a trust into existence a settlor need not place the trustees under a positive duty to perform the trust terms.34

27 ibid Summary [15]. 28 Henry Stokes, ‘The Trusts Act 2019 Moving on from the 1950s’ (Lawtalk, Issue 935, December 2019) 51, available at: www.lawsociety.org.nz/news/lawtalk/lawtalk-issue-935/the-trusts-act-2019-moving-on-fromthe-1950s/. See also, Rob Stock, ‘Day of Reckoning for Family Trusts’ Sunday Star Times (Auckland, 9 February 2020) 55, available at: www.pressreader.com/new-zealand/sunday-star-times/20200209/282368336643258; Rob Stock, ‘Bills ahead as Trusts Culture Winds Down’ Sunday Star Times (Auckland, 16 February 2020) 52, available at: www.pressreader.com/new-zealand/sunday-star-times/20200209/282368336643258. 29 Law Commission, A Trusts Act for New Zealand (n 11) [5.14], [5.16]. 30 Armitage v Nurse [1998] Ch 241 (CA). 31 Hayton (n 19). For an analysis of this concept in the context of Thai law, see Surutchada Reekie and Adam Reekie, ‘Trustee Duties in Thailand’s Statutory Trusts’, ch 11 in this collection. 32 Armitage (n 30) 253–54. 33 Spread Trustee Co Ltd v Hutcheson [2011] UKPC 13, [2012] 2 AC 194; Barnsley v Noble [2016] EWCA Civ 799, [2017] Ch 191. 34 C Mitchell, ‘Good Faith, Self-Denial and Mandatory Trustee Duties’ (2018) 32 Trust Law International 92, available at: discovery.ucl.ac.uk/id/eprint/10048580/1/Mitchell_Good_Faith_Self-Denial.pdf, 9.

New Zealand  247 As such the list of mandatory duties in the New Zealand statute includes performative as well as standard-setting duties, requiring trustees to know and act in accordance with the terms of the trust and to exercise powers for a proper purpose. There are, however, several noteworthy points and some ambiguities that arise out of the chosen formulation.

i.  The Duty to Act for the Benefit of the Beneficiaries Of the duties included in the mandatory list, the most controversial perhaps has been the duty to act for the benefit of the beneficiaries. This also features earlier in the Act in section 13 which provides: The characteristics of an express trust are as follows: (a) it is a fiduciary relationship in which a trustee holds or deals with trust property for the benefit of the beneficiaries or for a permitted purpose; and (b) the trustee is accountable for the way the trustee carries out the duties imposed on the trustee by law.

It is not entirely clear that this benefit duty was in fact a separate duty in the Armitage v Nurse formulation but the notion of loyalty it encapsulates is nevertheless consistent with the fiduciary classification of the trustee–beneficiary relationship. Fiduciary loyalty requires pursuit of the beneficiary’s interest over the trustee’s own interests and the interests of others.35 The requirement to act for the benefit of the beneficiaries is the prescriptive formulation of fiduciary loyalty.36 However, at least prior to the Act, this duty was not understood as an absolute duty on trustees. There are several factors that would suggest that the duty is not to be read quite as strictly as it may appear on its face in the Act. First, discretionary beneficiaries will not necessarily all benefit from trustees’ decisions and, indeed, the trustees have the power to choose between them and may even be authorised to disregard the interests of some of the beneficiaries.37 Discretionary trusts empower and require trustees to prefer one or some beneficiaries over another, making obedience to this duty, as strictly conceived, impossible.38 Accordingly, the duty does not require that all beneficiaries benefit or that one beneficiary cannot benefit to the non-benefit of another.

35 Bristol & West Building Society v Mothew [1998] Ch 1, 18 (Millett LJ); FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250; Arklow Investments Ltd v Maclean [2000] 2 NZLR 1. 36 L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’ (2014) 130 Law Quarterly Review 608. See, also, JE Penner, ‘Distinguishing Fiduciary, Trust and Accounting Relationships’ (2014) 8 Journal of Equity 201, 206–08 where the author argued that the concern is in fact to require from the fiduciary a duty of ‘deliberative exclusivity’ rather than loyalty as such. Although, note Barkley, ‘Conceptions of the Fiduciary in Trust Law’ (n 19), who argues there are several distinct meanings to fiduciary in the express trust context on which the statute is silent when it uses the word ‘fiduciary’. 37 Whaley v Whaley [2011] EWCA Civ 617; Clayton (n 6). 38 Of course, discretionary beneficiaries were more properly considered objects until relatively recently but, consistent with modern practice, they are included in the definition of beneficiaries in the Trusts Act 2019 (NZ) s 9.

248  Jessica Palmer Second, the duty to benefit beneficiaries does not necessarily require a trustee’s own self-denial, as evident from the self-dealing and fair-dealing rules being classed as default duties in the Act and therefore excludable. Trusts practice and case law have long permitted trustees to take positions that could be said to be for their own benefit where expressly authorised by the deed or with the informed consent of the beneficiaries. As such, the mandatory benefit duty will likely give rise to dilemmas for trustees: the trust deed may authorise or permit benefits to a trustee by way, for example, of remuneration or the power to purchase trust property, and yet they must be able to reconcile this with a mandatory duty to act for the beneficiaries’ benefit. It may be possible to do so on the basis that the beneficiaries’ interests and the trustee’s interests are not mutually exclusive – for instance, the trustee is rewarded for her service which is itself given for the benefit of the beneficiaries, and controls can be used to ensure a self-purchase is of mutual benefit – but it is not entirely straightforward and likely to be somewhat contrived. Third, some case law casts doubt on the necessity of the duty to act always for the benefit of the beneficiaries in every express trust. In Citibank NA v MBIA Assurance SA, Ardern LJ held that terms requiring trustees to act on the instructions of a power-holder despite the instruction not being in the beneficiaries’ interest and exoneration from any liability thereby arising were valid.39 Her Ladyship held that it was sufficient for there to be a duty of good faith and a power on the trustee to exercise at least some discretions independently.40 The trustee need not be obliged to act for the benefit of the beneficiaries at all times. While this ruling may be specific to a commercial context where the parties had purchased their rights and the trust could be understood as created by agreement, it nevertheless demonstrates that inroads can be made on what might be considered to be required as part of the core of the trust. A fourth consideration, and one that is of concern to legal practitioners in New Zealand,41 is the potential for conflict between the duty to act for the benefit of the beneficiaries and the separate duty to act in accordance with the terms of the trust, also a mandatory duty.42 The trust terms might require, for example, certain types of investments that produce reduced returns and so would not be in the beneficiaries’ best interests. The qualifying words to the benefit duty in the statute ‘for the benefit of the beneficiaries, in accordance with the terms of the trust’43 should resolve this particular concern but nevertheless it remains the subject of some consternation, particularly in a scenario like that of Citibank, that the requirement to act in the benefit of the beneficiaries could be read to trump other duties that might otherwise permit or require a different course of conduct.44 Accordingly, the Act’s mandatory duty to act for the benefit of the beneficiaries requires some subtleties of interpretation that are not necessarily apparent on the face of the statutory wording and somewhat undermine the accessibility objective underlying

39 Citibank NA v MBIA Assurance SA [2007] EWCA Civ 11, (2007) 1 All ER (Comm) 475. 40 ibid [82]. 41 J Kenny et al, ‘Protectors/Guardians and Company Trustees’ (New Zealand Law Society Trusts Conference Proceedings, 2021) 37, 66. 42 Trusts Act 2019 (NZ) s 24. 43 Trusts Act 2019 (NZ) s 26(b) (emphasis added) 44 Kenny et al (n 41).

New Zealand  249 the articulation of the trustee’s duties in the Act in the first place. Nevertheless, support for a moderated interpretation can be found in both case law and in the Act itself. In Merchant Navy Ratings Pension Fund Trustees Ltd v Stena Line Ltd, Asplin J said ‘“the best interests of the beneficiaries” should not be viewed as a paramount standalone duty’45 but rather as part of the proper purposes principle, espoused by Sir Robert Megarry VC in Cowan v Scargill.46 That is that the interests of the beneficiaries are determined by the purposes of the particular trust. As such, the particular context will drive the content of the benefit duty in any given trust. Following concern expressed by several submitters as to the apparent rigidity of the duty to act for the benefit of the beneficiaries as originally proposed by the Law Commission, the proper purposes principle was included in the bill and became section 21.47 It provides that when performing the duties set out in the Act, trustees must ‘have regard to the context and objectives of the trust’. It is likely that the benefit duty in section 26 will be read consistently with trusts law as it was understood prior to the new statute.48 As such, the apparent simplicity and rigidity of the duty is, like much of trusts law, subject to some refinements and contextualisation that will not necessarily be obvious to the lay trustee. It seems accessibility to the law through statute, while a laudable goal, is not entirely achievable when one is dealing with a nuanced area such as trusts law that is heavily principles-based and often context-dependent.

ii.  The Duty to Act in Good Faith The statutory formulation of Millett LJ’s irreducible core has conceptualised the requirement to act honestly and in good faith as one duty. Often honesty and good faith will overlap in practice, but it is possible to differentiate them. The meaning of trustee dishonesty has received judicial attention in recent times and is now essentially settled, requiring a hybrid objective-subjective standard.49 45 Merchant Navy Ratings Pension Fund Trustees Ltd v Stena Line Ltd [2015] EWHC 448 (Ch) [228]. See also Lord Nicholls, ‘Trustees and their Broader Community: Where Duty, Morality and Ethics Converge’ (1995) 9(3) Trusts Law International 71. 46 Cowan v Scargill [1985] 1 Ch 270. 47 Ministry of Justice, Departmental Report: Trusts Bill (19 February 2019) [24]. 48 The pre-Act position is not without detractors. See, eg, T Barkley, ‘The Content of the Trust: What Must a Trustee be Obliged to Do with the Property?’ (2013) 19 Trusts & Trustees 452 who argues that the trust construct requires a trustee to be under a duty to use the property for the benefit of someone other than the trustee and the ability for trustees to do otherwise is an anathema to the trust. Others suggest that what is essential is a duty to consider other beneficiaries before exercising a power in one’s own favour (assuming self-benefit is permitted by the trust terms): L Smith, ‘Massively Discretionary Trusts’ (2017) 70 Current Legal Problems 17. 49 Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 All ER 333; Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751; Spencer (n 5). ‘The assessment of a trustee’s honesty comprises both subjective and objective elements. A critical first step is to establish what the trustee actually knew about the terms of the trust relevant to the breach alleged and whether the trustee knew that the impugned conduct amounted to a breach of trust. The trustee’s knowledge might include constructive knowledge arising from wilful blindness in the sense described in Westpac although we do not need to determine that in this case. The second step requires an assessment of whether, in the light of what the trustee knew, he or she acted in the way an honest person would in the circumstances. This is to be assessed on an objective basis. A trustee who believes his or her actions or omissions were in the best interests of the beneficiaries will not necessarily be entitled to protection’. Spencer [131].

250  Jessica Palmer Good faith, on the other hand, is perhaps a more amorphous construct. At times, it is used synonymously with honesty but, when it is used on its own, it usually refers to a collection of different but related standards developed in several lines of cases that are concerned with requiring that a trustee’s behaviour is not irrational and that she has deliberated adequately before each decision. It is of course possible to fail to meet this standard of good faith while still acting honestly, showing that the two are different. In Gailey v Gordon, O’Regan J used bad faith as the organising concept for these various different grounds: ‘Bad faith in this context has been recognised as including a decision for an ulterior motive, taking into account of irrelevant considerations, and refusal to take into account relevant considerations and acting capriciously’.50 These instances of bad faith are often described in cases or categorised in textbooks as grounds to invoke the Court’s supervisory jurisdiction to review and set aside the exercise of a trustee’s discretion but it is also possible to understand them as facets of the trustee’s duty of good faith.51 Mitchell describes good faith understood in this way as requiring ‘that a power holder must make sincere and serious commitment to the purposes for which her powers have been given and thus require her to pay proper regard to the interests of those whose position will be affected by the exercise of these powers’.52 This understanding of good faith as distinct from honesty gives greater clarity to the duty to act honestly and in good faith, showing that both terms are independently meaningful and that neither is redundant. However, it may in turn create significant overlap with other mandatory duties, namely the duties to act for the benefit of the beneficiaries and to exercise powers for a proper purpose. First, if good faith requires the trustee to pay proper regard to the interests of the beneficiaries, as Mitchell suggests, it is not clear if this is any different from the duty to act for the benefit of the beneficiaries already discussed above. Second, if good faith is indeed concerned with the notion of sincere and serious deliberation, it might capture the same ground as the duty to exercise powers for a proper purpose. The duty to exercise powers for a proper purpose may be construed narrowly to refer only to the doctrines of ultra vires and fraud on a power, or more broadly to cover those other grounds for which an exercise of power can be reviewed and set aside – a capricious, irrational or perverse decision; a decision made after inadequate deliberations or where irrelevant considerations have been considered or relevant considerations have not been considered. Overlaps are not themselves problematic, but the possible multiplicity of overlaps highlights an issue of clarity or rather the lack thereof. Whether either the duty of good faith in section 25 or the duty to exercise powers for a proper purpose in section 27 will be interpreted judicially to incorporate the wider

50 Gailey v Gordon [2003] 2 NZLR 192 [89]. 51 In Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108 the UK Supreme Court ruled that there must be a breach of fiduciary duty by the trustee in order for the Court to set aside an exercise of power. This has been adopted in New Zealand: Master v Stewart [2014] NZHC 2419, [2018] NZAR 233; Unkovich v Clapham [2020] NZHC 952. The position has been met with criticism (see, eg, R Ham QC, ‘The rule in Hastings-Bass after Pitt v Holt and Futter v Futter’ (2016) 22 Trusts & Trustees 671) but it is nevertheless consistent with the conceptualisation of the accepted grounds for review being aspects of the duty of good faith. 52 Mitchell (n 34) 4–5.

New Zealand  251 grounds of review is important. A general statutory power of review based on whether a decision was reasonably open to the trustee is provided in section 126,53 but it is not clear whether this can be excluded or modified by the trust deed. That uncertainty could be somewhat avoided if the grounds for review traditionally understood are conceptualised as part of either of these mandatory duties and as such unable to be excluded. The content and reach of good faith as required in the Act are not clear. This is not necessarily a shortcoming of the Act itself but rather reflects a fluidity within concepts and principles that is very much characteristic of trusts law and which is unlikely to ever effectively be resolved by a statutory reform project of this kind.

iii.  Consequences of Excluding a Mandatory Duty Interestingly, the Act does not set out the consequences where mandatory duties are modified or excluded, either expressly or impliedly, by the trust deed. It may be, depending on the nature of the modifications, that the arrangement will be found to be lacking its necessary fiduciary character54 and therefore not a trust; or it may be that the relevant offending clause in the deed will simply be struck out if a trust intention is otherwise confirmed in the trust deed and in the surrounding context.

iv.  Limitations of the Mandatory-Default Classification Classification of duties as mandatory or default is one useful way of understanding duties, but it does not account for the nature of the duties and therefore the relevant liability rules and remedial outcomes that arise upon breach. The fiduciary duties of loyalty, as discussed above, for example, are spread across both categories of mandatory and default duties. A differentiation or hierarchy of duties owed by trustees organised by the gravity of the obligation and their subsequent liability rules is not new and has been the subject of much academic and judicial attention.55 Not all duties owed by trustees are fiduciary or indeed ‘trust duties’. Trustees will hold custodial trust duties; non-custodial trust or fiduciary duties; equitable duties of care; and strict duties of performance. The statute does not distinguish these categories of duty nor make any provision for the relevant remedies, tests of causation, mitigation and/or contribution rules in relation to them. The common law of trusts will continue to provide this content. In other areas of private law regulation, New Zealand has enacted remedial regimes within statutes that provide significant judicial discretion. In certain situations these 53 s 126 provides that the court may review, on application of a beneficiary, a trustee’s act, omission or decision on the ground that it ‘was not or is not reasonably open to the trustees in the circumstances’. 54 s 13 provides: ‘The characteristics of an express trust are as follows: (a) it is a fiduciary relationship in which a trustee holds or deals with trust property for the benefit of the beneficiaries or for a permitted purpose; and (b) the trustee is accountable for the way the trustee carries out the duties imposed on the trustee by law’. 55 Bank of New Zealand v NZ Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA), 687 (Tipping J); Bristol & West Building Society (n 35); IQ Eq (NTC) Trustees Asia (Jersey) Ltd v Arboit [2019] HKCFA 45, (2019) 22 HKCFAR 392.

252  Jessica Palmer have been appropriate either to meet public policy objectives, such as in the case of liability for unfair trading,56 or to reform areas that have become overly complicated, such as in the case of relief for cancellation and termination of contracts.57 However, the provision of a statutory smorgasbord of relief orders for breach can risk the creation of conceptual dissonance between the relevant duty breached and the remedy arrived at. Fortunately, the Trusts Act is silent on these matters.

C.  The Gross Negligence Limitation on Exemptions The earlier Trustee Act 1956 did not regulate exemption clauses. The new statute now does, and has imposed greater control than does Millett LJ’s formulation of the irreducible core referred to earlier. New Zealand legislation has followed the path taken in Jersey,58 Guernsey59 and Hong Kong60 of widening the scope of trustee liability which cannot be exempted or indemnified in the deed, extending it to gross negligence, although in contrast to those jurisdictions the prohibition in New Zealand applies to both lay and professional trustees alike. The feedback from trust advisers on this aspect of the trusts law reform was largely (and perhaps unsurprisingly) negative and seen as a significant intrusion on settlor autonomy.61 The Law Commission’s response to these objections was consistent with the view of the trust construct as possessing an irreducible core that is not entirely malleable according to the settlor’s preferences. In its final report, it answered the allegation of an undue limitation on settlor freedom in the following way: [I]t is a reasonable consequence of the choice of the trust form that the trustee of the trust property be held to certain standards and face consequences for breaching those standards in sufficiently serious ways. The extension of the restriction on exemption clauses to include gross negligence reinforces the fact that trustee obligations are real.62

However, despite this fairly strong stance, the detail shows somewhat of a workable balance being drawn. Three observations can be made here. First, the classification of trustee duties as mandatory or default is treated separately from the limitation of liability. Exemptions and indemnities are constrained by reference to the quality and extent of a trustee’s fault and not by whether a particular duty breached is mandatory or not. Liability for breach of any of the duties, whether mandatory or default, may be excluded by the terms of the trust where such was caused, for example, by a trustee’s negligence but not if she acted with gross negligence (or dishonestly or in wilful misconduct). While the Law Commission had initially proposed to

56 Fair Trading Act 1986 (NZ). 57 Contract and Commercial Law Act 2017 (NZ) Part 2. 58 Trusts (Jersey) Law 1984, s 30(10). 59 Trusts (Guernsey) Law 2007, s 39(7) and (8). 60 Trust Law (Amendment) Ordinance 2013 (HK) s 41W. 61 A particularly impassioned objection was made by Peter Watts in his commentary on the early indicative proposal: ‘It is the mark of a totalitarian society when it wishes to intrude on all human shortcomings, be those carelessness, vindictiveness, callousness, or other weaknesses’: Watts (n 18) 19. 62 Law Commission, Trusts Act for New Zealand (n 11) [5.31].

New Zealand  253 take a more stringent approach to mandatory duties, prohibiting exemption of liability for negligent breaches as well, this was withdrawn in the face of significant negative feedback, with the Commission explaining that there was little sense in the distinction in any event because negligent breaches of mandatory duties are ‘unlikely to arise in practice’.63 Second, and perhaps somewhat at odds with the Commission’s view as outlined above that trustees are unlikely to act negligently in practice thereby eliminating any need for beneficiary protection from the same, the threshold which the statute sets for gross negligence appears not too far removed from standard negligence. As outlined earlier, the Act provides that a trustee will have been grossly negligent when her ‘conduct was so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee’.64 Initially, the Law Commission had proposed setting the exemption restriction at recklessness on the basis that gross negligence might be difficult to define but then revised its proposal given the use of gross negligence in trusts law in other jurisdictions and in other parts of New Zealand’s own domestic law.65 The statutory definition seems to set a significantly lower threshold than would have been the case had recklessness been the limit and suggests a clear strengthening of trusts law’s protection of beneficiaries in New Zealand. However, it may be that the multifactorial assessment the Court is required to undertake to determine whether a trustee has in fact acted with gross negligence will recalibrate the standard to something closer to recklessness. In undertaking that assessment, the Court must consider the trustee’s own knowledge and intentions; her skills and knowledge that are relevant to the trustee’s role; the purpose for which she was appointed; whether the trustee is remunerated; and her own characteristics that are relevant to the role.66 These all call for subjective considerations to be factored in to whether or not the trustee has acted so unreasonably in any given scenario and they may very well lead to setting the bar for gross negligence higher than it otherwise would be on the basis of the wording of the test alone. In addition, these factors will likely mean that what will be expected of professional trustees is greater than of lay trustees thereby indirectly or impliedly creating a similar distinction to that which operates in the legislation of other jurisdictions.

D.  Duties of Other Power-Holders One area that some might argue has been left underdeveloped in the statute is the role of other power-holders and whether or not they should also be subject to duties. At the forefront of recent developments in trusts law has been the issue of substantial reserved powers held by settlors or others in non-trustee capacities. This question



63 ibid

[5.30]. Act 2019 (NZ) s 44(2). 65 Law Commission, Trusts Act for New Zealand (n 11) [5.29]. 66 Trusts Act 2019 (NZ) s 44(3)(b)–(e). 64 Trusts

254  Jessica Palmer has featured in both New Zealand and foreign cases,67 although in New Zealand the majority of reserved powers are held by settlors who are often also trustees and beneficiaries, rather than being vested in appointed protectors as is more common elsewhere. The reserved powers have included powers to appoint and remove trustees, powers to add and remove beneficiaries, and powers to effectively veto trustee decisions. Challenges to these trusts often arise because the nature of the power held and whether it is subject to any restraints are unclear. Courts generally approach this question on the facts of the individual case and construe the relevant power in light of the rest of the trust’s terms.68 Cases in which these trusts have been challenged have usually been decided using one of two approaches:69 either (1) the powers themselves are unfettered and considered as property, enabling spouses, partners and creditors of the power-holder to access their value;70 or (2) the trust itself is put under the spotlight and found either not to be a true trust due to a lack of settlor divestment and trustee accountability71 or held to be a valid trust but defeasible upon exercise of the powers.72 The Act does provide within those sections covering the appointment and discharge of trustees that any person with the power of appointment and removal of trustees has a duty to exercise the power honestly, in good faith and for a proper purpose,73 and that the exercise of the power is reviewable by application of a beneficiary consistent with the review provisions mentioned earlier.74 It is likely this will create a presumption that the power is thus fiduciary in nature, but the Act does not clarify whether the said duty can be modified or excluded.

E. Evaluation Despite the objectives of accessibility and clarity, users of the Act will have to be aware of the extent to which the apparent black-letter nature of the duties provisions are actually strongly coloured by context and principle. In addition, the law is much as it was prior to the passing of the Act with all its subtleties and complexities. The Act has not resolved

67 Re the X Trusts [2021] SC (Bda) 72 Civ; JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch); Webb v Webb [2020] UKPC 22, [2021] 2 NZLR 376 (on appeal from the Court of Appeal of the Cook Islands); Carmine v Ritchie [2012] NZHC 2279; Kwok v Rainey [2020] NZHC 923. See also M Conaglen and E Weaver, ‘Protectors as Fiduciaries: Theory and Practice’ (2012) 18 Trusts & Trustees 1, 17. 68 Webb (n 67) [167]. 69 See further, Palmer, ‘A Lament for Trust Principles in New Zealand’ (n 1) 43–50; A Hofri-Winogradow, ‘The Irreducible Core(s) of Trustee Obligation: One Core or Many?’ (forthcoming); M Bennett, ‘Competing Views on Illusory Trusts: The Clayton v Clayton Litigation in its Wider Context’ (2017) 11 Journal of Equity 48. 70 Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17, [2011] 4 All ER 704; Clayton (n 6). 71 Pugachev (n 67); Webb (n 67). 72 Brkic v White [2021] NZCA 670. 73 Trusts Act 2019 (NZ) s 94. 74 ibid s 95.

New Zealand  255 some of the existing ambiguities in relation to trustee duties, such as the meaning and reach of each of the duties to act for the benefit of the beneficiaries and to act in good faith. The Act does, however, make an important change – expanding the prohibition of exemption clauses to grossly negligent conduct in addition to dishonesty and wilful misconduct.

V.  Disclosure Regime A second significant area of reform in the Trusts Act 2019 concerns beneficiary access to trust information. Often settlors and trustees and their lawyers claim that confidentiality is key to the running of the trust and refuse disclosure, and this is all the more so in the modern New Zealand trust where the settlor generally stays involved as trustee and/ or beneficiary and sees themself as still somewhat in control. They may not want the beneficiary to know the details of property subject to the trust; who the other beneficiaries are; what has been done with the property; or even that there is a trust of which the beneficiary may benefit. However, if accountability of the trustee to the beneficiary is fundamental to the trust relationship, the beneficiary must be able to gather relevant information to assess and ensure the trustee is remaining accountable for what she does with the property. The beneficiaries need access to information about the trust. This is the position, albeit perhaps not quite so absolute, taken in the Trusts Act 2019.

A.  The Trusts Act Provisions The disclosure provisions are new to New Zealand trusts legislation and include their own purpose section: ‘to ensure that beneficiaries have sufficient information to enable the terms of the trust and the trustees’ duties to be enforced against the trustees’.75 Trustee accountability is thus the stated object. The disclosure requirements are divided into two categories:76 1 2

Mandatory disclosure whereby a presumption of disclosure of basic trust information77 applies in favour all beneficiaries; and Requested disclosure whereby a presumption of disclosure of trust information78 applies on request to the requesting beneficiary.

75 ibid s 50. 76 The disclosure provisions do not apply to charitable and purpose trusts: ibid s 50(2). 77 ibid s 51(3): Basic trust information is the information that someone is a beneficiary; who the trustees are; and notification to that beneficiary of their right to request trust information. 78 ibid s 49: Trust information is any information ‘regarding the terms of the trust, the administration of the trust, or the trust property; and that it is reasonably necessary for the beneficiary to have to enable the trust to be enforced’ but not including reasons for trustees’ decisions.

256  Jessica Palmer In relation to both, trustees must first consider a list of factors to determine whether it is reasonable to withhold information. The factors are wide-ranging and affirm a strong contextual approach to disclosure. The factors are: (a) the nature of the interests in the trust held by the beneficiary and the other beneficiaries of the trust, including the degree and extent of the beneficiary’s interest in the trust and the likelihood of the beneficiary receiving trust property in the future; (b) whether the information is subject to personal or commercial confidentiality; (c) the expectations and intentions of the settlor at the time of the creation of the trust (if known) as to whether the beneficiaries as a whole and the beneficiary in particular would be given information; (d) the age and circumstances of the beneficiary; (e) the age and circumstances of the other beneficiaries of the trust; (f) the effect on the beneficiary of giving the information; (g) the effect on the trustees, other beneficiaries of the trust, and third parties of giving the information; (h) in the case of a family trust, the effect of giving the information on– (i) relationships within the family; (ii) the relationship between the trustees and some or all of the beneficiaries to the detriment of the beneficiaries as a whole; (i) in a trust that has a large number of beneficiaries or unascertainable beneficiaries, the practicality of giving information to all beneficiaries or all members of a class of beneficiaries; (j) the practicality of imposing restrictions and other safeguards on the use of the information (for example, by way of an undertaking, or restricting who may inspect the documents); (k) the practicality of giving some or all of the information to the beneficiary in redacted form; (l) if a beneficiary has requested information, the nature and context of the request; and (m) any other factor that the trustee reasonably considers is relevant to determining whether the presumption applies.79

Where the trustee decides, against the presumptions, to withhold the basic trust information from all beneficiaries and to decline a disclosure request, they must apply for court directions in relation to whether the decision is reasonable and the alternative means for accountability.80 Although the factors for consideration above might suggest a wide discretion on the trustee, the two principles which the court is required to take into account emphasise the importance of disclosure: (a) trust information may be withheld from all beneficiaries only in exceptional circumstances; and (b) alternative means of enforcing a trust pending disclosure of information to beneficiaries must be consistent with the objectives of the trust and not adversely affect its administration.81

79 ibid s 53. 80 ibid s 54, except where the period of time in which no beneficiary has any trust information is less that 12 months, s 54(3). 81 ibid s 54(4).

New Zealand  257

B.  The Law Prior to the Trusts Act 2019 The pre-Act law also drew a distinction between mandatory notification and requested disclosure. With regard to the former, a duty to notify a beneficiary who had obtained a vested interest in possession was accepted in the law of trusts but no such disclosure was required to objects of discretionary powers.82 However, some well-known commentaries have expressed support for notification to those discretionary beneficiaries who are ‘real potential candidates for benefit’83 and Donovan Waters suggests courts have generally been moving away from technical positions based on the classification of the beneficiaries’ interest to a test of ‘whether it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed’.84 With regard to requests for information, courts have, in the past, recognised the beneficiary’s right to information on request but the basis of that right has been the subject of debate and recent reconsideration. It was once thought to be dependent on the beneficiary having a fixed share of the trust property,85 consistent with the position in relation to mandatory notification, and so did not extend to discretionary beneficiaries. The jurisprudence has developed so as to see access to information as a matter of the court’s supervisory jurisdiction rather than as triggered only by a vested interest.86 This has been confirmed in more recent cases as the necessary corollary of the trustee’s duty to account. O’Regan J said on behalf of the New Zealand Supreme Court in Erceg v Erceg: We see the starting point as being the obligation of a trustee to administer the trust in accordance with the trust deed and the duty to account to beneficiaries. A beneficiary who seeks such an account may seek access to documentation necessary to assess whether the trustee has acted in accordance with the trust deed. That can be expected to be the basis on which the beneficiary will seek disclosure of trust documentation.87

The Court of Appeal, in its judgment in Erceg, had appeared to suggest that disclosure of information was an exercise of discretion on the part of the trustees,88 but the Supreme Court conceptualised it as an ‘expectation’ that trust information would be disclosed to the beneficiary who wants it.89 The case was heard during the statutory reform process and the Law Commission’s various reports and its proposed disclosure

82 Re Manisty’s Settlement [1974] Ch 17, 25; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 431. 83 L Tucker et al, Lewin on Trusts, 20th edn (Sweet & Maxwell 2020) [21-010]. See also D Hayton et al, Underhill and Hayton: The Law Relating to Trusts and Trustees, 19th edn (LexisNexis 2016) [50.2], [56.11]. 84 D Waters, Waters’ Law of Trusts in Canada, 4th edn (Wildy 2012)1126. 85 O’Rourke v Darbishire [1920] AC 581; Murphy v Murphy [1999] 1 WLR 282. This understanding has been questioned by Campbell who considers the early cases and argues that there was no such proprietary right because a particular beneficiary’s right was considered to depend on the particular circumstances, not on a strict property right per se; see J Campbell, ‘Access by Trust Beneficiaries to Trustees’ Documents, Information and Reasons’ (2009) 3 Journal of Equity 97, 117 et seq. 86 Re Murphy’s Settlements [1998] 3 All ER 17; Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709; Foreman v Kingstone [2004] 1 NZLR 841. 87 Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320 [51]. 88 ibid. 89 ibid [62].

258  Jessica Palmer regime were available to the bench. The judgment represented a significant endorsement of the need for greater disclosure as an accountability mechanism. However, it is notable that the Supreme Court expressly preferred to use the language of expectation rather than presumption.

C.  Analysis of the Changes i.  Beneficiary Protection versus Settlor Autonomy The Act creates a presumption of disclosure and signals clearly the purpose of the new regime as being to enable beneficiaries to enforce the trust. The change appears significant and, when it was initially proposed by the Law Commission, it certainly engendered concerned submissions that such an approach was to swing too far in favour of beneficiary rights and would threaten the attraction and utility of trusts.90 Anecdotal evidence suggests that in the period leading up to the Act coming into force many trusts were in fact wound up or substantially varied in response to the incoming disclosure rules.91 However, despite the apparent novelty of the new regime, the list of factors relevant to the presumption contained within the new Act is similar to those factors that were already being relied upon by courts.92 In addition, the inclusion of the settlor’s expectations and intentions with regard to disclosure at the time of the creation of the trust as one of the factors that must be considered93 suggests that the legislators accepted that the presumption of disclosure could be readily displaced by a contrary intent of the settlor. The reaction of some respected commentators was that trustees can and ought to continue to abide by the wishes of the settlor even if those wishes were for limited disclosure, albeit that it is considered advisable to inform all beneficiaries at least of their status as beneficiaries.94 Built into the disclosure regime is something of a control mechanism referred to above – the court, upon a trustee applying for directions where no trust information has been provided, must take into account the principle that ‘trust information may be withheld from all beneficiaries only in exceptional circumstances’.95 However, the requirement to apply for directions and so to potentially be subjected to the principle is easily avoided by trustees ensuring that at least one beneficiary receives some trust information at least once each year. This leaves beneficiaries in effectively the same position that they were in before the Act – having to apply themselves to the court where trustees have refused to provide information upon request.

90 Law Commission, Trusts Act for New Zealand (n 11) [5.47]–[5.50]. 91 See, eg, comments made by legal practitioner Andrew Logan in Geraden Cann, ‘Mega Landlords: 48% Rise in Homes Owned by Trustees “Suggests Tax Avoidance”’ (Stuff, 2 Dec 2021), available at: www.stuff.co.nz/ life-style/homed/housing-affordability/300440725/mega-landlords-48-per-cent-rise-in-homes-owned-bytrustees-suggests-tax-avoidance; W Patterson, ‘Disclosure of Trust Information and Current Issues’ (New Zealand Law Society Trusts Conference, 2021) 113, 128. 92 Erceg (n 87) [56]; Foreman (n 86) [90]; derived from the Privy Council’s decision in Schmidt (n 86). 93 Trusts Act 2019 (NZ) s 53(c). 94 See, eg, Patterson (n 91) 122. 95 Trusts Act 2019 (NZ) s 54(4) (emphasis added).

New Zealand  259 It would seem, much like the Act’s approach to the mandatory duties, the importance of principles of protection and accountability are less emphatic than may at first appear and will bend to the factual context of each particular trust and to a settlor’s wishes with regard to disclosure.

ii.  Nature of the Regime A second observation about the disclosure regime is that it is not clear from the provisions what the nature of the regime is vis-a-vis the trustee. In orthodox trusts law, the trustee is not generally understood to have a duty of disclosure and the law has struggled to provide sanctions for non-compliance which further undermines any notion of there being a duty.96 In the Act, the disclosure provisions are contained within the same part as the trustees’ duties, the heading of which is ‘Trustees’ duties and information obligations’. However, it is not clear whether the disclosure regime does in fact create any duties on the trustee and, if so, to what extent they may be modified or excluded. The Law Commission had proposed that the new Act should provide for a mandatory obligation on trustees to provide sufficient information to sufficient beneficiaries to enable the trust to be enforced.97 In the final Act as passed, the nomenclature of mandatory and default duty is not used within the provisions. McLay has argued that the regime does not require disclosure to any beneficiary but rather requires trustees to exercise their discretion to determine whether information should be given to beneficiaries, necessitating an obligation to consider.98 If that is the case, then the accepted grounds for review of a trustee’s exercise of discretion – mala fides, caprice, irrationality, fraud on a power – and the statutory review provision for not being reasonable will be the controlling mechanisms for disclosure, and review of disclosure decisions on the traditional grounds will be subject to the same present confusions arising from the UK Supreme Court’s decision in Pitt v Holt that requires a breach of fiduciary duty in order for a trustee’s decision to be set aside.99 One cannot help but wonder if the complexity that comes with this conceptualisation of the disclosure regime defeats the original objectives of the statute generally and in the area of information obligations more specifically, which are to make the law more accessible and to ensure a ready means for ensuring enforceability of the trust.

iii.  Trust Information The definition of trust information employed in the disclosure regime is decidedly broad, being any information ‘regarding the terms of the trust, the administration of the trust, or the trust property; and that it is reasonably necessary for the beneficiary



96 Hayton

et al (n 83) [56.11]. Commission, Trusts Act for New Zealand (n 11) 103. 98 McLay (n 15) 345. 99 Pitt (n 51). 97 Law

260  Jessica Palmer to have to enable the trust to be enforced’.100 Separate from the disclosure regime, the Act also requires trustees to keep certain specified trust documents which it refers to as core documents.101 It is likely that the meaning of ‘trust information’ for the purposes of the disclosure provisions will for practical purposes be coloured by the ‘core documents’ list, given that trustees cannot be expected to disclose what they are not required to keep. What falls within trust information for the purpose of disclosure thus will not be any more than what are considered core documents but, of course, could be less. The statute expressly excludes trustees’ reasons for decisions from the definition of trust information. The Supreme Court noted recently in Lambie Trustee Ltd v Addleman102 that this is likely a significant change from the prior common law that beneficiaries were not generally entitled to such information such that the possibility of disclosure nevertheless remained in exceptional cases. Under the Act, trustees’ reasons are now beyond reach. Memoranda of wishes are not specifically mentioned in the definition of trust information but are included in the list of ‘core documents’ that must be kept by trustees.103 Several trusts experts discount the relevance of memoranda of wishes, arguing that they are not binding on the trustees and thus not relevant to understanding the purposes of the trust,104 while others have argued the role of a memorandum and thus whether it ought to be disclosed should be determined by reference to the settlor’s intention is writing such memoranda.105 The case law presents a mixed picture as to whether memoranda are disclosable or not. They are often regarded as highly confidential106 and there is no automatic entitlement to disclosure. On the other hand, disclosure has been ordered even when the particular settlor expected confidentiality.107 Recent New Zealand cases decided before the Trusts Act came in to force have referred to the importance of memoranda of wishes, adopting the Act’s core categorisation, but nevertheless refusing disclosure where the beneficiary was likely to use that information to harm other beneficiaries108 or interfere with the effective administration of the trust.109 In one of these cases, Cooke J said ‘documents concerning the settlor’s wishes can be seen as documents that are rudimentary in order for a beneficiary to understand the nature of the trust and their interest in it’.110

100 Trusts Act 2019 (NZ) s 49. 101 ibid ss 45–48. 102 Lambie Trustee Ltd v Addleman [2021] NZSC 54, [2021] 1 NZLR 307 [59]. 103 Trusts Act 2019 (NZ) s 45(h). 104 D Russell and T Graham, ‘Letters of Wishes and Understanding the Purposes of a Trust’ (2019) 25 Trusts & Trustees 277; T Zhong Wei, ‘The Irreducible Core Content of Modern Trust Law’ (2009) 15 Trusts & Trustees 477, 490. 105 R Lee, ‘Disclosure of Letters of Wishes in Family Settlements: Breakspear v Ackland’ (2009) 28 Estates, Trusts & Pensions Journal 105, 108–09; G Thomas and A Hudson, The Law of Trusts, 2nd edn (Oxford University Press 2010) [12.42]. 106 Addleman v Lambie Trustee Ltd [2019] NZCA 480 [25]. 107 Breakspear v Ackland [2008] EWHC 220 (Ch), [2009] Ch 32. 108 Jacomb v Jacomb [2020] NZHC 1764. 109 Erceg (n 87). 110 Jacomb (n 108) [16].

New Zealand  261

D. Evaluation The inclusion of an information regime in the new Act that adopts the language of presumption of disclosure and specifies its purpose being to ensure beneficiaries are able to enforce the trust might suggest a significant change to trusts law; but the devil remains to be seen, as always, in the detail. The signalled preference for disclosure and thus protection of beneficiaries is substantially qualified by the multifactorial assessment required of trustees that continues much the same balancing exercise between confidentiality and accountability that has existed traditionally in trusts law. While the Act does also introduce court oversight in the event no disclosure is being made, it will in practice be reasonably easy for trustees to avoid this simply by providing minimal information to at least one beneficiary. The disclosure regime is less dramatic than its presence may, at first sight, suggest.

VI. Conclusion Express trusts are a feat of flexibility and ingenuity within the common law system. The New Zealand legislative reform project has earnestly sought to make the most significant aspects of trusts law accessible and clear in order to adapt them to the peculiarity of the high rates of trusts usage and lay trusteeship in New Zealand. The exercise of committing what are considered core and basic principles of trusts law to statutory form confirms how difficult it is to distil trusts into a set of rules. The trusts law legislation project is a thought-provoking example of the extent or otherwise to which common law or judge-made rules of law in a common law system can be articulated in statutory form.111 Moreover, the concerns of some that the statute will unduly restrict trusts and undermine the importance of settlor autonomy in a quest to increase beneficiary protection is not borne out in a closer analysis of the reform to trustees’ duties and disclosure of trust information explored in this chapter. The Act has in fact retained considerable deference to the settlor’s expectations and intentions. Trusts are commonly referred to as the classic fiduciary relationship but the division of trustee duties in to mandatory and default duties in the New Zealand statute shows that its fiduciary character is not altogether uncontested or, at the very least, that its fiduciary character may be substantially limited. Further, the development of a suitably clear and usable disclosure regime to enable accountability and enforceability shows that the tension between beneficiary protection and settlor supremacy remains alive and well post the trusts law legislation projection in New Zealand. This chapter has shown that in these two significant features of New Zealand’s new Trusts Act, the reform to the law has been much less one of substance and more one

111 See further A Burrows, Thinking about Statutes: Interpretation, Interaction, Improvement (Cambridge University Press 2018); J Paterson and E Bant, ‘In the Age of Statutes, Why Do We Still Turn to the Common Law Torts? Lessons from the Statutory Prohibitions on Misleading Conduct in Australia’ (2016) 23 Torts Law Journal 139.

262  Jessica Palmer of form as what were traditionally considered principles in the common law of trusts have been converted into a legislative framework. A risk of this type of reform is that the comprehensive nature of the new statute will have the effect of reducing the attention given to New Zealand trusts law in other similar jurisdictions, which may in turn threaten the development of New Zealand trusts law. Whether this risk comes to pass will be known only in time.

14 Adaptation Throughout History: The Journey of the Israeli Trust from a Charitable Trust to an Estate Planning Instrument MEYTAL LIBERMAN*

I. Introduction A. Israel Israel is a small country, about the same size as Belgium in Europe or New Jersey in North America. It is located on the eastern shore of the Mediterranean Sea and has excellent access by air and sea to Europe, Africa, Asia and North America.1 Since 2010, Israel has been a member of the Organisation for Economic Co-operation and Development (OECD),2 and since 2018, it has also been a member of the Financial Action Task Force (FATF).3 According to its Declaration of Independence, Israel is a Jewish and democratic state.4 Israel is a country of immigration. Formal statistics show that at the time of its establishment, Israel’s population had only 872,700 people, consisting of 716,700 (82 per cent) Jews and 156,000 (18 per cent) Muslims, Christians and Druze. Israel’s population has grown phenomenally: at the end of 2020 there were 9,289,800 people,

* Meytal Liberman, LLB (Bar-Ilan), LLM (Tel Aviv), Advocate, TEP. 1 L Eyal and A Kaplan, ‘Israel’ in A Kaplan (ed), Trusts in Prime Jurisdictions, 4th edn (Globe Law and Business 2016). 2 OECD, ‘Israel’s Accession to the OECD’ (OECD), available at: ww.oecd.org/israel/israelsaccessiontotheoecd.htm. 3 FATF, ‘Israel’ (FATF), available at: www.fatf-gafi.org/countries/#Israel. 4 The Declaration of the Establishment of the State of Israel (1948) 1 Official Gazette 1. A translation thereof into English is available at: main.knesset.gov.il/en/about/pages/declaration.aspx (Declaration of Independence).

264  Meytal Liberman out of which 6,873,900 (74 per cent) were Jews, 1,957,300 (21 per cent) were Muslims and 458,600 (5 per cent) were others.5

B.  Outline of this Chapter In order to provide context, this chapter will begin with a historical description of the development of the Israeli legal system throughout three main time periods: the Ottoman Empire (1516–1917); the British rule and mandate (1917–1948); and the establishment of the state of Israel today (1948–today). The chapter will then explore the trusts that were used in each of these time periods, focusing on how these trusts were used and why. Accordingly, the chapter will start by looking into the waqf as the trust structure that has been predominantly used since the time of the Ottoman Empire, and how it has been adapted over time to meet the changing needs of the population in then Palestine and now Israel. Next, the chapter will explore the charitable trust, which was introduced by British rule with the aim of adapting the waqf to provide a civil alternative to the religious waqf. Then, the chapter will explore the trust under Israeli law, specifically pursuant to the enactment of the Israeli trusts law. It will be shown that during this time period, the trust underwent significant changes – namely the introduction and recognition of a civil private trust, thereby adapting the trust yet again to the needs of the citizens of an advanced and democratic state. Before concluding, this chapter will also explore the Jewish endowment and the awqaf (the plural of waqf) of the Christian Church. These serve as good examples of different applications and adaptations of similar trust concepts in the religious context.

II.  Israel’s Legal System: A Mixed Legal System Although Israel is a relatively young state, its legal system did not begin its existence on 14 May 1948, the day the State of Israel was established. Rather, the legal system which was in place prior to the establishment of the State of Israel was adopted into the Israeli legislation, which changed and evolved over time. Accordingly, the development of the Israeli legal system can be divided into three main time periods.

A.  The Ottoman Empire (1516–1917) The rule of the Ottoman Empire began in 1301, upon the declaration of Osman I as the first sultan, and ended after the First World War, during 1917–18. The conquest of

5 Central Bureau of Statistics, ‘Population, by Religion and Population Group’ (Central Bureau of Statistics, 31 August 2021), available at: www.cbs.gov.il/he/publications/doclib/2021/2.shnatonpopulation/st02_01.pdf.

Israel  265 Palestine took place in 1516, at the peak of its prosperity, and it ended during 1917–18, upon the conquest of Palestine by the British.6 The highest judicial authority was situated in Istanbul, which delegated its authority to the courts in the various districts. Disputes between an individual and the Empire were resolved in the Sharia courts, before a Muslim judge – a ‘Qadi’, who was appointed for this purpose by the sultan. The Jewish communities in Palestine conducted their life under Jewish law, yet since they were an integral part of the Empire, members of the Jewish communities appeared before a Qadi on a regular basis.7 As a Muslim state, the Ottoman Empire maintained one comprehensive legal system, which issued decisions in all aspects of life in accordance with Muslim law – the ‘Sharia’. A Qadi headed every Sharia court. The Qadi ruled in criminal, civil and financial disputes, as well as in matters concerning the day-to-day life in the city, and the wellbeing of its residents.8 The ‘Majalla’ was the Ottoman Civil Code, which was based on Muslim legal principles. It was phrased in a casuistic manner, and similar to other codes, it was intended to be exhaustive. It comprised of 16 books which were dedicated to general topics, and of two introductory articles. The first introductory article provided a general explanation on the structure of the Majalla and the reasons for its enactment. The second introductory article included 99 sections, which were known as ‘The General Principles of Pica’. Sections 36–45 of these general principles were interpreted as determining the power of custom as a legal source.9

B.  The British Rule and Mandate (1917–48) The British occupation in Palestine lasted about 30 years: from December 1917, on the arrival of the British army headed by General Allenby, until May 1948, on the establishment of the State of Israel. In the beginning, the British administration adopted the existing governmental institutions and adjusted them as it deemed necessary. The purpose was to maintain the legal status quo in the colonies of the British Empire as far as possible. However, the longer the British rule lasted, the more it was incorporated into the legal system in Palestine – a process commonly known as ‘Englification’.10

6 Amnon Cohen, ‘The Ottoman Period in the Palestine: The Judgment and the Law’ (The Court’s Museum, the Supreme Court Hall), available at: supreme.court.gov.il/museum/Documents/%D7% 94%D7%AA%D7%A7%D7%95%D7%A4%D7%94%20%D7%94%D7%A2%D7%95%D7%AA%D 7%9E%D7%90%D7%A0%D7%99%D7%AA%20-%20%D7%9E%D7%90%D7%9E%D7%A8%20%20%D7%A4%D7%A8%D7%95%D7%A4’%20%D7%90%D7%9E%D7%A0%D7%95%D7%9F%20 %D7%9B%D7%94%D7%9F.pdf. 7 ibid. 8 ibid. 9 R Gabizon, ‘The Abolishment of the Majalla: Custom and the Principles of the Pikah’ (1985) 14 Mishpatim 325, 326. 10 Assaf Likhovski, ‘Mandatory Law’ (The Court’s Museum, the Supreme Court Hall), available at: supreme.court.gov.il/museum/Documents/%D7%AA%D7%A7%D7%95%D7%A4%D7%AA%20 %D7%94%D7%9E%D7%A0%D7%93%D7%98%20-%20%D7%9E%D7%90%D7%9E%D7%A8%20-%20 %D7%93%D7%95%D7%A7%D7%98%D7%95%D7%A8%20%D7%90%D7%A1%D7%A3%20%D7%9C%D 7%97%D7%95%D7%91%D7%A1%D7%A7%D7%99.pdf.

266  Meytal Liberman Once the League of Nations granted Britain the mandate over Palestine in 1922, the British enacted the Palestine Order in Council on 10 August 1922.11 The purpose of the King’s Order-in-Council was to officially abolish the British military governance of Palestine, in place since its occupation from the Ottoman Empire during the First World War, and to establish civil administration in accordance with the provisions of the Mandate for Palestine, enacted by the League of Nations the previous month. Furthermore, section 46 of the King’s Order-in-Council provided for the Civil Courts to be exercised in conformity with Ottoman law, and that Ottoman laws declared to be in force by the British administration were to remain in force to the extent such laws conformed with English common law. Through this section, the Majalla was effectively adopted into the British legal system.12 Over the course of three decades of the British Mandate, the British legislator in Palestine replaced many of the Ottoman laws with British ordinances, which were based on British legislation.13 Furthermore, the above-mentioned section 46 guided the judges of the British Mandate to apply the English common law where there was no applicable Ottoman or Mandate legislation, and since the end of the 1930s, the courts have widely imported the English common law into the legal system in Palestine by reinterpretation of the Ottoman law, thereby creating an independent legal system in Palestine.14 Despite the British efforts to change the legal system in Palestine, this did not result in a full replacement of the local law. Therefore, when the British Mandated ended in 1948, the legal system that was left was a mixed legal system – partly based on Ottoman law, partly based on English common law, and partly based on local independent creation.15

C.  The Establishment of the State of Israel (1948) The State of Israel was established on 14 May 1948 with the Declaration of Independence.16 Shortly after its establishment, on 21 May 1948 the Law and Administration Ordinance17 was published. Section 11 provides that the law which existed in Palestine on 14 May 1948 shall remain in force, insofar as it is in line with the laws enacted by the State of Israel. Effectively, through section 11, the newly established Israeli legal system adopted the mixed legal system created by the British Mandate, including certain parts of the Majalla.18 Furthermore, through this section, the Israeli legal system adopted the abovementioned section 46 of the King’s Order-in-Council, and consequently Israeli judges

11 The Palestine Order in Council (10 August 1922) (King’s Order-in-Council). 12 Gabizon (n 9). 13 Likhovski (n 10). 14 ibid. 15 ibid. 16 Declaration of Independence (n 4). 17 Law and Administration Ordinance, 5708–1948 (1948) 2 Official Gazette 7. A translation thereof into English is available at: www.knesset.gov.il/review/data/eng/law/kns0_govt-justice_eng.pdf and at: www.nevo. co.il/law_word/law150/LAWS%20OF%20THE%20STATE%20OF%20ISRAEL-1.pdf. 18 Gabizon (n 9).

Israel  267 looked to English common law whenever they encountered a lacuna, thereby continuing to import English common law into the Israeli legal system.19 This continued for more than 30 years, until 31 July 1980 and the enactment of the Foundations of Law, which marked the final abolishment of section 46 of the King’s Order-in-Council, and the true independence of the Israeli courts.20 The Foundations of Law further provides in section 2(b), the ‘the provision of subsection (a) shall not derogate from the law which was accepted in Israel before the coming into force of this Law’. According to the draft Bill of the Foundations of Law, the purpose of this section is to clarify that the abolishment of section 46 does not derogate from the applicability of the Ottoman law which was in force prior to the establishment of the State of Israel, including the Majalla. Also, this section confirms that previous Israeli case law, which was based on English law, shall also remain in force. On 20 June 1984, the Majalla was completely abolished as well upon the publication of the Law for the Abolishment of the Majalla,21 which also stated that this shall not derogate from the validity of any provision of the Israeli law which has adopted specific provisions of the Majalla.22

III.  The Development of the Israeli Trusts Law The development of the Israeli trust coincides with the development of the Israeli legal system as a whole, and it too began with the Ottoman Empire and the waqf.

A.  The Muslim Trust: The Waqf i.  Introduction: The Waqf A waqf – an endowment – translates to ‘forbidding’ or ‘freezing’. A waqf is generally defined as ‘estopping any person from owning the property with the benefit generally being dedicated to help the poor or for some other charitable purpose’, or as ‘bequeathing the property and dedicating the fruit’.23 These definitions imply that the ownership of the subject matter of the waqf is withdrawn from the person setting up the waqf (the waqif, who is the settlor). He or she loses

19 Draft Bill Foundations of Law, 1361 HH 307 (1979). 20 Foundations of Law 5740–1980, 978 LSI 163 (1980) §2(a). A translation thereof into English is available at: adalah.org/Public/files/Discriminatory-Laws-Database/English/01-Foundations-of-Law-Act-1980.pdf. 21 The Law for the Abolishment of the Majalla 5744–1984, 1119 SH 156 (1984). 22 According to the Draft Bill of the Law for the Abolishment of the Majalla 1681 HH 246 (1984), the law is not intended to abolish the custom as a legal source to the extent it exists in Israel as a valid legal source. In HCJ 849/00 Shatz v Minister of Justice 56(5) PD 571 (2002), the Supreme Court was faced with this question but refrained from delivering a clear decision on this issue, and until today significant doubt exists whether the custom has been adopted as a legal source in Israeli law through the Majalla, as evident in File No 1549-08-07 District Court (Center), Ma’ariv Modi’in Publication Ltd v Businessnet Ltd (17 October 2012). 23 M Abu Obied, ‘Waqf as a Form of Trust’ in A Kaplan and BR Houser (eds), Trusts in Prime Jurisdictions, 5th edn (Globe Law and Business 2020) 651–52.

268  Meytal Liberman his or her right over it and deposits it in God (Allah)’s trust, and neither that person nor his or her heirs, nor anybody else, can sell it, buy it, give it as a gift, inherit it, or carry out any transaction or disposition of title on it. Neither can anybody claim ownership of it. Once the offer of the waqf is made, it is irreversible, and cannot be broken, either by the waqif or by anybody else. Its proceeds and benefits are then enjoyed by the named beneficiaries set by the waqif in accordance with the terms and conditions of the waqf.24 A waqf is established by an express, clear and unconditional statement of the owner concerning the subject matter, for example, ‘I hereby declare that this land or property is waqf for the benefit of the named beneficiaries and then after for the sake of God’. The statement must be intended to be effective immediately and irreversible. No formal act of acceptance by the charity or beneficiaries is required. Upon the completion of such announcement, the waqf is established. A waqf may be registered in court; this is not a precondition for its validity, but a mere formality to preclude others from denying the existence of the waqf. A waqf can also be established by conduct, as where a person constructs a mosque with the intention of giving it away.25 Any property belonging to the waqif which is capable of being bequeathed in perpetuity can be subject to a waqf, although immovable assets are preferable.26 Any person or group can be a beneficiary, although named persons must be in existence at the time of establishing the waqf. Groups must be properly defined and everlasting, for example, the descendants of the waqif.27 The terms of the waqf must confirm with the spirit or the general rules of the waqf. Any term or condition that does not is void. The Qadi, the Muslim judge, may assume the powers of the waqif if necessary to protect the interests of the waqf.28 The Mutawalli (the trustee) is the managing figure of the waqf. However, that role is not identical to that of a common law trustee. The Mutawalli has all the powers of an owner over the waqf property, except the power to sell the waqf property or to otherwise dispose of the property in a way that leads to its termination. The Mutawalli must act in compliance with the terms of the waqf, provided they are in line with the spirit of the waqf under Sharia law, and he or she must also invest the waqf property and pay its expenses, even if not specifically required to do so under the terms of the waqf. In circumstances where there is a concern that objectives of the waqf may not be achieved, the affairs of the waqf may be brough before a Qadi.29

ii.  The Extent of the Use of the Waqf Prior to the establishment of the Ottoman Empire, the waqf had no special significance under Sharia law and only few assets were subject to awqaf. After the establishment of the Ottoman Empire, the sultans often endowed many assets, namely real properties, for various purposes, usually for religious purposes or charitable purposes.30

24 ibid

652. 652–53. 653–54. 27 ibid 654. 28 ibid 655. 29 ibid 655–56. 30 M Doukhan, Land Laws in the State of Israel, 2nd edn (Jerusalem Press 1953) 62; Abu Obied (n 23) 652. 25 ibid 26 ibid

Israel  269 In addition to the charitable waqf, there is the family waqf. However, a precondition for establishing a family waqf is an express intention to convert it to a charitable waqf at some stage. Otherwise, the waqf cannot be concluded or established. A family waqf is usually intended to achieve one or more of the following goals: (a) To provide certain regular income to certain individuals as a manner of support. (b) To provide protection from expropriation and confiscation. These were considerable risks at that time, since the penal law of the Ottoman Empire allowed the sultans and courts to expropriate or confiscate assets, and this power was often used. By endowing assets to a waqf, this punishment could be avoided. (c) The waqif can choose the beneficiaries and determine their shares in the assets, and thereby overcome and bypass the fixed Islamic law rules of inheritance, which cannot be deviated from.31

Due to these reasons, awqaf became more and more common throughout the Ottoman Empire, and almost 75 per cent of the real properties that were cultivated or bore buildings in Turkey were awqaf.32 During the Ottoman period, there was only one possible way to create an endowment: a waqf before the Sharia courts. Therefore, not only Muslims established awqaf, but also Christians and Jews.33 As of 1881, there was an evident increase in the use of the waqf by Jews in comparison to Muslims and Christians. Jews established up to 10 awqaf a year. This can be attributed to the natural growth of the Jewish community, the expansion of the Jewish settlement outside the city walls of Jerusalem, and the great numbers of immigrants, who came following the pogroms in Russia and Romania. All these created a necessity to build new public institutions and to expand the activity of the current ones. Between 1881 and 1889, Jews established 51 new awqaf, out of which 48 were for public purposes, as evident from the records of the Sharia Court of Jerusalem.34

iii.  The Implementation of the Waqf in the Legal System of the British Mandate According to section 52 of the King’s Order-in-Council,35 Muslim religious courts have exclusive jurisdiction over matters involving the creation of a waqf and the internal administration of a waqf created for the benefit of Muslims.36 Section 53 further provides that the Rabbinical courts of the Jewish community shall have ‘exclusive jurisdiction over any case as to the constitution or internal administration of a Wakf or religious endowment constituted before the Rabbinical Court according to Jewish Law’. In 1925, the Civil and Religious Courts (Jurisdiction) Ordinance was enacted.37 The accepted interpretation of section 3 thereof was that awqaf established by Jews up 31 Doukhan (n 30) 62; Abu Obied (n 23) 659. 32 Doukhan (n 30) 62–63. 33 S Ya’acobi, Judgment in Matters concerning a Jewish Endowment Established before the Sharia Court and Has Not Been Re-Established before the Rabbinical Court (Nevo 2021) 4. 34 A Shpitzen, ‘The Legal Entity and Jewish Endowments in Jerusalem of the End of the Nineteenth Century’ (1981) 19 Cathedra 73, 76. 35 King’s Order-in-Council (n 11). 36 Abu Obied (n 23) 658. 37 Civil and Religious Courts (Jurisdiction) Ordinance (1925) 18 Palestine Laws 134.

270  Meytal Liberman until 1922 and which had not been converted into charitable trusts fell under the jurisdiction of the Rabbinical courts.38 During British rule, there was a decrease in the establishment of new awqaf, especially of charitable awqaf. This trend may be explained by the development of the modern country, which considered itself responsible for the wellbeing of the individuals in it and for providing public services to the community.39 In addition, during this time, changes occurred in the characteristics of the waqifs, and the privileged families who constituted a significant portion of the waqifs during the Ottoman period were replaced by medium and small families of medium and medium-low social status (such as merchants and businessmen). Only a fifth of the waqifs were from privileged families.40 Families continued to use the waqf as an alternative to a will under Sharia law. The waqf enabled childless waqifs to circumvent Muslim inheritance law and avoid bequeathing assets to remote family members or the treasury of state. The waqf was also used to circumvent Muslim inheritance law and grant female heirs the same rights in the estate as the male heirs.41 Despite the practical use of the waqf for families, is it considered, first and foremost, as an act of charity which guarantees the believer a reward in the afterlife. According to this belief, the more deprived people there are who are taken care of by the waqf, the greater the reward. The waqf also served as a means to commemorate the waqif’s name, to avoid division of his or her assets, and to maintain the assets as a sort of a living gravestone for him or her and their work.42 In 1924, the British Mandate enacted the Charitable Trusts Ordinance.43 This ordinance enabled an alternative route to establishment of a charitable trust – a civil route, which is not subject to the religious limitations of the waqf. In addition, British inheritance legislation allowed Muslims to bequeath freely their estate under a civil law. These two mechanisms were expected to set aside the waqf, yet the Muslims did not find them appealing. The traditional cultural inhibitions, as well as the political circumstances of the time, were strong enough to prevent the Muslims from using the equivalent civil instruments to those existing under Sharia law.44 As evident from the above, the decrease in the establishment of new awqaf, the secular approach of the British and the modern nature of the British rule all greatly contributed to the adaptation of the trust. They ranged from religious waqf for charitable

38 However, the Supreme court in the case of Podehortzer of 1996 (Disciplinary Court 5257/94 Podehortzer v Koperstock (19 September 1996)), held in majority opinion that the authority granted to the religious courts under said section 3 exceeds the authority granted in accordance with the King’s Order-in-Council, and it is therefore void. In other judgments of the Supreme Court in the matter since then, the matter was nonetheless left open for discussion, and effectively today there is no obligating case law of the Supreme Court which determines the status of the rulings of the Rabbinical Court with respect to awqaf established by Jews before the Sharia court in the period preceding the King’s Order-in-Council (Ya’acobi (n 33)). 39 I Riter, ‘Waqf in Changing Circumstances: Financial Management and the Political Role of the Waqf in Mandatory Jerusalem’ in A Bareli and N Karlinsky, Economy and Society in Mandatory Palestine, 1918–1948 (Kiryat Sde Boker 2003) 354. 40 ibid 355. 41 ibid. 42 ibid 356. 43 Charitable Trusts Ordinance (1924) 14 Palestine Laws 107. 44 Riter (n 39) 356.

Israel  271 purposes, to private family waqf and civil charitable trusts. Although the civil charitable trust was not widely used in the beginning, its legislation should nonetheless be considered as a milestone in the adaptation journey of the Israeli trust.

iv. The Waqf under Israeli Law As mentioned above, the law that was in force prior to the establishment of the State of Israel remained in force upon its establishment, and in fact, Sharia courts continue to operate in Israel until today under section 52 of the King’s Order-in-Council.45 Furthermore, in a Supreme Court ruling of 1971,46 it was reaffirmed that the Muslim courts have exclusive jurisdiction over all matters concerning the establishment of awqaf for the benefit of Muslims and their internal management, including the appointment of a Mutawalli. As to awqaf of Jews, section 53 of the King’s Order-in-Council continues to apply as well, and these are under the exclusive jurisdiction of the Rabbinical courts.47 In the 1990s, claims began to arise against the conduct of the Sharia courts when dealing with awqaf. In an attempt to adapt the waqf to better meet contemporary needs, reform led by the Qadi Achmad Natur was initiated, which aimed to ratify the sanctity of the waqf by limiting the powers of the Qadi and increasing the supervision of the Sharia courts over awqaf.48 a. The Waqf and the Regulation of Abandoned Properties Subsequent to the War of Independence The Absentees’ Property Law49 manifests yet another adaptation of the waqf to the changing times, and this time in the context of the aftermath of a war. The Absentees’ Property Law enabled the State of Israel, via the Custodian of Absentees’ Property (the Custodian), to take ownership of any asset abandoned by its owner, who fled to enemy territory during Israel’s War of Independence. This law had, and still has, significant impact on awqaf. In the case of Bulus, 1955,50 a beneficiary of a waqf applied to the court to oblige the Custodian, who had taken over the property since the Mutawalli became absent, to allow him to continue using the property. Effectively this was a claim to instruct the Custodian how to manage the waqf property. The Supreme Court held that any such action required the consent of the Mutawalli, and the authority to appoint a Mutawalli remained with the Sharia court. Therefore it did not grant the requested relief.

45 I Zachalka, The Sharia Courts between Adjudication and Identity (Israel Bar Publishing House 2009); King’s Order-in-Council (n 11). 46 CA 256/71 Samar v El-Muati 26(1) PD 505, 510 (1972). 47 This is also evident today in the formal governmental website of the Registration and Supervision of Religious Endowments Unit, which operates under the Rabbinical Courts Management: ‘Registration and Supervision of Religious Endowments Unit’ (Gov.il), available at: www.gov.il/he/departments/units/ hekdeshot. 48 Zachalka (n 45) 51. 49 Absentees’ Property Law 5710–1950, 37 SH 86 (1950). 50 HCJ 69/55 Bulus v Minister of Development et al 10 PD 673 (1956).

272  Meytal Liberman The Bulus case emphasised at that time the uncertainty that existed with respect to the application of the Absentees’ Property Law on awqaf. As a result, Amendment No 3 of the Absentees’ Property Law was enacted in 1964.51 It provided that the ownership of an abandoned property which constituted an endowment – a waqf – shall be granted to the Custodian without any limitation or restriction set by any law, or by any document concerning the endowment, whether the absentee is the owner of the property, or has the right of possession of the property, or the right to manage the endowment, or is a beneficiary of the endowment.52 As a result of the enactment of the Absentees’ Property Law in 1950, the management of absentees’ awqaf was taken out of Muslim hands and transferred to the institutions of the State of Israel, and this was further reaffirmed by the Amendment. Unsurprisingly, this was not received well by the Muslim community in Israel, and in 1963 the Muslim Endowments (Muslim Waqf) Draft Bill was proposed.53 According to its explanatory notes, the proposed law was intended to fulfil the ‘rightful claim’ of Muslims and to return to them the endowments (waqf) properties in order to ensure that the income and proceeds of these endowments were used for Muslim religious worship, the maintenance of religious institutions, cemeteries, as well as for charitable, educational and welfare purposes. Since this draft bill, seven more similar draft bills have been published,54 the most recent in 2003. To date, none of these bills have been accepted into Israeli legislation. Information concerning the properties under the management of the Custodian is unavailable to the public. Nonetheless, there have been attempts to oblige the Custodian to publish the information, and a petition was filed at the District Court in Jerusalem to order a Custodian to disclose the number of properties under its management. On 27 June 2021, the Court denied the petition on the ground that the disclosure of the requested information in the proposed manner may impair the management of the state’s foreign affairs and requires unreasonable allocation of resources.55 An appeal has been filed against this decision and legal proceedings are still ongoing in the Supreme Court.56

51 Absentees’ Property Law (Amendment No 3) (Release of Endowments Properties and the Use thereof) 5725–1964, 445 SH 58 (1965) (The Amendment). 52 ibid § 4A. In §§ 25E and 29G it is further provided that the Custodian must use the waqf properties still in its possession for the charitable purposes stipulated in the Amendment, which include support for the poor, education, health and religion, and not necessarily for those stipulated under the terms of the waqf. 53 Muslim Endowments (Muslim Waqf) Draft Bill in DK (1964) 1311 (HH) 1964 (Isr). 54 Muslim Endowments (Muslim Waqf) Draft Bill (1983); Muslim Endowments (Muslim Waqf) Draft Bill (1985); Muslim Endowments (Muslim Waqf) Draft Bill (1989); Muslim Endowments (Muslim Waqf) Draft Bill (1991); Muslim Endowments (Muslim Waqf) Draft Bill (1992); Muslim Endowments (Muslim Waqf) Draft Bill (1999); Muslim Endowments (Muslim Waqf) Draft Bill (2003). All of these draft bills are available at: main.knesset.gov.il/Activity/Legislation/Laws/Pages/LawSuggestionsSearch.aspx?t=lawsuggestionssearch&st =allsuggestions&wn=%d7%95%d7%95%d7%a7%d7%a3&ki=-1&sb=LatestSessionDate&so=D. 55 Administrative Petition (Jerusalem) 14498-08-20 Cohen v the Supervisor on the Application of the Freedom of Information Law in the Ministry of Finance (27 June 2021); Nir Hasson, ‘The Custodian of Absentees’ Property Refuses to Disclose the Scope of the Assets due to “Fear of Damages to Foreign Affairs”’ Ha’aretz (1 November 2021), available at: www.haaretz.co.il/news/local/.premium-1.10342271. 56 Administrative Petition Appeal 6616/21 Cohen v Supervisor on the Application of the Freedom of Information Law in the Ministry of Finance (13 October 2021).

Israel  273

B.  The British Charitable Trust In 1924, the British Mandate enacted the Charitable Trusts Ordinance. As previously mentioned, the purpose of the Charitable Trusts Ordinance was to adapt the religious charitable trust and provide a secular alternative, as stated explicitly in the preamble of the Ordinance. Furthermore, a formal notice concerning the enactment of the Charitable Trusts Ordinance was issued by the administration of the British Mandate and published in the daily newspaper Ha’aretz on 3 June 1924.57 The notice stated: There is no legal instrument currently in the law in force in Palestine which enables the use of assets for charitable purposes, other than a waqf before the religious Muslim court, or before the non-Muslim religious courts. Philanthropists often applied with a request to establish charitable institutions in the same manner acceptable in Europe. The proposed Ordinance shall enable just that: it stipulates provisions for the creation of trusts in accordance with the civil law and under the supervision of the civil courts. It does not derogate from the freedom of those desiring to establish a charitable trust by establishing a waqf or any other type of endowment under the religious laws. The Ordinance merely provides an alternative for those persons and institutions. … The Ordinance stipulates provisions for the establishment of charitable trusts only, and not family trusts, such as those established under the laws of various European countries, or as awqaf. At this moment, there is no intention to implement in the Palestine law such trusts, but only for charitable purposes. … It is explicitly stated in the Ordinance that it is not derogating from assets endowed for charitable purposes under a waqf or religious endowment made before a religious court.58

The notice provides a unique insight into the circumstances and objectives behind the enactment of the Charitable Trusts Ordinance. It can accordingly be inferred that British rule sought to adapt the current charitable religious trust to common European standards.

i.  Creation of a Charitable Trust under the Charitable Trusts Ordinance Section 2 of the Charitable Trusts Ordinance of 1924 defines a trust as a situation where the owner of a property accepts the obligation to use the property and the income and proceeds thereof exclusively for charitable purposes. Such purposes are defined as any purpose: [F]or the benefit of the public or any section of the public within or without Palestine of any of the following categories: (a) For the relief of poverty. (b) For the advancement of education or knowledge.



57 ‘Government’s 58 This

Notice (Formal for the Press)’ Ha’aretz (issue 1460, Tel Aviv, 3 June 1924) 4. is a general translation from Hebrew.

274  Meytal Liberman (c) For the advancement of Religion or the maintenance of religious rites or practices. (d) For any other purpose beneficial or of interest to mankind not falling within the preceding categories.

According to sections 3, 4 and 37 of the Charitable Trusts Ordinance, a charitable trust may be created in several ways: 1.

By a last will and testament of the ‘author of the trust’ – the settlor, or of the trustee. The will must indicate with reasonable certainty the author’s intention to create a trust, the purpose of the trust and the trust property. 2. By a non-testamentary written instrument signed by the author of the trust or the trustee. Such instrument must indicate with reasonable certainty the author’s intention to create a trust, the purpose of the trust and the trust property. The property should then be transferred to the trustee unless the author of the trust is the trustee himself. If the trust is created with respect to immovable property, the instrument must be notarially executed. 3. With respect to movable property, by the delivery of the property to the trustee, without the execution of a written instrument, provided the author of the trust indicated with reasonable certainty an intention on his part to create a trust, the purpose of the trust and the trust property. 4. By a declaration of the court, provided sufficient evidence has been presented. In 1925, the Civil and Religious Courts (Jurisdiction) Ordinance59 was enacted. Section 2 allowed any person who established a waqf before the Sharia court during the Ottoman period and until the entering into force of the King’s Order-in-Council, to apply to a civil court and convert the religious endowment to a charitable trust governed by the Charitable Trusts Ordinance. This was allowed for a period of 18 months. The enactment of this Ordinance further emphasised British efforts to adapt the religious charitable trust and convert it into the new civil charitable trust. Nevertheless, most religious endowments were not converted into civil charitable trusts, and with respect thereof, section 3(b) of the Civil and Religious Courts (Jurisdiction) Ordinance provides that the religious court of the waqif’s religion will have jurisdiction. If the waqif does not belong to any religion, or if there is no designated court for that religion, then the civil court shall have jurisdiction, and it shall adjudicate in accordance with general principles of justice. Accordingly, since the enactment of the Civil and Religious Courts (Jurisdiction) Ordinance, the prevailing view (until the case of Podehortzer)60 has been that the Rabbinical courts had jurisdiction over awqaf established by Jews before the Sharia courts up until 1922, which had not been converted into charitable trusts.61

ii.  The British Charitable Trust under Israeli Law The Charitable Trusts Ordinance, as well as other mandatory legislation in force prior to the establishment of the State of Israel, has been imported into the Israeli legal system through section 11 of the Law and Administration Ordinance.62

59 Civil

and Religious Courts (Jurisdiction) Ordinance (n 37). above text to fn 38. (n 33) 1. 62 See above section II.C. 60 See

61 Ya’acobi

Israel  275 In the case of The Society of the Ramat Hasharon-Herzliya Yeshiva,63 the Supreme Court implemented the Charitable Trusts Ordinance with respect to an agreement signed in 1957, shortly after the establishment of the State of Israel. In this case, the spouses undertook in that agreement to transfer by way of gift and for no consideration a real property to the Yeshiva (an educational institution, more specifically an orthodox Jewish college or seminary). The gift was made in memory of family members of the spouses who died in the Holocaust. The Yeshiva had undertaken not to sell the property, to plant groves and use the proceeds to maintain the Yeshiva, and to build a religious structure which would serve as a memorial monument for those who perished. The structure had not been built and the Yeshiva sold the property to a third party. The Supreme Court held that the Charitable Trusts Ordinance had been in force at the time of signing the agreement, and accordingly the real property had been held in trust for a charitable purpose, as defined in the Ordinance. Furthermore, the agreement imposed obligations on the Yeshiva which oblige the Yeshiva to use the property and the income exclusively for the charitable purposes. Although the trust deed had not been notarised as required by the Charitable Trusts Ordinance, the Court could nonetheless declare the existence of the trust, although such declaration does not create the trust, but rather acknowledges its existence formally. In these circumstances, the District Court declared the existence of a charitable trust, yet the Supreme Court held that such declaration should not have been made, for two reasons: such declaration had not been applied for by either of the parties – separate proceedings were required; and the term which required that the property was not to be sold indefinitely contradicted public policy. In 1974, the Charitable Trusts Regulations were published.64 These regulations specifically define the content of the trust deed, its manner of execution, how the trust properties are to be managed, and impose reporting obligations on the trustee towards the Supervisor of Trusts or the Public Trustee.

C.  Israeli Trusts Law i.  The Legal Environment Prior to the Enactment of the Trust Law (1948–79) According to the draft Bill of Trust Law,65 the type of trust commonly known is first and foremost the charitable trust under the Charitable Ordinance 1924. The purpose of the Trust Law is to introduce into the Israeli legal system the private trust, which is a non-charitable trust. The bill further states that the proposed law aims to implement the private trust in Israel for family, commercial and other purposes, as well as to provide a new legal arrangement for charitable trusts. Not all cases have been consistently decided. In the case of Eliash v Director of Lands,66 the Supreme Court held that the private trust was not part of the law of Palestine, and



63 CA

5533/98 The Society of the Ramat Hasharon-Herzliya Yeshiva v Segal 54(4) PD 538 (2000). Trusts Regulations 3135 KT 690 (1974). Law Draft Bill 1146 HH 23 (1974). 66 HC 77/31 Mordchai Eliash v Director of Lands, Jerusalem 1 PLR 735 (1932). 64 Charitable 65 Trust

276  Meytal Liberman in the case of Muberman,67 the Supreme Court juxtaposed the relationship between an executor and a beneficiary under a will to that of a trustee and a beneficiary of a trust yet stated that the English trusts law does not apply. One the other hand, in the case of Kadar,68 the Supreme Court stated that the issue of the private trust should be reviewed again, and provided several reservations with respect to the Supreme Court’s view in the case of Eliash v Director of Lands: a. It was the personal view of only one of the three judges in the panel. b. The court did not take into consideration section 46 of the King’s Order-in-Council of 1922, which enriched the legal system in Palestine with the English common law. c. The matter concerned real property, and specific considerations regarding the application of trusts law may have applied. In the case of Howard v Melamed,69 the Supreme Court held that a fiduciary relationship between two parties creates, in the circumstances described, a trust under law, and in the case of Israeli v Gandler,70 the District Court held that a private trust can be created under an agreement, either implied or explicit, or under law. In the case of Tzimbler v Turgeman,71 the court recognised the ‘Israeli-made Constructive Trust’ on the basis of common law principles. In this case, spouses purchased an apartment in 1963, but before the rights were registered under their name, the seller died, leaving the apartment to his widow, who refused to register the apartment under the name of the spouses. The Supreme Court held that the spouses had a beneficial right in the apartment, which is a semi-proprietary right, recognised under Israeli law; therefore a trust relation existed between them and the widow held the title of the apartment for the benefit of the spouses as beneficiaries. Furthermore, it can be argued that when the Israeli legal system imported the English common law through the Foundations of Law,72 it also imported the private common law trust, as it had been part of English jurisprudence since the fifteenth century.73 But Israeli case law was again inconsistent in this matter. Furthermore, the legal system in Palestine during the British Mandate was different from that in Britain,74 and it was even mentioned specifically in the notice of the British administration concerning the enactment of the Charitable Trusts Ordinance, that there is no intention to implement, in Palestine law, family trusts such as those established under the laws of various European countries. Therefore, it can be argued that the law that was in force prior to the establishment of the State of Israel and imported into the Israeli legal system via the Foundations of Law did not include the common law private trust.

67 CA 604/77 Muberman v Segal 32(3) PD 085 (1978). 68 CA 307/64 Loans Company Ltd in dissolution v Kadar Earthenware Ltd in dissolution et al 18(4) PD 483(1964) 491. 69 CA 400/67 Howard v Melamed 22(1) PD 100 (1968). 70 CivC (DC Hi) 843/75 Israeli v Gandler PM 5739(2) 045 (1978) (Isr.). 71 CA 1559/99 Tzimbler v Turgeman 57(5) PD 49 (1993). 72 See above section II.C. 73 AW Scott, ‘The Importance of the Trust’ (1966) 39 University of Colorado Law Review 177. 74 See above section II.B.

Israel  277 Regardless of whether the common law private trust has been imported into Israeli legislation, a family waqf could nonetheless be created before the Sharia court, as the waqf was a valid trust-like device before the establishment of the State of Israel and subsequently remained so as well.75 With respect to the creation of charitable trusts prior to the enactment of the Trust Law, it was possible, under the Charitable Trusts Ordinance or alternatively, as a waqf.

ii.  The Enactment of the Trust Law (1979) The enactment of the Trust Law in 1979 can be considered as a milestone in the adaptation process of the Israeli trust.76 As detailed below, the Trust Law formally introduced the private trust into Israeli legislation and replaced the charitable trust under the Charitable Trusts Ordinance with the new public endowment. Section 1 of the Trust Law defines a trust as ‘a relationship to property by virtue of which a trustee is bound to hold the same or to act in respect thereof in the interest of a beneficiary or for some other purpose’. Evidently, this definition is broad, and it applies to any relationship which is a trust relationship by its nature. Section 2 further provides that ‘a trust is created by Law, by a contract with the trustee, or by an instrument of endowment’. Until the enactment of the Trust Law, the term ‘endowment’ or ‘hekdesh’ commonly referred to a trust created for charitable purposes; since its enactment, the term now refers specifically to a trust created in accordance with the procedure stipulated in sections 17 or 26 of the Trust Law, as detailed below. a.  A Trust Created by Law A trust that is created in accordance with the Law is a relationship that complies with the definition stipulated in section 1, that its terms and conditions are determined in legislation, such as the modus operandi of an estate executor,77 or a company liquidator.78 Section 42 of the Trust Law provides that the provisions of the Law shall apply where no other Israeli law contains special provisions on the matter in question. It therefore follows that in the circumstances of a trust relationship subject to a specific law, the Law can be viewed as a complementary mechanism only. b.  A Trust Created under a Contract A trust created by a contract is one governed by the Israeli contract laws79 and requires an agreement between the settlor and the trustee. Under this framework, a trust contract can be viewed as being established for the benefit of a third party in accordance with

75 See above section III.A.iv. 76 Trust Law 5739–1979, 33 LSI 41 (1966–67) § 1. 77 Succession Law 5725–1965, 19 SH 215 (1964–65) §§ 97–106. 78 Insolvency and Economic Rehabilitation Law 5778–2018, 2708 SH 310 (2018). 79 Contracts (General Part) Law 5733–1973, 27 SH 117 (1972–73) (Contracts Law); Contracts (Remedies for Breach of Contract) Law 5731–1970, 25 SH 11 (1970–71), and relevant case law relating thereto.

278  Meytal Liberman section 34 of the Contracts Law, thereby granting the beneficiary a right to enforce the trust contract. Section 23 of the Contracts Law provides that a contract may be made orally, in writing or in some other form, unless a form is a condition of validity by virtue of law or agreement between the parties. Since the Law does not require the fulfilment of any form, it applies to any trust relationship that complies with the definition set forth in section 1. It therefore follows that to determine whether a contract can be regarded as a trust contract, the nature of the relationship between the parties should be examined. This was affirmed in the case of Arnon v Pieutrekovsky: A transaction shall be regarded as a trust transaction subject to the provisions of the Trust Law if the conditions of the definition stipulated in the Law have been materially fulfilled. The applicability of the definition of a trust on a transaction is not subject to the mere wishes of the parties, and despite using the phrase ‘trust’ in the transaction between them, the transaction shall not be a trust transaction and subject to the provisions of the law if its contents do not go in line with the definition of the trust in the Law.80

As mentioned above, section 23 of the Contracts Law provides that a contract may be entered orally, ie, without a written document. Therefore, a trust relationship may be created by the mere behaviour of the parties. This is commonly known as an ‘implied trust’. Justice Shamgar addressed this issue in the case of Wallas v Gat, stating the following: The Implied Trust was created in the Common Law to deal with circumstances where the behaviour of the parties and their actions imply that they intended to create a trust, but for some reason, this intention was not explicitly expressed … It is implied from their relationship and behaviour, that although the asset is registered under the name of one of them, the beneficial ownership belongs to the other.81

c.  A Trust Created by Deed of Endowment Section 17 of the Law deals with the creation of an endowment, and it states as follows: a.

The dedication of any property in favour of a beneficiary or for some other purpose (such dedication hereinafter referred to as an ‘endowment’) requires a written document (in this Law referred to as an ‘instrument of endowment’) in which the creator of the endowment expresses his intention to create an endowment and determines its objects, property and conditions. The written document shall be one of the following: 1. 2. 3.

A writing signed by the creator of the endowment before a notary;82 A will of the creator of the endowment, other than an oral will;83 A direction to make a payment for the purposes of section 147 of the Succession Law, 1965.84

80 OM (TA) 548/06 Arnon v Pieutrekovsky (1 March 2009). 81 CA 3829/91 Wallas v Gat 48(1) PD 801 (1994) 810. 82 Commonly known as an inter vivos trust. 83 Commonly known as a testamentary trust. The Succession Law (n 77), provides that a written will can be made before two witnesses, the court, or a notary, or in the handwriting of the testator. 84 A payment instruction in accordance with § 147 of the Succession Law provides that payments made to beneficiaries under an insurance policy are not included in one’s estate. Due to this reason, specific

Israel  279 b. c.

The endowment shall commence upon the transfer of control of the endowment property to the trustee. Where any property is de facto an endowment but no instrument of endowment exists in respect thereof, the court may declare the existence of an endowment and may determine its objects, property, conditions, and date of commencement.

In the case of Weinstein v Fox,85 the testator bequeathed his entire estate to his children, who were resident in the United States, on the condition that they immigrate to Israel, and that all the assets of the estate and the income derived therefrom remain in Israel. Under these circumstances, the executor of the estate applied to the court to release him from his position as executor of the estate, but simultaneously appoint him as trustee with respect to the assets under his control for the period until the children of the deceased immigrated to Israel. Ultimately, the Supreme Court of Israel approved his appointment as trustee and declared the existence of an endowment in accordance with section 17(c). d.  The Public Endowment According to sections 25 and 26 of the Trust Law, a trustee of a trust the object or one of the objects of which is the furtherance of a public purpose – a public endowment – shall, within three months from the date on which he becomes a trustee, notify the Registrar of Endowments of the existence of the public endowment. Such notification must be accompanied by a copy of the instrument of endowment and must include information concerning the name and address of the creator, the date of commencement of the endowment, the objects of the endowment, the property of the endowment, and the name and address of the trustees. There is no definition of a ‘public purpose’ in the Trust Law. With the aim of assisting the public with the creation and operation of public endowments, in 2017 the Registrar of Endowments published a document titled ‘Administrative Instructions on the Conduct of Charitable Endowments under the Trust Law’.86 Inter alia, the Instructions address this issue and suggest looking into other legislation in order to have a better indication of what purposes should be considered as public. Thus, the Instructions suggest looking to Schedule Two of the Companies Law,87 which details the public purposes a company may adopt in order to qualify as a ‘Public Benefit Company’.88 Schedule Two sets out the following public purposes: 1. 2.

Quality of the environment, protection of the environment or knowledge of nature and of the environment. Health or lifesaving.

instructions are usually given to the insurance company regarding the beneficiaries of the funds in case the main insured person dies. § 17(a)(3) of the Trust Law effectively allows the insured person to instruct the insurance company to a trustee under certain conditions and for the benefit of beneficiaries or some other purpose. To the best of the author’s knowledge, this type of endowment is rarely used. 85 CA 5717/95 Weinstein v Fox 54(5) PD 792 (2000). 86 The Registrar of Public Endowments, ‘Administrative Instructions on the Conduct of Charitable Endowments under the Trust Law’ (The Registrar of Public Endowments, October 2017), available at: www. gov.il/BlobFolder/policy/conducting_dedications/he/ConductingDedications.pdf (The Instructions). 87 Companies Law 5759–1999, 1711 SH 189 (1999). 88 Companies Law (Amendment No 6) 5766–2007, 2098 SH 332 (2007) § 345A.

280  Meytal Liberman 3. Religion, tradition, or commemoration. 4. Protection of animals and concern for their welfare. 5. Human rights. 6. Education, vocational training, culture and art. 7. Science, research or higher education. 8. Sport. 9. Immigration, immigrant absorption or settlement. 10. Charity or welfare. 11. Community welfare or community, social or national activity. 12. The rule of Law, government or public administration. 13. The establishment of funds or organisations for the encouragement or support of bodies active for one or more of the purposes enumerated in this Schedule. The Instructions further clarify that commemoration by itself is not generally regarded as a public purpose, unless the commemoration is of special public importance, such as when public figures are concerned. Another typical characteristic of a public purpose according to the Instructions is that it benefits an undefined group of beneficiaries, ie, the purpose does not serve specific persons whose identity is predetermined. The group of beneficiaries can be determined by a common characteristic, such as people in need, the sick, the residents of a certain city, etc. However, when the purpose serves a limited group of people whose identity is known, the purpose shall not be considered as public, even if its nature can be considered as public, such as a trust for the benefit of the sick family members of the settlor. Given the broad definition of the term ‘public purpose’, and also given that under section 26 a trust can be classified as a public trust even if only one of its purposes is public, a trust may well fall within the definition of a public trust and be subject to registration accordingly. A public endowment is not required to meet the conditions of section 17 of the Trust Law, as evident from the wording of section 26 of the Trust Law. Therefore, a public endowment may be created not only under section 17, but also under a contract, as long as one of its objectives is the furtherance of a public purpose. Hand in hand with the enactment of the provisions dealing with the public endowment, section 45 of the Trust Law formally repealed the Charitable Trusts Ordinance. However, section 44(a) of the Trust Law provides that an endowment which immediately before the coming into form of this Law existed under the Charitable Trusts Ordinance shall, from the coming into force of this Law, be regarded as a public endowment and be governed by the provisions of this Law.

It should also be noted that the abolishment of the Charitable Trusts Ordinance did not derogate from the possibility to create a religious trust, ie, a waqf or a Jewish endowment before the respective religious court.89 According to the annual report of the Registrar of Endowments of 2021,90 a total of 3,334 public endowments have been registered until 2021, whose assets are valued at 89 See above section III.A and below section III.D. 90 Registrar of Public Endowments, ‘Information Booklet of the Registrar of Public Endowments for the Year of 2021: Off the Desk of the Registrar of Endowments’ (Gov.il) 10.

Israel  281 a total of NIS6.568 billion, including 1,258 real properties. During 2021, 115 new public endowments have been registered, 64 terminated and 2,557 financial reports reviewed.

iii.  Use of Underlying Companies The trust, including the endowment, is not recognised as a legal entity in Israel,91 and therefore a common practice of trustees is to hold the assets of a trust via an underlying company incorporated in accordance with the provisions of the Income Tax Ordinance92 as a ‘see-through’ entity for tax purposes, thereby creating a designated legal entity to hold the trust assets on behalf of the trustee.

iv.  Recognition of Foreign Trusts and Trust-Like Structures in Israel Another adaptation of the Israeli trust concerns foreign trust structures. Different foreign wealth management or legacy structures can be found in operation in Israel. These structures include not only common law trusts, but also foundations, establishments and settlements made under the laws of other jurisdictions. Evidence on the operation of foreign trust-like entities in Israel can be found in the records of the Israeli Registrar of Companies as foreign corporations.93 Furthermore, the Israeli Income Tax Ordinance was amended in 2005 to include a chapter on trusts, which was later amended again in 2013.94 Section 75C of the Income Tax Ordinance defines a trust as an arrangement, according to which a trustee holds the trust’s assets in favour of a beneficiary, which was established in Israel or outside Israel, whether it is defined under the law applicable to it as a trust or whether defined otherwise. The Ordinance further provides that a trustee is a person that assets or income of assets were attributed to him, or that he holds assets in trust … For this purpose … a legal entity listed in the First Schedule A shall be regarded as trustee; the Minister of Finance may, by order, add corporate bodies to First Schedule A.

The legal entities listed in said First Schedule A are the following: 1. A foundation under the laws of Liechtenstein, Panama, the Bahamas and the Netherlands Antilles (Curaçao).

91 PCA 46/94 Zacks-Abramov v Land Registry Officer 50(2) PD 202 (1996); Public Endowments Law Draft Bill 2012, (Tazkrim.gov.il, 8 August 2012), available at: moj.my.salesforce.com/sfc/dist/version/download/? oid=00D1t000000uX5h&ids=0683Y000009E2vb&d=%2Fa%2F3Y00000096Y7%2FesoFjTLZuvPwygHzzarS g3mOadw5efSKY8yk8yLJjEE&asPdf=false. Proposed to regulate public trusts under a designated law and address issues that are currently not addressed by the Trust Law. It is therefore suggested in the draft bill, inter alia, to recognise the public endowment as a legal entity. 92 Income Tax Ordinance (New Version) 5721–1961, 6 DMI 120 (1961). 93 A search conducted in the database of the Registrar of Companies on 28 February 2022, shows that there are 27 entities whose name includes the word ‘Establishment’ written in Hebrew letters, out of which 19 are foreign entities. 94 Law for Amending the Income Tax Ordinance (No 147) 2005–5765, 2023 SH 781 (2005); Law for Changing National Priorities (Legislative Amendments for Attaining Budgetary Objectives for the Years 2013 and 2014) 5773–2013, Chapter G: Taxes, Mark A: Income Tax, Amendment of Income Tax Ordinance (No 197) 2405 SH143 (2005).

282  Meytal Liberman 2. 3.

An establishment under the laws of Liechtenstein. A registered trust enterprise (trust reg) under the laws of Liechtenstein.

The fact that foreign trusts are recognised under Israeli law is demonstrated forcefully in the case of Lnl Reg Trust v Levine,95 where a trust entity litigated in the Israeli District Court. In this case, the trust entity, Lnl Reg Trust was established in 1965 for holding assets and the administration thereof for a family. A dispute arose with respect to validity of a certain document executed by the founder, where he left instructions to the trustee, since it was not probated as a will. The importance of this case lies in the fact that the legal capacity of a Liechtenstein trust reg entity was effectively recognised by the Israeli District Court since it was able to file a claim and litigate in Israel. Furthermore, the District Court reviewed the bylaws of the trust entity and other legal arrangements within the trust and determined the rights of the beneficiaries accordingly. In my view, recognition of foreign trusts under Israeli law as trusts should be considered as further adaptation of the core concept of the Israeli trust, which has been adapted to also include foreign trust structures.

D.  The Jewish Endowment Unlike the trusts discussed above, the Jewish endowment is not an incarnation of an earlier trust, but rather a certain religious trust arrangement that has existed side by side with other trusts throughout history. In this respect, juxtaposing the Jewish endowment (which is based on the Jewish tradition) with the waqf can provide insight as to how the trust concept can be adapted by religion. The origin of the Jewish endowment (hekdesh) can be found in the endowment of assets for the construction of the Tabernacle, which had not been funded by taxes imposed on the Jewish people, but rather by donations made out of goodwill and in accordance with each person’s ability and generosity. This endowment, which was created at first for the construction of the Tabernacle, and afterwards for the maintenance of the Temple, was a common practice during the existence of both the First and Second Temples,96 as of 1000 BC and until 70 AD.97 In the years following the destruction of the Temple, the endowment for God was replaced with the donation to charity. According to the Jewish tradition, the act of charity is not that of religious grace, but rather an act compliant with the principles of morality and dignity, which lie at the foundation of any civilised human society. Relations amongst human beings in any society should be based on moral considerations, including the value of helping others, and especially those who are socially and financially underprivileged or weak, and are therefore in need of assistance and support.98

95 File No 1327/96 District Court (TA) Lnl Reg Trust v Levine (2 January 2008). 96 A Kaplan, ‘To the Public Endowment in Israel’ (2004) 158 Parashat Hashavua Magazine 1, available at: www.gov.il/BlobFolder/dynamiccollectorresultitem/158w/he/weekly-parsha-issues_158.doc. 97 Matiya Kam, ‘Periods in the History of the Israeli People’ (Lib.cet.ac.il), available at: lib.cet.ac.il/pages/ item.asp?item=5812. 98 Kaplan (n 96) 2.

Israel  283 The charitable commandment to donate to the poor may be executed in two manners: donating funds, food, or clothing, directly to the person in need, or alternatively, through charity organisations. The heads of the communities would appoint charitable managers, whose purpose was to collect funds from the members of the community for a ‘Charitable Treasury’, or food and clothing for the meal centres (Soup Kitchens).99 Given the multiplicity of the Jewish charity organisations that were in use by the Jewish communities in the diaspora, it was only natural that this phenomenon would continue, and the Jewish endowment is, in fact, a continuation of these charity organisations. Jewish endowments can be divided into two categories: (a) Rabbinical endowments: created before the Rabbinical Courts, and prior to the establishment of the State of Israel, before Chief Rabbinate Council of Palestine. (b) Charitable trusts: created under the Charitable Trusts Ordinance or the Trust Law.100 As mentioned above, Jewish law as a whole has never been formally adopted into the Israeli legal system.101 Nonetheless, certain matters are subject to the exclusive jurisdiction of the Rabbinical Court and Jewish Law.102 One such matter is the Jewish endowment, which under section 53 of the King’s Order-in-Council, is subject to the exclusive jurisdiction of the Rabbinical Court. This has also been reaffirmed by the Supreme Court in the case of the Sephardic Community Endowment,103 where it was held that the authority to declare the existence of an endowment and to appoint trustees to such endowment lies with the District Court in accordance with section 37 of the Trust Law. However, section 53(3) of the King’s Order-in-Council creates an exception, and in accordance with section 41(a) of the Trust Law, which provides that ‘a religious court may direct that the provisions of this Law relating to the creation and internal management of an endowment shall not apply to a religious endowment established before it under religious law’, where an endowment created before the Rabbinical Court is concerned, the exclusive jurisdiction over any matter relating to its creation or internal management lies with the Rabbinical Court. Unlike the other endowments discussed in this chapter, a Jewish endowment, which is subject to Jewish law, does not require the endowments to have certain purposes; it merely needs to be created before the Rabbinical court. An endowment with religious purposes shall not be considered as a religious endowment if not created before a religious court.104 99 ibid. 100 ibid. 101 See above section II.C. 102 Under the Judgment of Rabbinical Courts Law (Marriage and Divorce) 5713–1953, 134 SH 165 (1953), the Rabbinical Court has exclusive jurisdiction over matters concerning the marriage and divorce of Jews. Generally, the Rabbinical Court may be granted jurisdiction of other matters provided the consent of the litigating parties is obtained. 103 CA 11593/05 Attorney General v The Endowment of the Sephardic Community in the Holy Cities of Zefat and Meron (17 October 2006). 104 A Shinefeld, ‘On the Religious Endowments in the State of Israel’ (2003) 122 Parashat Hashavua Magazine 1, available at: www.gov.il/BlobFolder/dynamiccollectorresultitem/122w/he/weekly-parsha-issues_122.doc.

284  Meytal Liberman The Rabbinical Court is the entity responsible for Jewish endowments. As such, the Rabbinical Court is obliged to ensure the safekeeping of the assets of the endowment, their development, and to ensure that they are used for the purposes determined in the endowment. Due to this reason, there is no formal importance to the identity of the plaintiff, and the Court must intervene on its own initiative, when necessary, upon receipt of any information from anyone.105 The Rabbinical Court supervises the endowments under its responsibility in three main ways: (a) taking care when appointing a custodian (trustee) and holding him or her personally responsible; (b) determining that certain actions, such as a sale or attachment of any of the endowment assets, are prohibited unless the prior approval of the Court is obtained; and (c) imposing reporting obligations on the custodian with respect to his or her actions.106

E.  Trusts of the Church In contrast to the waqf and the Jewish endowment, the Church has not used a ‘Christian Trust’ but rather used the waqf and adapted it to its needs. This adaptation of the waqf provides insights on the use of the trust by different religions. According to an article by Michal Margalit in 2012,107 the task of evaluating the assets held by the churches in Israel is nearly impossible. Naturally, it includes a lot of real properties and funds, and it involves not only Israel but also the Palestinian Authority, the churches, Greece and Russia. This makes the situation complicated. Thus, there is no clear evidence concerning the scope of assets held by the churches, but only estimations. It is estimated that all churches in Israel, of all the movements of Christianity, hold approximately 100,000 dunams, whereas approximately 60 per cent of this land is held by the Greek Orthodox Patriarchate. According to Katz and Kark,108 the Greek Orthodox Patriarchate of Jerusalem has the highest status among the Patriarchates of Jerusalem as the oldest and largest church in Israel. According to the findings of a British Commission of Inquiry of 1921, the Patriarchate owned and administered 631 assets in Mandatory Palestine. The total area of these lands is at least 36,779 dunams. This land can be grouped into two main categories: real estate owned by the Patriarchate following purchase or inheritance, and endowed real estate (waqf) administered by the Patriarchate, such as local churches and local schools. The Greek Orthodox Patriarchate acquired many of its properties during the Ottoman period, and the Ottoman Land Law that was in force provided that the real property of the church is a waqf, as it is a property used for a religious purpose.109 Although the waqf was not legally owned by the Church, the Patriarch exercised absolute control over these assets. The Ottomans, who preferred dealing with heads

105 ibid. 106 ibid 2–3. 107 Michal Margalit, ‘What would Happen to the Apartments Built on the Grounds of the Church in Israel?’ Globes (2 January 2012), available at: www.globes.co.il/news/article.aspx?did=1000711499. 108 I Katz and R Kark, ‘The Greek Orthodox Patriarchate of Jerusalem and its Congregation: Dissent Over Real Estate’ (2005) 37 International Journal of Middle East Studies 509, 514. 109 Margalit (n 107).

Israel  285 of communities to dealing with individuals, granted the recognised head of the Patriarchate – that is, the patriarch – absolute control over the public property of his church. Upon appointment of a new patriarch, the Ottoman sultan would publish a formal authorisation granting a privilege, detailing the patriarch’s authority with regard to properties.110 The Greek Orthodox Patriarchate continues to hold many properties today as well, while many of them are leased and therefore generate substantial income for the Patriarchate.111 The use of the waqf for the establishment of churches continues even at the present time. For example, in the case of Nasir of 1986,112 the deceased left a will where she bequeathed real property to the Orthodox Community Waqf in Nazareth so that a church could be built on it. The Nazareth Orthodox Community Council applied to the Greek Orthodox Church Court in Nazareth to probate the will, but the will was contested on various grounds. Nonetheless, the Greek Orthodox Church Court eventually probated the will. An appeal to the Greek Orthodox Church Appeal Court and a petition to the Supreme Court resulted in affirmation of the jurisdiction of the Greek Orthodox Church Court over the matter and the validity of the probate order.

i.  Trusts under Christian Religious Law Section 54 of the King’s Order-in-Council, which is still in force today, allows the creation and management of religious Christian endowments, while the Christian courts have exclusive jurisdiction over such trusts. However, the situation in this respect is currently unclear. Not every Christian community has a religious law on endowments, or even a specific law relating to that community. Under these circumstances, it is unclear which law would be applied, and who is the authorised officer on behalf of such a community. No official officer has been appointed by the State to supervise Christian endowments.113

IV. Conclusion As shown in this chapter, the journey of the Israeli trust as of the Ottoman Empire, through British rule and the establishment of the State of Israel, and until today has been a turbulent one. The political, demographic and financial circumstances varied greatly from one time period to the next, thereby adapting the trust to meet the changing needs. The first trust-like device used in Palestine, and later in the State of Israel, was the Muslim waqf, which despite being a Muslim device, allowed the creation of both family private trusts, as well as charitable trusts, by both Muslims and non-Muslims. At that

110 Katz and Kark (n 108). 111 Margalit (n 107). 112 HCJ 193/85 Nasir v The Greek Orthodox Church Court in Nazareth 40(1) PD 418 (1986). 113 A Tenenbaum and A Kaplan, ‘Endowments in Israel – Expectation v Reality’ (1997) A(1) Sha’arey Mishpat 67, 81.

286  Meytal Liberman time period, charitable awqaf served as an instrument by the governing body – the sultan – to establish public institutions and were also greatly used by the Christian churches as well. Later, in an effort to adapt the charitable waqf, the British Mandate introduced the charitable trust, which served as an alternative to the waqf. Upon the establishment of the State of Israel, both the waqf and the Mandatory charitable trust have been formally adopted into the Israeli legal system, while it remains unclear whether the common law private trust has also been adopted. The changing circumstances and need to create a private trust served as the basis for yet another adaptation of the Israeli trust and the enactment of the Trust Law in 1979, which repealed the Charitable Trusts Ordinance, and effectively converted all existing charitable trusts to charitable endowments. However, as mentioned the most significant adaptation made by the Trust Law was the formal introduction of the private trust into Israeli legislation. The Israeli trust refers today to various types of trusts: the private and charitable trusts under the Trust Law, as well as the private and charitable trusts under the religious laws – the waqf and the Jewish endowment. When taking into account the vast body of law accumulated and the adaptations the Israeli trust has undergone until today, the Israeli trust can be viewed today as a flexible instrument for both private and charitable purposes. In recent years we have witnessed the great efforts by governments that have joined the FATF, including Israel in 2018, to combat money laundering and terror financing.114 According to the FATF, criminals might seek the services of trust service providers to help them retain control of the proceeds of their crimes, while disguising the origin and ownership of these assets. In order to reduce the risk of money laundering and terror financing, the FATF published a guide for such trust service providers.115 One of the ways to deal with this issue is by regulation and governmental supervision. Further adaptations of the Israeli trust are expected to take place. In the future, a register of private trusts might be established, extending beyond charitable trusts, and such registry may also include registration of the ultimate beneficial owners of the properties.116 In addition, and considering the high risk involved in the office of the trustee, a person or entity wishing to act as such might be required to obtain a licence in advance.117

114 FATF, ‘Israel’ (n 3). 115 FATF, ‘Guidance for a Risk-Based Approach: Trust and Company Service Providers’ (FATF, June 2019), available at: www.fatf-gafi.org/publications/fatfrecommendations/documents/rba-trust-company-serviceproviders.html. 116 See P Panico, ‘Beneficial Ownership Registers in the European Union under the Fourth and Fifth Anti-Money Laundering Directives’ in A Kaplan and BR Houser (eds), Trusts in Prime Jurisdictions, 5th edn (Globe Law and Business 2020). 117 In Gibraltar, for example, the trustees are required to hold a licence issued by the Gibraltar Financial Services Commission to act as such. Gibraltar Financial Services Commission, ‘Apply for a Licence’ (Gibraltar Financial Services Commission), available at: www.fsc.gi/FSC/ProfessionalTrusteeship.

15 Application of Cambodia’s New Trust Law from a Practitioner’s View MATTHEW RENDALL* AND SOROMNEAR SIN**

I. Introduction A.  Overview of Cambodian Legal System Like many formerly colonised countries, the evolution of Cambodia’s legal system was influenced by various factors and legal systems. Historically it has transformed from a customary rule-based system to a codified law-based system. The customary rules generally derived from social and religious norms.1 Along this journey from customary law to the current code-based system, Cambodia’s legal framework has been variously influenced by, among other things, the French legal system via French colonisation (1863–1953); the radical abolition of essentially the entire legal system and framework under the Khmer Rouge regime (1975–79), in which an excessive magnitude of legal documents were destroyed and courtrooms were converted into places to be used for unrelated purposes;2 the socialist era of the State of Cambodia (1979–89), during which Cambodia was under the influence of Vietnam and the USSR; the transitional government under the United Nations Transitional Authority (1991–93), in which laws were put in place under a coordinated arrangement comprising of formerly warring factions brought together under the auspices of the United Nations to govern the country until elections could be held in 1993; and, finally, the democratic, free market era that has followed the passing into law of the Constitution of 1993. During this latter, current, period the legal system has been largely influenced by foreign consultants working for, and funded by, international development agencies of * Managing Partner, SokSiphana&associates, Cambodia. ** Senior Associate, SokSiphana&associates, Cambodia. We thank our colleagues at SokSiphana&associates, Eszter Papp (Senior Foreign Council), Seyha Hab (Associate) and Linna Seangly (Associate) for their contributions to this chapter. 1 C Morris, ‘Justice Inverted: Law and Human Rights in Cambodia’ in K Brickell and S Springer (eds), The Handbook of Contemporary Cambodia (Routledge 2016). 2 DA Donovan, ‘Cambodia: Building a Legal System from Scratch’ (1993) 27 International Lawyer 445.​​​

288  Matthew Rendall and Soromnear Sin various countries including the United States, United Kingdom, Japan, France, Australia and others (the consultants in question tended to draft laws based on the laws of their home countries funding the project). Furthermore, Cambodia’s integration into the Association of Southeast Asian Nations (ASEAN) is another indicator that some of its business laws could be common law influenced. However, the assistance of the Japanese government in drafting the Civil Code and the French government in drafting the Criminal Code has resulted in the codes of those countries being a model for the current codification of Cambodia’s laws. As such, currently Cambodia finds itself with a set of laws influenced largely by both the common law and the civil law traditions. Gradually over the last 30 years or so, Cambodia has seen the implementation of new property laws, labour laws, commercial transaction laws, Civil and Criminal Codes and industry specific laws such as those regulating the banking and telecoms sectors. However, one law that was long lobbied for by the private sector during this period of development was a trusts law. Ultimately, Cambodia’s Trust Law (the Trust Law) was finally enacted in 2019.3

B.  Adoption of the Trust Law Prior to the enactment of the Trust Law, the only regulation relating to trusts was an executive level regulation (Sub-Decree No 476) on Financial Trusts adopted in August 2013 under which the use of trusts was limited to trusts relating to funds received from development partners for the purpose of developing the banking and microfinance sectors in Cambodia. The new Trust Law of 2019, which introduces a much broader scope of utilisation of trusts, was adopted following numerous technical meetings among government agencies, including the Ministry of Economy and Finance (MEF) and the Council of Ministers (Cambodia’s national cabinet), and ultimately passing muster of the Cambodian National Assembly. Although there may be numerous reasons for its adoption, the most cited reasons for its drafting and enactment include: (1) increasing investment into Cambodia (and thereby increasing the state’s tax revenue); (2) supporting diversification of financial products; and (3) improving management of sources of funds and investments across sectors for the purposes of increasing trust from development partners.4 Prior to the adoption of the Trust Law, similar arrangements existed in Cambodia in various forms such as escrow and nominee arrangements. However, these were largely unregulated (see Cambodian Civil Code in section III of this chapter). Up until the present date, banks and financial institutions in the Kingdom of Cambodia commonly act as escrow agents for their clients, by holding funds and other property in trust, under a contractual arrangement. Despite the fact that these institutions have been and are 3 Royal Kram No 0119/002 on the Promulgation of the Trust Law (4 January 2019). 4 Ministry of Information of Cambodia, Article on the Senate’s Full Endorsement on the Draft Trust Law (25 December 2018).

Cambodia  289 already regulated by the National Bank of Cambodia, the registration and regulation of these arrangements will now be under the purview of the Trust Regulator.5 Given the relatively recent adoption of the Trust Law, its implementation by the authorities and adaptation by the private sector is still a work in progress. In this chapter, we will endeavour to explain how the Trust Law works, but also to explore the uncertainties caused by this very recent adaptation, with a view to explaining how the creases in that adaptation process are being ironed out and might be refined further in the future. But before we delve into the Trust Law itself, to give readers a general understanding of the Cambodian law context, we will provide a brief overview of the Cambodian legal framework including the main sources of law, hierarchy, the law-making process and the various dispute resolution systems that exist in Cambodia.

C.  Sources of Law Like many other jurisdictions, Cambodian laws derive from two main sources known as primary and secondary sources of law. The primary sources of law refer to any legal instruments issued by the competent authorities of the Kingdom of Cambodia created and delegated authority by the established legal framework. Those include the Constitution, laws (domestic and international),6 royal decrees, sub-decrees, proclamations, decisions, circulars and deikas. The secondary sources, on the other hand, refer to ‘customs, traditions, conscience and equity’. Cambodian law specifically mentions that in civil cases, courts are empowered to use customs, traditions, conscience and equity to adjudicate when there is a gap or lack of the law addressing any specific matters of the adjudicated cases.7

D.  Hierarchy of Laws and Types of Law Hierarchy of laws in Cambodia ranges from the highest – the Constitution – to the lowest – local government regulations known as deikas. The supreme law of the Kingdom is the Constitution.8 Any decisions and laws issued by state institutions shall be strictly in conformity with the Constitution.9 The second highest form of law is Chbab (Law). Chbab is the law adopted/reviewed and approved by the National Assembly (Parliament), reviewed by the Senate, and promulgated by the Head of State (the king) or Acting Head of State via delegating writs.10 The third highest is Preah 5 Ministry of Economy and Finance of Cambodia, Notification No 011 on the Trust Registration Procedures for Retention Services (Escrow Account) (26 May 2020); Cambodia Law on the Organization and Functioning of Non-Banking Financial Services Authority (2021) art 20. 6 The Constitutional Council, Case No 131/003/2007 (26 June 2007); Decision No 092/003/2007 CC.D (10 July 2007). 7 Cambodia Law on Court Organization (1993) art 4. 8 Cambodia Constitution 1993 (Amend 1999) art 150. 9 ibid. 10 ibid art 28.

290  Matthew Rendall and Soromnear Sin Reach Kret (Royal Decree). Royal Decree is a regulation proposed by the Council of Ministers (the executive branch of government/Cabinet) and shall be signed by the Head of State or Acting Head of State.11 Then follows the Anukret (Sub-Decree) which is adopted by the Council of Ministers and signed by the Prime Minister.12 Next in the hierachy is the Prakas (Proclamation) being an instrument issued by the head of a government Ministry for the purpose of operational aspects of the Ministry and appointing/­transferring and dismissing officials with a rank below the chiefs of departments.13 A Prakas may only be issued for addressing issues within the scope of the framework and competence of the Ministry and cannot contradict other norms and standards of the Royal Government.14 Sech Kdei Somrach (Decisions) are similar to the Anukret, but adopted by the Council of Ministers and signed by the Prime Minister.15 Last is the Sarachor (Circular) which is issued by the head of a Ministry, signed by the Prime Minister, and adopted by the Council of Ministers.16

E.  Law-Making Process i.  Law Review and Preliminary Adoption Stage The National Assembly plays the main role in the law-making process both initiating and enacting the laws, while the Senate has the key role of reviewing the laws, i­ ncluding making exhortations and requests for refinement.17 The law drafting procedure can be initiated by the government (known in Khmer language as ‘sach kdei preang chbab’) or by the National Assembly and Senate (known in Khmer language as ‘sach kdei sner chbab’).18 In respect of draft laws initiated by the government, there are several requirements needing to be fulfilled. First, the government must prove that there is a need for a new law to resolve a specific social or economic issue or address an issue derived from state public policy.19 Second, the government shall set up two meetings to discuss the reasons why the law should be established.20 The first meeting is between relevant parties including the ministries which will likely be affected, the administrative officials of the sub-national level, governmental and non-governmental organisations, and the private sector to

11 ibid. 12 Law on Organization and Functioning of the Council of Ministers (1994) art 13. 13 ibid art 28. 14 ibid art 29. 15 ibid art 13. 16 ibid. 17 K Hauerstein (ed), Introduction to Legislative Drafting: References and Techniques (Permanent Secreteriat of the Committee for Legal and Judicial Reform & Konrad-Adenauer-Stiftung 2016). 18 The National Assembly of the Kingdom of Cambodia, ‘Law-Making Procedure’ (The National Assembly of the Kingdom of Cambodia, 31 March 2013), available at: national-assembly.org.kh/group-article/38. 19 Circular No 03 on the Implementation of the Guideline on the Rule and Procedure for Draft Law and Other Regulations (29 May 2013). 20 ibid.

Cambodia  291 discuss the economic and financial aspects.21 The second meeting is between relevant administrative departments on the technical, social and political aspects.22 Once the draft law is adopted by the Executive Branch, such draft shall be sent to the National Assembly to be forwarded to the Permanent Committee for review and recommendation.23 The Permanent Committee may consider either forwarding the draft to a special committee for further review and comment or putting the draft straight up for discussion in the plenary session of the National Assembly.24 As for draft laws initiated by the members of the National Assembly/Senate, these are likewise sent directly to the Permanent Committee for review.25 Again, if deemed necessary, the draft may be sent to a special committee for additional review and recommendation.26 Both the Special and Permanent Committees can decide to consider, not to consider, or to consider and regard the draft law as a matter of urgency in which case the draft law will be prioritised.27 During the meeting of the National Assembly, prior to the discussion on the draft law, the Assembly shall first set out the agenda.28 Once the agenda is adopted, members of the National Assembly will review the draft law (sach kdei preang chbab/sach kdei sner chbab).29 Thereafter, the National Assembly will decide whether to adopt the proposed law.30 Once the law is adopted by the National Assembly, such draft law shall be forwarded to the Senate for initial review and recommendation. Within 30 days after the receipt of the draft law, the Senate shall make a decision to either not respond within the given time frame, to review and adopt, or to review and request for correction.31 Failing to provide its response within the given time frame, means the draft law will be adopted.32

ii.  Final Adoption and Promulgation Stage Any request for amendment issued by the Senate shall be sent back to the National Assembly for review.33 Following such request the National Assembly has three choices: to either accept the requested revisions and forward the revised draft law directly to the king for promulgation; to partially reject or accept the requested revisions and send the draft law back to the Senate for second review; or to wholly reject the requested

21 ibid. 22 ibid. 23 ibid. 24 ibid. 25 ibid. 26 ibid. 27 Internal Regulations of the National Assembly of the Kingdom of Cambodia (28 October 1993) principle 24, 44. 28 ibid principle 19. 29 Circular No 03 on the Implementation of the Guideline on the Rule and Procedure for Draft Law and Other Regulations (29 May 2013). 30 ‘Law-Making Procedure’ (n 18). 31 Cambodia Constitution 1993 (Amend 1999) art 113(2). 32 ‘Law-Making Procedure’ (n 18). 33 ibid.

292  Matthew Rendall and Soromnear Sin revisions made by the Senate and send the draft law back to the Senate to conduct a second round of review.34 If the Senate then strongly demands the amendment, the National Assembly could reconsider on further review.35 The National Assembly, however, could then either wholly reject or accept the proposed amendment of the Senate; and, in either case, the draft law will be sent to the king for promulgation.36 The law shall then, after the promulgation date, enter into force within 10 days in Phnom Penh, 20 days for the entire country or immediately in an urgent case.37

F.  Dispute Resolution Mechanisms Available in Cambodia i. Litigation Going to court for settlement of disputes is a commonly used mechanism in Cambodia as the Constitution guarantees the rights of all Cambodian citizens to file their complaints/claims with a competent court to settle their disputes and to request for any compensation for damage.38 The court system in Cambodia is divided into three levels, namely Provincial/ Municipal Court/First Instance Court (the lowest), the Appellate Court (the second level) and the Supreme Court (the highest level).39 Cambodian courts have jurisdiction to hear all types of disputes, including administrative, civil and criminal cases.40 Between 18 May 2020 and 29 June 2021, the Cambodian courts handled more than 119,900 complaints/claims solely for criminal cases.41

ii.  Alternative Dispute Resolution (ADR) Alternative dispute resolution plays a significant role in resolving disputes in Cambodia, both for civil and commercial disputes.42 a. Negotiation Negotiation is an amicable dispute settlement mechanism solely arranged for and by the disputing parties in order to resolve their disputes, and which requires no third-party involvement.43 This mechanism is used in all types of disputes including

34 ibid. 35 ibid. 36 ibid. 37 Cambodia Constitution 1993 (Amend 1999) art 93. 38 ibid art 39. 39 Law on Organization of Court (2014) art 3. 40 Cambodia Constitution 1993 (Amend 1999) art 128. 41 Press Release on the Summary Result of the Campaign on Resolving Case Congestion at the Municipal-First Instance Court (29 June 2021). 42 Cambodia Civil Procedure Code (2007) art 97; Cambodia Commercial Arbitration Law (2006) art 1. 43 Sou Sorphea, ‘Dispute Resolution Outside of the Judicial System at the National and Sub-National Levels’ (Parliamentary Institute of Cambodia, June 2015) 3.

Cambodia  293 investment-related disputes.44 In Cambodia, this mechanism is typically the first go-to option to settle disputes before resorting to other mechanisms. This mechanism is often seen included in Cambodian contracts as the first option to settle potential disputes. b. Mediation Mediation is an amicable dispute settlement method where a third party helps the parties in dispute find a solution that is enforceable as a matter of contract, instead of a decision that is enforceable at law. This mechanism has been widely used throughout the country including in court proceedings45 or for settlement of family, labour, land, commercial and other minor civil disputes.46 Judges are given the power to attempt to settle disputes and effect a compromise settlement at any stage of litigation proceedings.47 c. Conciliation Conciliation as a method for dispute resolution was introduced in Cambodia in 1997 for labour disputes.48 This mechanism usually is used after the parties fail to reach a settlement – agreement via negotiation or mediation.49 In respect of investment-related disputes, should the parties fail to reach an amicable settlement within the indicated period (in the contract), either party can bring their dispute to settle via conciliation or court.50 This mechanism can also be found in civil, family and land-related disputes.51 d. Arbitration In Cambodia, there are two arbitration forums – the labour and commercial arbitration centres. With regard to labour arbitration, the parties are empowered to refer their disputes to be resolved through arbitration when the parties fail to reach a settlement agreement via conciliation.52 This mechanism may only be used for collective, as opposed to individual, disputes. Such arbitral awards are not binding unless agreed to by the parties prior to the proceedings. Commercial arbitration, on the other hand, is a mechanism designed to resolve commercial disputes between parties who wish to settle

44 Cambodia Law on Investment (1994) art 20. 45 Cambodia Civil Procedure Code (2007) arts 97 and 104. 46 Heng Nida, ‘Alternative Dispute Resolution: Cambodia and Japan’ (Parliamentary Institute of Cambodia, November 2016) 4. 47 Cambodia Civil Procedure Code (2007) art 97. 48 Cambodia Labour Law (1997) art 300. 49 Cambodia Law on the Investment (1994) art 20. 50 ibid. 51 Cambodia Labour Law (1997) arts 300, 301, 303; Cambodia Civil Procedure Code (2007) art 104; Sub-Decree on the Organization and Functioning of the Cadastral Commission (2002) arts 7, 11; Royal Decree on the Establishment of the National Authority of Land Dispute Resolution (2006) arts 3, 15; Law on Management and Administration of Commune and Sangkat Council (2001); Law on Management and Administration of Capital, Provinces, Khans, Municipalities and Districts (2008). 52 Cambodia Labour Law (1997) art 309.

294  Matthew Rendall and Soromnear Sin their disputes outside the traditional court system. In order to resolve the dispute via this mechanism, a mutual arbitration agreement of the parties is required.53 Such arbitral award is final, binding and enforceable.54

II.  Adoption of the New Trust Law [Note: All translations of Cambodian law in this section are translations of the authors.]

A.  Introduction to the New Trust Law After years of deliberation and discussion of the draft Law on Trusts, the Cambodian Law on Trusts was successfully promulgated on 2 January 2019, introducing to the general public in Cambodia for the first time the concept and instrument called ‘trusts’. The Trust Law consists of eight chapters, setting out 57 articles that govern procedures for the creation, registration, management and monitoring of trusts established in Cambodia. Pursuant to the Trust Law, trusts are categorised into four main types.55 The first type of trust is the ‘commercial trust’.56 This is defined as a trust established with the purpose of obtaining profits for the benefit of the trust contributor or any other person determined by the trust contributor. The Trust Law further divides these commercial trusts into sub-categories. The first sub-category includes pension funds, education funds and other similar arrangements whereby a person or a trustor transfers property to a trustee, and the property is to be transferred back to the trustor or to another person once the following conditions are met: • There is a transfer of property or funds into the trust by a person to the trustee on a regular basis, and the trustee manages and arranges the funds for the specific benefit of that particular individual or other individual. • Once the property or funds from other contributors are pooled into the investment project, and the investment by the trustee is for the benefit of all the trust ­contributors in the conditions determined by the parties. • When the property and benefits deriving from the investment have been determined, managed and reported separately to those individuals.57 The second sub-category refers to escrow services which entail the transfer of property or funds by a person to the trustee in which the trustee shall return the property



53 Cambodia

Commercial Arbitration Law (2006) art 7. art 42(iv). 55 Cambodia Law on Trusts (2019) art 9. 56 ibid arts 9–10. 57 ibid art 10, para 1. 54 ibid

Cambodia  295 or funds to such person or another person once one of the following conditions are met: • There is a safekeeping of property or funds by a person, including but not limited to notary publics, law offices or accounting companies. • There is a holding of property or funds which is deposited for the benefit of investors, purchasers of immovable property and for other commercial transactions. • Other depository services which are permitted by other regulatory bodies including, but not limited to, the National Bank of Cambodia, the Securities and Exchange Regulator of Cambodia, or the MEF, to manage activities in accordance with its authority and duties.58 The third sub-category includes employment share schemes or employment benefits wherein the trustee manages property or funds for investment on behalf of the employee.59 The Trust Law further elaborates on other permissible purposes including where: (1) there is a transfer of property or funds by a person to the trustee for the benefit of the contributor; and (2) when there are applicable regulations stipulating the processes and the management of Trust activities.60 The second main type of trust established under the Trust Law is the ‘public trust’.61 These are trusts established for the benefit of Cambodian citizens in general. This type of trust includes trust arrangements in relation to: 1.

2.

The development of the banking and microfinance sector in Cambodia, where: a. The development partner provides property or funds for the benefit of Cambodian citizens and such property or funds are currently being controlled or managed by banking and microfinance institutions or other persons; and b. Are in accordance with the terms set forth in the trust instrument or relevant regulations.62 Other public interests, where the relevant regulators appoint the trustee to manage and protect any funds in accordance with the terms set forth in the trust instrument or the relevant regulations. Such terms include without limitation: a. Funds which have been provided to the Royal Government or have been provided by the Royal Government to fulfil any particular purpose of donors, and such donors require that the funds shall be used and enjoyed in accordance with the purposes of the donors; or b. There exists a need to protect the interests of minors or other persons lacking legal capacity; or c. Inheritance that is converted into state property in accordance with the­ relevant regulations.63



58 ibid

art 10, para 2. art 10, para 3. 60 ibid art 10, para 4. 61 ibid art 11. 62 ibid art 11, para 1. 63 ibid art 11, para 2. 59 ibid

296  Matthew Rendall and Soromnear Sin The third main type of trust under the Trust Law is referred to as the ‘social trust’. A social trust is established when a trustor donates their property to the trustee in order for the trust property to be utilised for the general interest of society, such as cultural, educational, humanitarian, religious, or scientific purposes. Such social trusts are further divided into two sub-categories.64 1.

The first sub-category of a social fund is referred to as a ‘special fund’, which has the following characteristics: a. A fund that is established by the trustor through donation or will; b. The property is received from the trust contributor while he/she is alive or through a will of the trust contributor; c. The property is transferred to the trustee to fulfil the purpose of benefiting the society; d. Not for profit, nor for operation as a commercial enterprise; and e. Unless otherwise provided in the trust instrument, the initial property and any additional properties transferred into any funds by the trust contributors shall be kept for the fulfilment of the purpose of the trust and only the profit of such property shall be permitted to be distributed.65 2. Funds for the benefit of cultural, educational, humanitarian, religious or scientific organisations, including property received through donation or will, and such property is transferred in order to serve, inter alia, cultural, educational, humanitarian, religious or scientific purposes.66 Last, but not least, the fourth type of trust is referred to as a ‘private trust’, one that is established for the interests of the trustor, or any person determined by the trustor, in accordance with the following conditions: 1. The trustor is a natural person who donated their property or funds to the trustee for their own interests or that of other persons; or 2. The transfer of property or funds by the trustor: a. In the case that the trustor is alive, the trustor shall execute a trust instrument with certification from notary, lawyer, commune/sangkat officials, or other persons stipulated in relevant regulations. b. In the case that the trustor executed a will, when such trustor is deceased, the trust is established by will in accordance with the provisions of the Civil Code.67

B.  Creation, Registration and Management of Trusts Under the Trust Law, there are three main parties to a trust: trustor, trustee and beneficiary.68 That said, the Trust Law also lists other actors who could be involved such

64 ibid

art 12. art 12, para 1. art 12, para 2. 67 ibid art 13. 68 ibid art 5. 65 ibid 66 ibid

Cambodia  297 as trust contributors and trustor substitutes.69 However, a trust can only be established by the trustor or as prescribed under the applicable laws and regulations and the subject matter of the trust shall be lawful and must not be contrary to public order.70 To establish a trust, the trustor must execute a trust instrument, whereby the trustor transfers its property or funds to the trustee and shall specify the particular purpose of the trust and/or specify the identity of the beneficiary.71 Where the trust is established pursuant to laws and regulations, the trust property shall be deemed to be transferred automatically to the trustee to manage and dispose of the trust property in accordance with the relevant regulations specifying the particular purpose of the trust and/or the identity of the beneficiary.72 Nonetheless, pursuant to article 8 of the Trust Law, the trust only becomes effective when the trustee has agreed in writing to the appointment.73 A trust may also be terminated: (1) if there is a lapse of the period set forth in the trust instrument; (2) if the trust’s purpose has been achieved; (3) by the discretionary or uniform decision of the trustor; (4) pursuant to a court order; or (5) as otherwise provided in the trust instrument.74 The designated governmental entity responsible for the registration and overall regulation of trusts in Cambodia is the Trust Regulator. Although the Trust Law initially delegated such authority to the MEF, the Trust Regulator was subsequently established and the scope and authority to regulate the trusts sector in Cambodia was transferred from the MEF to the Trust Regulator, who shall implement the authority of the MEF under the Trust Law.75 Therefore, all trusts shall be valid only if they are registered with the Trust Regulator within three months following the establishment of such trust.76 In addition, prior to registration of trusts in accordance with the above-mentioned provision, professional trust service providers or operators must also seek prior approval from other relevant regulators pursuant to the applicable laws.77 To the best of our understanding, these other regulators would include the Ministry of Commerce, Securities and Exchange Regulator of Cambodia, and the Ministry of Post and Telecommunications. Whether approval from any of these regulators is required depends on the business of the operator/service provider, as well as the types of trusts that are involved. The government institution which has the leading role pertaining to the use of trusts in Cambodia, however, is still the Trust Regulator. This institution must record, manage and keep all information of the trustor, trustee, beneficiary and other relevant persons, annual declarations, changes of trustees as well as other necessary

69 ibid. 70 ibid art 6. 71 ibid art 7, para 1. 72 ibid art 7, para 2. 73 ibid art 8. 74 ibid art 32. 75 Cambodia Law on the Organization and Functioning of Non-Banking Financial Services Authority (2021) art 20. 76 Cambodia Law on Trusts (2019) art 28. 77 ibid art 29.

298  Matthew Rendall and Soromnear Sin information relating to the trust registration.78 In certain necessary instances, the Trust Regulator may require the management of the trust property to undergo an audit by an independent auditor. The independent auditor shall be approved by the Trust Regulator and the expenses relating to such audit will be borne by the trust. Moreover, the Law also establishes trust inspection officials under the supervision of the Trust Regulator who possess the right to inspect trusts.79

C.  Rights and Obligations of the Trustee and Beneficiaries Upon the establishment of such trusts, pursuant to the Trust Law, the trustee bears obligations and duties pertaining to the various fiduciary duties relating to the management of the trust property. Among others, these duties and obligations include the obligation to keep a record of meeting minutes, prepare annual accounting reports, and respond to the relevant regulators.80 They must also pay all taxes in relation to the trust property and execute insurance contracts concerning their responsibilities as a trustor.81 Nevertheless, in order to fulfil their duties as the trustee, the Trust Law also accords the trustee certain rights. These rights include the right to receive remuneration for the management of the trust (which may be adjusted based on the experience and/or qualifications of the trustee).82 In addition, the trustee may manage and dispose of the trust property in accordance with the purpose and terms set forth in the trust instrument as well as seek assistance or funds from others in the interests of the trust.83 That said, under the Trust Law, trustees will be held liable for: (1) loss or decrease of the trust property without valid reasons; (2) failure to amass profits into the trust property, in the event that the trust property can accumulate profits; (3) the use of the trust property in a manner contrary to the purpose of the trust; (4) intentional or unintentional faults in the conduct of its duties; as well as (5) other liabilities as set forth in the trust instrument.84 With regard to the beneficiaries, according to the Trust Law, the beneficiaries have the right to receive profits from the trust from the date the trust becomes effective, unless otherwise provided in any relevant regulations.85 In the event that there are multiple beneficiaries, these beneficiaries shall be entitled to the same or different benefits from the trust in accordance with the trust instrument. If there is no provision regarding the formalities or methods of receiving benefits, the presumption is that all beneficiaries are entitled to receive equal benefits.86



78 ibid

art 30. art 35. 80 ibid art 22. 81 ibid. 82 ibid art 21. 83 ibid. 84 ibid art 23. 85 ibid art 26. 86 ibid. 79 ibid

Cambodia  299 In addition, the beneficiaries may demand that the trustee should fulfil its obligations as set forth in the trust instrument and the relevant regulations, as well as receive information concerning the management and disposal of the trust.87

D.  Adaptation of Trusts Law Concepts As mentioned in the introduction of this chapter, due to historical and socio-political factors, Cambodian laws are influenced by many different jurisdictions and both common law and civil law influences can be identified in the current Cambodian laws and regulations. According to discussions with a contact from the Trust Regulator, this Trust Law has been heavily influenced by common law concepts from jurisdictions such as England and Wales. It is also notable that one of the lead consultants in the drafting of the Law, Shaan Stevens, is a New Zealand lawyer, based with a law firm in Singapore, another significant common law influence. Hence, despite Cambodia being typically considered a civil law jurisdiction (a result of French colonisation), the Trust Law is an example of how Cambodia’s legal framework is a melting pot of both common and civil legal traditions.

III.  Comparison with Trusts Legislation in Other Civil Law Countries A century ago, Pierre Lepaulle raised a question as to how civil law countries solve problems without Trusts: Trusts … are like those extraordinary drugs curing at the same time toothache, sprained ankles, and baldness sold by peddlers on the Paris boulevards; they solve equally well family troubles, business difficulties, religious and charitable problems. What amazes the sceptical civilian is that they do really solve them! Trusts have become so indispensable to the life of the Anglo-saxon jurist that one of his first questions when he meets a civilian is: ‘How do you solve the problem that we solve in using the trust device?’88

To Lepaulle’s question, Cambodia’s answer was the recent adoption of the Trust Law. However, we note that even before the adoption of the Trust Law there had been several legal concepts with characteristics similar to the trust in the Cambodian Civil Code. According to István Sándor, there are legal instruments in civil law which are similar to the trust. Such instruments are the contract, the guardianship and the curatorship, the gift and the legate, the third-party beneficiary contract, the fiducia, the agency and representation, the usufruct, the perpetual usufruct, the annuity contract, the dowry,



87 ibid 88 P

art 27. Lepaulle, ‘Civil Law Substitutes for Trusts?’ (1927) 36 Yale Law Journal 1126.

300  Matthew Rendall and Soromnear Sin the testamentary executor, the foundation, and the business associations.89 Most of the legal concepts listed by Sándor appear in the Cambodian Civil Code.90 For instance, article 311 of the Cambodian Civil Code provides that ‘[a] contract shall mean the matching of intentions held by two or more parties for the purpose of creating, amending or extinguishing an obligation’. Robert Sitkoff argues that the trust constitutes a nexus of contracts and legal relationships. In Sitkoff ’s opinion the two key relationships are between the settlor (or trustor under Cambodian law) and the trustee, and between the trustee and the beneficiaries; whereas the relationship between the settlor and the beneficiaries does not constitute a contract.91 However, literature which approaches the trust as a contract is clearly in minority. FW Maitland, in one of his essays, said: If we were asked what is the greatest and the most distinctive achievement performed by Englishmen in the field of jurisprudence I cannot think that we should have any better answer to give than this, namely the development from century to century of the Trust idea.92

Maitland’s words may seem to be an exaggeration, but when it is considered how much of the progress of the English law is due to the doctrines of the law of uses of trusts, its truth would seem to be clear. As the legal scholar Professor Austin Scott opined, it was chiefly by means of uses of trusts that the feudal system was undermined in England, that the law of conveyancing was revolutionised, that the economic position of married women was ameliorated, that family settlements have been effected, whereby daughters and younger sons of landed proprietors have been enabled to participate in the family wealth, that unincorporated associations have found a measure of protection, that business enterprises of many kinds have been enabled to accomplish their purposes, that great sums of money have been devoted to charitable enterprises.93 For legal practitioners who have studied and worked in civil law legal systems, the understanding of the institutions of the classic Roman law is the basis of ‘everything’. Roman law is the cornerstone that lawyers can almost always turn to for help whenever a case has to be placed in legal context. Studying Roman law is one way to develop a skill to approach legal cases in a systematic and analytical manner. Such skills are fruitful in particular when one has to deal with complex legal issues. Legal practitioners know that the issues they handle are usually more complex than straightforward. Even when a case appears to be straightforward, the opposing party’s lawyers will certainly make it ambiguous. These few words of appreciation of Roman law are to show that in civil legal traditions Roman law is not an unnecessary subject, which only makes the law school students’ life difficult. Indeed, it is still relevant and useful in practice.

89 I Sándor, Fiduciary Property Management and the Trust: Historical and Comparative Law Analysis (HVG-Orac Publishing House Ltd 2015) 189–99. 90 Cambodia Civil Code (20007) art 24 et seq on the guardianship and art 28 at seq on the curatorship; art 568 et seq on the gift and art 1199 on the testamentary gift; art 379 et seq on contracts benefiting a third party; art 364 et seq on agency; art 256 et seq on usufruct; art 719 et seq on life annuity contracts; art 1186 on the designation of executor of will; art 110 et seq on the incorporated foundations. Cambodia Law on Commercial Enterprises (2005). 91 Sándor (n 89) 204. 92 FW Maitland, Selected Essays (Cambridge University Press 1936) 129, quoted in Sándor (n 89) 13. 93 AW Scott, ‘The Trust As An Instrument of Law Reform’ (1992) 31 Yale Law Journal 457, 457.

Cambodia  301 However, there is an undisputable characteristic of cornerstones: they adapt relatively slowly to changed circumstances. An obvious example for this is the development of copyright law and the general protection of intellectual property rights in the Anglo-Saxon and continental legal systems. In the fifteenth century when, thanks to Gutenberg, books had been printed in large quantities, a strong need for the protection of intellectual property rights appeared. The Anglo-Saxon judge-made law’s reaction to the new demand was much faster than that of the civil law. For continental Europe, it took centuries to step over the German Pandectists’94 fundamental, Roman law-based principle, that only res corporalis (corporal things) could be a subject of ownership rights. There are at least two such cornerstones in civil law systems which heavily challenge the assimilation of the concept of the Anglo-Saxon trust: the principle of the autonomous and indivisible ownership and numerus clausus (taxative enumeration) of ownership rights. The indivisibility of ownership means that it can only be transferred as a whole. The numerus clausus of ownership rights means that ownership can only be encumbered with a fixed number of rights, which are typically set out in countries’ Civil Codes. [W]herever 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. What then is a judge to do in a Civil Law ­jurisdiction confronted with such a monstrosity as a common law settlement? There is only one thing to do – to capitulate.95

Cambodia is not the first, nor the last, civil law country which has to address such ­theoretical issues and to find a solution which satisfies the needs of the business ­community and fits into the existing legal system. But how strong is the civilian legal tradition in Cambodia that the concept of trust has to face? It is not so easy to assess. On the face of it, it appears that Cambodia bears all the patterns of the Romano-Germanic legal tradition. The Cambodian Civil Code was drafted with the assistance of Japanese scholars and the text of the Code is based on the Japanese Civil Code,96 whereas the latter was heavily influenced by the German Pandectists.97 This is how we got the Roman law roots of today’s Cambodian private law. When looking back over the recent past, we can see that such Romano-Germanic basis for the Cambodian private law is certainly not a strong one. This is because the Cambodian Civil Code entered into force only in 2011, which was approximately 10  years ago. Ten years is a relatively short period of time for a legal transplant to take roots in a host country. This is even more the case when an entire system of norms regulating the full spectrum of private relationships, such as the Civil

94 The Pandectists were German university legal scholars in the early ninteenth century who studied and taught Roman Law as a model of what they called Konstruktionsjurisprudenz (conceptual jurisprudence) as codified in the Pandects of Justinian. 95 RW Lee, ‘The Civil and the Common Law: A World Survey’ (1915) 14 Michigan Law Review 89, 89. 96 Japan International Coopertation Agency, ‘Materials’ (JICA), available at: www.jica.go.jp/project/english/ cambodia/0701047/materials/index.html. 97 See above fn 94.

302  Matthew Rendall and Soromnear Sin Code, is transplanted from one country into another. We could argue that during the time when Cambodia was a French colony, and the French Civil Code was applicable, the French legal tradition had taken root. However, the survival of French legal thinking is questionable considering that when the Khmer Rouge were controlling the country, educated people, including jurists, were considered as the peoples’ enemies. Save for a very few survivors, all Cambodian legal scholars, judges and lawyers were executed. We could have had an idea about how successful the implementation of the Japanese legal transplant (ie, the Civil Code) has been in Cambodia if we were able to access and study the decisions of the Cambodian courts. The review of the Cambodian courts’ decisions would allow us to understand how the Cambodian courts have interpreted the various concepts of the Civil Code and whether it is in line with the interpretation of the courts of other civil law jurisdictions. However, to date, Cambodian court judgments have not been made available to the public. Though there are promises that court judgments will be published gradually,98 to date, only 44 judgments have been published on the website of the Ministry of Justice.99 These are all judgments of first instance courts. First instance judgments, for obvious reasons, do not warrant that the same interpretation would be given to the provisions of the Civil Code at higher courts. Furthermore, none of the published judgments touches upon the concept of trust or issues of legal theory. In fact, the reasoning parts of the judgments are surprisingly brief and rarely have any added value in terms of the interpretation of abstract legal provisions. For lawyers in civil law countries, the trust has two major aspects: the creation of personal rights and the creation of real rights. The law of obligations in civil law ­countries mainly consists of default rules that the parties are free to overwrite so long as the terms of the contract do not contradict the mandatory rules of the law and public policy. For civil law jurists, therefore, there is nothing surprising about the trust regarding the aspect of personal rights. From the aspect of the creation of real rights, the question appears to be an entirely different one. As noted earlier, the typical concerns are the indivisibility of ownership rights and numerus clausus of real rights. A main characteristic of the common law trust is the concept of dual ownership, which distinguishes between the trustee’s legal ownership over the trust assets and the beneficiary’s equitable title to the same assets. In civil law systems, the ownership is considered as a right which is absolute and indivisible; and therefore, no similar

98 ‘This is the start of the publication of verdicts. We begin with these 44 civil verdicts, and we will publish more civil and criminal cases in the future. This is meant as a tool for the knowledge of students and legal enforcement officials. But it takes some time because we need to carefully check them before publishing in order to avoid conflicts with our professional standards’, said Chin Malin, spokesperson of the Ministry of Justice of the Kingdom of Cambodia. Niem Chheng, ‘Courts’ Decisions Now Published as Reference Source’ Phnom Penh Post (4 January 2021), available at: www.phnompenhpost.com/national/ courts-decisions-now-published-reference-source. 99 Ministry of Justice, ‘Actual Civil Judgments’ (Ministry of Justice), available at: www.moj.gov.kh/actualcivil-judgments.

Cambodia  303 division of legal and equitable titles is possible in such legal systems.100 The principle of autonomous and indivisible ownership has its roots in the abolition of the feudal burdens and is inextricably linked to historical factors.101 Without the adoption of the English law to a certain extent, civil law systems, which are built on the traditions of private law, do not permit two different legal titles to the same thing. With respect to the adoption of the trust, the premise is whether a regulation with a function similar to the arrangement of legal and equitable titles can be introduced in an environment of civil law, or if a different legal institution is unfit to fulfil the role of the trust. Thus, the regulation of the trust is only possible through the adaptation of divided ownership. Vera Bolgár submits that [t]he basic obstacles … are: first and chiefly, that the principle of indivision of property, supposed to be fundamental in Roman legal system and therefore presumptively also in modern civil law, precludes acceptance of an institution, such as that of the trust, by which property is divided into legal and equitable rights; and secondarily, that the principle of ­registration of interests in property necessitates a numerus clausus of rights in rem, limited to the categories received in the modern codes and not including even traditional rights involved in fiduciary arrangements.102

In her ‘Why No Trusts in the Civil law?’ Bolgár explains that ‘neither of these arguments is tenable in history or in logic’.103 In Cambodia, no issue seems to arise regarding the numerus clausus of real rights. This is because, according to the Cambodian Civil Code [no] Real Right may be created except as for the types and contents permitted under this Code or under any special law. A Real Right permitted under customary law shall be valid under this Code to the extent that such Real Right does not conflict with the provisions of this Code nor any special law.104

The Trust Law does not expressly place the legal relationships defined therein in categories such as real rights and personal rights. However, the creation of a new type of right in rem by the Trust Law (such as the right of the beneficiary to receive profits from the trust as well as the right to receive information concerning the management and disposal of the trust), does not contradict the Civil Code. Therefore, the numerus clausus of real rights should not create a problem for the smooth implementation of the concept of trust in Cambodian law.

100 The current art 544 of the French Civil Code, which has been in force since 1804 provides that: ‘La propriété est le droit de jouir et disposer des choses de la manière la plus absolue, pourvu qu’on n’en fasse pas un usage prohibé par les lois ou par les règlements’ [‘Ownership is the right to enjoy and dispose of things in the most absolute manner, provided they are not used in a way prohibited by statutes or regulations’.] Art 2284 of the French Civil Code provides that: ‘Quiconque s’est obligé personnellement, est tenu de remplir son engagement sur tous ses biens mobiliers et immobiliers, présents et à venir’ [‘Whoever has personally made himself liable is bound to fulfil his undertaking out of all his movable or immovable property, existing and to come’.] 101 V Bolgár ‘Why No Trusts in the Civil law?’ (1953) 2 American Journal of Comparative Law 204. 102 ibid. 103 ibid. 104 Cambodia Civil Code (2007) art 131 (Statutory nature of real right).

304  Matthew Rendall and Soromnear Sin

IV.  Our Experiences Regarding Application of the New Trust Law As with most new laws in Cambodia, the real impact is only felt once the necessary implementing regulations are put in place by the relevant Ministry. Whereas many jurisdictions prepare and release the implementing regulations, mechanisms and ­ procedures at the same time as the passage of the law, this is generally not the case in Cambodia and often it may be months, if not years, before the new law is effectively enforced. This is also the case with the Trust Law. Since the passage of the Trust Law, the Cambodian government has gradually taken steps to issue implementing regulations, including Sub-Decree No 114 (trust registration procedure)105 and Prakas No 854 (service fees for trust registration).106 Despite such efforts, the situation regarding creation and registration of trusts under this new Law remains relatively new and many legal loopholes and gaps continue to exist. The establishment of a trust framework in Cambodia is still, in essence, a work in progress. In our experience, as at the time of this writing, trusts in Cambodia have not yet been much utilised either for commercial or charitable purposes. Law firms, including the one where the authors of this chapter work, have received a number of enquiries regarding the establishment of trusts. Most of those enquiries are specifically concerned with the establishment of trusts for the primary purpose of holding land for foreign investors (a common issue in Asia where most countries prohibit foreign ownership of land, but also a very important issue given the degree to which foreign investors are involved in property development – particularly in the case in Cambodia). A few more enquirers concerned themselves with the rights and obligations of the various parties to a trust arrangement. In the analysis of the existing Law, with a view to responding to these enquiries, we have spotted a few ambiguities that make it difficult to definitively determine, for example, whether, or how, the new trust framework in Cambodia can be used to assist foreign investors in the property development sector in Cambodia – and also to advise on rights, liabilities and obligations generally. As such, and given there is no jurisprudence or precedent activity to go by, we have forwarded these enquiries and our assessment of the ambiguity in the Trust Law to the MEF, initially the competent authority and regulator of trusts in Cambodia (prior to the establishment of the Trust Regulator), seeking their comments and clarification. As a good way to illustrate the current status of the implementation of the Trust Law in Cambodia, particularly from a pracitical perspective as to how trusts can or cannot be utilised, we have set out hereunder the enquiries and responses. The questions also provide a very good illustration of the practical issues that investors and others currently concern themselves with in Cambodia when it comes to trusts.



105 Sub-Decree 106 Prakas

No 114 on the Management of Trust Registration (2 August 2019). No 854 on the Services Fee for Trust Registration (10 September 2019).

Cambodia  305 The first set of questions is relevant to the foreign landholding structure issue. The second set addresses the rights and obligations of the trustor, trustee and the beneficiary. Lastly, we posed questions relating to breach of trust conditions and its remedies.

A.  Questions Relating to Foreign Landholding Structure Q1. Whether a foreign natural or legal person may be the beneficiary of a trust in a case where the trust property is land. In particular, whether it would comply with article 44 of the Cambodian Constitution. Article 44 of the Cambodian Constitution provides that: All persons, individually or collectively, shall have the right to ownership. Only Khmer legal entities and citizens of Khmer nationality shall have the right to own land.

MEF’s Responses 1. The beneficiary of a trust has no legal interest in the trust property, only a beneficial interest. The trustee(s) hold the legal interest on behalf of the beneficiaries and the Trust Law deems the trust to be Cambodian resident for the purposes of the laws of Cambodia, thus the trustee can hold the legal title to the land. Q2.  If the answer to the question above is affirmative, whether the beneficiary may acquire the land at the term of the trust.

MEF’s Responses 2.  When the trust ends, and the trust property is vested in the beneficiary, then the title will be transferred into the beneficiary’s name, provided that the beneficiary is capable under the laws of Cambodia to hold title to the land; otherwise, the land could be transferred by the trustee into a new trust on behalf of the beneficiary or sold and the proceeds from sale distributed to the beneficiary. Q3.  If the answer to question 2 is negative, alternatively, would it be a valid settlement of the trust assets at the termination of the trust, to oblige the trustee to liquidate the trust (sell the land) and release the proceeds thereof to the foreign beneficiary.

MEF’s Responses 3.  The option is for the trustee, where the beneficiary is a non-Cambodian citizen, upon vesting to either sell the land and pay the proceeds to the beneficiary or vest the land into a new trust to hold on behalf of the beneficiary. The decision must be made by the trustee in the best interests of the beneficiary. For example, the best interests of the beneficiary may be to place the land in a new trust and to sell the land at a later date, or grant the beneficiary the right to live on the land etc.

306  Matthew Rendall and Soromnear Sin

B.  Questions Relating to the Rights and Obligations of the Trustor, Trustee and the Beneficiary Q4.  Whether a trust agreement which expressly provides that the beneficiary shall be entitled to instruct the trustee in respect of (i) the management of the trust property and/or (ii) the liquidation of the trust property, is consistent with the provisions of the Trust Law, particularly with article 27 thereof.

MEF’s Responses 4.  This example would not be consistent with the Trust Law. The beneficiary has rights to seek that the trustee is complying with the terms of the trust, but not how the trustee undertakes the performance of that duty. For example, if the beneficiary is of the opinion that the trustee is not complying with the trust instrument, they make seek a review by the trust regulator (MEF) or the courts. Q5.  Whether a provision of the trust agreement which deprives the trustor of all of its rights, including its rights over the trust property (article 17 of the Trust Law) and exonerates him of all its obligations (article 18 of the Trust Law), would be consistent with the Trust Law.

MEF’s Responses 5.  The purpose and essence of a trust is for the trustor to place the trust property outside the trustor’s legal ownership and control. The trustor can set the terms of the trust instrument at the establishment of the trust and be responsible for appointing the trustees, and any replacement of trustees. Any other interest in the trust property can only be a beneficial interest. Q6. Whether the parties to the trust agreement may exclude the applicability of article 19 of the Trust Law, ie, the regulator to substitute the trustee.

MEF’s Responses 6.  Only one party to the trust instrument has the power to appoint the trustee: the trustor. The trustor can retain the ongoing power, assign that power by deed to another person not being the trustee or another beneficiary, or enter into a deed – either immediately or upon the occurrence of a future event, for example, the trustor’s incapacity to act. If there is no such provision, then the default under article 19 will prevail. Q7.  Whether a reserved power clause included in the trust instrument (ie, the reservation by the trustor of certain rights and powers) would be consistent with Cambodian law. For instance, whether the trustor, by an express stipulation in the trust instrument, may reserve the power to revoke, vary or amend the trust instrument; the power to act as a director of officer of any company owned by the trust; the power to give the trustee binding directions in relation to the investment of the trust property; the power

Cambodia  307 to appoint, add or remove any trustee or beneficiary; and/or the power to require the trustee to obtain consent before exercising a power.

MEF’s Responses 7.  In the above examples, the trust would not be valid under the Cambodian Trust Law.

C.  Breach of Trust and its Remedies Q8. Whether either the trustor or the beneficiary shall have the right to unwind/ rescind a transaction entered into between the trustee and a third party and order a third party to return the trust property in the event of a breach of trust conditions by the trustee (for example, selling trust property contrary to the objectives of the trust). In particular, whether article 428 of the Civil Code would apply to the above scenario.

MEF’s Responses 8.  Under the Trust Law, the trustor has no legal ownership of the trust property and the beneficiaries have only beneficial ownership. The beneficiaries may have rights under the Civil Code. However, this is a matter that the MEF would need to examine further as to how it could/would address this concern.

D. Taxation Q9.  What kind of tax duties arise from the transfer of the Trust property from the ­trustor to the trustee. In particular, what kind of tax duties arise from the transfer of the trust property from the trustor to the trustee, in case the trust property is (i) Cambodian real estate, or (ii) shares of a Cambodian land-holding company.

MEF’s Responses 9.  The MEF is in discussion with other agencies and departments on issues around land transfer taxes on the transfer of land property into and out of a trust and the ability to ensure that the name on the title shows that the trustee is holding the land in trust, for example, ‘Sokchea Sao as Trustee of the ABC Trust’.

V. Conclusion As illustrated in each of the sections above, Cambodia is still navigating its way towards implementation of the new Trust Law, much of which is still broad and leaves plenty of

308  Matthew Rendall and Soromnear Sin room for practitioners as well as regulators to discuss and assess the best way forward. Only time will tell whether the adoption of this new Law will meet its intended purposes of increasing investments into Cambodia, diversifying financial products and improving the way funds and investments are being managed across various sectors. Our firm, SokSiphana&associates, maintains a watchful eye on the latest developments as they occur and are keen to see how these new legal instruments can best serve Cambodia, its development and investment partners.

part v Doctrinal Adaptation

310

16 Trusts in South Korea: Towards an Independent Fund Mechanism YING-CHIEH WU*

I. Introduction This chapter deals with the view accepted by academics and practitioners of the theoretical foundation of trusts law1 in South Korea.2 Trusts law is a legal institution that originates in the common law tradition. However, it has been widely transplanted into many civil law jurisdictions. South Korea, being a Romano-Germanic civil law jurisdiction, is among them. But a distinctive difference can be found in South Korean trusts law. This difference mainly arises from the need to adapt the common law trust to the local Romano-Germanic legal mentality. That adaptation has resulted in Korean law focusing on the independent nature of trust funds, rather than the proprietary dimension of the trust. In other words, the common law proprietary regime of the trust has become an independent fund mechanism. This fundamental change in relation to the theoretical structure of trusts arose when trusts law was imported into South Korea in 1961.3 This chapter discusses the legal effects arising from this independent fund mechanism, explores why the common law proprietary regime has been rejected, and

* Associate Professor, School of Law, Seoul National University. The author would like to thank Ying Khai Liew, Matthew Harding, Tamaruya Masayuki and Alex Yang for their helpful and thought-provoking comments. It goes without saying that all errors are mine. The article was funded by the 2022 Research Fund of the Seoul National University Asia-Pacific Law Institute, donated by the Seoul National University Foundation. 1 For a general account of the reasons for the reform in 2011 and of the key features of the revised Act, see Ying-Chieh Wu, ‘Trust Law in South Korea: Development and Challenges’ in L Ho and R Lee (eds), Asian Civil Jurisdictions: A Comparative Analysis (Cambridge University Press 2013). 2 The official name of South Korea is the Republic of Korea. But the expression ‘South Korea’ is more commonly referred to, to distinguish it from North Korea. Therefore, this chapter will use the term ‘South Korea’ unless the use of official name is necessary. 3 The first Korean Trust Act was enacted in 1961 and revised in 2011. (Official Translation, Ministry of Government Legislation, National Law Information Center, Republic of Korea), available at: www.law.go.kr/ LSW/eng/engLsSc.do?menuId=2§ion=lawNm&query=Trust+Act&x=0&y=0#liBgcolor24. This chapter will not strictly quote from the official translation where it fails to convey to the English reader the nuances of the texts in the original language. Some minor modifications will thus be made if necessary.

312  Ying-Chieh Wu explains how effects similar to the proprietary regime have been achieved by dissimilar means in South Korea. In the following sections, we will examine the independent fund mechanism (section II), and then discuss the reasons the proprietary regime was not implemented on South Korea’s civil law soil (section III).

II.  A Civilian Approach A.  Similar Consequences through Dissimilar Routes The Trust Act of the Republic of Korea (KTA) defines the trust as a legal relation whereby a person who creates a trust (ie, the settlor) transfers a specified asset … to a person who accepts the trust (ie, the trustee) on the basis of the confidence reposed in the trustee by the settlor, and the trustee has to manage, dispose of, administer, develop those assets (ie, the trust fund), or take steps necessary for the fulfilment of the interests of a specified person (ie, the beneficiary) or certain purposes (ie, serving private or charitable purposes).

This description of a trust may appear similar to that of the trust in common law. However, one of the most distinctive differences lies in the adoption of the nonproprietary regime. This requires further explanation, and two points merit particular mention. First, the proprietary regime was not adopted. That is, the beneficiary does not enjoy any proprietary interest over the trust fund. Instead, the principle of independence of trust funds applies, which guarantees the segregation of the trust fund from the trustee’s private assets. Second, the constructive trust response is not triggered should the trustee dispose of the independent trust fund to a third party in breach of the trust. Rather, the rescission response is accorded to the beneficiary. The remedy of rescission assists the beneficiary to recover the dissipated asset back to the independent fund from the third-party disponee. This will be discussed in more detail below.

B.  The Principle of Independence of the Trust Fund i.  A Principle that Insulates Trust Funds (1) Consequences of the Principle: A trust is a mechanism whereby the trustee is required to manage the trust fund for a beneficiary or a purpose. Thus, at the centre of this relationship lies the trust fund that must serve the interest of a beneficiary or a purpose. The trust fund is vested in the trustee. But he is in essence only an administrator of the fund. Therefore, though the trust fund belongs to the trustee, it must be segregated from his private assets: the principle of independence of the trust fund plays an important role to achieve this. In other words, despite the trust fund being held by the trustee, the principle prevents the fund from falling within the trustee’s private assets. It thus creates a chasm between them. The application of this principle results in several legal consequences, the effects of which can also be said to comprise the content of the principle of independence of the trust fund. They are outlined below.

South Korea  313 (2) Prohibition of Compulsory Execution, etc: When a trustee fails to perform his personal obligations, his personal creditors are in principle entitled to seize the trustee’s assets in order to secure the assets that can be used to satisfy their debts. However, that would not be available for the assets comprising the trust fund. That is, ‘no compulsory execution, auction for exercise of security right and so on, preservative measure … or administrative disposition on default of national tax and so on shall be made to any trust fund held by the trustee’.4 However, ‘this shall not apply in cases where they are based on a proprietary right existing over the trust fund prior to the creation of the trust, or on a right arising in the course of management of the trust affairs’.5 Therefore, the trustee’s personal creditors and the government are both incapable of subjecting the trust fund to any compulsory execution, provisional attachment, realisation of security, or grant of an interim injunction. This is, however, not so if the creditor already held a security right6 (ie, a proprietary interest) over the trust fund before it was transferred to the trustee or if the debt the trustee owed to the creditor arose in the course of management of the trust business.7 The rationale for the former exception lies in the inertia of pre-existing property rights. The rationale for the latter exception rests on the fact that it is fair for the trust fund to be used to discharge debt arising from the administration of trust b ­ usiness. The upshot is that the trust fund is in principle independent and insulated. (3) Trustee’s Bankruptcy, etc: Trust funds are held by trustees. Therefore, if a trustee becomes insolvent, all the assets he holds must be subject to bankruptcy or rehabilitation procedures. However, the KTA provides that ‘the trust fund shall not form part (i) of the bankruptcy foundation of the trustee, (ii) of the trustee’s private assets to which the administrator of rehabilitation procedures has power to administer or dispose of, or (iii) of the individual rehabilitation foundation’.8 Since the trust fund is demarcated from the trustee’s private assets, it is immune to the bankruptcy or rehabilitation procedures of the trustee. The fund will remain intact. It will not be used to satisfy the debt the trustee owes to his personal creditors. Nor will it be used to recover the trustee’s economic capacity in the rehabilitation process. This is the so-called bankruptcy or insolvency effect of the trust. It is submitted that such a protective effect constitutes one of the main reasons the trust has become so popular in practice.9 The upshot is that the trust fund is independent and insulated. (4) Trustee’s Death and Divorce: When a person dies, all his assets that are left as inheritance automatically pass down to his children by operation of law.10 However, if a relevant asset left belongs to a trust fund, it shall not fall within the scope of the ­inheritance left by the trustee. This is so since the fund is not supposed to be distributed

4 KTA, art 22. 5 ibid art 22 proviso. 6 eg, a mortgage or a hypothec. 7 For more details, see Sunseop Jung, Trust Law (Jiwon Publishing 2021) 273. 8 KTA art 24. 9 Ying-Chieh Wu, Trust Law (Hongmoonsa 2021) 171. 10 The Civil Code of the Republic of Korea, art 1005: ‘An heir succeeds, from the time of the commencement of the inheritance, all the rights and obligations of his predecessor, except for those personal to the latter’; art 997 provides that ‘an inheritance is commenced by the death of a person’.

314  Ying-Chieh Wu to the heir(s) of the trustee. Therefore, the KTA provides that ‘no trust fund shall belong to the inheritance left by a trustee’.11 Furthermore, the KTA also provides that ‘the trust fund does not become an object of division of property following the divorce of a trustee’.12 In principle, one of the parties is entitled to claim for division of property in the process of divorce.13 The reason for such a claim is to allow one of the spouses to receive his or her share or (economic or non-economic) contribution to the assets acquired by the other party. However, trust funds have nothing to do with such contributions made by the trustee’s spouse. They are given by the settlor to be used for another’s benefit or for a purpose. Therefore, those assets are not subject to the claim raised by the spouse of the trustee in their divorce. The upshot is that the trust fund is independent and insulated. (5) Prohibition of Set-Off: Say A has concluded two contracts with B. Under the first contract, A acquires a credit against B in A’s capacity as a trustee. But under the second contract, A in his personal capacity owes a debt to B. It is clear that, A is not allowed to use the credit he holds as a trustee against B to set off the debt he owes personally to B, in spite of the fact that they both belong to A. What is included in the trust fund is ­separated from matters regarding the trustee’s private assets. Thus, the KTA provides that ‘a claim belonging to a trust fund and a debt not belonging to the trust fund shall not offset each other’.14 However, the opposite is fully possible: the trustee can offset trust debts using his private credit for the sake of convenience. There is no provision prohibiting the trustee from discharging trust debts using the trustee’s own assets. The trustee is then allowed to recoup money from the trust fund.15 To conclude, by prohibiting the trustee from discharging his private debt using credit belonging to the trust fund by way of set-off, the law again shows that the trust fund is independent and insulated. (6) Merger of Rights: Imagine that A has ownership of a piece of land, and B has a ­security right – say, a hypothec – over that land. If B somehow acquires ownership of the land, both ownership and the security right would be vested in the same person. However, one cannot have a security right over his own asset. Therefore, the basic ­principle is that such a security right is extinguished when the merger of these two proprietary rights occurs.16 However, if A as a trustee has ownership of X yet also has a security interest via a trust fund over X, the security right is not extinguished since

11 KTA art 23. 12 ibid. 13 KCC art 839-2: ‘(1) One of the parties who have been divorced by agreement, may claim a division of property against the other party. (2) If no agreement is made for a division of property as referred to in ­paragraph (1), or if it is impossible to reach an agreement, the Family Court shall, upon a request of the parties, determine the amount and method of division, considering the amount of property acquired by cooperation of both parties and other circumstances’. 14 KTA art 25(1). 15 ibid art 46(2): ‘Where a trustee has paid expenses incurred in relation to the performance of trust affairs from the private asset, he or she may be reimbursed for the expenses paid and the interest accrued from the date of payment’. 16 KCC art 191: ‘When the ownership and some other proprietary right over one and the same thing become rested in one and the same person, the other proprietary right shall be extinguished’.

South Korea  315 it should be used for the beneficiary or the purpose of trust. Therefore, the KTA has created an exception to the rule by prescribing that ‘no rights shall be extinguished by merger if the ownership and any other proprietary right (a security right or easement etc) over one and the same thing are transferred to the trust fund and the trustee’s private assets’.17 In other words, though both ownership and another proprietary right are vested in the same trustee, if he holds one of them as a trustee and the other in his personal capacity, the other right is not extinguished. This is to protect the trust fund. Furthermore, say the trustee has engaged in self-dealing with the beneficiary’s consent. If the trustee has purchased a part of the assets from the trust fund, he has to pay for it using his own money. A situation may arise where the trustee owes a debt in his personal capacity to himself as a trustee. In a similar context, say a creditor transfers the credit he has against his debtor and asks the debtor to hold it for a beneficiary or a purpose on trust. In principle, when both credit and the corresponding debt are vested in the same person, the debt would be extinguished since there is no reason to request oneself to pay a debt to oneself.18 However, in the aforementioned trust scenario, the credit and its corresponding debt are not distinguished by merger. This is to protect the trust fund. Hence, the KTA again made an exception to the rule by providing that ‘no debt and the corresponding credit shall be extinguished by merger even if they devolve on the trustee’.19 The trust fund is protected and insulated. (7) Real Subrogation of Trust Funds: If a trustee obtains proceeds arising from the trust fund, those proceeds automatically become part of trust fund. In other words, the newly acquired assets are substituted for the disposed trust funds. For example, if the trustee acquires proceeds by selling an asset to a third party and receives its price in return, the money now becomes part of the trust fund. Likewise, if an insured asset in a trust fund is damaged so that the trustee has received the agreed compensation from the insurance company, the compensation money automatically falls within the scope of the trust fund. This is the so-called real subrogation of trust funds. According to the KTA, ‘assets acquired by a trustee in the course of management, disposal, administration, development, or damage of the trust fund shall belong to the trust fund’.20 This consequence ensures that the substituted assets always form part of the trust fund. They are not regarded as a trustee’s private asset. Therefore, trust funds are protected and insulated. (8) The Requirements: The condition for applying the rule of independence of trust funds requires trust funds be kept separately from a trustee’s private assets and any other funds he holds under another trust. In other words, if trust funds are not segregated from a trustee’s private assets, the rule of independence of trust funds does not apply even if the trust funds are recognised as subject to the trust among the internal parties to the trust (ie, the settlor, trustee and beneficiary). Hence, the requirement



17 KTA

art 26(1). art 507. 19 KTA art 26(3). 20 ibid art 27. 18 KCC

316  Ying-Chieh Wu of segregation is vital in order for the rule to be applied. But the question is: how is segregation to be carried out? The KTA provides that ‘(i) with respect to any assets that can be registered, the fact that they are subject to a trust can be asserted against a third party21 by making a registration thereof ’.22 Registrable assets such as land must be registered under the name of a trustee, and it must also be shown on the registration book that the land owned is held on trust. It must be noted that this is not registration of the trust itself, but a registration of the relevant asset, which also shows that it is part of a trust fund. The KTA further provides: ‘(ii) with respect to those assets that cannot be registered, the fact that it is subject to a trust can be asserted against a third party when it is identifiable through managing it separately from a trustee’s private assets or other trust funds he holds’.23 The archetypal assets are those of chattels and money. Chattels should be kept separately and the trustee must declare that they are part of the trust fund. As for money, it must be deposited in a separate bank account. This is because the KTA also provides that ‘the trustee must manage the trust fund s­ eparately from the trustee’s private assets and make the trust fund identifiable’.24 Hence, the requirements for the application of the rule of independence of the trust fund and the trustee’s duty to keep trust fund separate are two sides of the same coin. To sum up, the aforementioned effects of (1)–(7) take full force as long as trust funds are publicised via a clear separation between trust funds and a trustee’s private asset or other trust funds he holds.

ii.  Limited Liability Trusts (1) Limiting Trustee Liability: A trustee’s personal creditors are not capable of reaching trust funds because of the principle of independence of trust funds. But, as mentioned above, creditors arising in the course of managing trust business are able to access trust funds. It must be noted that such trust creditors can also reach a trustee’s private assets in order to recoup their debts. The Supreme Court of the Republic of Korea has also made it clear, from the trustee’s perspective that, ‘the liability a trustee owes to trust creditors is not limited to the trust fund he holds. It extends to the trustee’s private assets’.25 This is obviously a huge burden for anyone who accepts trusteeship. Thus, it is not uncommon that trustees in practice tend expressly to confine their liability to trust fund assets when they contract with other parties in the course of administering the trust. However, this may work against the trust because trustees may be put in a disadvantageous position when making the deal, as the other party may ask for better terms in return for the reduction in trustee liability. Therefore, the need for an institutional limitation of the trustee’s liability for trust debts emerged. This has led to the adoption of the so-called limited liability trust. The limited liability trust was enacted when

21 However, if the third party is not the personal creditor of the trustee but a third party who has purchased the trust fund, some further conditions are required. More details are elaborated below. 22 KTA art 4(1). 23 ibid art 4(2). 24 ibid art 37(1). 25 Supreme Court of Korea Case No 2010.6.24, 2007DA63997.

South Korea  317 the KTA was revised in 2011. It took effect in 2012 and has been widely welcomed by trustees in practice. Under this trust, trustees cannot be held liable for debts arising from managing the trust. The trustee’s liability is confined to the scope of the trust fund he holds.26 (2) The Requirements: The limited liability trust takes effect only after it is registered as a limited liability trust.27 It must be noted that this is different from the registration of registrable assets required for the application of the rule of independence of trust funds. These are two different types of registration. The former relates to the creation of a limited liability trust that prevents trust creditors from reaching trustees’ private assets; and the latter is concerned with the protection or segregation of trust funds. Just because a trust is registered does not mean that registerable assets also become automatically registered as trust funds. These two types of registration are separate and different. Furthermore, trustees are obliged to inform all trust creditors in writing of the fact that they are acting as a trustee of a limited liability trust.28 When the trustee of a limited liability trust fails to perform this duty to inform, the other party is entitled to rescind the contract within three months of the conclusion of the contract.29 Another point worth mentioning is that, even under a limited liability trust, trustees can be held personally liable for intentional or negligent wrongs committed in the course of managing trust affairs.30 In this case, the aggrieved party is entitled to damages and to reach the trustee’s private assets to compensate for the loss suffered. Finally, once a trust fund’s assets are insufficient to satisfy all debts incurred for the trust, the trustee can apply for bankruptcy of the trust fund.31 This is mainly aimed at making a pro rata distribution of any residual trust funds to the trust’s creditors.

C.  The Beneficiary’s Right of Rescission against Third-Party Disponees i.  When Trust Funds are Disposed of in Breach of Trust Above, we have explored the principle of independence of trust funds. Under that ­principle, trust funds are segregated from the trustee’s private assets and thus are (i) out of reach of a trustee’s personal creditors, (ii) not inherited by the trustee’s heirs or subject to the division of property in a trustee’s divorce, (iii) not allowed to be used to offset a trustee’s own debt, and (iv) not extinguished despite the merger of rights. Last but not least, the principle allows substitute assets to continue to be deemed as part of trust funds. These effects deriving from the principle of independence of trust funds



26 KTA

art 114(1). arts 114(1) and 126. 28 ibid art 116(1). 29 ibid art 116(2). 30 ibid art 118(1)(ii). 31 ibid art 138. 27 ibid

318  Ying-Chieh Wu purport to maintain the status quo of trust funds. However, these effects do not help if a trust fund is transferred to a third party by the trustee in breach of trust. Therefore, apart from the remedy of damages against the trustee,32 a beneficiary has a separate remedy to recover the trust fund from the third party. Unlike the common law proprietary response of constructive trust imposed on the third-party disponee,33 the KTA gives beneficiaries the right to rescind the disposition that the trustee has concluded with the third-party disponee. The right of rescission in the civil law tradition is a remedy a­ rising by operation of law which is not a proprietary remedy. The function of rescission is (1) to release parties to the transaction from mutual obligations and (2) to trigger the revesting of the title, if any, to the dissipated asset back to the transferor.34 The original title holder only regains proprietary rights (for example, ownership) after, and not before, the right to rescission is exercised.

ii.  The Rescission Response: Requirements and Consequences (1) The Requirements: The KTA provides that ‘[i]n a case where the trustee disposes of trust funds in breach of trust, the beneficiary can rescind the disposition, provided that the other party or the subsequent disponee knew or could have known, at the time of the breach, the disposition was concluded in breach of trust.35 Certain requirements must be met in order for the beneficiary to obtain the right of rescission. They are as follows: (i) the trustee must dispose of trust funds in breach of the terms or purpose of the trust (the objective requirement); and (2) the third-party disponee must have known or could have known that what was transferred to him belonged to a trust fund and that his counterparty (ie, the trustee) was disposing of it in breach of trust. It must be noted that simply knowing that the subject matter of the disposition is a trust property is not sufficient. This is because trustees may be empowered to sell trust funds. Thus, the third party is required to have known or to be able to have known that the disposition involved a breach of trust. (2) The Consequences: Once both objective and subjective requirements are satisfied, the beneficiary is entitled to rescind the disposition concluded between the trustee and third-party disponee. After the beneficiary has exercised his right to rescind, the disposition loses its efficacy retroactively (ie, ab initio). Then the title to the dissipated fund would revest, not in the beneficiary, but in the trustee (or a newly appointed trustee). The role of the beneficiary is only to trigger the title’s return back to the trustee. It is then up to the trustee, based on the revested title (for example, ownership) to recover the possession of the chattel disposed of or to apply to recover the name of the registrable 32 ibid art 43(1). 33 It will be explained below why the proprietary approach is not accepted in South Korea. 34 If only a contract is made but title to the subject matter of the contract has not yet been transferred to the other party, then rescission functions only to release the parties from their obligations. In this case, no title needs revesting. Since the result of title-revesting is not always a consequence arising from the exercise of rescission, it is not a decisive or vital element of rescission. Therefore, the consequence of title-revesting is not regarded as a criterion or inherent to the discussion of whether rescission is proprietary in nature. Title does not even revest after rescission in some jurisdictions (eg, in Germany, only a personal right to claim it back arises by operation of law based on the rule of unjust enrichment). 35 KTA art 75(1).

South Korea  319 assets from the third-party disponee. One thing meriting mention is that the beneficiary can still exercise the right of rescission even if the third-party disponee no longer holds the trust property, either because he has sold or consumed it. This is because the unavailability of restitution does not bar the beneficiary from exercising the right of rescission under Korean law. It is then left to the trustee to claim compensation (ie, the value of the property) against the third-party disponee for not being able to return the dissipated property. To conclude, the trust fund or its value may be recovered against non-bona fide purchasers under the rescission response.

III.  The Common Law Proprietary Regime A.  A Different Basis In the preceding section, we saw that trust funds are protected through the principle of independence of trust funds and the beneficiary’s right of rescission. However, these are not grounds relied upon in common law courts for protecting trust funds from a trustee’s private assets, personal creditors and third parties. In the common law, the proprietary regime is adopted and applied. For example, in England, the beneficiary has a proprietary right36 over trust funds, which enables beneficiaries to be ranked above the trustee’s other personal creditors37 and to bind those third parties who are not bona fide purchasers38 when the trust funds are disposed of in breach of trust. It is interesting to find that trust funds are protected through different regimes between the two legal traditions, that is, the common law proprietary regime and the Korean independent fund regime. The question then arises as to why such a distinction has arisen. Trusts law comes from the common law world, yet Korean law has rejected the proprietary regime. The answer is found in certain stringent local rules as regards proprietary rights,39 as well as concerns that have arisen over systematic coherence.

B.  Problems with the Proprietary Regime under South Korean Private Law i. The Numerus Clausus Rule Under Korean law, only proprietary rights prescribed by statute (for example, Book II of the Civil Code of the Republic of Korea (KCC) that involves various property rights)40 are recognised as valid in law. Parties are not allowed to create new types of

36 Baker v Acher-Shee [1927] AC 844 (HL); IRC v Berill [1982] 1 All ER 867. 37 It is also enshrined in the Insolvency Act 1986, s 283(1)(a) and (3)(a). 38 Foskett v McKeown [2001] 1 AC 102, 127. 39 Most of these rules are imported from the German Bürgeliches Gesetzbuch [Civil Code]. 40 The term ‘property right’ is used as opposed to the term ‘personal right’. Hence, the law of property rights denotes an area that deals with those rights good against the world.

320  Ying-Chieh Wu rights that have binding force against the world.41 The rationale behind this rule is that the law attempts to prevent prejudice against people in the market or them being bound ­unexpectedly. Therefore, the number of property or proprietary rights is fixed by law. But that does not mean they cannot be expanded. Examples of newly added proprietary interests include intellectual property rights. But beneficiary rights have not yet been added to the list. The question then arises: is it possible to add the beneficiary’s right under a trust onto the list of property rights? It is actually naive to think that a positive answer would provide a solution. In fact, it is impossible to enlist it because of the basic conditions that must be met in order to qualify for the list.42 Given that impossibility, it is no surprise that the KTA has expressly decided to characterise the nature of the beneficiary’s right as a merely personal right.43

ii.  The Proprietary Agreement Plus Formality Under the Korean law of property rights, a proprietary agreement, in addition to a contractual agreement, is required in order to obtain a proprietary right over a piece of land or a chattel from another party. Say, A sells his hat to B under a contract in return for B paying 1,000 Korean Won to A. At this contractual stage, only A’s obligation to transfer the title to B and B’s obligation to pay for it are created. The same is the case where the subject matter of the contract is land. In other words, only obligations are generated when the parties reach a contractual agreement. A separate proprietary agreement is required in order for property in the subject matter to pass to the other party. This is an agreement specifically aimed at transferring the title to the other party. Such an agreement is different from the contractual agreement because the proprietary agreement itself, when taking effect, has the immediate consequence of transferring the title to the other party. The proprietary agreement does not generate any further obligations. The next question is: when does this proprietary agreement occur? In the case of a transaction relating to chattels, the proprietary agreement is considered to be made at the moment the transferor hands over the relevant goods or chattel to the other party. Hence, the KCC provides that ‘transfer of property over chattels or goods takes effect when their delivery (ie, transfer of possession or handing over) is completed’.44 If the subject matter is land, the proprietary agreement is considered to have been created when the transferor hands over the title documents to the other party who accepts them but the proprietary agreement takes effect once the title to land is registered under the name of the other party. Therefore, the KCC provides that ‘acquisition of property in land takes effect when its registration is perfected’.45

41 KCC art 185. 42 They are further elaborated immediately below. 43 KTA arts 63 and 65. The English translation has used the term ‘claim’, but the original Korean denotes the idea of a personal right. However, it has also been argued, at least in the context of Japanese law, that a purely personal right approach cannot fully explain various effects of the trust that protect trust funds: see Tamaruya Masayuki, ‘Accessory Liability and Tracing: Modern Adaptations of Japanese Trust Law’, ch 17 in this collection. 44 KCC art 188. So, unlike the case of chattels, the proprietary agreement in a land transaction consists of two elements: the handing over of the title documents plus registration. 45 ibid art 186.

South Korea  321 In sum, the proprietary agreement takes effect when the relevant formality requirements are satisfied. Let us turn to trusts. Both proprietary agreement and the implementation of formality requirements over trust funds are carried out by the settlor and trustee. The beneficiary does not have to make any proprietary agreement with the settlor, nor is he required to possess the chattels or register the title to trust funds under his name in order to acquire a beneficial right under a trust. In fact, the beneficiary can obtain a beneficial right under a trust without even knowing of the existence of the trust because the KTA provides that in principle ‘the person appointed as a beneficiary of a trust acquires the beneficial right immediately after the trust comes into being’.46 Furthermore, if a beneficiary is yet to be born, it is impossible for him to make any proprietary agreement. The key conceptual problem is that since there is no proprietary agreement made between the settlor and beneficiary, the beneficiary is not qualified to obtain any proprietary right under Korean law. This implies that the beneficiary’s right cannot be included on the codified list of property rights.

iii.  Damages for Torts According to the KCC, a person is liable for damages if his intentional or negligent wrongful conduct has caused any loss to another.47 If trust property (say, money), is interfered with by a tortfeasor who has stolen it, it is the trustee who can claim damages against the tortfeasor, not the beneficiary, since title to money is vested only in the trustee. The beneficiary may be able to claim damages against the tortfeasor but only on behalf of the trustee because the KCC gives personal right-holders (ie, obligees) a right to claim his obligor’s right against another provided that the obligor does not exercise his right.48 But, this is a right accorded to a personal right-holder and, moreover, what he exercises is not his right but the obligor’s right. After all, what the beneficiary exercises is the trustee’s right against the tortfeasor; the beneficiary has no damages claim under tort law. That said, if the reason a tortfeasor has interfered with trust funds is to intentionally cause loss to the beneficiary, the beneficiary may be entitled to ask for damages for infringing upon his beneficial interest under the trust. This is because if a personal right is intentionally (but not negligently) infringed upon by another, the aggrieved party can hold the tortfeasor liable for damages.49 This only shows that the beneficiary’s right is not proprietary. To conclude, though a beneficiary can claim damages against a tortfeasor for intentionally infringing upon his beneficiary’s right under a trust, the damages here are specifically given for the infringement of the beneficiary’s personal right, not of the fund itself. As for damages for the interference of the trust fund itself, only the trustee in whom the fund is vested is entitled to sue the tortfeasor. This illustrates how the beneficiary does not have any proprietary interest in trust funds under Korean law.



46 KTA

art 56(1); however, the appointed person can reject it: art 57(1). art 750. 48 ibid art 404(1). 49 Supreme Court of Korea Case No 2001.5.8, 99DA38699. 47 KCC

322  Ying-Chieh Wu

iv. Money50 The most controversial subject matter of a proprietary right in South Korea (and, indeed, all of the East Asian civil law jurisdictions) would undoubtedly be money. Money as currency is not only a tangible thing (when focusing on its physical constituents, such as metal or paper), but also a store of value used as a universal means of exchange. When considering the possibility of a proprietary right in money, it seems that only the former feature gives rise to the possibility of money as the object of a proprietary right; the latter feature can be used as a ground for refusing to accept money as the subject matter of a proprietary right. To illustrate, when I have 10 Korean Won (KRW) in my pocket, there is no problem for me to exclude anyone who tries to pickpocket the 10 KRW from me. My intention with regard to the pickpocket might be construed as precluding the pickpocket from touching my coins or notes.51 Since my 10 KRW in my pocket can be specifically identified by its physical material (coins or notes), it is treated as a corporeal or ‘tangible’ thing (the first feature), and nobody is allowed to make physical contact with it without my permission. Accordingly, in cases where there is possession of ­physical money, its owner can assert a proprietary right over it. The story changes dramatically when the coins or notes are handed either to an agent for certain purposes, or to a bank as a deposit, or because they are stolen by someone else. Money in this case is deemed to be a store of value used as a universal means of exchange. Since money is treated as a ‘general’ means of exchange, any coins or notes making up 10 KRW will suffice to repay me the 10 KRW owed to me by the agent or the bank. It does not need to be the particular coins or notes that I previously handed over (unless the 10 KRW had been put in a sealed envelope and spending of it was prohibited by agreement).52 So, even if I did have a proprietary right over the coins or notes that I gave to the agent or the bank, or over coins or notes that were stolen, I would no longer have a proprietary right over those coins or notes. All I would be entitled to do would be to ask for the return of coins or notes of the same value, ie, 10 KRW. This is a personal claim, because when money leaves my possession, my proprietary right over it leaves me as well, ie, title to money in principle rests with its possession.53 In short, when the trust funds consist of money, the beneficiary cannot

50 ‘Money’ in this section is used to denote ‘physical money’ such as coins and notes; thus, electronic money and bank money are excluded from the debate. Those two kinds of money need special treatment which is outside the scope of this chapter. 51 Even if my intention were that the pickpocket should not touch ‘my 10 KRW’, this intention can be interpreted as an intention that he should not touch my note with the value of 10 KRW. 52 However, even in this case, it is hard to say that I have a property right over the money in the envelope. The reason I can recover the coins and notes in the envelope is that the envelope is not allowed to be opened, which helps me to recover the specific coins or notes inside it. 53 Supreme Court of Korea Case No 2012.8.30, 2012DO6157. But this does not apply to the situations immediately after a tortfeasor has stolen and possessed the victim’s money, or where the money is still in a specific envelope. In this case, the victim is entitled to follow the tortfeasor and retake the money, according to art 761 of the KCC that prescribes the right of self-defence. However, this is only allowed when the thief is still around the spot of the incident. If the thief is only seen the next day, the victim is only allowed to sue him and claim damages for tort, and this is a personal right under Korean law. It might be argued that this position regarding title to money under Korean law is theoretically problematic. But this is a question that merits studying in a separate project since it is concerned with the nature of title to money in general and thus is out of the ambit of this chapter. The argument of this chapter is based on the present position concerning the nature of money under Korean law.

South Korea  323 be said to have any proprietary right since the physical form of the money is not in the beneficiary’s possession.

v.  Unborn Beneficiaries, etc Suppose a trust is created by a grandmother today for her first grandchild born after five years. The trustee needs to accumulate the proceeds arising from the trust fund until the baby is born. It is obvious that no beneficiary acquires any proprietary right in the trust fund within these five years. If the reason trusts have insolvency and third-party effects is because the beneficiary has a proprietary right over trust funds, the trust fund would be in danger in our scenario if the trustee becomes bankrupt or disposes of the fund in breach of trust. This is because no one has any proprietary right during the five-year period. One might attempt a counter-explanation, for example, that the independence of the trust fund can be achieved by a statute directly providing for its proprietary effect, or that an exception to the general proprietary approach applies when there are no beneficiaries. However, these attempts only go to prove that one cannot conclude that the beneficiary’s right is proprietary in nature simply because protection is given to the trust fund where the trustee is bankrupt or disposes of property in breach of trust. To put this another way, the proprietary approach can seldom explain the most distinctive and characteristic effects of trusts when the beneficiary does not yet exist.54 This is even more obvious in trusts where no specified beneficiaries exist at all, for example, purpose trusts and charitable trusts. If the basis for the protection of the trust fund is rooted in the proprietary nature of the beneficiary’s right, it should remain true for all types of trusts. It simply goes against systematic coherence to say that the ground for the two effects differs according to the type of trust.55

vi.  Regarding the Right against a Right Approach It has been argued that the beneficiary’s right can be conceptualised as a right against a right.56 That is, this view regards the beneficiary’s right not as a proprietary right against a thing or in trust funds, nor as a personal right against the trustee, but as a right against the rights a trustee holds under the trust.57 It might be said that structuring the beneficiary’s right in such a fashion would help civil lawyers to avoid the conflict the proprietary approach may cause. Unfortunately, the right against a right approach as regards the nature of the beneficiary’s right is unlikely to be accepted in 54 Under the KTA, the insolvency effect is based on the aforementioned principle of independence of trust funds, and the beneficiary’s right of rescission can be exercised by a trust administrator (KTA art 68) when the beneficiary is absent. Trust administrators are appointed by a court when there is no beneficiary (KTA art 67). 55 Note, however, that different legal traditions may put different weight on the importance of systematic coherence of their legal systems. Civil law jurisdictions whose laws originate in the Romano-Germanic legal tradition (including South Korea) generally put relatively high importance on theoretical and systematic coherence. 56 See, B MacFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1. 57 Professor Ben MacFarlane has given such right a new name: ‘persistent right’. See B McFarlane, The Structure of Property (Hart Publishing 2008) 206.

324  Ying-Chieh Wu South Korea (and possibly in any Romano-Germanic legal systems) for the following two reasons. First, the right against a right approach is not a novel idea in the civil law tradition. The most distinct example is that of a pledge of rights. Pledge is a security right recognised in the KCC.58 The subject matter of a pledge is generally physical chattels. But it can also be rights such as debts or intellectual property rights. In other words, pledges of rights can also be created. So, for example, if a debtor provides the creditor with his credit or intellectual property right, what the creditor is offered is not a physical thing but a pure right. The creditor’s security right is then attached to the debt or intellectual property right the debtor offered. The structure of the pledge in this case takes the form of a right against a right. However, it is still classified as a type of proprietary right. Its nature is not different from other security rights such as a hypothec, mortgage or lien. They all fall within the ambit of proprietary rights despite pledges of rights taking the form of a right against a right. Thus, the idea of a right against a right is not unknown in South Korea, yet it is still classified as a proprietary right. The traditionally recognised systemic dichotomy of personal and proprietary rights remains unaltered. If the right against a right is already a proprietary right in South Korea, the next question that arises is whether it is possible to use the right against a right approach to transform the conventionally recognised personal right approach to the proprietary right approach in relation to the nature of the beneficiary’s right. The next point answers this question. Second, the right against a right approach might be viable when the trust fund consists of a credit but it confronts difficulty when it comprises land. In the former, it might be possible to say that the beneficiary’s right is attached to the right (ie, the credit) held by the trustee because what the trustee holds is a right itself (ie, the credit). Therefore, we can say that the beneficiary’s right is a right against a right (ie, the credit) held by the trustee. However, this is not so in the case of land. If the trust fund comprises a piece of land, it means that the trustee has ownership title to that piece of land. Can we say that the beneficiary’s right in this context is attached to the trustee’s ownership right only? Unfortunately, the answer is negative. That is because ownership and its object are like two sides of the same coin: you cannot on the one hand have an absolute right attached to ownership and on the other hand deny your absolute right to the land that forms the object of that ownership. Logically, practically and realistically speaking, if the beneficiary’s right is a proprietary right attached to the land owned by a trustee under a trust, that beneficiary’s right is attached to both the trustee’s ownership as well as the land. This is so because land is the subject matter of trustee’s ownership. It is correct to say that the beneficiary’s right is attached to the trustee’s ownership (ie, right) as well as to say it is attached to the land (ie, the thing) held under the trust. They are not two different stories.59 So, when a trust fund consists of land or a chattel, 58 KCC art 345. 59 The structure is exactly akin to that of security rights such as hypothec or pledge. If you have a pledge over a chattel belonging to your debtor, you then have a security right over your debtor’s ownership to that chattel. In this case, your security right is attached to your debtor’s ownership. You can also say it is attached to the chattel itself. Again, your debtor’s ownership and the object of that ownership are two sides of the same coin, if you have a pledge over your debtor’s chattel, it is correct to say your security right is attached to your debtor’s ownership (ie, the aspect of right) as well as to say it is attached to the chattel (the physical aspect). The meaning of these analyses are identical. They are not two different scenarios.

South Korea  325 the right against a right approach is merely a different way (that focuses on the aspect of the right itself) of expressing that the beneficiary has a proprietary right in the fund. It then ultimately boils down to the question of whether or not the beneficiary can have a proprietary right in trust funds, which, as already explored above, the answer is a resounding negative.

IV. Conclusion This chapter has sought to argue that the common law proprietary regime cannot be directly imported into the local civilian legal system for various reasons, ranging from the rules concerning proprietary rights to the issue of systematic coherence. An adaptation has had to be made to explain the legal grounds for the insolvency and third-party effects accorded to trust funds. Local lawyers have found those grounds in the rule of independence of trust funds and the beneficiary’s right to rescind a disposition made of this independent fund in breach of trust. By regulating aspects of the trust fund, the common law proprietary effects are achieved, without adopting the proprietary view of the beneficiary’s interest. This method of adaptation may not be criticism-free.60 But at the very least it provides explanations which square best with the local legal system. For South Korean lawyers, it is trust funds that lie at the centre of any trust relationship. This is so because a trust will not fail for want of a settlor, a trustee,61 or a beneficiary.62 However all trusts require trust funds. Creating a trust is close to creating a de facto foundation that can be used for both specified beneficiaries or pure purposes. For example, trusts are utilised in practice for several purposes, namely, as a tool for estate planning, for investments, for asset-backed securitisation, for taking care of pets, or for charitable purposes. In all these instances, trust funds form the irreducible core of the trust being used. Effects stemming from the principle of independence of trust funds run through all types of trusts. The existence of trust funds is thus the essential element common to all trusts. In determining the nature of a legal phenomenon, one must uncover the universal factor that explains all instances of the phenomenon. This method follows from the conception of legal analysis as legal science, especially for the civil lawyer.

60 Ying-Chieh Wu, ‘Trusts Reimagined: The Transplantation and Evolution of Trust Law in Northeast Asia’ (2020) 68 American Journal of Comparative Law 441. 61 In case he is removed and before a new trustee is appointed. 62 When the beneficiary is not born yet or does not exist at all, in cases such as purpose or charitable trusts.

326

17 Accessory Liability and Tracing: Modern Adaptations of Japanese Trusts Law MASAYUKI TAMARUYA*

I. Introduction As the amount of assets held in trusts and collective investments increases, the need to protect wealth held under fiduciary arrangements has never been greater. Methods used to transfer money, funds and various forms of wealth are becoming increasingly sophisticated, and the need to prevent wealth from dissipating both within and across jurisdictional borders is unquestionable. Beneficiaries should have the legal means to trace funds to those who have received them improperly and to take away ill-gotten profits from such recipients and those who have assisted in wrongdoing by trustees and fiduciaries. Nonetheless, countervailing policy considerations complicate this issue. The ­possibility that any such transactions can be avoided and the fund taken back creates risks to those who enter into a transaction with a trustee or fiduciary. These ­recipients and accessories are often professionals and financial intermediaries, who may be targeted for their deep pockets by the beneficiary. In the event of the bankruptcy of trustees or fiduciaries – or even recipients or accessories – the interests of their respective creditors are affected. These general propositions apply to Japan as they do in other jurisdictions. In fact, as section II demonstrates, there is arguably a greater case in Japan for the refinement and adaptation of the doctrine concerning the liability of third parties implicated in the breach of trust by the fiduciary. Given the common law origin of trusts and ­fiduciary duties, one might be tempted to derive inspiration from their experiences. This is what this chapter attempts to do, but not without difficulty. Doctrinally, the issue straddles different areas of law concerning torts, property, trusts and unjust enrichment. For jurisdictions like Japan that are based on codified private law, legal analysis must * Professor of Law, the University of Tokyo, Japan. An earlier version of this chapter was presented at Seoul National University and University of Tokyo Trust Law Workshop. I am grateful to the workshop members, and Ying Khai Liew and Ying-Chieh Wu for helpful comments. Research for this chapter was funded by the Japan Society for the Promotion of Science, KAKENHI Grant Numbers 19H01408.

328  Masayuki Tamaruya be conducted in the absence of statutory provisions that apply directly. Nonetheless, ­analyses must begin with the provisions that touch on the matter, which will be collected and examined in section III. As a matter of comparative law, the exercise involves transposing common law trusts and fiduciary notions into a civil law basis. One of the challenges addressed in section IV is examining the theoretical possibility of replicating proprietary remedies against third-party recipients. Even within common law jurisdictions, the justification for such remedies varies, and the attitude towards remedies for financial loss differs across common law and civil law jurisdictions. Section V synthesises the Japanese statutory basis and common law inspirations against the background of modern necessities.

II.  Investment Chains and Family Trusts The need for doctrinal refinement and adaptation in Japan has arisen from two recent developments. One is the rise in investments involving large amounts of assets in ­deregulated and globalised markets. Assets collected from a broad public cohort are now directed to diverse destinations using various instruments, creating greater risk of loss that must be addressed through more effective remedies. A good illustration is Pension Beneficiaries v Seki,1 a 2011 case involving private pension monies that were dissipated in a risky investment overseas.2 All Japan Liquor Retailers Association was running a pension fund that suffered from the collapse of Japanese asset prices in the 1990s and the early 2000s. The manager invested a large proportion of the fund into the British litigation finance firm Invaro, routing the fund through bonds nominally issued by the Canadian firm Chancery & Leadenhall. Invaro was run by the British businessman Terry Lindon, whom the British government had earlier prosecuted for embezzlement, though he had been acquitted by the courts. Chancery was run by South African businessman Bill Godley, who had earlier operated the Imperial Consolidated Ponzi scheme, and the English High Court had sentenced him to three and a half years in prison.3 Of the entire pension fund worth ¥18.5 billion, ¥14.4 billion was invested in Chancery bonds, and when Invaro failed in 2004, ¥13.4 billion was lost. The manager was later convicted, and the association filed for bankruptcy. In the ensuing civil litigation, the Osaka District Court held the manager liable to the pensioners in tort. The court also held liable one of the Association’s board members who had supervisory authority over the manager, but absolved others, including those on the Pension Committee. An intermediary who introduced the investment to the manager was also held liable under tort and securities regulations for failure to explain the structure of the investment and accompanying risks; however, Credit Suisse, which acted as a custodian of the Chancery bonds, was found not to be liable.4 1 Pension Beneficiaries v Seki 2184 Hanrei Jiho 74 (Osaka District Court, 25 July 2011). 2 For detail, see JM Ramseyer and M Tamaruya, ‘Fiduciary Principles in Japanese Law’ in EJ Criddle, PB Miller and RH Sitkoff (eds), The Oxford Handbook of Fiduciary Law (Oxford University Press 2019) 661–63. 3 Serious Fraud Office, ‘Convicted Fraudster Ordered to Pay £1.5m’ (Serious Fraud Offence, 14 November, 2014), available at: www.sfo.gov.uk/2014/11/14/convicted-fraudster-ordered-pay-1-5m/. 4 All Japan Liquor Retailers Association v Credit Swiss, LEX/DB 25481880 (Tokyo High Court, 30 May 2012).

Japan  329 This case needs to be understood in its temporal context. In the 1990s, the deregulation of the pension system was accelerating. Trust bank monopolies were phased out, and restrictions on investment in equities and alternative assets were lifted. Suddenly, the bosses of liquor retailers found themselves tasked with a vast scope of powers over the management of assets without being aware of the corresponding responsibilities. The judge was sympathetic to laypersons who were ignorant of the consequences of their failure to execute their responsibilities. Since the early 2010s, multiple initiatives both by the government and within investment communities have been taken to prevent similar incidences from occurring. If an identical case emerges today, a judge is unlikely to show sympathy. Another feature of the pension beneficiaries’ case was that the effort to follow or trace the lost funds was largely futile. As a greater amount of pension money and other pooled funds are invested overseas in various forms of assets, this may be considered unsatisfactory today. In the 2010s, Japan witnessed growing interest in the use of trusts for the management of family assets and succession planning, commonly known as family trusts.5 While the trust is still used predominantly in commercial contexts, with a trust bank serving as the sole regulated trustee, family trusts are typically served by one or more family members or acquaintances as trustees, who are, in turn, typically assisted by judicial scriveners, attorneys, accountants, or financial institutions. Trustees are non-professionals, and professionals who assist them are not necessarily under the jurisdiction of the Financial Services Agency (FSA). Circumstantial evidence suggests that family trusts are susceptible to abuse. Before the abuse of trusts began to attract attention, the abuse of guardianship was a major social concern. When the use of guardianship increased following the reform of the guardianship system in 1999, there was an equally sharp increase in the reported instances of abuse. At its peak in 2014, the Ministry of Health and Labour reported 831 cases of abuse amounting to ¥5.67 billion ($51.5 million), although the figures have decreased to 186 cases and ¥790 million ($6.32 million) by 2020.6 The vulnerability of family trusts to misuse was highlighted in the latest mutual evaluation report by the Financial Action Task Force (FATF), which warned that although family trusts and foreign trusts are small sectors in comparison to the rest of the trusts industry, they pose an unquantifiable risk of abuse.7 The trustees of a family trust might be unwitting or intentional in their breaches of trust. Their advisers may also be incompetent, though they are more likely to be skilful and sophisticated. Either way, there is a risk that trust assets are dissipated and end up with criminals. Both developments in Japan – the extension of investment chains and the rise of family trusts – indicate that greater amounts of assets are flowing into the deregulated and globalised world, creating greater risks in the event that a trust is breached.

5 M Tamaruya, ‘The Transformation of Japanese Trusts Law and Practice: Historical Contexts and Future Challenges’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021). 6 Ministry of Health, Labour and Welfare, The Current State of Guardianship (March 2021) 49. 7 Financial Action Task Force, ‘Anti-Money Laundering and Counter-Terrorist Financing Measures: Japan, Mutual Evaluation Report’ (FATF, August 2021) para 478, available at: www.fatf-gafi.org/media/fatf/­ documents/reports/mer4/Mutual-Evaluation-Report-Japan-2021.pdf.

330  Masayuki Tamaruya This, in turn, draws greater attention to the liabilities of those who assist fiduciaries or receive the dissipated assets.

III.  Statutes and Case Law Over the past several decades, the issues of accessory liability and tracing have generated much academic debate in common law jurisdictions. By comparison, civil law jurisdictions have been relatively wary of providing stronger protection to victims of misappropriation when the asset is in the hands of third parties. Civil law jurisdictions particularly recognise more general exceptions to the nemo dat quod non habet rule through the doctrine of good faith acquisition, whereby one who acquires possession of a movable from another possessor in good faith acquires the title.8 Civil lawyers have been hesitant to recognise constructive trusts and other equitable remedies available in common law jurisdictions.9 While this chapter intends to derive inspiration from common law jurisprudence in its attempt to refine third-party liability, it takes a cautious approach and aims for adaptation. Thus, it builds on Japan’s existing statutory scheme based largely on the civil law tradition and considers some interpretive alternatives to better adjust to the recent trust practices and investment environments.

A.  Accessory Liability The Japanese Civil Code contains no specific provision addressing tort liability for breaches of trust or fiduciary obligation. However, the Trust Act does not specifically address the liability of those who assist in the trustee’s breach of trust. Thus, one must engage in the statutory jigsaw puzzle of deducing from the provisions of these statutes to ascertain the appropriate scope of liability. Some possible leads for understanding liabilities may be gleaned from Trust Act provisions on liabilities owed by those who engage in trust administration in different capacities. When the trustee delegates part of his duties and responsibilities to a third party, the trustee owes the duty to monitor the performance of the third party in a manner that is necessary, proper and in accordance with the purpose of the trust.10 Although a third party will be under a contractual obligation to the trustee by virtue of delegation, there is no express provision regarding the liability he owes to the beneficiary.11 The beneficiary is in a position to require the trustee to hold this 8 See Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919 [84]–[86] (Millett LJ dissenting); J Cartwright, Contract Law: An Introduction to the English Law of Contract for the Civil Lawyer, 3rd edn (Bloomsbury 2016) 170. 9 See AE Overbeck, ‘Explanatory Report on the Hague Convention on the Law Applicable to Trusts and on their Recognition’ in Proceedings of the Fifteenth Session: Trusts Applicable Law and Recognition, vol 2 (HCCH Publications 1985) paras 167–68. 10 Trust Act, Law No 108 of 2006, ss 28, 35 (Trust Act). 11 The earlier Trust Act, Law No 62 of 1922, provided that the one who administers the trust on behalf of the trustee owes responsibilities identical to that of the trustee. This provision was removed because it imposes an onerous burden on the delegated third party.

Japan  331 third party accountable under the mandate, but it is not entirely clear whether the ­statute contemplates the possibility of the beneficiary pursuing the third party directly. Even when the trustee is dead or bankrupt, the proper course would usually involve appointing a successor. A third party may also be appointed to act on behalf of the beneficiaries. The Act gives different names to such appointees depending on the circumstances: a trust administrator (信託管理人) can be appointed when the beneficiary does not­ physically exist; a trust supervisor (信託監督人) can be appointed when the beneficiary does exist; and a beneficiaries’ agent (受益者代理人) can be selected among the beneficiaries. In each instance, the appointee owes a statutory duty similar to that of an agent who must act as a faithful administrator and act sincerely and impartially for the benefit of the beneficiaries.12 In the absence of formal delegation or appointment to act on behalf of the beneficiary, the Trust Act is silent regarding the third party’s liability for causing harm to the trust or beneficiary. Given that beneficiaries have greater recourse against those appointed to act on their behalf than those who were delegated certain powers, one could argue that a third person placed in a position to act for the beneficiaries can be liable without a formal delegation or appointment. Nonetheless, unless there is a fiduciary-like relationship between the third party and either the trustee or beneficiaries, it is difficult to find a source of liability within the Trust Act. To explore further possibilities, one must examine tort law. To begin with, the general tort law provision of the Civil Code, article 709, is a French-inspired provision, which establishes the general grounds of tort liability: Civil Code Article 709 (Damages in Torts) A person who has intentionally or negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence.

Like in France, and unlike in England or Germany, Japanese tort law does not recognise a doctrine that categorically forecloses compensation for pure economic loss.13 This approach bears the risk of the indiscriminate multiplication of claims and expansion of economic losses. To avoid such outcomes, Japanese judges and commentators have narrowly interpreted ‘legally protected interests’ and the duty of care underlying ­‘negligence’ standards. However, the point at which the boundary should be drawn has been contested. Accessory tort liability is specifically addressed by the following provision concerning joint tortfeasors: Article 719 (Liability of Joint Tortfeasors) (1) If more than one person has inflicted damages on others by their joint tortious acts, each of them shall be jointly and severally liable to compensate for those damages. The same shall apply if it cannot be ascertained which of the joint tortfeasors inflicted the damages. 12 Trust Act s 126 (trust administrator’s duties); s 133 (trust supervisor’s duties); s 140 (duties of beneficiary’s agent). 13 Y Nomi, ‘Japan’ in VV Palmer and M Bussani (eds), Pure Economic Loss: New Horizons in Comparative Law (Routledge 2008) 71–73.

332  Masayuki Tamaruya (2) The provisions of the preceding paragraph shall apply to any person who incited or was an accessory to the perpetrator, by deeming him/her to be one of the joint tortfeasors.

This provision recognises three categories of joint tortfeasor liability: joint tortious acts, unascertainable joint tortfeasors and incitement and accessories. However, this provision is notoriously difficult to apply. In the 1960s and 1970s, it was broadly applied to cases of pollution. Factories that operated independently of each other but contributed to air or water pollution were held to satisfy the requirement of ‘joint tortious acts’ because harmful emissions from each factory together caused health hazards.14 It is not obvious whether similar broad interpretations should apply to different categories of cases, such as those causing economic harm. Incitement and accessory are not defined, and the distinction between this category of tortfeasors and earlier ascertainable and unascertainable tortfeasors has not been clarified.15 Setting a principled parameter for accessory liability pertaining to the management of protected funds is a major challenge. Another potential difficulty is the level of fault required for incitement and accessory liability. Here, the Japanese court has shown willingness to allow accessory liability by negligence. In Kawamoto v Yokota,16 a branch manager of a respectable company was found to have negligently assisted a fraudster when he unwittingly indicated to a claimant that there was an impending transaction involving a large payment to the fraudster; the claimant laid out money to the fraudster on this basis. While finding that the defendant was unaware of the impending fraud, the Tokyo High Court held the defendant liable for negligently assisting the fraudster, although the damages were reduced by 90 per cent in view of the claimant’s carelessness.

B.  Recipient Liabilities The Trust Act expressly provides for a beneficiary’s remedy against third-party recipients. According to article 27, where the trustee disposes of trust assets in breach of trust, the beneficiary can rescind the transaction between the trustee and the recipient if the latter knows about the breach or was grossly negligent in not knowing that the transaction was in breach of trust.17 This is similar to the common law bona fide purchaser rule, though the recipient is protected even if he receives the assets as a gift and not in exchange for any consideration. To the extent that the rescission is successful, the transfer is void ab initio and the trustee is treated as if he retained the title to the property. Even if the recipient is bankrupt, the (successor) trustee can claim the ownership of the property.18 However, this approach has its limitations: if the

14 eg, [party names unknown] 672 Hanrei Jiho 30 (Tsu District Court, Yokkaichi Branch, 24 July 1972). 15 A Kubota, Tort Law, 2nd edn (Yuhikaku 2018) 485–87. 16 Kawamoto v Yokota (1973) 706 Hanrei Jiho 23 (Tokyo High Court). 17 Trust Act s 27(1). 18 M Arai, ‘Trust Law in Japan: Inspiring Changes in Asia, 1922 and 2006’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013) 38; H Dogauchi, Trust Doctrine and Private Law System (Yuhikaku 1996) 182.

Japan  333 relevant property is money, the recipient is considered the owner of the money by virtue of possession, extinguishing the beneficiary’s ownership claim.19 If the recipient disposes of the property before recission, the beneficiary cannot claim ownership of the proceeds. Under these circumstances, the beneficiary must seek recourse by way of unjust enrichment pursuant to the Civil Code.20 This claim is personal in nature, depriving the beneficiary of priority in bankruptcy or a claim to the profits in the hands of the recipient. The remedy under article 27 lacks a proprietary nature; this is not an accident. In formulating the recessionary remedy, drafters of the 1922 Trust Act rejected the English doctrines of tracing and constructive trust for three reasons. First, these remedies were considered inconsistent with the civilian understanding of trust as obligational in nature; second, it was considered illogical to recognise trusts where there is no confidence to be imposed on the purported trustee; third, at a more practical level, the drafters were unsure how the third party who colluded with the trustee to escape with the trust assets could be compelled to administer the trust and perform fiduciary duties.21 Since the 2006 Trust Act continued the basic structure of the 1922 Act, one cannot easily dismiss the fact that the drafters intentionally avoided providing for a proprietary remedy. This can be a formidable barrier to suggesting that a proprietary remedy should be recognised. Nonetheless, these objections can arguably be overcome in light of the century-long history of trust practices and a greater understanding of the theoretical nature of trusts. Of these three objections, the latter two can be readily disposed of. In common law jurisdictions, trustees of constructive trusts are not necessarily subject to the same duties and liabilities as trustees of express trust.22 While equitable remedies can be tailored to the facts of individual cases, the trustee’s main responsibility is to return the property held improperly to the trust. On this basis, there is no need to impose confidence on the trustee or to task the court with the responsibility of monitoring the operation of constructive trusteeship. The general understanding of Japanese trusts law in in personam terms is not an insuperable barrier. There is now a broad consensus that, on a closer look, the Trust Act contains a number of provisions conducive to the in rem understanding of the trust.23 The most important provisions for the purpose of this chapter are those that confer trust assets an independent and ring-fenced status. Under the Japanese Trust Act, trust assets do not form part of the estate in the event of a trustee’s death24 or

19 If the relevant property is real property, or otherwise can officially be registered, the remedy is available only if the property was registered as trust property and the recipient knew or was grossly negligent in not knowing that the transaction was in breach of trust. Even if the beneficiary rescinds the transaction, if the recipient transfers the relevant property to yet another third party and completes registration, the proprietary claim fails. 20 Civil Code, Law No 89 of 1896, s 703. 21 K Osakadani, Fundamental Issues of Trust Law Reform (Ministry of Justice Research Bureau 1938) 67–93. 22 RC Nolan, ‘Equitable Property’ (2006) 122 Law Quarterly Review 232, 241; HE Smith, ‘Fiduciary Law and Equity’ in EJ Criddle, PB Miller and RH Sitkoff (eds), The Oxford Handbook of Fiduciary Law (Oxford University Press 2019) 756. 23 K Shinomiya, Trust Law, rev edn (Yuhikaku 1989) 61–63; Dogauchi (n 18) 217–19. 24 Trust Act s 74.

334  Masayuki Tamaruya bankruptcy estate in the event of a trustee’s bankruptcy.25 The trust asset’s independence is buttressed by the doctrine of real subrogation: ‘any property obtained by the trustee as a result of the administration, disposition, loss or damage of, or any other events occurring to property that belongs to the trust property’ becomes part of the trust property.26 Furthermore, recent case law indicates that courts are willing to recognise trusts based on the implied intent of the settlor.27 In Nakata Construction Co v East Japan Construction Guaranty Co (2002),28 the Japanese Supreme Court implied a trust in which none of the parties expressed a wish to create one. In this case, a construction company went bankrupt before completing its work for the local government.29 The Supreme Court held that the advance payment made by the local government and held by the construction company in a separate bank account was in trust for the benefit of the local government. The trust contract arose from the fact that, under the relevant legislation and contractual arrangements, the bankrupt company could withdraw from the separate bank account only for the purpose of specific construction work and by following designated procedures subject to the guarantee company’s audit. In other words, the implied intention of the parties provided the basis for the Japanese Supreme Court to justify an outcome similar to imposing the English Quistclose trust.30 In Holographic Will Trustee v Ueno Department Store (2016), the court effectively implied a trust by giving effect to a testamentary trust that contravened forced heirship.31 Finding that the purpose of the trust was unattainable, the Tokyo High Court held that the trust was terminated.32 Under the Japanese Trust Act, if a trust is terminated and the trustee makes a requisite distribution, in the absence of an express designation, the settlor or her heirs or successors are deemed a residuary beneficiary.33 The Court held that upon termination, the trust implied that the trust property was to be distributed to the designated beneficiary to the extent that it did not contravene the rights of the forced heir claimants, and the remaining shares were to be given to the forced heir claimants. Although the forced heirship claimant was presumably the last person the deceased wanted to give her shares to, the Japanese court was willing to imply such terms in the trust based on the settlor’s intent.34 These cases evidence the Japanese courts’ willingness to interpret parties’ intentions flexibly to achieve an outcome that matches the expectations within relevant 25 ibid s 25(1). 26 ibid s 16(i). For comparative significance of real subrogation, FH Lawson, A Common Lawyer Looks at the Civil Law (University of Michigan Law School 1953) 195–97. 27 Creation of trusts based on implied intention is very close to what common lawyers call a ‘trust arising by operation of law’. See L Smith, The Law of Tracing (Oxford University Press 1997) 295. 28 Nakata Construction Co v East Japan Construction Guaranty Co (2002) 56(1) Minshu 20 (Supreme Court, 17 November 2002). 29 For detail, see Arai (n 18) 32–33; Tamaruya, ‘The Transformation of Japanese Trusts Law and Practice (n 5) 224–25. 30 M Okino, ‘Public Work Advance Payment and Trust: Supreme Court Case of 17 January, 2002 Re-Considered’ in Y Nomi et al eds, Law and Policy in the Study of Civil Law: In Celebration of 70th Birthday of Professor Yoshinobu Hirai (Yuhikaku 2007) 389–411; Arai (n 18) 33. 31 Holographic Will Trustee v Ueno Department Store 2325 Hanji 41 (Tokyo High Court, 19 October 2016). 32 Trust Act s 163(i). 33 ibid s 182(2). 34 M Tamaruya, ‘Japanese Wealth Management and the Transformation of the Law of Trusts and Succession’ (2019) 33 Trust Law International 147, 151.

Japan  335 commercial or familial settings. In the Nakata Construction case, the court was aware that the outcome carried a proprietary effect in the sense that the money held in a segregated account is ring-fenced to foreclose the bankruptcy administrator’s claim. Although there has been no case implying a trust in which the assets were disposed of in a breach of trust, the categories of implied trusts are arguably not closed. Whether implied trusts can justifiably be extended to cases where the assets are transferred in a breach of trust is a question on which common law and historical materials can be instructive.

IV.  Common Law Inspirations A.  General Approach Civil lawyers are aware that deriving inspiration from common law is fraught with difficulty,35 which is confounded if the basis of the liability is contested. While common law courts have often referred to the liability of dishonest assistance and unconscionable recipients as the liability to account as a constructive trustee, this terminology has been criticised as being misleading.36 This difficulty is doubly confounded if the common law is not uniform in formulating the basis for the liability. American and English law are deeply divided regarding constructive trusts. Against this background, a brief outline of the comparative law approach is required before conducting a detailed discussion. The Anglo-American divide in treating accessory liability concerns the way in which the wrongs are categorised. As DA DeMott observes, American law characterises both the breach of a fiduciary duty and culpable assistance to a fiduciary’s breach as tortious, whereas English law houses both wrongs under equity.37 The corollary is that in the United States, the requisite elements for establishing accessory liability are uniform across common law and equity, while in England the elements for establishing assistance to a fiduciary breach are distinct from those concerning other torts. Since the Japanese Trust Act does not provide a distinct basis for triggering accessory liability, a natural approach would be to commence from a tortious analysis. More substantively, given that Japanese law does not preclude the recovery of pure economic loss, Japanese judges are not likely to be inclined to follow the restrictive approach typically followed in English law. Emulating constructive trusts and tracing in common law is particularly difficult for civilians.38 Here, again, the Anglo-American divide, concerning the analytical 35 M Lupoi, Trusts: A Comparative Study (Cambridge University Press 2000) 193; Ying-Chieh Wu, ‘Constructive Trusts in the Civil Law Tradition’ (2018) 12 Journal of Equity 319, 319–20. 36 Paragon Finance v DB Thakerar & Co [1999] 1 All ER 400 (CA) 409; YK Liew, Rationalising Constructive Trusts (Hart Publishing 2017) 338. 37 DA DeMott, ‘Accessory Disloyalty: Comparative Perspective on Substantial Assistance to Fiduciary Breach’ in PS Davies and JE Penner (eds), Equity, Trusts and Commerce (Hart Publishing 2017) 254. 38 Ying-Chieh Wu suggests that civilians can see the constructive trust as involving a beneficiary enforcing his or her pre-existing proprietary right against the third party: Wu (n 35) 323–24. The present chapter does not argue against this thesis, but rather explores an alternative approach.

336  Masayuki Tamaruya approach, emerges.39 American law treats constructive trusts and tracing as part of its remedies, granting wider discretion to judges possessing equitable jurisdiction.40 In contrast, while theoretical debates may not have converged in England, case law appears to posit that tracing operates on the basis of property law.41 Unfortunately, neither of these approaches is easy to emulate. Unlike their American counterparts, Japanese judges are seldom inclined to wield a vast scope of discretionary powers, and the Japanese public would not have it any other way. Japanese judges would also shy away from the daunting task of reconciling civil law and common law notions of property,42 especially when the proprietary basis for trust assets is contested in England and other common law jurisdictions.43 One way to overcome these difficulties is to return to historical sources: the Californian Civil Code of 1872,44 the Indian Trusts Act of 188245 and Liechtenstein’s 1926 Personen- und Gesellschaftsrecht (PGR: Law of Persons and Companies).46 The first two codifications were completed by eminent common law lawyers in the mid-nineteenth century. I refer to these examples not only because they inspired the Japanese Trust Act as originally introduced in 1922, but also because they are trust codifications completed at a time when common lawyers were still interested in codification, and when the Anglo-American divide was not yet entrenched.47 The third source of inspiration, the 1926 Law in Liechtenstein, is a codification of trusts law in a civil law country that occurred concurrently with the Japanese attempt, completed in 1922. In this respect, this exercise parallels similar attempts in mixed jurisdictions, where extensive theoretical enquiry was conducted to integrate common law trust into Roman law-based legal systems.48 Unlike several such attempts, Liechtenstein legislation contains provisions on tracing similar to the common law codification in California and India.

39 C Saiman, ‘Restitution in America: Why the US Refuses to Join the Global Restitution Party’ (2008) 28 Oxford Journal of Legal Studies 99, 112–13. 40 DB Dobbs and CL Roberts, Law of Remedies: Damages–Remedies–Restitution, 3rd edn (West Academic Publishing 2018) 405, § 4.3. 41 Foskett v McKeown [2001] 1 AC 102. 42 See Lawson (n 26) 200–7. 43 LD Smith, ‘Trust and Patrimony’ (2008) 38 Revue Générale de Droit 379; B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1. 44 California Civil Code (RM Sims ed, 1906) (repealed 1986). 45 S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299. 46 Personen- und Gesellschaftsrecht, LR 216.0 (Liechtenstein). Reliance is made hereafter to the translation by Bryan Jeeves, Liechtenstein Company Law, 2nd edn (Liechtenstein Verlag AG 1999). 47 Over the nineteenth century, American case law gradually departed from English tradition, but that was a gradual process spanning almost a century: J Getzler, ‘Transplantation and Mutation in Anglo-American Trust Law’ (2009) 10 Theoretical Inquiries in Law 355. 48 The constructive trust was not received in South Africa: E Cameron et al, Honore’s South African Law of Trusts, 6th edn (Juta 2018) ss 76, 77. It is not codified in Quebec: M McAuley, ‘A Problematique: Engineering the Constructive Trust in Quebec – Structural Tension in the Development of In Rem Restitution for Unjust Enrichment’, available at: ciaj-icaj.ca/wp-content/uploads/documents/import/1997/MCAULEY97. pdf?id=1389&1489699477. In Scotland, it exists only at the margin, is unhelpful, and can cause injustice: GL Gretton, ‘Constructive Trusts I’ (1997) 1 Edinburgh Law Review 281; see also Scottish Law Commission, Report on Trust Law (Scot Law Com No 239, 2014) para 2.8. The doctrine of constructive trust is not recognised in Louisiana: In re ATP Oil & Gas Corp, 553 BR 577 (Bankruptcy Court, SD Texas, Houston Division, 2016).

Japan  337

B.  Accessory Liability As discussed above, the natural starting point for comparative endeavours is the American tort approach. The Restatement (Third) of Torts divides secondary liability into civil conspiracy, aiding and abetting.49 Noting that the breach of fiduciary duty is a primary wrongdoing that generally produces liability for aiding and abetting, section 28 provides the following: A defendant is subject to liability for aiding and abetting a tort upon proof of the following elements: (a) a tort was committed against the plaintiff by another party; (b) the defendant knew that the other party’s conduct was wrongful; (c) the defendant knowingly and substantially assisted in the commission or concealment of the tort; and (d) the plaintiff suffered economic loss as a result.

Taken at face value, the requirement for this accessory liability is more restrictive than that required under the Japanese Civil Code article 719. Liability in this section requires proof of the defendant’s knowledge; negligence does not suffice.50 The defendant must have ‘substantially assisted’ the wrongdoing, and mere encouragement will not meet these standards.51 This reflects the judicial policy of avoiding the discouragement of the provision of advice and information over the course of ordinary transactions, which can be indistinguishable from encouraging wrongdoing by recipients or non-parties.52 However, there are subtleties. While the defendant is not liable just because he should have known of the primary wrong, the defendant does not need to understand the full legal significance of the facts or all the details of the primary wrongdoing. It is sufficient if the defendant was aware of the facts that made the primary conduct wrong. The defendant’s knowledge can also be inferred from circumstantial evidence.53 Indeed, the application of the general doctrine to the categories of actors is controversial.54 AW Scott discusses different categories of persons who deal with trustees, including depositories of trust funds,55 brokers56 and directors and officers of corporate trustees.57 Generally, third parties are liable only if they knowingly participate in a breach of trust or knowingly assist the trustee in committing a breach of trust. However, attorneys and other agents are exceptions. An agent can be liable even if he lacks actual knowledge of the breach of trust in cases in which he should have known

49 American Law Institute, Restatement (Third) of Torts: Liability for Economic Harm (2020) §§ 27, 28. The two heads of secondary liability was provided in a single section in the earlier edition: American Law Institute, Restatement (Second) of Torts (1979) § 876. 50 Restatement (Third) of Torts (n 49) § 28, comment c. 51 ibid, Reporter’s Note to comment d. Encouragement was a ground for liability under the Restatement (Second) of Torts (n 49) § 876(2). 52 Art Capital Group LLC v Neuhaus 896 NYS 2d 35, 37 (NY Appellate Division, 2010). 53 Restatement (Third) of Torts (n 49) § 28, comment c. 54 DeMott (n 37) 269. 55 AW Scott, WF Fratcher and ML Ascher, Scott and Ascher on Trusts, 5th edn (Wolters Kluwer 2008) s 30.4. 56 ibid s 30.6.2. 57 ibid s 30.6.3.

338  Masayuki Tamaruya that he was assisting the trustee in the commission of a breach.58 Some states introduced statutes that, in various ways and under various circumstances, protect a third party who deals with or otherwise assists a trustee.59 The Uniform Trust Code protects a person who assists a trustee in good faith without knowledge that the trustee is exceeding or improperly exercising the trustee’s powers.60 Nonetheless, one can have ‘knowledge of a fact’ if he ‘from all the facts and circumstances known to the person at the time in ­question, has reason to know it’.61 The position of financial intermediaries can also be controversial, and the law is evolving regarding such matters. In RBC Capital Markets LLC v Jervis,62 an investment bank was advising the target directors in a merger and acquisition transaction. Although the court did not explicitly characterise the relationship between the target directors and the defendant as fiduciary, the informational asymmetries between the bank and its client created ‘an obligation not to act in a manner that is contrary to the interests of the board of directors’.63 Even if not found to be fiduciary, the expectation of loyalty on the advising bankers served as a basis for liability as an accessory to the board of directors’ breach of fiduciary duty of disclosure in the proxy statement. A similar interaction between the breach of fiduciary claim and aiding and abetting claims can be seen in Anwar v Fairfield Greenwich Ltd.64 In this case, the plaintiffs were investors in a group of hedge funds that had invested in Bernard Madoff ’s Ponzi scheme. The US District Court in New York held that the Citco group, which provided administrative and custodial services to hedge funds through its entities, owed a fiduciary duty to investors in hedge funds. While there was no direct contractual relationship between the defendant and investors, the Court concluded that the defendant’s responsibilities, such as preparing monthly financial statements and calculating the net asset value of the securities, had created an independent fiduciary duty for the investors who had trusted and relied on the defendant. The Court also ruled in favour of the investors on their claims of aiding and abetting the hedge funds’ fraud and breach of fiduciary duty. Given the defendants’ familiarity with the funds, their general experience in providing financial services, and their knowledge of Madoff ’s prominent role and lack of transparency, the Court found that the plaintiffs had sufficiently alleged a strong inference of actual knowledge regarding the underlying fraud and breach of fiduciary duty, such that the case should not be dismissed at that stage.65 In England, the courts and scholars have developed a more unifying rationale for third-party liability to assist trustees’ equitable wrongdoings.66 The doctrinal shift from knowing assistance to dishonest assistance occurred just as the English 58 ibid s 30.6.4. 59 PT Wendel, ‘The Evolution of the Law of Trustee’s Powers and Third Party Liability for Participating in a Breach of Trust: An Economic Analysis’ (2005) 35 Seton Hall Law Review 971. 60 Uniform Trust Code, s 1012(a). 61 ibid s 104(a); Scott et al (n 55) s 30.6.4. 62 RBC Capital Markets LLC v Jervis 129 A 3d 816 (Del, 2015). The case is discussed in HE Jackson and TB Gillis, ‘Fiduciary Law and Financial Regulation’ in EJ Criddle, PB Miller and RH Sitkoff (eds), The Oxford Handbook of Fiduciary Law (Oxford University Press 2019) 855–56. 63 RBC Capital Markets LLC (n 62) 865, fn 190; DeMott (n 37) 272. 64 Anwar v Fairfield Greenwich Ltd 728 F Supp 2d 372 (SD NY, 2010). 65 ibid 442–43. 66 PS Davies, Accessory Liability (Bloomsbury 2017) 88.

Japan  339 court reoriented the place of equitable doctrine within commercial transactions. In the 1960s and 1970s, the English court displayed a willingness to relax the requirement for finding accessory liability and ordered damages to banks that allowed funds to be withdrawn by sophisticated fraudsters.67 This ‘apparently caused consternation in banking circles’,68 and the English court began to tighten the test for accessory liability in the late 1980s.69 The Privy Council judgment in Royal Brunei Airlines Sdn Bhd v Tan70 is credited as the new beginning of the modern doctrine of dishonest assistance, with Lord Nicholls’ opinion reorienting the focus from the trustee’s dishonesty to that of the assistant.71 Extensive debates have taken place over the component of dishonesty, with the court vacillating between Lord Nicholls’ objective test and the more subjective test proposed later in Twinsectra Ltd v Yardley.72 As Simon Gardner points out, ordinary standards of honesty is a concept not free of doubt or unchanging, and subject to construction according to the judge’s value judgement.73 One vision of dishonesty would demand actual knowledge, while another would require alertness to the possible breach. According to the former standard, the liability would be less likely to arise, allowing professional agents to fear less of the financial exposure, possibly leading to competitiveness in commercial undertakings. The latter standard could bring greater risks of liability, but improvements in professional standards might be expected. The harsh rule on joint and several liability could also affect judicial attitude.74

C.  Constructive Trusts and Tracing One of the common features of the codified trusts law in California, India and Liechtenstein is that while they provide a proprietary remedy for breaches of trust, they avoid the understanding of trusts in proprietary terms. According to the 1872 California Civil Code, a voluntary trust is ‘an obligation arising out of a personal confidence reposed in, and voluntarily accepted by, one for the benefit of another’,75 and the trustee is vested with ‘the whole estate … subject only to the execution of the trust’.76 In India, the trust is ‘an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner … for the benefit of another’, and the beneficiary’s interest is defined as ‘his right against the trustee as owner of the trust property’.77 Under Liechtenstein PGR, the trustee receives the trust property and owes ‘the obligation to administer or use such property in his own name as an independent 67 Karak Rubber Co v Burden (No 2) [1972] 1 All ER 1073; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073. 68 Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, 375. 69 Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340. 70 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC). 71 Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in WR Cornish (ed), Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (Hart Publishing 1998). 72 Twinsectra Ltd v Yardley [2002] UKHL12, [2002] 2 AC 164. 73 S Gardner, An Introduction to the Law of Trusts, 3rd edn (Oxford University Press 2011) 262. 74 ibid 262–64. 75 California Civil Code, s 2216 (1906). 76 ibid s 863. 77 Indian Trusts Act 1882, s 3.

340  Masayuki Tamaruya legal owner for the benefit of one or several third persons (beneficiaries) with effect towards all other persons’.78 Thus, all three codes regard the trustee as the owner of the trust asset who owes a certain obligation to act in the interest of the beneficiary. However, the motives for adopting this obligational conception of trust are not uniform. The California Civil Code was originally drafted as part of the proposed New York Civil Code, which incorporated earlier property reforms in the 1820s.79 The New York revision of property laws of 1827–28 simplified the law of property in favour of increasing the alienability of land. The negative attitude towards the creation of trusts, fee tails and other restraints on the alienation of property influenced the provisions of the California Code.80 The Indian Trusts Act was introduced as part of the British Law Commission’s efforts to codify English laws for use in British India. By the time the Commission was established, European settlers were already utilising trusts, and the court had enforced varied forms of trusts-like mechanisms used by local Hindu and Muslim populations. While they saw the opportunity to codify trusts law, the drafters considered it undesirable for these trusts to be entangled with the complication of double estates.81 In drafting the Liechtenstein legislation, Wilhelm Beck, an eminent Liechtenstein lawyer, was motivated to attract foreign investors by providing liberal and flexible company law provisions.82 This effort was part of the ‘invention of offshore finance’ by the impoverished principality struggling immediately after the First World War to survive without any significant natural resources.83 In fitting trusts into the legal system based on the Austrian Civil Code of 1812, it must have been considered unwise to replicate the proprietary conception of common law trusts. Despite the varying motives in conceptualising trust in obligational terms, all three codes incorporate constructive trusts, which are normally considered proprietary in nature. These codes can be instructive regarding the ways in which they bridge obligational trusts and proprietary remedies. The California Civil Code classifies trusts into voluntary and involuntary trusts.84 Involuntary trusts arise when one wrongfully detains something or when one gains something by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful acts.85 In each instance, the involuntary trustee holds the property for the benefit of the owner or a person who would otherwise have had it. The tracing rule is housed under the heading of the obligation of a third person: § 2243. Third person, when involuntary trustee. Everyone to whom property is transferred in violation of a trust, holds the same as an involuntary trustee under such trust, unless he purchased it in good faith, and for a valuable consideration.86 78 Personen- und Gesellschaftsrecht (Liechtenstein) art 897. 79 The definition of trust in the California Civil Code, s 863 (1906) is virtually identical with the definition contained in Draft New York Civil Code, s 281 (1862) and the New York Revised Statutes of 1829, s 60. 80 LM Friedman, A History of American Law, 2nd edn (Simon & Schuster 1985) 239–41. 81 W Stokes (ed), The Anglo-Indian Codes (Clarendon Press 1887) 821. 82 FA Schurr, ‘Trusts in Civil Law Environments: Can Civil Law Jurisdictions such as Liechtenstein Deal with Core issues of Trust Law?’ in RC Nolan, KFK Low and HW Tang (eds), Trusts and Modern Wealth Management (Cambridge University Press 2018) 511, fn 6. 83 P Panico, International Trust Laws, 2nd edn (Oxford University Press 2017) s 14.76. 84 California Civil Code, ss 2215–17 (1906). 85 ibid ss 2223, 2224. 86 ibid s 2243.

Japan  341 Compared with other examples in India and Liechtenstein, this provision is rather succinct, which is consistent with American reformers’ desire to simplify property laws. Nonetheless, there is an interesting conceptual leap from the obligational notion of trust to what is usually considered a proprietary remedy. Instead of imposing a separate trust (constructive, implied, or otherwise), the California Civil Code treats the recipient as holding the received property as a trustee under ‘such trust’, presumably referring to the original trust that was breached. Although the California Code does not provide for the conversion of received property, if the recipient holds the property under the original trust, one could presume that any assets received in the course of the conversion will form a part of the original trust assets. While the drafters of the Indian Act referred to the California Civil Code, it contained a more elaborate provision replicating the English tracing action: 63. Following trust property into the hands of third persons. Where trust property comes into the hands of a third person inconsistently with the trust, the beneficiary may require him to admit formally, or may institute a suit for a declaration, that the property is comprised in the trust. Into that which it has been converted. Where the trustee has disposed of trust property and the money or other property which he has received therefore can be traced in his hands, or in the hands of his legal representative or legatee, the beneficiary has, in respect thereof, rights as nearly as may be the same as his rights in respect of the original trust property.87

Section 64 protects a transferee in good faith for consideration without having notice of the trust and a transferee for consideration from such a transferee.88 Although the Indian Trusts Act does not use the term ‘involuntary trust’, the conceptual manipulation is similar to the California Civil Code. A trust property that is wrongfully transferred to a third party is considered a part of the trust assets. The Indian Trusts Act is more detailed than the California Code in that it clarifies that this result can be reached either outside the court by way of formal admission by the third party or through court proceedings asking for declaration. The second paragraph of section 63 indicates that the beneficiary can reach the fund or property into which the trust ­property is converted.89 In fact, later case law confirmed that ‘what s 63 provides is a right in rem and not a right in personam’.90 Liechtenstein’s 1926 trusts legislation also places the third party in the position of a trustee vis-a-vis the beneficiary when the former receives property for the latter’s benefit without specifically being appointed as a trustee. Article 898 introduces the concept of ‘implied trust’: Art 898. Wherever by operation of law or disposition of an official authority or in any other way, a person, without being specifically appointed as trustee, receives property or rights of any kind in his own name, but for the benefit of the owner hitherto or a third party, the relationship existing between such person and the third party shall, in the absence of any other provision, be treated as an implied trust.91



87 Indian

Trusts Act 1882, s 63. s 64. 89 HK Saharay, Goyle’s the Law of Trusts, 3rd edn (Eastern Law House 2016) 382. 90 State of Orissa v Netrananda Mohapatra AIR 1962 Ori 4 (DB); Saharay (n 89) 383. 91 Personen- und Gesellschaftsrecht (Liechtenstein) art 898. 88 ibid

342  Masayuki Tamaruya The Liechtenstein legislation was inspired by the English Trustee Act of 1925,92 but it is difficult to speculate on an intellectual link with the Indian Trusts Act or the California Civil Code. Nonetheless, there is a notable similarity between the implied trust concept in Liechtenstein and the involuntary trust concept in the California Civil Code.93 Similar to the California Code, the Liechtenstein law includes a separate provision on the transfer of the trust property to the third party in breach of trust: Art 912. [para 3] Where third parties have acquired from the trustee property or rights which they knew were trust property and the trustee was not entitled to dispose of such property or rights, the settlor, a co-trustee or a beneficiary or, finally, a trustee appointed by the Princely Liechtenstein Court of Justice may, alone or as joint litigant with others, claim the surrender of such assets or take action on grounds of unjust enrichment for the benefit of the trust assets.

This provision does not make a direct connection with implied trusts and provides a specific remedy for claiming the surrender of transferred assets or the action of unjust enrichment.94 Nonetheless, the provision prescribes the appointment of a trustee by the court and appears consistent with the imposition of implied trusts.95 These three pieces of legislation use slightly different terminology and techniques to impose trusts to provide tracing remedies. This was done without resorting to the proprietary conception of the beneficiary’s interest or division of common law and ­equitable titles. However, this terminology may be confusing. The same trust is treated as involuntary in California and is implied in Liechtenstein. The technique appears to vary among the statutes. The Californian and Indian legislation seem to imply that the third-party recipient is the trustee of the original trust, while the Liechtenstein legislation seems to presume that the implied trust arises separately from the original trust. These variations may be more productively dealt with when we discuss the condition under which trust is imposed and the range of duties that the third-party recipient owes under the imposed trust.96 Before moving on to a conceptual synthesis, we should caution ourselves against being overly optimistic about deriving conceptual inspiration from foreign law; what the law says in the book and how it works on the ground can differ widely. In this respect, none of these examples bode well. By the 1920s, the statutory language of the California Civil Code was being ignored by the court,97 and by 1955, practitioners considered it ‘as functional as a vermiform appendix’.98 In 1986, the trusts section of the Californian 92 Lupoi (n 35) 280. 93 cf California Civil Code, ss 2223, 2224 (1906), as discussed in text corresponding to fn 85. In the Lichtenstein legislation, the provision on implied trusts (art 898) follows immediately after the provision defining the trust relationship (art 897); while in the California Civil Code, the definition of involuntary trust (s 2217) immediately follows the provision defining voluntary trust (s 2216). 94 Lupoi observes that the constructive trust does not apply in those circumstances covered by art 912: Lupoi (n 35) 325. 95 Schurr argues that the Liechtenstein legislation represents a departure from the conventional civil law approach by recognising trusts implied by law and the right to follow trust property: Schurr (n 82) 514–15. 96 See fn 119 and accompanying text. 97 Title Ins & Trust Co v Duffill 191 Cal 629, 218 P 14 (1923); see also cases cited in GT Bogert, Trusts, 6th edn (Thompson 1987) 136, fn 21. 98 OB Evans, ‘Observations on the State, etc, of the California Laws of Uses and Trusts’ (1954) 28 Southern California Law Review 111.

Japan  343 Code was overhauled based on the Restatement of the Law (Second) of Trust and placed within the Probate Code.99 In India, despite the introduction of a free-standing trusts code, judges continued to resort to English case law.100 With regard to section 63, the Indian Supreme Court clarified that the two remedies made available by statute are not exhaustive, indicating that other remedies, including restoring the property and the appointment of a new trustee, are available.101 The Liechtenstein PGR, hailed as an early and successful example of transporting all aspects of trust into the civil-law notion, also has its limits due to the absence of the equity court’s discretionary jurisdiction.102 In the Cayman Islands’ case of In the Matter of the Golden Trust,103 the governing law of the trust and its trustee had to be changed from Liechtenstein to the Cayman Islands to rely on the equitable remedy of rectification.

V. Synthesis We are now in a position to attempt to construct accessory liability and tracing in a manner that fits the Japanese statutory scheme and meets the needs of modern Japanese society. If Japanese statutory provisions are building blocks, inspiration from common law can be used to cement them.

A.  Accessory Liability Reading the abstract language of article 719 of the Civil Code regarding the liability of joint tortfeasors, it is not difficult to find accessory liability. If a third party intends to harm the trust beneficiary and work with the trustee to achieve the intended result, the court would have no difficulty finding him liable for the loss. This is consistent with the common law position. However, a more delicate analysis is required when a defendant’s fault does not rise to the level of intentional wrongdoing. Since the main concerns here are the financial institutions and professionals rather than the trustees or fiduciaries themselves, there is a deep pocket issue. If joint tortfeasor liability is imposed indiscriminately, these institutions and professionals effectively serve as insurers and must pay every time the trustee of fiduciaries causes a loss to the beneficiary. A cautious approach is warranted and, in broad terms, is consistent with common law principles. In contexts where professionals assist the trustee in serving a family trust, their tort liability can be tailored to the position they occupy vis-a-vis the beneficiary. Note that, if by virtue of the trust instrument or trustee’s direction, the third party is delegated with certain powers or is appointed to act in the interest of the beneficiary, there are express

99 Division 9 of the California Probate Code (ss 15000 et seq); California Law Revision Commission, ‘Recommendation Proposing the Trust Law’ (1985) 18 California Law Revision Commission’s Reports 501. 100 Tofaris (n 45) 317–38. 101 Janakirama Iyer v Nilkanta Iyer AIR 1962 SC 633. See Saharay (n 89) 383. 102 Lupoi (n 35) 281, Panico (n 83) ss 14.76–14.80. Until recently, trusts were not used as often as other forms of legal personality such as Anstalt and Stiftung. 103 In the Matter of the Golden Trust 2021(2) CILR 355. See Panico (n 83) s 14.80.

344  Masayuki Tamaruya provisions in the Trust Act to this end.104 This does not cover instances in which the third party has not been formally delegated any power nor appointed as the beneficiary’s fiduciary, and yet has undertaken a fiduciary-like responsibility that involves enhancing or protecting the interest of the beneficiary. In this case, the relevant third party can be tasked with responsibility and liability analogous to the trustee. This conclusion can be reached either as an analogy to the responsibility and liability imposed upon trustees, the appointee as the beneficiary’s fiduciary, or a cautious extension of tort liability. Formulating accessory liability in tort more generally is difficult. The American approach relies on the general tort principle of accessory liability, but its application to different categories of third parties is controversial and haphazard. The English approach is centred on the unitary notion of equitable wrongs, but the concept of dishonesty remains elusive and controversial. Dishonesty, derived from reformulation in Tan of the holding in Barnes v Addy, does not conceptually fit within Japanese tort law, which is premised on negligence. One possibility is to examine the relationship between the fiduciary and assistant, and upon finding a certain reliance or dependence on the part of the former to expect loyalty from the latter, to impose an affirmative duty to prevent the loss from occurring to the beneficiary. Failure to perform this duty constitutes the accessory’s fault, upon which accessory liability can be based. To apply this to the context of investment funds, uncertainty and the state of flux must be acknowledged. In Kyushu Petroleum Industry Employee Pension Fund v Risona Bank,105 the trust bank had acted as a trustee for a pension fund since 1971. After the liberalisation of pension fund management in 2000, the pension fund decided to follow the advice of an investment adviser who had been newly appointed in 2002. While the trust bank limited itself to a custodial role, the fund significantly increased its high-risk investment and suffered large losses. In 2012, the adviser was arrested for falsifying the account and the pension fund sued the trust bank for a breach of duty of care. The court rejected the claim, holding that the trustee was required by law to follow the pension fund’s investment policy and was not required to advise beyond the mandate regarding the diversified investment of the entire pension fund. Despite the similarity with the American case of Anwar v Fairfield Greenwich Ltd,106 in which custodial service providers were found liable for a breach of fiduciary duty and aiding and abetting fraud and breach of fiduciary duty, the trust bank was absolved. However, the Japanese regulatory environment has shifted. Following the incident, the FSA introduced a regulation limiting the investment of pension money to funds subject to external audits and requiring trust banks to procure information on asset value directly from the investment fund rather than via financial advisers.107 In 2014, the FSA updated its regulatory document, using the term ‘fiduciary duty’ for the first time and giving that term a broad meaning. It stressed that all service providers in investment chains should improve their asset management capabilities to ‘contribut[e]

104 See nn 10–12 and accompanying text. 105 Kyushu Petroleum Industry Employee Pension Fund v Risona Bank 2194 Hanrei Jiho 56 (Osaka District Court, 29 March 2013). 106 See above section III.A. 107 Cabinet Office Order No 52 of 2007 on Financial Instruments Business, s 130(1)[15].

Japan  345 to the medium- to long-term growth of the financial market’ and ‘a positive cycle facilitating steady asset formation for Japanese citizens’.108 In 2017, the FSA published ‘Principles on Fiduciary Duty’ to encourage financial institution engaging in sales, advice, product development, asset management or administration in the investment chains to prioritise the interests of the ultimate beneficiaries.109 The Ministry of Health and Labour has also updated the guidelines on pension fund managers’ roles and responsibilities,110 and the Pension Fund Association published a handbook reflecting these guidelines.111 These informal guidelines are not legally binding and are certainly not intended to ground accessory liability or tracing. Nonetheless, to the extent that they relate to the standard of conduct expected of those who operate in investment chains to serve the ultimate beneficiaries of investment funds, these guidelines can be informative. To the extent that investors rely or repose trust in the financial institution in the investment chain and justifiably expect loyalty, financial institutions have an affirmative duty to prevent loss to the beneficiary. Failure to perform this duty constitutes the fault upon which accessory liability is based.

B.  Constructive Trusts and Tracing While much of the discussion here is devoted to formulating proprietary remedies in the Japanese context, a quick review of the available personal remedies is in order. The primary remedy the Trust Act offers is for the beneficiary to rescind the transaction that was entered into in a breach of trust pursuant to article 27. This is available as long as the third party knew or was grossly negligent in not knowing that the transaction was in a breach of trust. As already mentioned, this remedy is futile if the relevant asset is disposed of before recission, in which case the only recourse is an unjust enrichment claim. This is personal in nature; therefore, the beneficiary cannot expect to recover excess profits or enjoy priority in bankruptcy. If the receipt of the property constitutes an independent tort, such as colluding with the trustee to embezzle assets, compensation for loss can be allowed. These theories possibly overlap, and the court will not allow for double recovery. Depending on the concrete facts of the case, such as the solvency of the defendant, his state of mind, and whether the profit remains with the defendant, the claimant will choose the most advantageous option. While there is, as yet, no authority that recognises a proprietary remedy against the third-party recipient, the trust codes in California, India and Liechtenstein suggest

108 Financial Services Agency, ‘Financial Monitoring Policy for 2014–2015 (Policy for Supervision and Inspection)’ (FSA, September 2014) 3, available at: www.fsa.go.jp/en/news/2014/20141225-1/01.pdf; cf Law Commission, Fiduciary Duties of Investment Intermediaries (Law Com No 350, 2014). 109 Financial Services Agency, ‘Principles for Customer-Oriented Business Conduct’ (FSA, 30 March 2017), available at: www.fsa.go.jp/news/r2/singi/20210115-1/02.pdf. This was influenced by Professor Kay’s Review of UK Equity Markets and Long-Term Decision Making (Final report, July 2012). 110 Ministry of Health, Labour and Welfare, Guideline on the Role and Responsibilities of Employees’ Pension Fund Asset Managers (September 2012); Ministry of Health, Labour and Welfare, Guideline on the Role and Responsibilities of Determined Benefit Employees’ Pension Fund Asset Managers (April 2018). 111 Pension Fund Association, Pension Fund Fiduciary Duty Handbook, rev edn (May 2018).

346  Masayuki Tamaruya that the imposition of implied trusts could bridge the gap between the obligational conception of trust and proprietary remedies. Japanese case law has indicated that, where appropriate, judges may be willing to imply trusts even though the settlor did not express an intention to create one. Once a trust is implied, the Trust Act contains several provisions that ensure the independence of the trust fund by way of doctrines that carry proprietary consequences.112 Among them is a provision on subrogation applicable to ‘any property obtained by the trustee as a result of the administration, disposition, loss or damage of, or any other events occurring to property that belongs to the trust property’.113 Thus, if the defendant can be characterised as the trustee of an implied trust, the proceeds from the disposition of the trust property can be regarded as part of the trust assets. When should a trust be implied? It should be noted that if the defendant is a thirdparty recipient (not purchaser) with notice (or not grossly negligent in his lack of notice), the beneficiary has a rescission claim pursuant to the Japanese Trust Act.114 Thus, the question is whether and under what conditions it is appropriate to confer, on the beneficiary, a preferred position in comparison to other creditors who want their money back from the insolvent recipient. These competing creditors may be victims of torts, may have had their contracts breached, or may see the defendant unjustly enriched. It cannot be assumed that the Japanese public, unfamiliar with the institution of trusts, is prepared to agree that the beneficiary should enjoy any preferential status.115 Distinct grounds are required to justify proprietary consequences. The argument here is that fiduciary duty can be both a grounding and limiting concept. Trusts should be implied where the third-party recipient can be characterised as a fiduciary acting for the beneficiary. Not all bona fide recipients should be regarded as fiduciaries, but if the recipient is under an obligation to act for the beneficiary, it is sensible to infer that the property he receives does not belong to him beneficially and is not available to his creditors upon his bankruptcy. Outside the context of trusts, the Japanese Supreme Court has ruled that securities held by a bankrupt broker were subject to the client’s right of segregation (取戻権), as the creditors did not have expectations to have recourse against those assets purchased according to the client’s mandate and on the client’s account.116 This can provide an independent basis for imposing trusts by implication, which in turn justifies proprietary consequences, including real subrogation available under the Japanese Trust Act. By extension, the recipient of the property held in the implied trust could also be treated as a trustee by implication if he was not a bona fide recipient and was in the position of fiduciary in relation to the ultimate beneficiary. This result effectively replicates the common law tracing rules, albeit on a limited basis. 112 Ying-Chieh Wu, ‘Trusts Reimagined: The Transplantation and Evolution of Trust Law in Northeast Asia’ (2020) 68 American Journal of Comparative Law 441, 462–63; Shinomiya (n 23) 181–94. 113 Trust Act, s 16(i). See L Smith, ‘Unauthorized Dispositions of Trust Property: Tracing in Quebec Law’ (2013) 58 McGill Law Journal 795. 114 Trust Act, s 27; see above section III.B. 115 Scott et al (n 55) s13.1. (‘The trust beneficiary has an equitable property right that is enforceable against “every person in the world” because “every person in the world” is obligated not to collude with the trustee in a breach of trust’.) 116 [party name unknown] (1968) 22(7) Minshu 1313 (Japanese Supreme Court).

Japan  347 Again, the broader invocation of fiduciary duty by the guidelines issued by the FSA and other bodies may be relevant here. According to these guidelines, which are not strictly legally binding, financial institutions in the investment chain owe fiduciaries to the ultimate beneficiaries.117 It should also be noted that under the anti-money laundering regime, financial institutions are now required – as part of ongoing customer due diligence – to ‘scrutin[ise] transactions undertaken throughout the course of that relationship [with the customer] to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile including, where necessary, the source of funds’.118 Although this is not directly relevant to the financial institution’s recipient liability, nor is it intended to have any direct implication on trusts law, it indicates a certain level of probity expected of a receiving financial institution in ascertaining the source of the property. Once a trust is implied, the recipient is obligated as a trustee. It is not sensible to imply that all duties are owed as if he is the original trustee or fiduciary.119 The primary duty is to return the property to the trustee acting for the original trust. In addition, the implied trustee should be obligated not to disturb the independence of the assets and maintain their segregation. If he disposes of the trust assets in a breach of trust, any property obtained in exchange should belong to the trust by virtue of a real subrogation. If there is a shortfall, the implied trustee is liable to reinstate the loss. This analysis has the potential to replicate the common law doctrine of knowing receipt, albeit on a limited basis. It is difficult to decipher the implication of the above analysis to fact-intensive cases like Pension Beneficiaries v Seki.120 The implied trust analysis is more likely to reach the gains and proceeds in the hands of the recipient. It is also possible that the beneficiary can trace assets if further trusts can be implied. It might be argued that the remedy is too narrow because the relationship between the recipient and beneficiary must be fiduciary in nature, and mere knowledge is insufficient. Nonetheless, this is inevitable given that there is no statutory basis for proprietary remedies, either through the express language of the Trust Act or the Civil Code provisions on unjust enrichment. This limitation can be compensated by the broad construction of fiduciary relationships in the investment chain. In contrast, it might be contended that this imposes an onerous burden on financial institutions operating in the investment chain. This concern is particularly serious if the broad conception of fiduciary duty is adopted, and it can invite political opposition, as observed in the United States, over the debate regarding whether a broker-dealer should be considered a fiduciary.121 Nonetheless, such consequences can arguably be 117 See A Hudson, Equity and Trusts (Palgrave 2014) 218–19 (reference to the Financial Conduct Authority’s Principles of Businesses rule book in the UK in discussing the dishonesty element of recipient liability). 118 Financial Action Task Force, ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations’ (FATF, March 2022) 14. 119 C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts (Hart Publishing 2010) 132–44. 120 See above section II. 121 Department of Labor Employee Benefits Security Administration, Definition of the Term ‘Fiduciary’; Conflict of Interest Rule-Retirement Investment Advice, 81 Fed Reg 20946 (8 April 2016), found unconstitutional in Chamber of Commerce of the United States of America v US Department of Labor 885 F 3d 360 (5th Cir, 2018); General Rules and Regulations, Security Exchange Act of 1934, 17 CFR § 240.15l-1 (12 July 2019).

348  Masayuki Tamaruya justified in light of the recent emphasis on financial institutions’ integrity and veracity in customer due diligence and ascertainment of the ultimate beneficiaries.

VI. Conclusion Rather than attempting to characterise the present state of Japanese law, this chapter has suggested a doctrinal framework of accessory liability and tracing to implement better adaptation to the expanding investment chains and the growing use of family trusts in Japan. In addition to cases in which one knowingly participates in the trustee’s or fiduciary’s breach of trust, accessory liability can be imposed against one who stands in a fiduciary position to the trustee or fiduciary, or is relied upon with a justifiable expectation of loyalty by the fiduciary or beneficiary. The accessory is liable to the extent that he knew, or should have known, of the breach and failed to take reasonable steps to prevent a loss from occurring to the beneficiary. Against a recipient from the trustee acting in breach of trust, the beneficiary should be entitled to a proprietary remedy to the extent that a trust can be implied on the basis that the recipient is himself under a duty to act for the beneficiary. In addition to the obligation to return the assets to the original trustee, he owes a duty not to disturb the independence of the trust assets. Thus, if he disposes of some part of the trust property, he holds the proceeds as part of the trust assets and is liable to reinstate any loss. Although there is inherent ambiguity in relying on the notion of loyalty or fiduciary, the proposed approach can strike a proper balance between protecting the ultimate beneficiary and ensuring predictability in commercial transactions in our increasingly deregulated and globalised world.

18 Intention in the Creation of Chinese Inter Vivos Express Trusts HUI JING*

I. Introduction In both English law and Chinese law, it is an inherent requirement that, before an inter vivos express trust (hereinafter referred to as ‘express trust’)1 is created, an owner must manifest a proper intention to deliberately and voluntarily engage with the express trust device. Under English law, the orthodox view is that the proper intention is the owner’s unliteral decisive intention.2 When the inter vivos express trust device was transplanted into China’s domestic legal system, legislators took a different approach to the intention rule: a settlor’s unliteral intention cannot suffice; rather, a bilateral intention is required between settlor and trustee before a valid trust relationship can be created.3 Regarding the ascertainment of a settlor’s intention, both jurisdictions adopt an objective approach, focusing on the settlor’s manifest acts or words rather than their uncommunicated inner thoughts.4 In contrast to English law, under Chinese law, it is not onerous to objectively ascertain a settlor’s trust-creating intention due to the statutory requirement that the formal language of trust must be used in the written trust instrument. During the legislative process of the Trust Law of the People’s Republic of China (Trust Law),5 legislators in China thoroughly examined English law statutes, judicial * Assistant Professor, Faculty of Law, The University of Hong Kong. 1 This chapter is only focused on the inter vivos express trust’s intention rules. Inter vivos express trusts are distinct from testamentary trusts in various respects, including the intention rules. 2 G Virgo, The Principles of Equity & Trusts, 3rd edn (Oxford University Press 2018) 72; YK Liew, Rationalising Constructive Trusts (Hart Publishing 2017) 3; M Bryan, ‘The Inferred Trust: An Unhappy Marriage of Contract and Trust?’ (2016) 69 Current Legal Problems 377, 395. 3 In contrast to Chinese inter vivos express trusts, a settlor’s unliteral intention can suffice for creating Chinese testamentary trusts. See 《中华人民共和国民法典》 [Civil Code of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 May 2020, art 1133. On account of Chinese testamentary trusts, see, eg, Jian Qu, ‘Trusts and the Chinese Civil Code: Toward a New Era of Codification’ (2021) 27 Trusts & Trustees 82, 87–89; Lingyun Gao, ‘The Development of Private Trusts in Mainland China: Legal Obstacles and Solutions’ (2014) 20 Trusts & Trustees 350, 355. 4 Virgo (n 2) 73; Liew, Rationalising Constructive Trusts (n 2) 6. 5 《中华人民共和国信托法》 [Trust Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 April 2001.

350  Hui Jing decisions and commentaries.6 The above-mentioned differences in the intention rules were adaptations legislators made in transplanting the English express trust device into the Chinese domestic legal system. These adaptations, as a result of both doctrinal and practical considerations, demonstrate the close interaction between express trusts and contracts in Chinese law. Doctrinally, the express trust was transplanted when the rules of contract law were already well developed. Therefore, reconciling the rules of express trusts with those of contract law is critical to the design of the trusts law system from the legal transplantation point of view.7 Practically, Chinese legislators enacted the Trust Law to regulate disorderly financial mixed operations and to clearly define the scope of trust business.8 Despite this strong regulatory impulse, the Trust Law was still characterised as a branch of Chinese private law. This suggests that, similar to other private law tools such as contract and property, the express trust in China also has a commitment to facilitate individual autonomy by providing people with more choices in the planning of their property arrangements.9 It is a common practice in China to use contracts to plan transaction details, and people are already well aware of the contract’s advantage in the execution of their commercial arrangements. As such, the alignment of express trust rules with contract law is a sensible response to Chinese business practice, which has the effect of encouraging people to use the express trust device to conduct commercial transactions. The above-mentioned adaptations are thus deeply rooted in China’s particular social and legal circumstances. These circumstances can, in turn, shed critical light on our understanding of the unique features of the Chinese express trust. Focusing on the idea of autonomy enhancement,10 this chapter explores the intention rules for the creation of Chinese express trusts from a comparative law perspective. By comparing the intention rules in Chinese and English law, this chapter offers a preliminary study of the adaptations that Chinese legislators have made in the design of trust intention rules and the reasons for these adaptations. By adopting the lens of

6 FH Foster, ‘American Trust Law in a Chinese Mirror’ (2010) 94 Minnesota Law Review 602, 627–31; R Lee, ‘Conceptualizing the Chinese Trust’ (2009) 58 International & Comparative Law Quarterly 655, 656. 7 The legal transplantation process involves considerations as to how the law transplanted should be construed, in order to maintain the logical consistency and coherence between the recipient’s existing law and the transplanted legal rules. See Foster (n 6) 607; Wang Jingen and LA DiMatteo, ‘Chinese Reception and Transplantation of Western Contract Law’ (2016) 34 Berkeley Journal of International Law 44, 48. 8 L Ho, Trust Law in China (Sweet & Maxwell Asia 2003) 3–9; L Ho, ‘Business Trusts in China: A Reality Check’ (2020) 88 University of Cincinnati Law Review 767, 769–70; S Tensmeyer, ‘Modernizing Chinese Trust Law’ (2015) 90 New York University Law Review 710, 717. 9 On account of the Chinese trusts law’s autonomy-enhancing role, see Hui Jing, ‘The Autonomy-Based Account of Chinese Trust Laws’ [2022] American Journal of Comparative Law (forthcoming). 10 One may argue that the personal autonomy idea can only be given effect in a liberal polity and that, therefore, it is problematic to explore its meaning and application in the context of Chinese law. In contrast, the author argues that the autonomy idea can be explored in the Chinese law setting on two grounds. First, personal autonomy is manifested in degrees. Although the Chinese government retains intensive control over the lifestyles that people can choose, there still exists certain, albeit limited, room for persons to engage their capacities for self-control. The availability of the trust and contract devices exemplifies this line of thought. Second, the concept of personal autonomy itself does not preclude its exploration in regimes that cannot be characterised as liberal in the Western sense. The autonomy concept is often discussed in conjunction with the idea of paternalism and authoritarianism. The Chinese context thus provides an opportunity to help one identify the specific degree to which individuals in China can enjoy autonomous status in their pursuit of lifestyles and, from the lens of political philosophy, the state’s understanding of an individual’s role in its political structures. For details on the two grounds, see ibid.

China  351 personal autonomy, one can better understand the normative concerns underlying the above-mentioned adaptations and the unique ways in which trusts law interacts with neighbouring laws, such as contract law. This chapter comprises five parts. After the introductory remarks in section I, section II provides an in-depth analysis of the intention rules in Chinese express trusts law. It identifies the adaptations in the intention rules that Chinese legislators have made in the course of transplanting the English express trust device and explores how these adaptations accept the understanding of personal autonomy in the context of Chinese express trusts. Section III compares contract law and express trusts law in China. By studying the similarities and differences between the two devices, it points out the limitations of ‘contractual jurisprudence’11 for the understanding of Chinese express trusts. Section IV provides accounts of the adaptations that Chinese trusts law has adopted into its intention rules. Section V concludes.

II.  Intention Rules in Chinese Express Trusts Law This section analyses the intention rules under the Chinese express trust. Trust intention refers to the wish or intent of a settlor to consciously utilise the express trust device in the planning of their property arrangements. The focus of a settlor’s intention in the creation of an express trust is consistent with the idea of ‘self-determination’,12 namely, the capacity of a person to be guided by their own motives rather than manipulated by external forces.13 At the same time, it is accepted that, in the real world, people’s lives are interconnected and interdependent. Accordingly, ensuring ‘mutual social respect’14 for each party’s claim to self-determination is necessary to forming ‘just social relationships’.15 Utilisation of express trusts involves both internal interactions of trust parties as well as external interactions between trust parties and third parties. The observance of interpersonal respect between parties is crucial to the effective operation of the express trust device. Through comparisons with English law, this section explores the unique way in which the intention rules in Chinese law take effect and how they are committed to the ideal of personal autonomy. Three rules are identified and critically examined: the bilateral intention rule; the objective construction rule; and the genuine intention rule.

A.  The Bilateral Intention Rule Consistent with the idea of autonomy enhancement, only if a person ‘deliberately and consciously’16 engages with a legal device can the legal consequences envisaged

11 CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 193, (2007) 69 NSWLR 680 [70]. 12 CM Korsgaard, Self-Constitution: Agency, Identity, and Integrity (Oxford University Press 2009) 69. 13 G Dworkin, The Theory and Practice of Autonomy (Cambridge University Press 1988) 6, 71–72; J Raz, The Morality of Freedom (Oxford University Press 1986) 395. 14 J Christman, ‘Liberalism, Autonomy, and Self-Transformation’ (2001) 27 Social Theory and Practice 185, 206. 15 JW Singer, ‘Democratic Estates: Property Law in a Free and Democratic Society’ (2009) 94 Cornell Law Review 1009, 1062. 16 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 196 [279].

352  Hui Jing by that device arise; granting effect to a property owner’s ‘willy-nilly’17 intention does not enhance their autonomy regarding the disposition of their private property.18 The express trust device subscribes to this line of thinking: to create valid express trusts, settlors must demonstrate a positive intention to consciously and voluntarily dispose of their property by way of express trusts. It is a classical view in English law that the positive intention required is a unilateral positive intention on the part of the settlor.19 As Snell’s Equity states: An intention to declare a trust requires a focus on the proper construction of the words used in the relevant documentation. Here the focus is on the unilateral intention of the settlor alone … with narrow rules of construction with little reference to the background circumstances.20

An intention to create an express trust is distinct from an intention to make a gift: only the former matters for the creation of an express trust. Settlors must demonstrate an intention to ‘want somebody to hold property for the benefit of another person, so that they are under a duty to do so’.21 Regarding individual autonomy, the unliteral intention rule strengthens the autonomy of property owners: it subjects the execution of a settlor’s property arrangements solely to their own will, without any regard to the consent of trustees who may provide ‘skills, knowledge [or] experience’22 to the execution of such arrangements. The unliteral rule’s autonomy-enhancing role also accords with the oft-cited maxim that ‘equity never allows a trust to fail for want of a trustee’.23 To give as much effect as possible to a settlor’s intention, English law allows intended beneficiaries to acquire an equitable proprietary right over the trust property upon the settlor transferring the title to the property to the intended trustee, regardless of whether the trustee is ignorant of the intended trusteeship or lacks the capacity to take up trusteeship.24 In addition, except as regards a trustee’s ‘irreducible core duties’,25 it is generally the settlor, rather than the trustee, who dictates the content and scope of responsibilities that a trustee is obliged to bear: a trustee is not allowed to ‘accept responsibility for one part of the trust property designated by the settlor, but disclaim responsibility for another part’.26 Although influenced by English trust theories, legislators in China have adopted a strikingly different position on express trust intention rules. Contrary to the English unilateral rule, a bilateral intention between the owner and the intended trustee is

17 D Kimel, ‘Personal Autonomy and Change of Mind in Promise and in Contract’ in G Klass, G Letsas and P Saprai (eds), Philosophical Foundations of Contract Law (Oxford University Press 2014) 98. 18 Ying Khai Liew, ‘Justifying Anglo-American Trusts Law’ (2021) 12 William & Mary Business Law Review 685, 695. 19 Bryan (n 2) 395. This view is subject to challenge in the context of commercial express trusts. See Co-Operative Group Ltd v Birse Developments Ltd [2014] EWHC 530 (TCC) [85]–[88]; Man Yip, ‘The Commercial Context in Trust Law’ [2016] Conveyancer and Property Lawyer 347, 355–56. 20 J McGhee (ed), Snell’s Equity 34th edn, (Sweet & Maxwell 2019) 22–071. 21 Virgo (n 2) 72. 22 H Dagan, ‘Autonomy and Property’ in H Dagan and BC Zipursky (eds), Research Handbook on Private Law Theory (Edward Elgar Publishing Limited 2020) 192. 23 Bisrat v Kebede [2015] EWHC 840 (Ch) [30]. 24 YK Liew and C Mitchell, ‘The Creation of Express Trusts’ (2017) 11 Journal of Equity 133, 142–43. 25 Armitage v Nurse [1998] Ch 241, 245. 26 Liew and Mitchell (n 24) 145.

China  353 required under Chinese law before an express trust relationship can be successfully established. A consensual deal must be reached between settlor and trustee before trust obligations arise for each party. Article 8 of the Trust Law explicitly states this bilateral requirement: Where a trust is created in the form of a trust contract, the trust shall be deemed created when the said contract is signed. Where a trust is created in any other form of writing, the trust is deemed created when the trustee accepts to take the trustee office.

The same principle applies in both cases: before an express trust can be established, the intended trustee must have knowledge of the owner’s ‘unequivocal and deliberate intention’27 to engage with the trust device and must have been given an opportunity to read the terms of the trust instrument before deciding whether to accept the trusteeship. In this way, the bilateral intention requirement is intrinsic to the conceptual nature of express trusts created under Chinese law. Given the ‘irreducible core’28 role that a trustee performs in trust creation, Chinese express trusts have the attributes of ‘consensual formation and consensual terms’.29 These consensual attributes distinguish the Chinese express trust from its English counterpart, and exhibit the way in which Chinese law facilitates autonomy enhancement: property owners are empowered to seek the assistance of trustees to implement their property arrangements; nevertheless, such plans can only be given effect with the prior approval of the trustees.30

B.  The Objective Construction Rule Instead of committing to ‘the ideal perfect individualised injustice’,31 which emphasises a party’s subjective intention, English law adopts an objective theory of trust intention, whose external standard is the ‘reasonable person’. According to this theory, we are to ask the following question: given a settlor’s manifest ‘words or conducts’,32 not their ‘innermost thoughts’33 and ‘uncommunicated subjective intention’,34 would a reasonable person conclude that the creation of a trust is intended? It is in this objective sense that an express trust can be validly created, even though the property owner did not ‘understand that this was the effect of what they were doing’.35 Moreover, due to this objective approach, English courts are granted wide leeway when ascertaining an owner’s intention. They can take account of the conduct of the parties, the language

27 LC Fowler & Sons Ltd v St Stephens College Board of Governors [1991] 3 NZLR 304, 310. 28 J Fee, ‘Trust-Owned Companies and the Irreducible Core of the Trust’ (2020) 26 Trusts & Trustees 826, 832. 29 JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625, 629. 30 This approach is not unique to Chinese trusts law; it can also be seen in the Trust Acts of Japan, South Korea and Taiwan. See Ying-Chieh Wu, ‘Trusts Reimagined: The Transplantation and Evolution of Trust Law in Northeast Asia’ (2020) 68 American Journal of Comparative Law 441, 451. 31 E McKendrick, Contract Law: Text, Cases, and Materials, 9th edn (Oxford University Press 2020) 18. 32 Siu Pik Fong v Tse Chu Kai [2019] HKDC 388, [2019] HKCU 1490 [27]. 33 Re Bland-Sutton’s Will Trusts [1951] Ch 485, 511. 34 Day v Day [2013] EWCA Civ 280, [2014] Ch 114 [48]. 35 Virgo (n 2) 72.

354  Hui Jing used in the transaction documents (for example, precatory or decisive words), and the matrix of the surrounding circumstances, concluding that the owner does intend the recipient to hold the property on trust for the benefit of others. A trust relationship can thus be implied by English courts even if the language of ‘trust’ or ‘trustee’ is not used in the transaction documents. In Chinese express trusts, trust intention is also assessed objectively, with reference to the terms of the agreement reached between the parties involved.36 Objective assessment of an owner’s intention aligns with, and contributes to, the bilateral intention rule’s commitment to autonomy enhancement. As noted earlier,37 the bilateral requirement gives intended trustees the opportunity to decline the trusteeship at the outset. An objective reading of the owner’s intention can facilitate the intended trustee’s decision-making: it avoids ‘the evidential difficulties associated with an inquiry into the actual state of mind’38 of the owner, thereby enabling a trustee to clearly understand a settlor’s actions and words so that they can decide for themselves whether to accept the purported trusteeship. Chinese courts have generated a wealth of case law exemplifying the objective approach to the construction of trust intention.39 In the Hangzhou Intermediate People’s Court case of Hangzhou Mai Tianjia Investment Company v Luo,40 the majority of the collegiate bench opined that a trust can only be inferred in cases where the property owner clearly and unequivocally communicates the intention to create a trust. Five years later, in a commercial trust case adjudicated by the Supreme People’s Court,41 it was held that whether a trust relationship is created should be assessed by reference to the objectively manifested intention of the person alleged to have created it. In this case, the transaction agreements concluded among the relevant parties made explicit reference to the trust’s purpose, the scope of the trustee’s powers, and the ring-fencing effect of the trust property. Because of this, the Supreme People’s Court considered it appropriate to characterise the legal relationship at issue as a trust, rather than a debtor–creditor, relationship. In English law, depending on the circumstances of the case, it is sometimes difficult to discharge the task of objectively ascertaining an owner’s trust intention. This is not the case under Chinese law, due to the strict formality requirement that Chinese law imposes on the creation of express trusts. As elaborated in articles 8 and 9 of the

36 For details, see 高凌云 [Gao Lingyun], 《被误读的信托 – 信托法原论》 [A Misreading of Trust – Discussion on the Origin of Trust] (复旦大学出版社 [Fudan University Press] 2010) 66. 37 See section II.A. 38 McKendrick (n 31) 18. 39 Chinese courts have recognised the importance of uniformity and consistency when applying legal rules to cases. Study of case law is thus essential to gain a full understanding of the Chinese legal system. See Qiao Liu and Xiang Ren, ‘CISG in Chinese Courts: The Issue of Applicability’ (2017) 65 American Journal of Comparative Law 873, 917. 40 《杭州麦田家投资有限公司与罗某某民事纠纷案》 [Civil Dispute between Hangzhou Mai Tianjia Investment Company and Luo], 杭州市中级人民法院 [Hangzhou Intermediate People’s Court], 浙杭商终字第91号 [Civil Division, Appeal Ruling, Case No 91], 28 March 2011. 41 《五矿国际信托有限公司与广西有色金属集团有限公司营业信托纠纷》 [Business Trust Dispute between Minmetals International Trust Company and Guangxi Nonferrous Metals Group Company], 最高人民法院 [Supreme People’s Court], 最高法民终233号 [Civil Division, Appealing Ruling, Case No 233], 12 September 2016.

China  355 Trust Law, the creation of a Chinese express trust should take the form of writing; the written document should state clearly the purpose of the trust, the scope of the beneficiaries and the condition of the property under the trust. This suggests that the formal language of trust must be used in the trust instrument and that the property owner must understand the consequences of what they are doing. However, it must be noted that the written declaration is not necessarily conclusive for the inference of a trust under Chinese law.42 Case law has shown that the written declaration is a strong indicator of the intention to create a trust; however, before a trust can be conclusively inferred an overall assessment of the transaction is needed, wherein the conduct of the parties and the incidents of the transaction are comprehensively examined.43 The written requirement performs a ‘cautionary and channelling function’44 for trustees and contributes to their autonomous status: by writing down all the essential terms under a trust, trustees can evaluate the conditions of the trust being created, knowledge of which can inform their decision on whether to accept the intended trusteeship.

C.  The Genuine Intention Rule In both English and Chinese law, a qualified trust intention requires the settlor to not only demonstrate an objective trust-creating intention but also for that intention to be ‘proper, real and genuine’.45 In establishing a trust, the settlor should not have ‘an ulterior motive to create a different set of rights and obligations’.46 This ‘ulterior motive’ was well expressed by Diplock LJ in the English High Court decision of Snook v London and West Riding Investments Ltd: [I]t means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.47

The ulterior motive can be manifested in various forms, such as hiding assets from creditors or a divorced spouse or misleading tax authorities. The declaration of an express trust will be tainted by these ulterior motives, the result of which is that the purported trust would be void and unenforceable. Consistent with autonomy, the propriety requirement regarding trust intention reflects ‘relational justice’,48 namely, the causal role of interpersonal relationships in the enjoyment and development of a person’s autonomy. This ‘relational’ idea originates in

42 As in English law: see Liew and Mitchell (n 24) 140. 43 Business Trust Dispute between Minmetals International Trust Company and Guangxi Nonferrous Metals Group Company (n 41); Civil Dispute between Hangzhou Mai Tianjia Investment Company and Luo (n 40). 44 LL Fuller, ‘Consideration and Form’ (1941) 41 Columbia Law Review 799, 800. 45 Fastbet Investments Pty Ltd v Deputy Commissioner of Taxation (No 5) [2019] FCA 2073, (2019) 167 ALD 492, 511. 46 Virgo (n 2) 77. 47 Snook v London and West Riding Investments Ltd (1967) 1 All ER 518, 528. 48 H Dagan, ‘The Challenges of Private Law: A Research Agenda for an Autonomy-Based Private Law’ in K Barker, K Fairweather and R Grantham (eds), Private Law in the 21st Century (Hart Publishing 2017) 73.

356  Hui Jing the fact that, in the real world, all people live in an interconnected and interdependent way.49 Therefore, a satisfactory concept of law should affirm the ‘notion of interpersonal respect [for] each other’s right to self-determination’.50 Under English intention rules, relational justice is given effect via the sham trust doctrine and the statute (for example, the Insolvency Act 1986). According to the sham trust doctrine, acts that claim to do something different from what they are intended to do are considered shams, as are the trusts created under such acts, thereby rendering them invalid.51 If a sham is found, either a resulting trust in favour of the settlor or an estoppel in favour of the third party will be invoked,52 depending on whether the interests of innocent third parties were adversely affected due to their reliance on the ‘apparently valid transaction’.53 Besides the sham doctrine in case law, English statute law can also set aside the declaration of certain trusts. For example, pursuant to the Insolvency Act 1986, a trust will be declared void if a settlor’s actual subjective intention behind the creation of a trust is to prejudice the interests of creditors in their claims against the settlor54 or to unfairly favour the interests of one group of creditors to the detriment of other creditors.55 The notion of interpersonal respect is also not foreign to Chinese law. For instance, Chinese contract law requires mutual consent between promisor and promisee before a valid contractual relationship can be enlivened.56 Chinese property law, in comparison, requires the property right of immovables to be registered before its enforceability against third parties can arise.57 The creation of a Chinese express trust gives rise to both contractual and proprietary effects,58 illuminating the commitment of Chinese trusts law to relational justice. For example, consider the interaction between settlors and their creditors. As a result of the trust’s well-rehearsed function of ‘creating custodianship

49 J Nedelsky, Law’s Relations: A Relational Theory of Self, Autonomy, and Law (Oxford University Press 2011) 22. 50 Dagan, ‘The Challenges of Private Law’ (n 48) 73. 51 Virgo (n 2) 77. 52 M Conaglen, ‘Sham Trusts’ (2008) 67 Cambridge Law Journal 176, 205–06. 53 Ali v Dinc [2020] EWHC 3055 (Ch) [286]. 54 Insolvency Act 1986 (UK) s 423. 55 ibid ss 238, 239. 56 《中华人民共和国民法典》 [Civil Code of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 May 2020, arts 471, 472. 57 ibid art 209. 58 The way in which an express trust beneficiary exercises his rescission right under Chinese trusts law exemplifies the abovementioned proprietary effects. Pursuant to arts 22 and 49 of the Trust Law, where a trustee disposes of the trust asset in breach of the trust purpose, or causes losses to the trust asset due to his improper handling of trust affairs, beneficiaries under the trust have the right to apply to the Court for rescinding such dispositions, provided the person with whom the trustee transacts is not a bona fide third party. Given the two legislative provisions, many scholarly writings suggest that the beneficiary’s rescission right is quasiproprietary in nature, which can be exercised against the whole world except bona fide third-party recipients. For literature on this aspect, see, eg, 赵廉慧 [Zhao Lianhui], 《信托法解释论》 [Interpretative Theory of Trust Law] (中国法制出版社 [China Legal Publishing House] 2015) 425; 王涌 [Wang Yong], 《论信托法 与物权法的关系: 信托法在民法法系中的问题》 [‘On the Relationship between Trust Law and Property Law: The Problem of Trust Law in the Civil Law System’] (2008) 6 北京大学学报(哲学社会科学版) Journal of Peking University (Philosophy & Social Sciences) 93, 97; Ruiqiao Zhang, ‘Trust Law of China and Its Uncertainties: Examination of the Rights and Obligations of Trust and Ownership of Trust Property’ (2015) 10 National Taiwan University Law Review 45, 71; Kai Lyu, ‘Re-Clarifying China’s Trust Law: Characteristics and New Conceptual Basis’ (2015) 36 Loyola of Los Angeles International and Comparative Law Review 447, 463–64; Charles Zhen Qu, ‘The Doctrinal Basis of the Trust Principles in China’s Trust Law’ (2003) 38 Real Property, Probate and Trust Journal 345, 373–74; Lee, ‘Conceptualizing the Chinese Trust’ (n 6) 666.

China  357 over ring-fenced asset[s]’,59 it is unsurprising that property owners may be motivated to place their assets beyond the reach of their unsecured creditors under the cloak of express trusts. Such acts violate settlors’ duties to their creditors: a respectful debtor– creditor relationship prohibits debtors from setting up a trust to frustrate their creditors’ legitimate claims. Article 12 of the Trust Law endorses relational justice by allowing creditors to apply to the courts to revoke a trust created for debt evasion. As with English law, Chinese law is attentive to the interests of innocent third parties who transact with a trustee through a trust that is being revoked. Article 12 strikes a sensible balance between the interests of innocent third parties and the genuine trust intention rule. It sets a statutory limit on the consequences of trust rescission: namely, that while a trust should be rescinded if its creation merely serves the purpose of damaging the interests of the settlor’s creditors, the effect of such a rescission should not affect the benefits that an innocent third party has already obtained through transactions involving the trust property.

III.  Comparison between Contracts and Express Trusts Given the intention rules for Chinese express trusts, one may ask whether, under Chinese law, an express trust is ‘functionally indistinguishable’60 from the contract, especially considering that the Civil Code of the People’s Republic of China (Civil Code)61 explicitly recognises the validity of the third-party beneficiary contract.62 The intention rules for express trusts have numerous similarities with contracts, and both devices share a similar commitment to the enhancement of individual autonomy. These similarities form the basis of the argument that ‘a Chinese express trust in nature is analogous to a contract’.63 This has been debated for more than two decades since the passage of the Trust Law, and it is still widely discussed in recently published literature.64 In what ways, and to what extent, can this argument withstand scrutiny? The sections below explore this question.

A.  Joint Intention First, attention will be paid to the intention rules of the two devices. Regarding the interpretation of intention rules, Michael Bryan noted that there are ‘no special trust [or contract] hermeneutics’.65 Discussing the construction of express trust terms contained 59 Yip (n 19) 358. 60 Langbein, ‘The Contractarian Basis of the Law of Trusts’ (n 29) 627. 61 《中华人民共和国民法典》 [Civil Code of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 May 2020. 62 《中华人民共和国民法典》 [Civil Code of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 May 2020, art 522. 63 Qu (n 3) 85. 64 On discussion of the relationship between express trusts and contracts in Chinese law, see, eg, 赵廉慧 [Zhao Lianhui] Interpretative Theory of Trust Law (n 58) 72–73; Lyu (n 58) 473; Qu (n 3) 85. 65 Bryan (n 2) 391.

358  Hui Jing in a contract, Bryan convincingly observed that ‘[the] objective of construing any legal instrument is to ascertain the meaning of that instrument … [although the instrument] must be understood in [its] correct doctrinal significance’.66 Following Bryan’s logic, we see that it is pointless to search for the special principles of construction for express trusts or contracts; the issue lies in selecting particular interpretative rules (for example, text-specific versus context-specific) in light of the ‘doctrinal signification’67 of trusts law and contract law, respectively. As explained in section II, Chinese trusts law uses three interpretative rules to ascertain a proper trust-creating intention: the bilateral intention rule, the objective construction rule and the genuine intention rule. A close inspection of the Civil Code shows that these three rules also have applications in the context of Chinese contract law.

i.  Interpretative Principles Consistent with the autonomy-enhancing theory underlying Chinese contract law,68 it has been commonly acknowledged that the contract device is designed to give effect to, or facilitate, ‘consensual transactions’69 between contracting parties. The contract device contributes to people’s right to self-government by offering them diversified contract options to ‘carry out their projects and advance their plans’.70 These contract options are ‘purposely designed … institutionalized mechanisms’71 that allow people to cooperate with each other in different ways depending on their particular circumstances and needs, notwithstanding a lack of ‘preexisting reasons [for them] to trust one another’.72 Whether consensual cooperation is smoothly conducted depends on whether bilateral consent between the contracting parties is successfully reached. Similar to express trusts, contract law exemplifies relational autonomy. Commitment to interpersonal respect requires that a balance be struck between the autonomous interests of multiple parties in a contractual relationship. In this regard, Chinese law adopts an objective approach to the construction of contract intention, whereby one party clearly understands the counterparty’s acts or words and then determines whether to accept the purported contractual relationship. The reasonable person standard is incorporated to assist in the assessment of whether an agreement is intended to be binding.73 Finally, an individual’s freedom is not unconstrainted in the course of utilising the contract device. Akin to the sham trust doctrine, to qualify as a contract-creating intention, the intention must be proper and genuine; a contract cannot be created to defraud creditors,

66 ibid. 67 ibid. 68 Yuanshi Bu (ed), Chinese Civil Law (Hart Publishing 2013) 5; 崔建远 [Cui Jianyuan], 《合同法总论》[General Introduction to Contract Law], 2nd edn 中国人民大学出版社 [China Remin University Press] 2011) 22. 69 Agnew v Lansforsakringbolagens AB (2000) 1 All ER 737, 769. 70 Ḥ Dagan, A Liberal Theory of Property (Cambridge University Press 2021) 19. 71 D Kimel, ‘Neutrality, Autonomy, and Freedom of Contract’ (2001) 21 Oxford Journal of Legal Studies 473, 491. 72 H Dagan, ‘Autonomy, Pluralism, and Contract Law Theory’ (2013) 76(2) Law & Contemporary Problems 19, 28. 73 Bu (n 68) 54, 70.

China  359 mislead regulatory authorities, or perpetrate illegal activities.74 A valid contract cannot be created by a non-genuine intention; any consequences arising from such an invalid contract are borne by the contracting parties themselves.

ii.  The Content of the Joint Intention a.  In the Context of Trust Law In addition to the overlapping of interpretative rules, under Chinese law, express trusts and contracts are similar in the content of the intentions contemplated by the parties in the operation of each device. In express trusts, a typical structure is that A (settlor) concludes a written75 trust instrument with B (trustee), and their joint intention is that B should manage the trust property entrusted by A in the ‘best interest’76 of C (beneficiary). The requirement to benefit the beneficiary reflects the ‘other-regarding’77 nature of an express trust, constituting the core of the joint intention of A and B. Also because of the trust’s other-regarding character, A and B may empower A to bring enforcement proceedings in cases of breach by B and grant C certain entitlements to hold B accountable for the discharge of their role. Chinese law endorses this logic. It grants A wide default powers so they can play a proactive role in supervising B’s ongoing administration of the trust property;78 it also endows C with the ‘authority to invoke enforcement proceedings’79 where B disposes of trust assets in contravention of the trust purpose or causes losses to the trust property due to their improper handling of trust affairs.80 If C’s eligibility to file lawsuits against a defaulting B is consciously intended by A and B, the existing legislative framework for express trusts gives effect to such an intention,81 enhancing the ‘overall autonomy’82 of A, B, and C. b.  In the Context of Contract Law The above analysis has applications for contract law. If the contracting parties wish to create a third-party beneficiary contract where the contract terms are intended to be enforceable by the third party, application of the objective approach to contract intention requires that the third party be expressly identified in the contract by name and that 74 ibid 41. 75 On account of the written formality requirement, see above section II.B. 76 《中华人民共和国信托法》 [Trust Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 April 2001, art 25. 77 M Harding, Charity Law and the Liberal State (Cambridge University Press 2014) 91. 78 Due to the concerns of adverse tax consequences and sham trusts, settlors in English law tend to take the approaches of trust protector or letter of wishes to reserve a role in the administration of express trusts. See Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 903; Breakspear v Ackland [2008] EWHC 220 (Ch), [2008] 3 WLR 698, 711; Re Londonderry’s Settlement [1965] Ch 918, 936. 79 Ḥ Dagan and M Heller, The Choice Theory of Contracts (Cambridge University Press 2017) 87. 80 《中华人民共和国信托法》 [Trust Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 April 2001, arts 22 and 49. 81 卞耀武 [Bian Yaowu], 《中华人民共和国信托法释义》[Interpretation of the Trust Law of the People’s Republic of China] (法律出版社 [Law Press] 2002) 133–34. 82 Ewr Saethau Farms Ltd v Neath and Port Talbot Waste Management Co ltd [2011] EWCA Civ 1000 [13].

360  Hui Jing the wording of the contract terms be explicit regarding the conferral of enforcement rights to the third party.83 Focusing on the tripartite relationship in an express trust structure, it is not difficult to replicate the fact pattern of a trust by way of the third-party beneficiary contract device: for instance, A enters into a contract with B, and their joint contractual intention is that B should manage the property entrusted by A in the best interest of C. Giving effect to such a contractual arrangement allows ‘contracting parties to provide something akin to a gift to [C]. The largesse of the gift is entirely dependent upon the contracting parties’.84 Regarding the content of the joint contractual intention, two interrelated observations can be made of the Civil Code. The first relates to the relationship between A, B and C. The legislation that created the third-party beneficiary contract suggests that the original contracting parties A and B possess the power to shape the rights of the third party C. Put another way, the conferral of enforcement rights to third parties will not ‘diminish the power of the contracting parties to regulate their relationship with the third party’.85 Regarding contractual privity, it is clear that allowing third parties to enforce the terms of a contract to which they are not parties is ‘anathema to the underlying justification of the doctrine of privity’.86 In spite of this, the Civil Code still recognises a third party’s enforcement right, demonstrating the state’s desire to effect the joint intention of the original contracting parties to the largest possible extent. The second observation concerns the source of the third party’s rights. A literal reading of the Civil Code suggests that a third party’s right to enforce contract terms is derived from the contractual arrangement between the original contracting parties. Therefore, the conferral of the enforcement right on C should be traceable to a consensual agreement between A and B. This also suggests that, depending upon the ‘joint wishes’87 of A and B, a contractual arrangement between them can only confer the benefit on C, excluding C’s ability to enforce the contract from their own side. In this light, effecting the ‘individual right[s] and freedom[s]’88 of the original contracting parties comprises the tenor of a third-party beneficiary contract and ‘the consequences and results [of those rights and freedoms] … form the basis of a related set of rights insofar as the third party is concerned’.89 The two foregoing observations are interconnected: together, they exhibit the predominance of the contracting parties’ joint intention in the formation of various types of ‘worthwhile relationships’,90 and they demonstrate a concern for personal autonomy similar to that found in a trust setting.

83 黄薇 [Huang Wei] (ed), 《中华人民共和国民法典释义及适用指南（上）》[Interpretation and Application Guide of the Civil Code of the People’s Republic of China (Part I)] (中国民主法制出版社 [China Democracy and Legal Publishing House] 2020) 891. 84 C MacMillan, ‘A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999’ (2000) 63 Modern Law Review 721, 723. 85 A Phang, ‘On Justification and Method in Law Reform: The Contracts (Rights of Third Parties) Act 1999’ (2002) 18 Journal of Contract Law 32, 35. 86 ibid 36. See also 黄薇 [Huang Wei] (n 83) 891. 87 Total Spares & Supplies Ltd v Antares SRL [2004] EWHC 2626 (Ch) [55]. 88 HF Stone, ‘The Common Law in the United States’ (1936) 50 Harvard Law Review 4, 22. 89 Phang (n 85) 43. 90 Raz (n 13) 88.

China  361

B.  Irreducible Features of Express Trusts Analysis of the intention rules demonstrates the close relation between express trusts and contracts, and the similar approaches they have adopted to the enhancement of individual autonomy. The analysis, however, should not stop there. Intention is only one element in the creation of express trusts; its analysis cannot represent the whole picture of express trusts. With reference to English trust experiences, Chinese legislators have incorporated several irreducible features into express trusts. These features point towards the uniqueness of the express trust device. Because of these features, express trusts are not easily replicated by, or reducible to, the third-party beneficiary contracts provided by Chinese law. The following section responds to the ‘trust nature’ question alluded to at the outset of this section, discussing the express trust’s irreducible features from two perspectives: internal governance mechanisms and ring-fencing rules.

i.  Internal Governance Mechanisms The internal governance of an express trust concerns the accountability of the trustee. It relates to the adoption of mechanisms that ensure the trustee of an express trust complies with their duties so as to effectively achieve the purpose of the trust.91 To illustrate the contrast between contracts and express trusts, two mechanisms will be discussed: the mandatory right of trust beneficiaries and the imposition of the duty of loyalty on trustees. a.  The Mandatory Right of Trust Beneficiaries In line with the contractual analysis presented earlier, where a third-party beneficiary contract replicates the rights of a trust beneficiary by virtue of contractual provisions, the contract in question can function in a similar way to that of an express trust. However, where a third-party contract only confers a benefit to a third party but disallows them from enforcing the contract terms, the uniqueness of a beneficiary’s role in the internal governance structure of an express trust becomes evident. This uniqueness is attributable to the source of the beneficiary’s right. In contrast to third-party beneficiary contracts, the beneficiary’s right under a trust arrangement is independent of the consensual deal between settlor and trustee. Rather, a beneficiary’s right derives from the law itself. The Trust Law devotes special provisions to beneficiaries’ rights. Similar to their English counterparts, under a Chinese express trust, the granting of these rights to beneficiaries allows beneficiaries to proactively supervise trustees’ day-to-day management of the trust property. Aside from beneficiaries’ right to launch lawsuits against defaulting trustees, as explained earlier,92 articles 20 and 49 of the Trust Law empower beneficiaries to obtain information about the administration, use and disposition of



91 Hui 92 See

Jing, ‘The Governance of Charities in China’ (2021) 16 Asian Journal of Comparative Law 356, 360. above section III.A.

362  Hui Jing the trust property, and to request trustees to give explanations of their managerial and distributive decisions.93 Moreover, articles 22, 23 and 49 of the Trust Law grant beneficiaries the right to ask trustees to change the method of trust management, provided that such a method is not conducive to trust purposes for special reasons unknown at the time the trust was created. These articles highlight the supervisory role that legislators expect beneficiaries to play in a trust structure. They also exhibit the mandatory nature of beneficiaries’ supervisory rights, which cannot be excluded or reduced by settlors and trustees via consensual agreements. The formality requirement for trust creation supports this observation. Article 9 of the Trust Law only requires the scope of the beneficiaries to be specified in the written trust instrument; there is no obligation for settlors or trustees to offer a list of beneficiaries’ rights in the instrument. Article 9 indicates that, in the absence of explicit provisions on the role of beneficiaries in the instrument, beneficiaries can still exercise their supervisory rights in accordance with the Law. It is arguable that, in situations where an express trust is created via contract, the contractual arrangement concluded between settlor and trustee may also ground the rights of a beneficiary. This argument may become relevant when, under Chinese law, settlor and trustee use contractual provisions to modify certain rights of beneficiaries. Such modifications may arise in two scenarios. The first relates to the time at which a beneficiary may enjoy the benefit of a trust; it can start from the date the trust comes into existence or from the date agreed upon by settlor and trustee in the trust instrument.94 The second concerns a beneficiary’s entitlement to use their right to benefit from a trust to repay their matured debts; such an entitlement can only be given effect where the trust instrument makes no restrictive provisions on it.95 Notwithstanding the availability of modifications in the preceding two cases, this contractual argument has two limitations. First, pursuant to trusts law, the rights subject to modification are constrained to those that relate to the entitlements of beneficiaries to receive trust benefits and the way in which they obtain such benefits. Contractual modifications do not apply to the rights concerning beneficiaries’ performance of their supervisory role, as explained previously. Second, the contractual argument has no role to play where settlors and trustees make no reference to beneficiaries’ rights in the trust instrument. In the absence of contractual provisions, beneficiaries can exercise their default rights in the way envisioned by trusts law. From the perspective of a third party, these two limitations substantively distinguish a third-party beneficiary contract from an express trust. b.  The Imposition of Duty of Loyalty on Trustees In light of the analysis in section II, trustees, because they are autonomous individuals, cannot be forced to accept the responsibility of trusteeship. However, once the 93 The traditional approach in English law is that trustees have an immunity from having the courts examine their reasons. See Breakspear (n 78) [54]–[58]; Re Rabaiott’s Settlement [2000] WTLR 953, 933; A Samuels, ‘Disclosure of Trust Documents’ (1965) 28 Modern Law Review 220, 222. 94 《中华人民共和国信托法》 [Trust Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 April 2001, art 44. 95 ibid art 47.

China  363 intended trustees have consented to the trustee office, they are obliged to exercise their ‘wide-ranging powers’96 and discharge their duties according to an ‘exacting standard of conduct’.97 An example of this standard of conduct is the imposition of the duty of loyalty on trustees. The availability of such a duty is primarily attributable to the unique management regime of an express trust. In English law, the transfer of the trust property from the settlor to the trustee gives rise to the ‘split ownership of trust property’,98 with legal ownership vested in the trustee and equitable ownership vested in the beneficiary. Because of the split ownership of trust property, trustees can act as ‘whole owner[s]’99 of trust property over third parties; meanwhile, beneficiaries are subject to ‘structural vulnerability to exploitative misuse of power’ by trustees.100 To protect beneficiaries’ interests from being unfairly prejudiced in the course of trust management, the duty of loyalty is imposed on trustees. Influenced by English trusts law theories, Chinese trusts law recognises the concept of the duty of loyalty, although it makes no explicit mention of what the duty of loyalty refers to. Nonetheless, there is a scholarly consensus that, similar to the English duty of loyalty, the duty of loyalty under Chinese law entails the no-profit rule and the no-conflict rule.101 According to Chinese scholars, these two rules are the most important duties imposed on trustees; as such, they can only be altered or modified, never completely excluded, by the parties to a trust via trust agreements.102 This contrasts with third-party beneficiary contracts: while one contracting party may be burdened with the duty to confer benefits to a third party, the contracting party in question does not automatically owe the third party a duty of loyalty. Depending on the contracting parties’ joint intention, the duty of loyalty can be incorporated into the agreement as a standard whereby each party performs their duties and responsibilities. However, in contrast to trustees, the incorporated duty of loyalty standard is not mandatory; its availability is wholly dependent on the wishes of the contracting parties. The scholarly consensus is that article 26 of the Trust Law prescribes the no-profit rule and that article 28 prescribes the no-conflict rule.103 Trustees are endowed with wide discretionary powers by law, and any ‘exploitive misuse of power’104 by them may impede the fulfilment of the trust purpose pursued by the settlor. To address such misuses of power, the no-profit rule was created to guarantee trustees’ faithful performance of their

96 Tung-Pi Chen, ‘The Chinese Notariat: An Overlooked Cornerstone of the Legal System of the People’s Republic of China’ (1986) 35 International & Comparative Law Quarterly 63, 64. 97 P Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 University of New South Wales Law Journal 76, 97. 98 R Lee, ‘Convergence and Divergence in the Worlds of the Trust: Duties and Liabilities of Trustees under the Chinese Trust’ in LD Smith (ed), The Worlds of the Trust (Cambridge University Press 2013) 407. 99 ADM Milling Ltd v Twekesbury Town Council [2011] EWHC 595 (Ch), [2012] Ch 99, 114. 100 PB Miller, ‘A Theory of Fiduciary Liability’ (2011) 56 McGill Law Journal 235, 269. 101 See 赵廉慧 [Zhao Lianhui] Interpretative Theory of Trust Law (n 58) 306; 姜雪莲 [Jiang Xuelian], 《信托受托人的忠实义务》[‘The Duty of Loyalty for the Trustee’] (2016) 28 中外法学 Peking University Law Journal 181, 194. 102 赵廉慧 [Zhao Lianhui] Interpretative Theory of Trust Law (n 58) 306; 金锦萍 [Jin Jinping], 《公益信托与慈善信托专论》[Legal Issues on Charitable Trust] (社会科学文献出版社 [Social Sciences Academic Press] 2020) 86. 103 Zhang (n 58) 57; Hui Jing, ‘The Duty of Loyalty in Chinese Trust Laws’ (2020) 13 Journal of Equity 347, 350. 104 Miller (n 100) 270.

364  Hui Jing duties and to prevent them ‘from being swayed by considerations of personal [gain]’.105 The no-conflict rule performs a similar ‘prophylactic form of protection’.106 Article 28 prohibits trustees from (a) conducting transactions involving their own property and the property of the trust of which they are a trustee and (b) conducting transactions between different trusts involving their trust property. In both scenarios, trustees may be tempted to depart from their faithful management of trust affairs. To address this, article 28 was enacted to reduce trustees’ defaulting risk.107 On the one hand, the duty of loyalty considerably restricts the autonomous choice of the trustees. On the other hand, such a duty enhances the relational autonomy of the beneficiaries.

ii.  The Ring-Fencing Rules The supervisory rights granted to beneficiaries, and the duty of loyalty imposed on trustees, supply the check-and-balance mechanisms between settlors, trustees and beneficiaries. Their observance guarantees the accountability of trustees in the daily management of an express trust. In contrast to the internal governance mechanism, the ring-fencing rules demonstrate an ‘external or in rem dimension’108 of express trusts. These rules facilitate ‘an accompanying reorganization of rights and responsibilities between [settlor and trustee] and third parties … with whom the principal parties deal’,109 and their application can give rise to proprietary effects bearing on the interest of external third parties. These in rem effects make the express trust a ‘very particular sort of legal device’,110 distinguishing it from the in personam nature of a third-party beneficiary contract. The ring-fencing rules have been intensively discussed in organisational law.111 These rules draw a boundary between the organisation and its managers: ‘[e]ach could sue or be sued with regard to the separate property of each’.112 Express trusts, in both English and Chinese law, are recognised as having organisational characteristics,113 and their ring-fencing effect is achieved indirectly114 by reference to special rules developed 105 Warman International Ltd v Dwyer (1995) 128 ALR 201, 209. 106 M Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart Publishing 2010) 211. See also Jing (n 103) 353. 107 On account of the problems associated with the Chinese no-conflict rule, see Jing, ‘The Duty of Loyalty in Chinese Trust Laws’ (n 103) 368. 108 RH Sitkoff, ‘An Agency Costs Theory of Trust Law’ (2003) 89 Cornell Law Review 621, 633. 109 H Hansmann and U Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University Law Review 434, 472. 110 JE Penner, ‘An Untheory of the Law of Trusts, or Some Notes Towards Understanding the Structure of Trusts Law Doctrine’ (2010) 63 Current Legal Problems 653, 665. 111 See, eg, H Hansmann and R Kraakman, ‘The Essential Role of Organizational Law’ (2000) 110 Yale Law Journal 387, 393; Hansmann and Mattei, ‘The Functions of Trust Law’ (n 109) 479. 112 RH Sitkoff, ‘Trust Law as Fiduciary Governance Plus Asset Partitioning’ in LD Smith (ed), The Worlds of the Trust (Cambridge University Press 2013) 435. 113 Hansmann and Kraakman (n 111) 416; 赵廉慧 [Zhao Lianhui], 《作为民法特别法的信托法》 [‘Trust Law as a Special Law of Civil Law’] (2021) 1 环球法律评论 Global Law Review 68, 74. 114 In contrast, corporations achieve their ring-fencing effect in a direct way. A corporation is required to be registered with regulators before it is validly established. The register record is accessible by the public and provides the information on what property is held in the corporation’s own name and what the corporation’s powers and responsibilities are. See Sitkoff, ‘Trust Law as Fiduciary Governance Plus Asset Partitioning’ (n 112) 435.

China  365 by courts or legislators. In English law, the ring-fencing effect is achieved via the trust’s ‘historical equity heritage’:115 that is, the distinction between legal and equitable titles. This dual-title structure creates ‘two distinct legal persons [ie trustees]: a natural person contracting on behalf of himself [or herself], and an artificial person acting on behalf of the [trust purpose]’.116 Within the dual-title structure, trustees only hold the legal title to the trust property: they do not possess any equitable proprietary interest in it. The trust property, therefore, cannot be considered as belonging to trustees’ bankruptcy assets should they become insolvent. In this way, the trust property is exempt from the claims of trustees’ ordinary personal creditors.117 In contrast, Chinese law does not accept the dual-title structure, due to its principle of ‘indivisibility of ownership’.118 To replicate the ring-fencing effect of English express trusts, Chinese legislators introduced the principle of ‘trust property independence’.119 Implementation of this independence principle is supplemented by three concrete rules. First, trustees are required to manage and compile accounts of trust property separately from their own assets.120 Second, trust property is not to form part of the liquidation property of trustees or of settlors when they die, when they are declared bankrupt, or when the trust is dissolved.121 Third, any consequences of the transactions entered into by the trustees in their capacity as trustees is to be borne by the trust property itself.122 When combined, these rules achieve the ring-fencing effect. As Ying-Chieh Wu has observed: The concept of trust fund independence resembles the concept of legal personhood. It … exists and functions as if it were an autonomous or self-contained bundle of assets not affected by the trustee’s personal bankruptcy, death, or compulsory execution.123

Similar to the trust’s intention rules, Chinese legislators incorporated relational justice into the trust property independence principle. Interpersonal respect between self-determining individuals is given effect via the trust’s offering of legitimate protections of the interests of third parties who transact with trustees. One illustration of this commitment is the trust’s rule regarding ‘preservation of third-party rights’.124 According to this rule, trust parties cannot use contractual arrangements to foreclose the rights of the trust’s creditors to recourse against the trust property for the purpose of satisfying their claims; any trust clauses purporting to effect foreclosure are considered invalid even though they were concluded on a consensual basis between settlor and trustee.

115 Lee, ‘Convergence and Divergence’ (n 98) 411. 116 Hansmann and Kraakman (n 111) 416. 117 Wu (n 30) 462. 118 Lee, ‘Conceptualizing the Chinese Trust’ (n 6) 663. 119 Zhang (n 58) 57. The trusts laws of Japan, of South Korea and of Taiwan also introduce the concept of trust asset independence to achieve the ring-fencing effect. See Wu (n 30) 463. 120 《中华人民共和国信托法》 [Trust Law of the People’s Republic of China] (People’s Republic of China) National People’s Congress, 28 April 2001, art 29. 121 ibid art 15. 122 卞耀武 [Bian Yaowu] (n 81) 82; 赵廉慧 [Zhao Lianhui] Interpretative Theory of Trust Law (n 58) 220–21. 123 Wu (n 30) 463. 124 Sitkoff, ‘Trust Law as Fiduciary Governance Plus Asset Partitioning’ (n 112) 436.

366  Hui Jing Due to these concerns regarding third parties, contractual arrangements alone fall short of achieving the ring-fencing effect of an express trust. According to Robert Sitkoff, ‘the rules of [ring-fencing] … could not likewise be replicated by an ordinary contract owing to [its] inability to limit the rights of non-privies’.125 Moreover, because of this inability, the ‘cumulative weight of the advantage of ’126 express trusts becomes noticeable: they make it possible for individuals to pursue ‘more complex and sophisticated’127 goals, which cannot be easily achieved via contracts.

IV.  Account of Adaptations The foregoing analysis has shown that, in Chinese law, contracts differ substantially from express trusts. Although similar in terms of requiring bilateral intention, their differences become evident when considering the irreducible features of express trusts. The analysis also shows that, when transplanting the express trust device, Chinese legislators made wide reference to, and numerous adaptions of, English trusts rules. Examples of such adaptations include the bilateral intention rule128 and the introduction of the trust property independence principle.129 This book chapter centres on the intention rules, discussing them in light of China’s particular social and legal circumstances. Its account of these intention rules is based on two interrelated sources: the legislative background against which the Trust Law was enacted and the reconciliation of legal rules.

A.  The Legislative Background of the Trust Law With the adoption of the Open Door Policy, Chinese governments, both national and provincial, established a number of non-bank financial institutions, such as trust and investment companies (TICs).130 The TICs’ policy objective was to ‘obtain extrabudgetary investments to fund infrastructure and development projects that burgeoned in China’.131 As Lusina Ho commented: [The] primary business of TICs was to act as agents for government provinces or developments in raising funds or extending credit outside the rigid central budget … they were instrumental to the free movement of extra-budget capital between government entities, the obtaining of hitherto untapped overseas investments.132

Although labelled ‘trust deposits’ or ‘trust loans’, the business activities of these TICs were deposit-taking in nature, in marked contrast to the business activities of trusts in 125 ibid 439. 126 JH Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165, 188. 127 Liew, ‘Justifying Anglo-American Trusts Law’ (n 18) 694. 128 See above section II.A. 129 See above section II.B. 130 Lyu (n 58) 449; Tensmeyer (n 8) 716–17; Zhang (n 58) 48. 131 Ho, ‘Business Trusts in China: A Reality Check’ (n 8) 769. 132 Ho, Trust Law in China (n 8) 4.

China  367 common law jurisdictions. With the unregulated expansion of ‘trust deposit’ business activities, the Chinese economy overheated. Given the adverse consequences of this overheating, legislators enacted a nationwide, trust-centred law prescribing the legal elements of a trust and providing guidelines for proper trust business activity. Enacting a uniform trusts law was not easy: it required consideration of the effects of the newly introduced rules on daily commercial transactions as well as the reconciliation of these new trusts rules with the already existing rules under Chinese law. It was these considerations that led Chinese legislators to adapt contract rules when designing the Chinese express trust system. China’s commercial practice in the late 1990s made wide use of contractual arrangements in the planning of transactions and trade structures. This practice is partly attributable to the values of transactional flexibility, efficiency and predictability associated with the use of contractual tools, which motivate individuals to use contracts to structure their property arrangements.133 Another reason for their adoption is the social recognition of contracts. In Chinese civil society, contracts have always played an essential role in the formation and development of relationships between self-determining individuals.134 People are willing and accustomed to using contracts to allocate risks or arrange their rights and obligations, irrespective of whether their transactional goals are commercial or civil. On this point, Liang Huixing was particularly observant: Enterprises cannot rely on guessing this market, but rely on signing contracts to organize their own production and exchanges. Only after signing the contract can they produce with confidence and can the products they produce be sold. It can be seen that under the conditions of a market economy, the contractual relationship is the most basic relationship.135

Legal norms are often responses to social conventions, and newly introduced legislation is expected to express the normative ideas of developed social practices.136 Trust businesses fall into the category of commercial transactions. Therefore, in the eyes of legislators, when it comes to the regulation of trust businesses, it seemed reasonable to learn from commercial practice. Since contracts were widely used to assign rights and obligations to the parties involved in trust businesses, contract rules were consulted in the design of the express trust system.

B.  The Reconciliation of Legal Rules The second source of the Chinese adaptations of English trusts law is the reconciliation of legal rules. It has been widely acknowledged that legal transplantation is a process of absorption and digestion.137 During this process, the most important questions are

133 SA Smith, Contract Theory (Oxford University Press 2004) 104. 134 崔建远 [Cui Jianyuan] (n 68) 22–23. 135 梁慧星 [Liang Huixing],《合同法的成功与不足》 [‘The Success and Shortcomings of Contract Law’] (中国私法网 China Private Law Network, 17 June 2004), available at: www.privatelaw.com.cn/Web_ P/N_Show/?News_CPI=9&PID=2764. 136 S Falk Moore, ‘Law and Social Change: The Semi-Autonomous Social Field as an Appropriate Subject of Study’ (1973) 4 Law & Society Review 719, 719–20. 137 Wu (n 30) 443.

368  Hui Jing why the legal device is being transplanted and how it can be transplanted. The answers affect whether the transplanted legal rules and the recipient’s existing rules are logically reconcilable. This concern for reconciliation adds support to the legislative approach of modelling the intention rules for express trusts on existing contract rules. In the context of legal transplantation, functional analysis helps legislators reconcile newly introduced rules with China’s existing rules. According to functional analysis, it is crucial to identify the institutional similarities and differences between the express trusts to be transplanted and the existing legal devices under Chinese law. At the time the Trust Law was being debated, the third-party beneficiary contract had already been thoroughly discussed and analysed by legislators, scholars and practitioners. The third-party beneficiary contract was already in wide use for transactions involving financial structuring, bailment arrangements and insurance risk allocation.138 Express trusts were ‘originally created to preserve wealth for the landed gentry in England’,139 and they were only introduced by China’s northeast Asian forerunners (for example, Japan, Taiwan and South Korea) from the 1900s to the 1990s.140 Chinese legislators, in contrast, were more familiar with the rules of the third-party beneficiary contract and their application. Given the tripartite relationship of a typical trust structure, as well the other-regarding nature of the express trust, Chinese legislators drew an analogy between express trusts and third-party beneficiary contracts, applying the contractual notion of intention to the creation of express trusts. Legislators adapted contract rules as templates for the intention rules of express trusts. Underlying this legislative initiative was the belief that, in light of their familiarity with contract rules, the public may be incentivised – or at least be made less reluctant – to utilise the trust device in the pursuit of their transaction goals. Such a mentality may have contributed to the flourishing of Chinese trust practice, which in turn has been conducive to the establishment and development of ‘trust jurisprudence’141 in China.

V. Conclusion This chapter explored the intention rules in Chinese express trusts law. It found that the alignment of intention rules in express trusts law with those of contract law is embedded in China’s unique social and legal conditions. Through a reading of the Chinese express trust’s intention rules, a close relationship between contracts and express trusts in Chinese law was identified. However, the express trust’s irreducible features were found to sharply distinguish the two devices. It was also found that the similarities and differences between contracts and express trusts are manifested in the ways in which each is committed to autonomy enhancement. The Trust Law was enacted in 2001 in

138 薛虹 [Xue Hong], 《为第三人利益合同中的受益人》[‘Research on the Beneficiary in the Third-Party Beneficiary Contract’] (1994) 2 法学研究 Chinese Journal of Law 44, 47. 139 Ho, ‘Business Trusts in China: A Reality Check’ (n 8) 767. 140 Wu (n 30) 444–47. 141 Auskay International Manufacturing & Trade Pty Ltd v Qantas Airways Ltd [2008] FCA 1458, (2008) 251 ALR 166, 178.

China  369 response to the needs of commercial practice at that time. However, due to limited trust practices and legislators’ limited knowledge, the Trust Law as promulgated was vague and incomplete in various respects. As a result of some 20 years’ implementation of the Trust Law, the general public is no longer unfamiliar with the trust device. Indeed, they are increasingly using the trust device to arrange matters arising from incapacitation, divorce and inheritance. To adapt to ever-changing social needs and address the shortcomings of trusts rules as revealed by two decades of trust practice, a new question has appeared before Chinese legislators: should Chinese trusts law be revised in accordance with current social developments, and if so, what new adaptations should be made?

370

part vi Cross-Border Adaptation

372

19 Trusts Choice of Law Rules in Asia-Pacific: Adapting to the Future YING KHAI LIEW*

I. Introduction The chapters in this collection have, to various extents, addressed a historical point – that is, the ways in which the domestic trusts laws of Asian-Pacific jurisdictions have adapted to meet demands first arising in the past. In this closing chapter, I want to address the future, from the perspective of trusts choice of law rules. At present, crossborder trusts disputes in Asia-Pacific are scarce. It may be for this reason that choice of law rules relating to trusts are viewed as insignificant, whether viewed from the private international law perspective, or from the perspective of trusts law. However, we live in an increasingly globalised world; and for that reason, it is safe to assume that crossborder movement across the region will only increase in the future. This may be due to movement of persons for personal reasons, but also due to an increase in commercial activity, given that commerce inherently thrives on cross-border activity. For the same reason, the future holds an increase in cross-border disputes. So the question I want to address is: how can Asian-Pacific jurisdictions develop their trusts choice of law rules, in order to adapt to the future increase in cross-border trusts disputes? This question is by no means an easy one to answer for at least three reasons. The first reason is the paucity of cases involving cross-border trusts disputes in the region. This leads to much uncertainty over the applicable rules and how courts will apply existing rules. The second reason is that domestic trusts law has developed at significantly varying rates across Asia-Pacific, which has had the knock-on effect of causing an uneven development of trusts choice of law rules across the region. The third reason is that, generally speaking, jurisdictions in Asia-Pacific have focused much of their attention on developing express trusts, and less on resulting and constructive trusts. This has led to a lack of appetite to develop coherent choice of law rules governing resulting and constructive trusts.

* Professor, Melbourne Law School, University of Melbourne. I thank Richard Garnett for comments on an earlier draft.

374  Ying Khai Liew In this chapter I do not aim to provide an absolute answer. But what I hope to do is to trigger a discussion on the matter by providing two tools which may help in the journey of developing trusts choice of law rules. First, I will attempt to construct a framework by which the development of trusts choice of law rules can be addressed across the region. This is the task of section II. Second, I will seek to demonstrate that a proper understanding of domestic substantive express, constructive and resulting trusts is intricately related to the development of sound trusts choice of law rules. Section III makes this point, by sketching what a proper understanding of these trusts entails, and how that may affect the choice of law rules that govern them. Section IV concludes.

II.  A Framework It is trite that choice of law rules are essentially rules of the forum, developed to deal with cases litigated in forum courts with cross-border elements.1 Therefore, it might be thought that the development of trusts choice of law rules is an issue that can only be answered on a jurisdiction-by-jurisdiction basis, and that nothing useful can be gained by addressing the question from a region-wide perspective. But I do not think that is right. To the contrary, much can be gained from addressing the question from a regionwide perspective. Where there are commonalities that bind jurisdictions together, whether by way of similar legal rules and/or shared challenges, a coordinated response is always more productive than an individualised response; this is, after all, one of the moving spirits of the Asia-Pacific Trusts Law project.2 Therefore, if it can be shown that the jurisdictions in Asia-Pacific can be grouped in some sensible manner according to commonalities that may impact on how trusts choice of law rules ought to be developed, then we arrive at a useful framework for addressing the issue from a region-wide perspective.

A.  Four Groups Such a framework can indeed be found by dividing Asian-Pacific jurisdictions into four groups, according to the state of and extent to which they have adopted domestic substantive trusts laws.

i.  Group 1 In Group 1 falls jurisdictions which have not adopted or recognised domestic trusts law in any form. A large number of jurisdictions in Asia-Pacific fall within Group 1, given that many of them do not have a common law heritage and have not adopted trusts

1 See John Pfeiffer Pty Ltd v Rogerson [2000] HCA 36, (2000) 203 CLR 503 [39]–[40]. 2 See YK Liew and M Harding, ‘Introduction’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021) 2.

Private International Law  375 law by way of legislation. The most significant examples, due to their relative economic significance, are Indonesia3 and Vietnam.4

ii.  Group 2 Group 2 contains jurisdictions to which trusts law is not indigenous, but which have imported substantive trusts law via legislation. Here, the existence and validity of trusts law is owed to statutory intervention. The jurisdictions in this group can be divided into three sub-groups, distinguished more or less by the ways in which they first adopted substantive trusts law. In subgroup (1) falls India, Pakistan, Bangladesh and Sri Lanka. These are jurisdictions whose trusts laws were directly influenced by the Indian Trusts Act 1882. That Act was adopted wholesale in Pakistan in 19575 and in Bangladesh in 1972,6 and with modifications by Sri Lanka (then Ceylon) in 1917.7 Certainly, as Zubair Abassi explains in chapter 12 of this book, in Pakistan four provincial and one federal trusts statutes were passed in 2020 providing an updated statutory trusts regime;8 however, it remains the case that those statutes find their pedigree in – and, indeed, reproduce almost verbatim – the provisions of the Indian Trusts Act 1882, therefore explaining Pakistan’s inclusion in sub-group (1). In sub-group (2) falls the East Asian jurisdictions of Japan, South Korea, Taiwan (ROC) and China (PRC). The forerunner statute in these jurisdictions was the Japanese Trust Act 1922, which directly inspired the enacting of the Korean Trust Act 1961, the Taiwanese Trust Act 1996, and the Chinese Trust Act 2001.9 The Japanese and Korean Acts were overhauled and updated in respectively 2011 and 2006, but their pedigree remains found in the 1922 Japanese Trust Act. In sub-group (3) falls jurisdictions whose trusts laws owe their existence to much more recent statutory developments. This sub-group includes Cambodia, which introduced a trusts statute only in 2019.10 It would also include Thailand, if and when the Private Asset Management Trust Bill (whose legal passage through the legislature has met with hiccups) is passed into law.

iii.  Group 3 Group 3 contains ‘offshore’ jurisdictions and designated ‘financial centres’. The former includes those discussed by Katy Barnett in chapter 9 of this book, namely Cook Islands, 3 See E Leks, ‘Arrangements Resembling Trusts under Indonesian Land Law’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021). 4 See Nguyen Hung Quang and Nguyen Thuy Duong, ‘Property Management Relationships and “Trusts” in Vietnam’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021). 5 West Pakistan (Adaptation and Repeal of Laws) Act 1957. 6 Bangladesh (Adaptation of Existing Laws) Order 1972. 7 Trusts Ordinance 1917 (Sri Lanka). 8 Sindh Trusts Act 2020; Punjab Trusts Act 2020; Islamabad Capital Territory Trust Act 2020; Khyber Pakhtunkhwa Trust Act 2020; Balochistan Trust Act 2020. 9 See, in general, L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013). 10 Trust Law promulgated by Royal Decree № NS/RKM/0119/002 (Cambodia).

376  Ying Khai Liew Niue and Western Samoa, as well as others in Asia-Pacific such as Vanuatu. The legal systems of these jurisdictions are primarily of a common law heritage, although in most cases the existence and operation of trusts law are extensively governed by a statute.11 As to ‘financial centres’, these include the Gulf jurisdictions discussed by David Russell in chapter 8 of this book, namely the Qatar Financial Centre, the Dubai International Financial Centre, and Bahrain, but there are also others in the region such as Labuan. In all these jurisdictions a statute governs the existence and operation of trusts.12

iv.  Group 4 Finally, in Group 4 falls jurisdictions whose trusts laws are directly referable to their common law heritage. Those jurisdictions are: Australia, New Zealand, Singapore, Hong Kong and Malaysia. The direct reference to common law remains true even in New Zealand, where the Trusts Act 2019, which purports to ‘restate and reform’ the law of express trusts, ‘is not an exhaustive code of the law’ and ‘is intended to be complemented by the rules of the common law and equity relating to trusts’.13

B. Lessons Grouping Asian-Pacific jurisdictions by way of the state of domestic trusts laws provides a useful framework for approaching the development of trusts choice of law rules in the region, because the development of domestic law and of choice of law rules go hand-in-hand. Thus, the framework informs us not only about the state of the jurisdictions’ trusts choice of law rules, but more importantly also provides lessons as to how, if at all, jurisdictions can adapt their choice of law rules to the future increase in cross-border trusts litigation.

i.  Group 1 Let me begin with Group 1. In general, jurisdictions are unlikely to have on their agenda the development of choice of law rules for areas of domestic law which are uncertain or underdeveloped, because those areas of law will unlikely be utilised often enough to give rise to cross-border disputes. Unsurprisingly, all the jurisdictions in Group 1 have no dedicated trusts choice of law rules. Therefore, the first step on the path towards adopting trusts choice of law rules is obviously the introduction of domestic trusts law rules in the first place. This argument might, however, be challenged on the ground that it may well be possible – indeed, desirable – for jurisdictions without domestic trusts laws to adopt 11 See, eg, International Trust Act 1984 (Cook Islands); Trusts Act 1994 (Niue); Trusts Act 2014 (Samoa). In Vanuatu, English trusts law prior to independence on 30 July 1980 generally applies: see TM Bayer, ‘Vanuatu’ (1996) 2 Trusts & Trustees 53. 12 Regulation No 12 of 2007 (Qatar); Law No 4 of 2018 (as amended) (Dubai); Legislative Decree No 23 of 2016 (Bahrain); Labuan Trust Act 1996 (as amended in 2010). 13 Trusts Act 2019 (NZ) s 5(8).

Private International Law  377 rules that provide for the recognition of trusts and trusts choice of law rules. After all, it was precisely civil law jurisdictions with no domestic trusts laws that first raised the need to develop such rules, which led to the coming into existence of the Hague Convention on the Law applicable to Trusts and on their Recognition (Hague Trusts Convention).14 But unlike those – primarily European – civil law jurisdictions, there is in practice no evidence that Group 1 courts are systematically faced with cross-border trusts disputes such that the adoption of trusts choice of law rules becomes necessary. After all, due to the lack of domestic trusts laws, individuals or companies within those jurisdictions would be most unlikely to engage in the trust form as a means to an end; they would be much more comfortable instead to utilise other forms such as the foundation. And should a cross-border trusts dispute arise, forum courts would be satisfied simply to characterise the dispute according to its functional equivalent in domestic law, and to apply the relevant choice of law rule.15 Any development on the choice of law front can therefore only be achieved after domestic trusts law is introduced, and after its use has become commonplace.

ii.  Group 2 The jurisdictions in Group 2 have incorporated trusts law within their legal systems, but lack any dedicated trusts choice of law rules. This statement requires clarification in relation to India and China. Concerning India, it has been asserted that ‘most of the principles provided in the Hague [Trusts] Convention are already covered in the Indian Trusts Act, 1882’.16 However, I can find nothing in the 1882 Act that provides for trusts choice of law rules, and I proceed on that basis. Concerning China, article 17 of the Chinese Private International Law Act (PILA) appears to provide choice of law rules for trusts, where it states: ‘The parties concerned may choose the laws applicable to trust by agreement. If the parties do not choose, the laws at the locality of the trust or of the fiduciary relation shall apply’. Upon closer examination, however, this provision only applies to trusts created through a contract. This is because the phrase ‘may choose … by agreement’ is a translation of ‘协议选择’, which implies a discussion between the relevant parties following which a consensus is achieved.17 So article 17 does not govern trusts arising otherwise than by way of contract. Therefore, the problem here is not the absence of any trusts choice of law rules, but the lack of comprehensive and dedicated rules covering all trusts. Because the jurisdictions in Group 2 have domestic trusts laws, an increase in cross-border activity would almost certainly be accompanied by an increase in crossborder trusts disputes. This itself provides good reason for these jurisdictions to develop

14 D Hayton, ‘“Trusts” in Private International Law’ in Collected Courses of the Hague Academy of International Law, vol 366 (Brill 2014) 58. 15 A Dutta, ‘Trusts’ in J Basedow et al (eds), Encyclopedia of Private International Law (Edward Elgar 2017) 1756. This approach is unsatisfactory, however, since it fails to appreciate what trusts really are, as I discuss later. 16 Nishith Desai Associates, ‘Trusts’ in The Chamber of Tax Consultants (ed), International Taxation: A Compendium, vol 3, 4th edn (Taxmann 2020) 1017. 17 I thank Hui Jing for bringing this to my attention.

378  Ying Khai Liew comprehensive trusts choice of law rules to deal with these cases. But this is not the only way to look at things. Hinging the impetus for developing trusts choice of law rules on the increased incidents of cross-border trusts disputes is certainly logical: choice of law rules are usually developed in order to keep up with, rather than to drive the development of domestic law. However, there is also much to be said for proactively developing trusts choice of law rules pre-emptively. It seems to me that the relationship between domestic rules and choice of law rules is not necessarily one-directional but may also be an iterative one: the development of one can drive the other. Thus, a vigorous set of trusts choice of law rules may better facilitate and encourage the use and development of trusts law, particularly in the commercial arena, since commercial life attracts – indeed, thrives on – cross-border activity. By ensuring certainty and predictability where cross-border trusts disputes occur, developments on the choice of law front can increase confidence in and use of domestic trusts laws and lead to the increased attraction of foreign investment into the region. This sort of development would most strongly appeal to those jurisdictions in subgroup (2), for the simple reason that the trust’s primary domain in those jurisdictions is commercial.18 As far as I can tell, trusts law is not a prominent feature of commercial life in sub-group (1), while the recentness of the introduction of trusts in sub-group (3) makes it difficult to discern any pattern in the ways and extent to which trusts are used in those jurisdictions. But this is not to say that sub-groups (1) and (3) should not develop choice of law rules to drive the use and development of domestic trusts laws; after all, an aspiration towards a thriving commercial sector is one that probably appeals to every jurisdiction.

iii.  Group 3 Turning now to Group 3. These jurisdictions predominantly use express trusts, and all of them contain statutory trusts choice of law rules. With minor exceptions, those rules provide that effect will be given to an express or implied choice of governing law, absent which the law of the closest connection will govern. In determining the law of the closest connection, account will be taken of the place of trust administration, the situs of the trust property, the domicile or residence of the trustee, and the objects of the trust. And where the chosen law does not recognise trusts or the category of trust in question then that law does not apply.19 18 See M Tamaruya, ‘The Transformation of Japanese Trust Law and Practice: Historical Contexts and Future Challenges’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021); Ying-Chieh Wu, ‘Trust Law in South Korea: Developments and Challenges’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013); Yun-Chien Chang, Weitseng Chen and Ying-Chieh Wu, Taiwan (Wolters Kluwer 2019); L Ho, R Lee and J Jin, ‘Trust Law in China: A Critical Evaluation of its Conceptual Foundation’ in L Ho and R Lee (eds), Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis (Cambridge University Press 2013) 79–82. 19 See, eg, Regulation No 12 of 2007 (Qatar) art 9; DIFC Law No 4 of 2018 (Dubai) pt 2; Legislative Decree No 23 of 2016 (Bahrain) art 3; International Trust Act 1984 (Cook Islands) s 13G(1); Trusts Act 1994 (Niue) s 5; Trusts Act 2014 (Samoa) s 8; Labuan Trust Act 1996, s 6. The minor exceptions are: in the case of Qatar, the domicile of the settlor and the beneficiary is expressly listed as considerations to determine the law of the closest connection; and in the Cook Islands the phrase ‘closest connection’ is not used, nor does the statute provide a list of factors, but simply refers to consideration of ‘other circumstances’ (ie, apart from express or implied (although, again, the word ‘implied’ is not used) choice) in determining the governing law.

Private International Law  379 It can at once be noticed that these connecting factors are substantively similar to those which apply in Group 4. But a crucial difference between the groups is that, in Group 3, the overwhelming policy driving the development of trusts laws is the facilitation of ‘financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy’.20 Relatedly, in Group 3, domestic trusts laws are primarily utilised by non-residents, which means that cross-border disputes in the forum courts are already commonplace. Taken together, we can surmise that these jurisdictions probably adopt the attitude that existing trusts choice of law rules already serve their purposes, and so ‘what is not shown to be broken needs no fixing’. Insofar as express trusts are concerned, there is probably nothing significant left that can be done to develop their choice of law rules. But there may be room for development in relation to resulting and constructive trusts, in particular those which arise in close connection with express trusts such as automatic resulting trusts. These trusts arising by operation of law are discussed in the context of Group 4 below.

iv.  Group 4 The jurisdictions in Group 4 can be said to have the most comprehensive domestic trusts laws and choice of law rules in Asia-Pacific: their trusts laws are not predominantly made up of express trusts but also constructive and resulting trusts, and they ostensibly have choice of law rules which govern all three types of trusts. In the case of Australia and Hong Kong which are signatories to the Hague Trusts Convention, the Convention rules determine the choice of law rules for express trusts.21 In relation to New Zealand, Singapore and Malaysia, common law choice of rules apply, but there is little difference in substance, since ‘the Convention is regarded as consistent with the common law on almost all points’.22 Thus, under the Convention,23 as is the case at common law,24 express or implied choices take effect unless the chosen law does not provide for trusts or the category of trust in question; where there is no effective choice then a close connection test is applied, where particular reference would be made to the place of the trust administration, situs of trust assets, the trustee’s place of residence or business, and the objects of the trust. In relation to constructive and resulting trusts, however, there is much to be desired. First, there is some uncertainty as to the source of trusts choice of law rules in Hong Kong. Unlike Australia, New Zealand, Singapore and Malaysia which clearly rely on

20 A Zoromé, ‘Concept of Offshore Financial Centers: In Search of an Operational Definition’ (2007) IMF Working Paper WP/07/87, 7, available at: www.imf.org/external/pubs/ft/wp/2007/wp0787.pdf. 21 See, Australia: Trusts (Hague Convention) Act 1991; Hong Kong: Recognition of Trusts Ordinance (Cap 76 of the Laws of Hong Kong). 22 R Garnett, ‘Identifying an Asia-Pacific Private International Law of Trusts’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021) 382. See too Webb v Rogers (1992) 57 SASR 193, 204; Augustus v Permanent Trustee Co (Canberra) Ltd (1971) 124 CLR 245, 252; Ballard v AG (Vic) [2010] VSC 525, (2010) 30 VR 413 [22]. See also Sim Hok Khun @ Hadi Gunawan v Henry Budi Harsono @ Sim Hok Kiong [2012] SGHCR 1, [24]; A Briggs, Private International Law in English Courts (Oxford University Press 2014) 764, fn 140. 23 See Hague Trusts Convention, arts 6, 7. 24 See, eg, Augustus (n 22); Chellaram v Chellaram (No 2) [2002] EWHC 632 (Ch).

380  Ying Khai Liew common law rules, Hong Kong25 has extended the operation of the Convention to trusts created ‘by virtue of a judicial decision whether in Hong Kong or elsewhere’ and to ‘any other trusts arising under the law of Hong Kong’. This provision ostensibly extends the Convention to constructive and resulting trusts, but upon closer examination is incapable of applying in many circumstances in which those trusts arise.26 In any event, ‘in the Hong Kong and English cases concerning applicable law and constructive trusts, the Convention has been largely ignored, which possibly suggests a reluctance to extend its provisions beyond the field of express trusts’.27 This suggests that the choice of law rules for constructive and resulting trusts for all these jurisdictions are to be found in the common law. Second, there is uncertainty as to the approach taken.28 In New Zealand, Hong Kong, Singapore and Malaysia, the approach is to identify the underlying obligation or relationship giving rise to the trust and to apply the relevant law governing that obligation or relationship.29 In contrast, in Australia it seems that the starting point is the application of the lex fori where the dispute concerns equitable rights or remedies.30 Although there are signs that courts are willing to depart from that approach and adopt instead the approach of the other jurisdictions,31 instances of this have been few and far between. Third, constructive and resulting trusts are imperfectly understood. This may be why it has not proven to be easy to identify what counts as the ‘underlying obligation or relationship’ in a constructive or resulting trust dispute. Certainly, we do have sporadic judicial decisions that decide one way or another;32 but the law is by no means clear due to the fact that there is ‘no clear English or Commonwealth authority on the choice of law rules relating to constructive and resulting trusts’.33 Commentators who have attempted to identify the ‘underlying obligation or relationship’ have also arrived at contrasting conclusions.34 In view of these points, it seems clear that the obvious next step for Group 4 is the development of a set of certain and defensible rules pertaining to constructive and resulting trusts.

25 Recognition of Trusts Ordinance (Cap 76 of the Laws of Hong Kong) s 2(3), following England: see Recognition of Trusts Act 1987 (UK) s 1(2). 26 A Chong, ‘The Common Law Choice of Law Rules for Resulting and Constructive Trusts’ (2005) 54 International & Comparative Law Quarterly 855, 858–59. 27 Garnett ‘Asia-Pacific PIL of Trusts’ (n 22) 384. See too Lord Collins of Mapesbury and J Harris, Dicey, Morris & Collins on the Conflict of Laws (Sweet & Maxwell 2018) [29–085]. 28 An expanded discussion of the following points can be found in Garnett, ‘Asia-Pacific PIL of Trusts’ (n 22) 392–94. 29 See, eg, Schumacher v Summergrove Estates Ltd [2014] NZCA 412, [2014] 3 NZLR 599 [37]; Rickshaw v Baron von Uexkull [2006] SGCA 39, [2007] 1 SLR(R) 377; Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1996] 1 WLR 387, 391–92; Collins and Harris (n 27) [29R–075]. 30 National Commercial Bank v Wimborne (1978) 5 BPR 11,958. 31 See, eg, Paramasivam v Flynn (1998) 90 FCR 489; Murakami v Wiryadi [2010] NSWCA 7. 32 See discussion in Garnett, ‘Asia-Pacific PIL of Trusts’ (n 22) 393–94. 33 Collins and Harris (n 27) [29–076]. 34 See, eg, on constructive trusts: Chong (n 26); TM Yeo, Choice of Law for Equitable Doctrines (Oxford University Press 2004) ch 6; J Harris, The Hague Trusts Convention (Hart Publishing 2002) 128 ff. On resulting trusts: L Forrester, ‘Resulting Trusts in the Conflict of Laws: An Australian Perspective’ (2021) 17 Journal of Private International Law 193.

Private International Law  381

III.  A Proper Understanding Having identified a framework for approaching the adaptation of trusts choice of law rules across Asia-Pacific, in this section I want to address how a proper understanding of substantive law can impact on the development of those rules in the region. Certainly, there is strictly speaking no direct link between substantive rules and choice of law rules. For example, the exercise of characterisation for private international law purposes, while undertaken according to the lex fori, need not mirror domestic legal categories: characterisation is a functional exercise.35 It might therefore be argued that choice of law rules can – and often do – have a life of their own, and are not impacted by the forum’s understanding of the associated substantive rules. But in response, it can be pointed out that ‘the classifications under domestic law exert a highly persuasive influence at the conflicts level’.36 Because forum courts determine the applicable choice of law rules, judges in determining that issue are not – and, indeed, cannot be – completely detached from the domestic law analysis of the type of claim in question.37 But more to the point, for present purposes, is that the need for developing trusts choice of law rules and the ways in which those developments should best occur are also highly influenced by our understanding of substantive trusts law. This section will discuss express, resulting and constructive trusts in turn. As the framework will indicate, it is jurisdictions in Group 2(2) where the development of choice of law rules for express trusts is the most pressing, while it is in Group 4 where development of choice of law rules for resulting and constructive trusts is most needed. In my discussion, I will focus respectively on the jurisdictions falling within these Groups to demonstrate how a proper understanding of express, resulting and constructive trusts can impact on choice of law rules.

A.  Express Trusts In the common law tradition, it is received wisdom that the trust is a distinctive legal device. By distinctive, I specifically mean the fact that an express trust is neither simply a contract, nor a matter of property law, nor of succession or family law, nor an insolvency matter; rather, it is a unique device that reflects aspects of contracts and property, which may (or may not) be used in the succession or family context, and provides insolvency remoteness (although this is by no means the exclusive reason why trusts are

35 See, eg, Yeo (n 34) 71; G Panagopoulous, Restitution in Private International Law (Oxford University Press 2000) 33; Zheng Sophia Tang, Yongping Xiao and Zhengxin Huo, Conflict of Laws in the People’s Republic of China (Edward Elgar 2016) [2.30], [10.08]; Weizuo Chen and G Goldstein, ‘The Asian Principles of Private International Law: Objectives, Contents, Structure and Selected Topics on Choice of Law’ (2017) 13 Journal of Private International Law 411, 421; WW Cook, ‘Logical and Legal Bases of Conflict of Laws’ (1942) 33 Yale Law Journal 457, 458–70; Wight v Eckhardt Marine GmbH [2003] UKPC 37, [2004] 1 AC 147 [12]. 36 Chong (n 26) 861. 37 This point has also been made in East Asia: see, eg, J Yokoyama, Private International Law in Japan, 2nd edn (Wolters Kluwer 2019) [65]; Zhengxin Huo, ‘An Imperfect Improvement: The New Conflict of Laws Act of the People’s Republic of China’ (2011) 60 International & Comparative Law Quarterly 1065, 1075.

382  Ying Khai Liew used). This uniqueness thesis holds true whether one subscribes to the ‘obligational’38 or ‘proprietary’39 theory of the trust: proponents of either view ever only go so far as to argue that the obligational or proprietary aspect is predominant, rather than exclusive. The uniqueness of trusts is reflected in the private international law context by the fact that the common law developed a dedicated category of choice of law rules for express trusts. This is telling, because it indicates that the trust cannot, even in applying choice of law rules, be reduced functionally to a contract, property, succession, etc. This holds true even if many current choice of law rules for express trusts mirror those for contracts, a matter to which I turn further below. The uniqueness of express trusts is, however, not well appreciated in jurisdictions where the trust is imported as opposed to being indigenous. This is explicable in the light of the infrastructure of civilian private law, which Ying-Chieh Wu has explained to be ‘rooted in the Roman-Germanic basis, which adopts dichotomous system in respect of the private law dealing with property: the law of property and that of obligation’.40 This analysis is reflected in Asia-Pacific. Taking the jurisdictions in Group 2 as an illustration, when the Indian Trusts Act 1882 was enacted, a conscious choice was made to reject a proprietary definition of trusts in favour of an understanding of the trust as an obligation.41 This understanding is reflected not only in sub-group (1) where that Act had a direct influence, as I discussed earlier, but also in sub-group (2), given that the Act also influenced the trusts statutes in East Asia.42 Thus, the ‘majority thesis in East Asia’43 is that the trust is simply a kind of contract.44 In the private international law context, most East Asian lawyers would readily assume that the choice of law rules applicable to contracts would naturally apply to cross-border trusts disputes. However, on a proper understanding, it seems to me to be demonstrably clear that express trusts are no less unique in those civil law jurisdictions than in common law jurisdictions. Taking sub-group (2) as examples, three reasons can be found for this. First, while express trusts can be (and are commonly) created by contract, all four jurisdictions also provide for the creation of trusts by will, and by self-declaration in Japan, Korea and Taiwan.45 Testamentary trusts come into being only when the testator

38 See, eg, D Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 Law Quarterly Review 96; P Parkinson, ‘Reconceptualising the Express Trust’ (2002) 61 Cambridge Law Journal 657. 39 See, eg, AW Scott, ‘The Nature of the Rights of the “Cestui Que Trust”’ (1917) 17 Columbia Law Review 269. Or, indeed, a hybrid theory: see, eg, B McFarlane and R Stevens, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1; P Jaffey, ‘Explaining the Trust’ (2015) 131 Law Quarterly Review 377. 40 Ying-Chieh Wu, ‘East Asian Trusts at the Crossroads’ (2015) 10 National Taiwan University Law Review 79, 81. 41 S Tofaris, ‘The Transplantation of Trusts Law in India’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021) 131–33. 42 S Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 Journal of Legal History 299, 324. 43 Wu, ‘East Asian Trusts’ (n 40) 81–82. 44 Another reason is that the numerous clausus principle subscribed to by civilian jurisdictions (see, eg, Japanese Civil Code, art 175; Korean Civil Code, art 185; Taiwanese Civil Code, art 757; Chinese Property Law, art 5) does not admit of interests under trusts as being property rights. 45 Japanese Trust Act, art 3; Korean Trust Act, art 3; Taiwanese Trust Act, art 2; Chinese Trust Act, art 8. Note, however, that in Taiwan only charitable trusts can be created by self-declaration, subject to strict restrictions (art 71 of the Taiwanese Trust Act).

Private International Law  383 dies, and self-declared trusts are unilateral by nature; in both cases there is no counterparty to render the contractual analysis sustainable.46 Therefore trusts are clearly not reducible to contracts. Second, numerous statutory provisions in those jurisdictions are wholly incompatible with a characterisation of the beneficiary’s rights as simply in personam in nature.47 These include, for example, provisions securing the independence of the trust property,48 the right to rescind dispositions in breach of trust,49 the continuity of the trust despite the trustee’s death or bankruptcy,50 and the right of a sole beneficiary to the trust property upon termination.51 To these can be added the fact that the statutes of all four jurisdictions also provide a comprehensive set of mandatory and default rules which apply only to trusts, and not to any other – even closely analogous – relationship. These support the view that the trust is a distinctive legal institution. Third, it is undeniable that the trust imported in East Asia is conceptually consistent with the common law trust. The first trust statute enacted in the region, the 1922 Japanese Trust Act, ‘was shaped by the extensive use of English and American treatises and case law, the Californian Civil Code and the [Indian Trust Act]’, and hence ‘[t]he concept of trust that the Trust Act embraced was unmistakably based on the common law’.52 Indeed, ‘in 1921 the trust concept meant for most lawyers across the world the common law trust’.53 And when the 1922 Act inspired Korea, Taiwan and China to construct their own laws, ‘the [common law] trust was imported into [those jurisdictions] via Japan’.54 Therefore, even though the trusts in these jurisdictions reflect the obligational theory, as mentioned earlier, it does not follow that the trust is exclusively obligational, but simply that obligations are a predominant feature. After all, this is consistent with the arguments of those who subscribe to the obligational theory at common law. Unsurprisingly, therefore, ‘[d]espite the civil law scholars’ herculean efforts [to elucidate the nature of the trust], one can perceive the sense of resignation that fitting the trust idea into a neat conceptual model is an unattainable task’.55 The lack of appreciation in East Asia for the uniqueness of express trusts has led to an absence of dedicated trusts choice of law rules, and this causes much uncertainty and confusion as to how a trust dispute would be characterised. Taking trusts created by

46 Wu, ‘East Asian Trusts’ (n 40) 84–85. 47 See, eg, L Ho, ‘The Reception of Trust in Asia: Emerging Asian Principles of Trust?’ [2004] Singapore Journal of Legal Studies 287, 300; M Tamaruya, ‘Transformation of Trust Ideas in Japan: Drafting of the Trust Act 1922’ (2013) 88 Rikkyo Law Review 97 (218), (113) 202. 48 Japanese Trust Act, arts 16–18; Korean Trust Act, arts 22–27; Taiwanese Trust Act, ch II; Chinese Trust Act, arts 15–16. 49 Japanese Trust Act, art 27; Korean Trust Act, art 75; Taiwanese Trust Act, art 18.; Chinese Trust Act, art 22. 50 Japanese Trust Act, art 75; Korean Trust Act, arts 23–24; Taiwanese Trust Act, art 45; Chinese Trust Act, art 52. 51 Japanese Trust Act, art 182; Korean Trust Act, art 101; Taiwanese Trust Act, art 65; Chinese Trust Act, art 54. 52 Tofaris, ‘Trust Law Goes East’ (n 42) 299, 324. 53 DWM Waters, ‘The Future of the Trust: Part I’ (2006) 13 Journal of International Trust and Corporate Planning 179, 211–12. 54 Wu, ‘Trust Law in South Korea’ (n 18) 47. 55 Tamaruya, ‘Transformation of Trust Ideas in Japan’ (n 47) 203 (112).

384  Ying Khai Liew contract first, the most instinctive solution here might be to characterise the dispute as a contract,56 since this aligns with the common (but misguided) assumption that trusts are contracts. But this is by no means a foregone conclusion, since it is not impossible to apply a property characterisation. After all, an express trust almost always involves the creation or acquisition of in rem rights at at least two points in time – first, when the settlor transfers trust assets to the trustee, and then upon termination of the trust, when residual trust assets will vest in the beneficiary, the settlor, or such persons as provided for in the trust instrument, as the case may be.57 Moreover, a property characterisation may easily follow if a trust dispute is conceptualised as a dispute to determine the title or ownership of the relevant property. The property characterisation may also be applied to disputes concerning testamentary or self-declared trusts, since, as I have discussed above, there is no contract in these cases. But again, the property characterisation is not a foregone conclusion. Testamentary trusts might also be characterised as concerning succession or wills. Alternatively, in jurisdictions that have a category of choice of law rules applicable to ‘juridical acts’ as opposed to contracts,58 testamentary and selfdeclared trusts might also be characterised as relating to juridical acts. And regardless of whether a trust is created by contract, will, or self-declaration, a dispute concerning an alleged breach of trust might also possibly be characterised as concerning unjust enrichment or negotiorum gestio (for example, where the claim concerns an errant trustee making a personal profit), or tort (for example, where the claim concerns a breach of trust causing a loss to the trust fund). The fact that all these options are available is a direct consequence of a lack of dedicated trusts choice of law rules. And this state of affairs is unsettling. The availability of these options for characterising a trust dispute causes uncertainty, and risks inconsistency in the law. Without a dedicated set of trusts choice of law rules, the law may well discourage individuals and companies from entering trust relationships which relate to or utilise domestic trusts laws, since parties are unable to foresee how those forum courts might resolve the choice of law question, should a cross-border dispute arise. Apart from issues of characterisation, problems also arise with the application of connecting factors, which do not fully reflect the uniqueness of the trust. Most significantly, it can be observed that the connecting factors of a majority of the potentially applicable categories would not recognise a choice of governing law in a trust deed. For example, if a trusts dispute is characterised as relating to succession, the testator’s lex patriae59 or habitual residence at time of death will likely apply;60 if it is characterised as relating to property, the lex situs will apply.61 The application of a hard-and-fast 56 Except in the case of China, discussed shortly below. 57 Japanese Trust Act, art 182; Korean Trust Act, art 101; Taiwanese Trust Act, ch VII; Chinese Trust Act, art 54. 58 Act on General Rules for Application of Laws, Law No 78 of 2006 (Japan) arts 7 and 8 (Japanese PILA); Act Governing the Choice of Law in Civil Matters Involving Foreign Elements (Taiwan) art 20 (Taiwanese PILA). 59 Japanese PILA, art 36; Act on Private International Law (Korea) art 49 (Korean PILA); Taiwanese PILA, art 58. 60 Laws Applicable to Foreign-Related Civil Relationships Law of the People’s Republic of China, art 31 (Chinese PIA), although for immovables it is the lex situs. 61 Japanese PILA, art 13; Korean PILA, art 19; Taiwanese PILA, art 38. Similarly, Chinese PILA, arts 36–37, although a choice of governing law will be recognised in relation to movables.

Private International Law  385 connecting factor would deny settlors the autonomy to choose a governing law, and this detracts from the fact that an express trust is a unique facilitative device that provides property owners with the freedom to deal with their own property. The same problem arises even where a trust dispute is characterised as a contract. In East Asia, the relevant connecting factors all recognise express choices of governing law, but not all of them give effect to implied choices.62 Express trusts are overwhelmingly intention-based, and it is not clear why a choice not stated in so many words, but which clearly reflects the actual intention of the parties, ought not to be given effect. Moreover, the rules which apply in the absence of party choice are ill-suited to trusts. Most notably, they do not take into account any feature of express trusts in determining the most closely connected law, such as the place of administration of the trust, the place of residence or business of the trustee, or the objects of the trust.63 And why would they, when the contracts choice of law rules are meant to govern contracts and not trusts? But in applying the contracts choice of law rules, the unique characteristics of the trust are lost in translation. These problems in the preceding paragraph also arise in relation to the ‘trust’ choice of law rules in article 17 of the Chinese PILA. As I discussed earlier, article 17 is capable of applying only to trust contracts. While the provision recognises express choices, it is unclear if implied choices will be given effect to – and this is problematic, for reasons already discussed. In the absence of choice, the governing law is the law ‘at the locality of the trust or of the fiduciary relation’. It is impossible to predict how courts will choose the governing law if both limbs point to different laws, since they are placed on an equal footing. Because these are ‘hard and fast connecting factors’; and ‘[g]iven the complexity of the disputes arising out of trusts … such a rigid arrangement may be problematic’.64 In sum, when the express trust is recognised for what it truly is, that is, a unique, distinctive legal device, then it becomes clear that dedicated trusts choice of law rules are needed in order to take its uniqueness fully into account in the private international law sphere. For civil law jurisdictions in Asia-Pacific which have imported the express trust, this entails that the development of trusts choice of law rules is necessary to adapt to the future increase in cross-border trusts disputes.

B.  Resulting and Constructive Trusts Before discussing resulting and constructive trusts, I first want to consider the divide in Group 4 between the Australian approach and the other jurisdictions. I alluded earlier to the fact that in Australia the starting point is the application of the lex fori where equitable claims are in question, whereas the other jurisdictions search for the relevant law that governs the underlying obligation or relationship. I must explain immediately that

62 See, in particular, Taiwanese PILA, art 20(2); and see DJW Wang, ‘The Revision of Taiwan’s Choice-of-Law Rules in Contracts’ in J Basedow and KB Pissler (eds), Private International Law in Mainland China, Taiwan and Europe (Mohr Siebeck 2014) 185; Rong-Chwan Chen, ‘The Recent Development of Private International Law in Taiwan’ in Wen-Yeu Wang (ed), Codification in East Asia (Springer 2014) 241. 63 cf art 7 of the Hague Trusts Convention. 64 Huo (n 37) 1079.

386  Ying Khai Liew this understanding is but one possible interpretation of the cases; it has been suggested, alternatively, that the lex fori approach applies to equitable claims ‘other than trusts’.65 Certainly, the cases do acknowledge that the lex fori approach does not apply to express trusts;66 they are, however, less forthright about resulting and constructive trusts,67 and therefore others have argued that the lex fori approach is, subject to limited exceptions, the general rule.68 The paucity of cases does not help clarify the position. If the lex fori approach does indeed provide starting point for resulting and constructive trusts, I argue that this is a wrong approach. The undesirability of this approach has been extensively discussed by distinguished commentators, for example Richard Garnett who argues that ‘in practice this approach [is] parochial and facilitate[s] forum shopping by claimants’.69 To those reasons, I would add the important point that the lex fori approach fails to reflect a proper understanding of constructive and resulting trusts. The key reason underlying the lex fori approach is that ‘[t]he Equity Court … is a Court of conscience and acts in personam’, therefore ‘it has jurisdiction over persons within or subject to its jurisdiction to require them to act in accordance with the principles of equity administered by the court’.70 While historically equity may well be said to have acted in personam, this sort of understanding fails to reflect the fact that resulting and constructive trusts clearly have proprietary effects. And this is not simply a reference to the fact that all trusts require property,71 although this much is true; it is also seen in the fact that the practical effect of the imposition of resulting and constructive trusts is, in most if not all cases, to allow the beneficiary to call for the property held by the trustee. Therefore, to reduce these trusts to the principle that ‘equity acts in personam’ is as reductive as the argument that express trusts are simply contracts. It follows, then, that the lex fori approach must be rejected in favour of a more nuanced approach.

i.  Resulting Trusts The starting point for resulting trusts often begins with the well-known distinction that Megarry J drew in Vandervell’s Trusts (No 2) between ‘presumed resulting trusts’ and ‘automatic resulting trusts’.72 The former refers to cases where A makes a voluntary transfer of property to B, and where A provides the purchase money for property vested in B; the latter refers to resulting trusts which arise over incompletely disposed interests in assets held on express trusts.

65 R Mortensen, R Garnett and M Keyes, Private International Law in Australia, 4th edn (LexisNexis Butterworths 2018) [19.5]. 66 See, eg, Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86, 192; Paramasivam (n 31) 502, 503. 67 cf Heinemann (n 66) 192. 68 Yeo (n 34) [2.10], relying in particular on Paramasivam (n 31) 217. 69 Garnett, ‘Asia-Pacific PIL of Trusts’ (n 22) 392. See also Yeo (n 34) [2.10]; Ford & Lee: The Law of Trusts [25.4010]. 70 Wimborne (n 30) 11,982. See too Collins and Harris (n 27) [34–084] and Australian authorities cited therein. 71 cf Chong (n 26) 873–76. 72 Re Vandervell’s Trustees Ltd (No 2) [1974] Ch 269, 289.

Private International Law  387 I begin with ‘automatic resulting trusts’. Although there is an absence of case law on the point, there is general consensus amongst commentators that the governing law of an express trust should also apply to determine if an automatic resulting trust arises, because the law which governs the failure of an express trust should also determine the consequence of that failure.73 It is undeniable that this approach has the advantage of achieving coherence between failure and consequence. But I wish to add that coherence is not the only merit of the approach; on a proper understanding, an automatic resulting trust gives effect to the settlor’s intentions inasmuch as the original express trust does, such that the same law ought to govern both matters. To explain this point, we can first observe that the ‘failure’ of an express trust, when unpacked, means that the settlor’s objective intention does not provide for the complete disposal of the interests in the trust assets. This is usually taken to mean that there is a lack of beneficiaries to whom distribution would exhaust the trust assets. But a ‘failure’ also assumes two other things. The first is that the settlor does not explicitly provide for the trustee to benefit from any surplus of trust assets. An explicit provision is required because it is natural to presume that one designated as ‘trustee’ is not intended to benefit from the trust property unless explicitly so provided. The second assumption is that the settlor has not disqualified himself from benefiting, for otherwise the property will go to the state (bona vacantia).74 It follows that automatic resulting trusts can be said to arise as a necessary implication of the settlor’s intentions: if no provision was made for the surplus, and if the only remaining candidate to take the beneficial interest is the settlor, then the property must be held for the settlor under a (resulting) trust. The source of the resulting trust is therefore the express trust. Thus, the resulting trust is as much a response to the settlor’s intention as is the express trust itself, and therefore both ought to be governed by the same law. Against this it has been suggested that the suggested choice of law approach cannot be justified on the basis of settlor intentions, because ‘[i]f it were, it would seem curious not also to [apply those rules to] give effect to other forms of [resulting] trust[s] apparently based on the settlor’s assumed intentions’.75 It is true that resulting trusts, both of the ‘automatic’ and ‘presumed’ variety, respond to the settlor (A)’s (presumed or actual) intentions. More precisely, they respond to A’s unilateral negative intention, which is that the recipient-trustee (B) was not intended by A to take the beneficial interest in the property.76 However, the context in which resulting trusts arise matters. The source of automatic resulting trusts is the express trust which fails. The source of presumed resulting trusts, on the other hand, lies elsewhere: these resulting trusts arise in a context where the recipient (B) is not a trustee at all – indeed, B would take the property absolutely – unless a resulting trust arises. Therefore, it is necessary to investigate what the

73 See, eg, R Stevens, ‘Resulting Trusts in the Conflict of Laws’ in P Birks and F Rose (eds), Restitution and Equity: Resulting Trusts and Equitable Compensation, vol 1 (Mansfield Press 2000) 157; Harris (n 34) 126–27; Collins and Harris (n 27) [29–082]; D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law Relating to Trusts and Trustees, 19th edn (LexisNexis Butterworths 2016) [100.67]. 74 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 708. 75 Harris (n 34) 126. 76 See discussion in Ying Khai Liew, ‘Trusts: Modern Taxonomy and Autonomy’ (2021) 35 Trust Law International 27, 36–40.

388  Ying Khai Liew source of the underlying obligation is, in order to arrive at a defensible set of choice of law rules. To this matter the discussion now turns. I first want to make the substantive point that some commentators have argued, contrary to my analysis, that presumed resulting trusts respond to a presumption that A positively intended to declare a trust, as opposed to A’s negative intention.77 I have extensively argued elsewhere that the positive intention conception is wrong, for historical, taxonomical, coherency and normative reasons.78 But let me reproduce, in brief, one of those reasons which affects the choice of law discussion here. It is trite that a presumption can not only be rebutted by evidence to the contrary, but it can also be affirmed by positive evidence consistent with the presumption.79 On a positive intention analysis of resulting trusts, this leads to confusion where A properly declares a trust: the declaration would mean that the trust is an express trust, but the very same intention would also affirm the presumption of resulting trust, leading to the conclusion that the trust is also a resulting trust. This confusingly fails to distinguish between trusts arising as a result of A’s successful exercise of his power to create a trust, and trusts arising despite the lack of an exercise of such a power. This confusion might then lead to the further mistaken conclusion that presumed resulting trusts are to be treated as express trusts for choice of law purposes.80 As I have discussed earlier, the ultimate source of a presumed resulting trust relationship is not an express trust. In order to ascertain the correct approach, it is necessary to emphasise that presumed resulting trusts arise in response to A’s unilateral negative intention. This implies that the rationale of these trusts has everything to do with A and A alone.81 Importantly for the present discussion, these trusts have nothing to do with B: it is well accepted that B’s consent, agreement, or acquiescence is not necessary for resulting trusts to arise. In particular, I emphasise that these trusts are not concerned with any fault on B’s part, as demonstrated by the fact that B’s ignorance of the transfer of property by A to him will not prevent a presumed resulting trust from arising.82 Because personal liabilities do not arise unless a recipient has knowledge of the circumstances surrounding the transfer,83 it therefore follows that presumed resulting trusts are not at all concerned with making B do something equivalent to giving up his property to A. Rather, they arise to compel B to give up his property to A. Understood this way, then, it becomes clear that presumed resulting trusts are ultimately property disputes to which the lex situs ought to apply.

77 J Mee, ‘Presumed Resulting Trusts, Intention and Declaration’ (2014) 73 Cambridge Law Journal 86; W Swadling, ‘Explaining Resulting Trusts’ (2008) 124 Law Quarterly Review 72, 80 ff. 78 Liew ‘Modern Taxonomy and Autonomy’ (n 76) 32–36. 79 See, eg, National Crime Agency v Dong [2017] EWHC 3116 (Ch) [32]. 80 Hayton, Matthews and Mitchell (n 73) [100.69]. 81 I have argued elsewhere the rationale is the protection of A’s autonomy: Ying Khai Liew, ‘Justifying Anglo-American Trusts Law’ (2021) 12 William & Mary Business Law Review 685, 732 ff; Liew ‘Modern Taxonomy and Autonomy’ (n 76) 48–49. 82 See, eg, Re Vinogradoff [1935] WN 68. 83 See YK Liew and C Mitchell, ‘The Creation of Express Trusts’ (2017) 11 Journal of Equity 133, 142–48; Ying Khai Liew, ‘Constructive Trusts and Discretion in Australia: Taking Stock’ (2021) 44 Melbourne University Law Review 963, 976–77. A claim based on fault is a knowing receipt claim, and for choice of law purposes the claim would be characterised as a tort: see Ford & Lee (n 69) [25.7410]; Yeo (n 34) 215–35.

Private International Law  389 This is consistent with the position advocated by a majority of commentators.84 The cases,85 though, paint a less consistent picture, and it would be a step in the right direction for the courts to adopt the property choice of law rules in relation to presumed resulting trusts.

ii.  Constructive Trusts It is generally acknowledged that constructive trusts arise in a variety of distinct circumstances and are therefore not susceptible to any unitary rationale.86 But an uncritical mind might suggest, to the contrary, that all constructive trusts are unified by the fact that they arise ‘whenever the circumstances are such that it would be unconscionable for the owner of property [B] … to assert his own beneficial interest in the property and deny the beneficial interest of another [A]’.87 On this view, ‘[u]nconscionability is the touchstone of the remedy of a constructive trust preventing a person taking an asset which belongs to someone else’.88 If this is taken to mean that constructive trusts prevent B from denying A’s interest in B’s property, then ‘unconscionability’ is hardly a rationale for constructive trusts, because it remains an open question why B is prevented from so denying in the first place. But the language of ‘unconscionability’ also risks the conclusion that constructive trusts arise if and only if B denies A’s interest in the property. This misunderstanding might suggest that, for choice of law purposes, constructive trusts ought to be characterised as torts, since that category includes cases where a defendant commits a wrong. But as the discussion below indicates, not all constructive trusts respond to wrongdoing, and therefore a proper understanding of substantive constructive trusts can help a proper characterisation of constructive trusts for choice of law purposes. Another sort of unified analysis has been proposed, although not in the context of substantive law but at the choice of law level. Adeline Chong has suggested that all constructive (and resulting) trusts ought to be treated as concerning property and governed by the lex situs, because trusts are fundamentally proprietary in nature, and because constructive (and resulting) trusts are ultimately mechanisms to compel B to transfer property to A.89 This suggestion unfortunately relies on reductive reasoning. First, while it is true that in constructive trust claims property rights are always at stake, this does not necessarily entail that the underlying obligation (or cause of action, or issue at stake) is a property dispute. In my earlier discussion I have discussed how trusts

84 Yeo (n 34) [6.05]–[6.08]; Collins and Harris (n 27) [29–077], [29–081]: ‘rights in prop are ultimately at stake’. cf Forrester (n 34). 85 See, eg, Whung v Whung [2011] FamCA 137 [198]. cf Lightning v Lightning Electrical Contractors [1998] NPC 71 (CA). 86 See YK Liew, Rationalising Constructive Trusts (Hart Publishing 2017). 87 Paragon Finance Plc v DB Thakerar & Co (a firm) [1999] 1 All ER 400, 409. See, in Asia-Pacific: Wong Yew Kwan v Wong Yu Ke [2010] 2 CLJ 703 [8] (Court of Appeal, Malaysia); Zaharah A Kadir v Ramunia Bauxite Pte Ltd [2011] 1 LNS 1015 [110] (Court of Appeal, Malaysia); Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 108; KAP Motors Pty Ltd and Another v Federal Commissioner of Taxation [2008] FCA 159, (2008) 168 FCR 319 [41]. 88 Eaton v LDC Finance Ltd [2012] NZHC 1105 [159] 89 Chong (n 26) 873–77.

390  Ying Khai Liew are conceptually unique; and it follows from that discussion that it is never right to analyse a trust as a property dispute (or as a contractual dispute) simply by virtue of the fact that a trust is in question. Second, Chong’s analysis is based on the proposition that constructive trusts are ‘responses to causes of action’,90 a proposition which leads her to characterise the (proprietary) response as a matter of property for choice of law purposes. But it is clear that in certain circumstances a ‘constructive trust’ also describes a relationship between the parties. For example, in ‘agreement-based constructive trusts’,91 B informally promises to hold A’s property on trust for A (or C), and A transfers that property to B in reliance on the promise.92 A constructive trust relationship arises, whereby B takes on certain duties and A gains certain rights. A constructive trust award following a successful claim against B would be a response conceptually akin to a declaration that a constructive trust relationship existed between the parties. In such cases, then, the essential question is how we should characterise the relationship and not the response. Third, in some claims a constructive trust is but one of a number of possible remedial responses that the court might award to a successful claimant. This is best explained by way of an example. Suppose A detrimentally relies on B’s promise to cede an interest in property B owns to A but B reneges on his promise. Upon successfully establishing a proprietary estoppel claim against B, courts have a discretion whether to impose a constructive trust or to provide monetary compensation.93 The difficulty with Chong’s approach, then, is that we end up with different choice of law rules for a single type of claim, depending on the remedial response. Such unprincipled fragmentation is surely worrying for the uncertainty it causes. Ultimately, consistency dictates that one set of rules ought to apply to each claim, regardless of the remedy, unless there is good reason to depart from that position. It is impossible exhaustively to address here the numerous distinct circumstances in which constructive trusts arise. Instead, I want to describe one way in which the law of constructive trusts can be structurally analysed, an analysis which I have developed in detail elsewhere,94 and then I will explain how that analysis can help the development of choice of law rules. To begin, we can observe that rights can be distinguished as ‘primary’ or ‘secondary’. Primary rights (and corresponding primary duties) exist ‘in and per se’, that is, they arise upon the occurrence of pre-defined real-world events that do not include a breach of a pre-existing right. An example is contractual rights, which arise in response to the juristic act of entering a contract – an act which does not involve any breach or wrongdoing. Secondary rights (and corresponding secondary duties), on the other hand, arise where the defendant breaches a primary duty to the claimant. An example is a right to

90 ibid 859. 91 See Ying Khai Liew, ‘Making Sense of Agreement-Based Constructive Trusts in the Commercial Context’ (2022) 4 Journal of Business Law 330. 92 Clear examples are secret trusts, the doctrine in Rochefoucauld v Boustead [1897] 1 Ch 196, and the doctrine in Pallant v Morgan [1953] Ch 43: see discussion in Liew, Rationalising Constructive Trusts (n 86) chs 4–6. 93 For a discussion in the context of Singaporean law, see Ying Khai Liew, ‘The Remedial Approach to Proprietary Estoppel in Singapore’ [2020] Conveyancer and Property Lawyer 11. 94 See, eg, Liew, Rationalising Constructive Trusts (n 86) chs 2, 3.

Private International Law  391 claim damages for breach of contract, which arises due to the defendant’s breach of the claimant’s primary right through violation of a contractual term. The dichotomy of primary and secondary rights is useful because it helps us to distinguish between three types of claims. First, in a claim for the enforcement of primary rights, the remedy asked for by the claimant is a ‘replicative’ remedy. This is a remedy that simply restates and enforces the claimant’s primary right against the defendant, instead of correcting the consequences of the defendant’s breach. Actions for specific performance or a debt due are examples: the remedy compels the defendant to do as he promised, that is, to carry out his primary duty to the claimant. The second type of claim is a claim for the enforcement of secondary rights. Here, a claimant asks for a ‘reflective’ remedy: the court must exercise discretion to determine the appropriate content of the remedy that best reflects the claimant’s secondary right. The need for exercising discretion in this limited sense is a logical consequence of the fact that secondary rights arise out of breaches of primary duties: where a wrongdoing occurs, courts must ascertain how best to correct the effects of the defendant’s wrongdoing; the content of the remedy cannot simply replicate the content of the claimant’s rights. A claim for damages for breach of contract is an example: the amount of damages must be determined according to the principles of breach, causation and remoteness to reflect the claimant’s secondary right to compensation. The third type of claim is a claim for a ‘transformative’ remedy. In these claims, courts exercise wide-ranging discretion to determine the remedy. Thus, the remedy radically transforms the parties’ pre-trial rights and duties; those rights and duties do not logically inform the awarded remedy in the same way as the previous two types of claim. Statutory provisions that allow courts to provide for the recovery of expenses ‘where it is just to do so having regard to all the circumstances of the case’ are an example. The claimant has no substantive right to recovery; at best he has a right that the court considers his case according to the statutory provision. The remedy therefore transforms his pre-trial right, in the sense that such an award finds its main source in the court’s exercise of discretion rather than any substantive right of the claimant. This trichotomy can be applied to constructive trusts. Some constructive trusts sought by claimants are ‘replicative’ in nature. One example is ‘agreement-based constructive trusts’, a situation I have described above, where B informally promises to hold A’s property on trust for A (or C), and A transfers that property to B in reliance on the promise.95 This covers, for example, secret trusts, the doctrine in Rochefoucauld v Boustead,96 and the doctrine in Pallant v Morgan.97 Another example is a claim for a constructive trust that enforces the claimant’s contractual right, more precisely a right arising under a specifically enforceable contract for sale. A third example is the ‘rule in Re Rose’98 where a constructive trust arises in B’s favour where A does everything in his power to transfer property to B, although the legal transfer is not yet finalised. It is observable that in all these claims the claimant is asking for a constructive trust award that restates and enforces his primary right arising from pre-trial, non-wrong events.



95 See

main text from fn 91 above. (n 92). 97 Pallant (n 92). 98 Re Rose (deceased) [1952] Ch 499. 96 Rochefoucauld

392  Ying Khai Liew At other times, constructive trusts are ‘replicative’ in nature. A clear example is where B promises to cede an interest in property he owns to A, and A detrimentally relies on that promise. Where these facts occur, B incurs a duty (and A obtains a corresponding right) to ensure the reliability of B’s induced assumptions. But if B then acts unreliably by going back on his promise, this gives A a secondary right to be compensated for any harm A may have suffered due to B’s unreliability. Courts must determine whether to impose a constructive trust or award monetary compensation, depending on which order best corrects the effects of B’s wrongdoing. Another example is where a fiduciary breaches his duties and receives bribes or secret commissions. At yet other times, certain courts impose ‘transformative’ constructive trusts. These go by the label ‘remedial constructive trusts’, and reflect the idea that, in relation to certain claims, constructive trusts can be imposed or withheld through the exercise of judicial discretion to take into account factors extraneous to the relationship between the claimant and defendant. The award of a remedial constructive trust therefore has little to do with the parties’ pre-trial rights and duties. These trusts are recognised in all of the Group 4 jurisdictions except Hong Kong, and have been said to be relevant in a wide range of claims. For example, in Australia it has been said that remedial constructive trusts can arise in the context of estoppel claims,99 a failure of a joint endeavour,100 breach of fiduciary duty, and knowing receipt;101 in New Zealand102 and Singapore,103 they are relevant in cases involving ‘unjust enrichment’ and ‘unconscionability’; in Malaysia, they are relevant in any claim where ‘justice and good conscience’ demands it.104 How might this structured analysis inform the development of choice of law rules?105 Taking replicative constructive trusts first, because these restate and enforce the underlying primary relationship between the parties, it is entirely appropriate – indeed, necessary – to examine and characterise that primary relationship for choice of law purposes.106 In relation to constructive trusts that enforce a contractual right, the New South Wales Court of Appeal has held in Murakami v Wiryadi that the proper law of the contractual relationship ought to apply.107 ‘Agreement-based constructive trusts’, which would be express trusts but for the lack of formalities, should attract the choice of law rules applicable to express trusts, whether of the Hague Convention (in signatory jurisdictions) or common law rules.108 The ‘rule in Re Rose’ ought to attract the 99 Giumelli v Giumelli (1999) 196 CLR 101. 100 Muschinski v Dodds (1985) 160 CLR 583; Baumgartner v Baumgartner (1987) 76 ALR 75. 101 Robins v Incentive Dynamics Pty Ltd (in liquidation) [2003] NSWCA 71. 102 Commonwealth Reserves v Chodar [2001] 2 NZLR 374 [42]–[44]. 103 Wee Chiaw Sek Anna v Ng Li-Ann Genevieve [2013] SGCA 36, [2013] 3 SLR 801 [172], [182]. 104 Mayban Trustees Bhd v CIMB Bank Bhd [2012] 6 MLJ 354 [77]; CIMB Bank Bhd v Maybank Trustees Bhd [2014] 3 MLJ 169 [129]. 105 The analysis which follows echoes the approach taken in Yeo (n 34), which is to find the nearest existing choice of law category in each case, but differs insofar as the structured analysis of constructive trusts informs how the categories are chosen. 106 As suggested in Murakami (n 31) [141]. See too Arab Monetary Fund v Hashim (No 9) The Times, 11 October 1994; Grupo Torras SA v Al-Sabah [2001] CLC 221 (CA). 107 Murakami (n 31) [141]. See too Collins and Harris (n 27) [29–079]. 108 As suggested by a majority of commentators: see, eg, Collins and Harris (n 27) [20–085]; D Hayton, ‘The Hague Convention on the Law Applicable to Trusts and on Their Recognition’ (1987) 36 International & Comparative Law Quarterly 260, 264; Harris (n 34) 130.

Private International Law  393 choice of law rules for property because the rule essentially concerns the precise point at which A successfully and finally exercises his power to transfer property to B such that it is beyond recall.109 Therefore, a claim by B to enforce his right against A when A has successfully exercised such a power in B’s favour is ultimately a property dispute, to which the lex situs ought to apply. Next, consider reflective constructive trusts. The reflective nature of these trusts implies that there is always a pre-existing primary relationship between the parties which imposes a duty on the defendant that he has breached. This realisation has two implications for choice of law rules. First, if the primary relationship can be categorised according to an existing category of choice of law rules, such as contract or express trust, then those rules should apply because they are the source of the secondary right/ duty. After all, a secondary duty is but ‘a rational echo of the primary [duty], for it exists to serve, so far as may still be done, the reasons for the primary [duty] that was not performed when its performance was due’.110 Second, it may be that the primary relationship is not susceptible to being so categorised, for example proprietary estoppel, where (as I have explained) the primary relationship concerns ensuring the reliability of induced assumptions. Or, it may be that the claim in question is not, upon close examination, referable to a pre-existing contract or trust relationship, such as where A’s claim is against a bribe or secret commission that B receives in the course of acting as A’s fiduciary: it is fictitious and artificial to argue that B contracts or undertakes as part of his trusteeship to receive a bribe or secret commission for A.111 In these cases, the claim is essentially for a reflective constructive trust to correct the effects of wrongdoing by the defendant. Thus, for choice of law purposes they should attract a tort classification. I pause here to say something about the ‘common intention constructive trust’. This doctrine typically but not exclusively arises in the family homes context; it gives effect to the parties’ intentions where they had an express or implied common intention to share the interests in the property in a particular way, and where the claimant had detrimentally relied on that common intention.112 There is some debate as to whether this constructive trust is a replicative or reflective remedy.113 On the former understanding, the trust replicates the parties’ relationship which arises immediately when the elements of common intention and detrimental reliance are fulfilled; on the latter understanding, the doctrine is akin to proprietary estoppel, whereby the remedy aims to compensate the claimant for detriment suffered in reliance on an assumption that the claimant would

109 Liew, Rationalising Constructive Trusts (n 86) 209–11. 110 J Gardner, ‘What is Tort Law For? Part 1: The Place of Corrective Justice’ (2011) 30 Law & Philosophy 1, 40. See too Collins and Harris (n 27) [36–070]. 111 See J Bird, ‘Bribes, Restitution and the Conflict of Laws’ [1995] Lloyd’s Maritime and Commercial Law Quarterly 198. The potential fragmentation insofar as two sets of choice of law rules apply to one type of relationship is therefore justified on the basis that the source of the claim against bribes and secret commissions is different from any other remedy sought which flows from a breach of the primary relationship. 112 See KFK Low, ‘Victoria Meets Confucius in Singapore: Implied Trusts of Residential Property’ in YK Liew and M Harding (eds), Asia-Pacific Trusts Law, Vol 1: Theory and Practice in Context (Hart Publishing 2021) 100–02; Man Yip, ‘Resulting and Constructive Trusts in the Contemporary Singaporean Family Context’, ch 2 in this collection. 113 See Ying Khai Liew, ‘The Secondary-Rights Approach to the “Common Intention Constructive Trust”’ (2015) 79(3) Conveyancer and Property Lawyer 210.

394  Ying Khai Liew obtain an interest in the property which was generated by the defendant, in circumstances where the defendant goes back on that assumption. This debate is interesting for choice of law purposes because it neatly demonstrates that a proper understanding of the substantive doctrine can affect how the choice of law rules develop. Thus, on an analysis of the constructive trust as a replicative remedy, the claim may attract property114 or express trusts115 choice of law rules, depending on how one views the essence of the primary relationship between the parties. On the other hand, if analysed as a reflective remedy, the doctrine would be treated as a tort for choice of law purposes, for the reason that the claim is wrongs-based. Finally, when we turn to choice of law rules for transformative constructive trusts, there is a shift in focus: we are no longer asking how to categorise claims; instead, it is the remedy itself which is under scrutiny. To put this in another way, here I am not concerned with the choice of law rules which apply to estoppel, failure of joint endeavour, knowing receipt, unconscionability, unjust enrichment, etc claims – claims in which courts have said remedial constructive trusts are relevant; I am concerned with what choice of law rules should apply to determining whether a remedial constructive trust will be granted. This is a natural consequence of the transformative nature of these constructive trusts: they have little to do with pre-trial rights and duties, and so are ‘remedial’ in the broadest sense of the term.116 On one view, it might be said that the lex causae should apply. This analysis is based on the classification of constructive trusts as ‘substantive’ (thus attracting the lex causae) as opposed to ‘procedural’ (thus attracting the lex fori). In support of this view, Yeo has suggested that only a ‘thin line’ separates remedial and institutional (non-remedial) constructive trusts, and therefore both should be regarded as ‘substantive law, even if the trust is labelled in domestic law as remedial’.117 Garnett, too, has written that this view is supported by the fact that a constructive trust ‘is closely linked to the rights and liabilities of the parties as it involves the imposition of an interest over property and has limited relevance to the conduct of court proceedings’.118 In addition, there are a number of Commonwealth decisions that expressly adopt or assume the classification of constructive trusts as substantive.119 If we confine the concept of ‘procedural’ law to those rules that concern court proceedings or the administration of justice,120 then it is clear that the award of remedial constructive trusts is not a procedural but a substantive matter. I argue, however,

114 See Collins and Harris (n 27) [29–077]. 115 See Hayton, Matthews and Mitchell (n 73) [100.83]. 116 For a useful discussion of the different ways in which the term ‘remedial’ might be used, in the choice of law context, see Yeo (n 34) [4.04]–[4.06]. 117 ibid [4.86]. 118 R Garnett, Substance and Procedure in Private International Law (Oxford University Press 2012) [10.21]. See also the Australian High Court decision, John Pfeiffer (n 1) 543: ‘matters that affect the existence, extent or enforceability of the rights or duties of the parties to an action are matters that, on their face, appear to be concerned with issues of substance’. 119 See, eg, Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105; Bank of Ireland v Pexxnet Ltd [2010] EWHC 1872 (Comm); Murakami (n 31); To Group Co Ltd Xiamen King v Eton Properties Ltd [2010] HKCFI 236 [107]. 120 This is Garnett’s thesis: see Garnett, Substance and Procedure (n 118). See also John Pfeiffer (n 1) [99].

Private International Law  395 that even if we accept this, the lex fori ought always to apply. There are three reasons for this, which become apparent when the distinction between transformative (on the one hand) and replicative and reflective (on the other hand) constructive trusts is borne squarely in mind. The first reason is that the award of remedial constructive trusts might be said to fall within the ‘formative jurisdiction’ of the forum court, which arguably provides a lex fori exception to matters of substance. This is based on Otto Kahn-Freund’s distinction between ‘declaratory’ and ‘formative’ proceedings.121 In declaratory proceedings, the aim of a judgment is ‘to enforce rights and obligations’ and the judge ‘does not create any new rights’; in formative proceedings, the judgment ‘create[s] such rights and obligations afresh’, and the judge’s ‘function is not declaratory, but creative, constitutive, formative’.122 This distinction maps on to the terminology I have employed: claims for replicative constructive trusts are ‘declaratory’, while claims for transformative constructive trusts are ‘formative’. Kahn-Freund also clarifies that ‘[a] judge does not … take “formative” action if he enforces a right whose content or extent is, according to the foreign law which he applies, subject to judicial discretion’.123 In my terminology, claims for reflective constructive trusts, which require the exercise of discretion to determine the content of the remedy, are ‘declaratory’ rather than ‘formative’. Kahn-Freund argues that ‘formative’ proceedings invariably require the application of the lex fori. He explains: ‘[a] judge derives his powers [to create new rights] from the “judicial mandate”, and the mandate derives wholly from the lex fori. No foreign law can add to or subtract from it’.124 Moreover, ‘[a] court cannot change the rights and obligations of the parties without a specific mandate to do so. Failing it, the court has no jurisdiction. The facts which permit a court to act or compel it to do so circumscribe its jurisdiction, not the rights of the parties. Hence they cannot be determined by a foreign law’.125 The second reason is found in the common law principle that the lex fori applies to the question of remedies.126 Garnett has explained that this principle, although not as extensive as a literal reading would suggest, at least reflects two points. First, ‘if the remedy in question does not also exist or have a functional equivalent under the law of the cause of action then it cannot be awarded by the forum court’; second, ‘[o]nce it is established that a similar type of relief is available under foreign law, it is that law which determines whether it should be granted on the facts’.127 As I have explained, remedial

121 O Kahn-Freund, ‘General Problems of Private International Law’ in Collected Courses of the Hague Academy of International Law, vol 143 (Brill 1974) 349 ff. While this distinction is not explicitly recognised in the case law at present, Yeo (n 34) [1.83] has argued that this provides a reasonable explanation for why English courts never apply foreign law in certain claims (eg, divorce, custody and guardianship) although these are not classified as public policy matters, or mandatory rules, or procedural issues. 122 Kahn-Freund (n 121) 350. 123 ibid, fn 788 (emphasis added). 124 ibid 352. 125 ibid 355. 126 Collins and Harris (n 27) [7–011] and authorities therein. See also Pfeiffer (n 1) [99]; Phrantzes v Argenti [1960] 2 QB 19. 127 Garnett, Substance and Procedure (n 118) [10.02]. See also Shanghai Electric Group Co Ltd v PT Merak Energi Indonesia [2010] SGHC 2, [2010] 2 SLR 329.

396  Ying Khai Liew constructive trusts, being transformative in nature, are distinctive because they have little to do with the parties’ pre-trial rights; they also allow courts to take into account factors extraneous to the parties (for example, third-party interests) in determining whether to impose them. For these reasons, I think it is clear that remedial constructive trusts are not the ‘functional equivalent’ of, or of a ‘similar type’ to, institutional (non-remedial) constructive trusts. If so, then in effect the lex fori always applies to remedial constructive trusts. Even if available under the lex causae, remedial constructive trusts would not be imposed where the forum does not recognise them;128 if not available under the lex causae, then they would not be imposed even if the forum recognises them. The third reason is based on the Privy Council decision in The Halcyon Isle,129 a decision that has been cited in approval in Singapore, Australia and New Zealand.130 One of the principles emerging from that case is that, in relation to claims by creditors against a debtor who has a limited fund insufficient to fulfil all his debts, the lex fori applies to determine priorities even though the creditors’ claims might have attracted a different lex causae. Although in The Halcyon Isle itself there were indeed multiple creditors whose priorities would attract the laws of multiple jurisdictions had the lex fori rule not applied, this fact was not expressed to be a precondition. Rather, the lex fori approach applied because the concern of the forum courts here is ‘doing evenhanded justice between competing creditors’.131 Given that remedial constructive trusts are primarily, if not exclusively, transformative in nature because courts want to take third-party interests into account, it seems to me that the principle is of application, and therefore the lex fori approach should apply. If I am right, then the analysis also provides a warning to forum courts in terms of how they develop the law of constructive trusts. In Australia, for example, courts have a general tendency to incline towards ‘repackaging’ replicative and reflective constructive trusts as transformative constructive trusts, by suggesting that the former constructive trusts arise only as a consequence of a court’s exercise of wide-ranging discretion following its creative or ‘formative’ jurisdiction.132 This is misleading, but if taken seriously would eventually lead to the application of the lex fori in circumstances where a different category of rules would otherwise apply. This in substance is to backslide into the approach whereby the lex fori applies to equitable claims indiscriminately. For the reasons I have given earlier when discussing that point, this approach ought to be avoided. Thus, in developing domestic laws, jurisdictions ought to be cautious in extending transformative constructive trusts, reserving the ‘transformative’ analysis only for exceptional cases.

128 Pfeiffer (n 1) [99]; Phrantzes (n 126). 129 Bankers Trust International Ltd v Todd Shipyards Corp (The Halcyon Isle) [1981] AC 221. 130 The Halcyon Isle was an appeal from Singapore. See also The Ship ‘Sam Hawk’ v Reiter Petroleum Inc [2016] FCAFC 26, (2016) 246 FCR 337 (Australia); RL Fournier v The Ship ‘MARGARET Z’ [1999] 3 NZLR 111 (New Zealand). 131 The Halcyon Isle (n 130) 230–31. 132 See discussion in Liew, ‘Constructive Trusts and Discretion’ (n 83) 10–22.

Private International Law  397

IV. Conclusion In this chapter, I have taken the likelihood of a future increase in cross-border activity, as well as cross-border litigation, as a given. Based on that assumption, I have explored ways in which jurisdictions in Asia-Pacific may develop their choice of law rules to adapt to that future. I have sought to demonstrate two things in general: first, that there is a useful framework by which the development of choice of law rules can be addressed across Asia-Pacific, despite the fact that choice of law rules are but rules of the forum; second, that a proper understanding of substantive express, resulting and constructive trusts can dramatically affect – and improve – the development and application of choice of law rules. Overall, the development of trusts choice of law rules is not a matter that can be detached from the development of domestic trusts. Therefore, any adaptation must take into account both perspectives for a holistic development of the law.

398

INDEX Abu Dhabi: foreign trusts, 139 foundations, 132, 133 public policy, 141, 142 trusts law, 131, 135, 136, 144–7 accessory liability: England, 338–9 Japan, 8, 327–8, 330–5, 337–9, 343–5 United States, 335, 337–8, 344 Anguilla, 132, 169 Antigua, 178 ASEAN, 4, 95, 288 Asiaciti, 170, 171, 178 asset protection trusts, 150, 163–6, 170, 174, 176, 180 Australia: changing values, 191 charitable trusts, 183, 184–90 choice of law, 376, 379–80, 385–6 constructive and resulting trusts, 192, 194, 385–6, 392, 396 family assets, 183, 190–6 federalism, 183–4 Hague Convention and, 168–9, 379 perpetuities, 161 public policy, 183, 185, 187, 189–90, 196 role, 10–11 South Pacific islands and, 151, 152–3, 178 statutory adaptations, 6, 183–201 taxation treaties, 173 trading trusts, 183, 196–201 Austria: foundations, 132 Bahamas, 97, 132, 281 Bahrain: choice of law, 376 foreign trusts, 139 public policy, 142 trust law, 131, 136, 144–7 waqf, 134 Bangladesh, 375 Bermuda, 169 Bitcoin, 113, 114, 119 British Virgin Islands, 95, 169 Buddhism: Sri Lanka, 82–90

Cambodia: 2019 Trust Law, 10 adoption, 288–9 application experience, 304–7 authorities, 297 beneficiary rights, 298–9, 306 categories of trusts, 294–6 civil law comparisons, 299–303 creation, 296–7 legal models, 299 objectives, 288 overview, 294–9 registration, 297 Regulator, 297–8, 304 remedies, 307 rights and obligations, 298–9, 306–7 settlor rights, 306–7 taxation, 307 termination, 297 trustee appointments, 306 trustee liability, 298 ASEAN membership, 288 choice of law, 375 civil law alternatives to trust, 299–303 dispute resolution ADR, 292–4 arbitration, 293–4 conciliation, 293 litigation, 292 mechanisms, 292–4 mediation, 293 negotiation, 292–3 employment trusts, 295 escrow services, 294–5 foreign landholdings, 305 France and, 287, 288, 299, 302 Japan and, 288, 302 Khmer Rouge, 287, 302 law-making process, 290–2 legal hierarchies, 289–90 legal system, 287–8, 301–2 new trust law, 7, 287–308 ownership rights, 303 private trusts, 296 public trusts, 295

400  Index social trusts, 296 sources of law, 289–90 Vietnamese period, 287 Canada: perpetuities, 161 Cayman Islands, 95, 97, 130, 169, 343 certainty of objects, 138, 156–9, 274 charitable trusts: Australia, 183, 184–90 British Palestine mandate, 270–1, 273–4 creation, 274 cy-près, 46, 57, 71–2, 73 Hong Kong tsos/tongs and, 46–50 Israeli law and, 274–5, 280, 283 Pakistan, 223 public benefit, 47–50, 185, 189 purposes, 185–7, 273–4 religion and, 46–7, 185 China: adaptations, 9 ancestral worship trusts, 42 choice of law, 375, 377, 385 contracts v express trusts comparisons, 357–66 interpretive principles, 358–9 joint intention, 357–60 customary law, 5, 33–51 tsos and tongs, 34–9 express trusts beneficiaries’ rights, 361–2 contracts and, 357–66 doctrinal adaptations, 366–8 intention, 8, 349–60 irreducible features, 361–6 legislative background, 366–7 reconciliation of rules, 367–8 ring-fencing, 364–6 third party rights, 365 trustee loyalty, 362–4 intention bilateral rule, 349, 351–3, 358, 366 express trusts, 8, 349–60 genuine intention, 355–7 interpretive principles, 358–9 joint intention, 357–60 objective construction, 353–5 male only succession, 36 mutual social respect, 351 Open Door Policy, 366 privity of contract, 360 self-determination, 351 sham trusts, 356, 358–9 tsos and tongs, 5, 33–51 colonialism and, 5, 33–4 customary law and, 34–9 disputes, 37

choice of law see also individual countries adaptations, 8–9, 373–97 constructive/resulting trusts and, 373, 379–80, 385–96 express trusts, 381–5 Hague Convention, 168–9, 379, 392 lessons, 376–80 offshore trusts, 151 South Pacific trusts and, 168–9 substantive law and, 381–96 commerce: adaptations, 4–5 Australian trading trusts, 183, 196–201 Gulf Region trusts, 5, 129–47 South Pacific trusts, 5, 159–80 Taiwanese crypto-assets, 4–5, 111–28 Confucianism, 33, 36 constructive trusts: Australia, 192 choice of law and, 373, 379–80, 389–96 civilian systems and, 335–6 common intention, 16–21, 393–4 India, 339, 340, 342, 343 Japan, 339–43, 345–8 Liechtenstein, 339–40 reflective trusts, 393–4, 395, 396 replicative trusts, 391–2, 393, 395, 396 Singapore, 3, 16–31 substantive trusts, 394 tracing and, 339–43 transformative trusts, 392, 394, 396 unconscionability, 389, 392, 394 US, 336, 339, 340–1, 342–3, 345–6 Cook Islands: asset protection trusts, 150, 163–6, 170, 174 charitable trusts, 158 choice of law, 375–6 colonial history, 151, 169, 170 corruption, 177 international relationship property trusts (IRPT), 166–8, 170, 173 offshore trusts, 5, 149–80 accumulations, 162 assessment, 179 effect, 177, 179 New Zealand and, 179 perpetuities, 161 protectors, 155, 159, 165 rationale, 170, 174 revenues from, 175 Saunders v Vautier rule, 162 trustee liability, 159–61 tourism, 175 counter-terrorism, 6, 10, 223, 224, 225–7, 286

Index  401 Crypto 2.0, 113 crypto-assets: asset values, 114 blockchains, 113–15 business model and trusts, 113–16 custodians meaning, 115 Taiwan, 4–5, 111–28 Taiwanese definition of trusts and, 116–22 trust enterprises, 115–16, 122, 128 unclear relationship with customers, 118–20 issues, 111–13 Taiwan, 4–5, 111–28 trading platforms, 114–15, 118 trust enterprises, 122–7 wallets, 115 customary law: Cambodia, 287 Hong Kong, 3, 33–51 Sri Lanka, 3, 92 Taiwan, 119 cy-près, 46, 57, 71–2, 73 Cyprus: foundations, 132 distributed ledger technology (DLT), 113 double taxation, 173 Dubai: choice of law, 376 foreign trusts, 139, 140 foundations, 132–3 offshore trusts, 97, 98 public policy and trusts, 141, 142 trust law, 130–1, 134–6, 138, 144–7 waqf, 134 East India Company, 60, 62, 68 England: accessory liability, 338–9 Cambodian trust law and, 299 charitable trusts, 46–7, 48, 68, 184–7 Chinese trust law and, 349–51, 352, 363, 366 conflict of laws, 135, 380 constructive trusts family trusts, 15–16 India and, 343 Singapore family trusts and, 17–21 discretionary trusts: hibah trusts and, 105–7 family trusts, 15–16 feudalism, 300, 303 fiduciary duties, 259, 335, 363 good faith, 212, 213, 215 Gulf Region trust laws and, 130, 131 Hindu endowments and, 66–7 Hong Kong tso/tong and, 41–2

intention, 349, 352 genuine intention, 355–7 objective construction, 353–4 legal model, 9, 383 Malaysian law and, 93–4 origin of trusts, 368 Pakistani trust law and, 224 perpetuities and, 44, 97 proprietary rights, 319, 365 resulting trusts, 386–7 ring-fencing rule, 365 sham trusts, 356 tracing, 336, 341 trust principles, 41–2, 66–7 trustee loyalty, 363 Ethereum, 113 Facebook, 113 family trusts: adaptation, 2–3 Australia, 183, 190–6 England, 15–16 Hong Kong: tso/tong, 5, 33–51 Japan, 328–30 New Zealand, 241 Singapore: constructive/resulting trusts, 2–3, 15–31 waqf, 269 feudalism, 300, 303 Financial Action Task Force (FATF), 152, 223, 225, 228, 230, 263, 286 Financial Stability Board (FSB), 152 forced heirship, 95, 102, 104–5, 173, 179, 334 Ford, Harold, 196–7 foundations, 132–4, 224 France: Cambodia and, 287, 288, 299, 302 South Pacific colonialism, 151 torts model, 331 French Polynesia, 151 Germany, 151, 212, 301 Gibraltar, 169 good faith duty, 205, 211–15, 245, 246–7, 249–51 Guernsey: foundations, 132 offshore trusts, 97, 98, 169 Red Cross trusts, 158 Saunders v Vautier rule, 163 trust model, 130 trustee liability, 252 Gulf Cooperation Council (GCC), 131, 140, 141 Gulf Region: choice of law, 376 civil law, 5

402  Index common law jurisdictions, 5 foreign trusts, 139–40 foundations, 132–4 public policy, 141–3 trust laws, 130–2 provisions, 144–7 recent developments, 134–8 waqf, 133–4 Hague Convention on the Law of Trusts (1985): choice of law, 168–9, 379, 392 civil law and, 377 constructive/resulting trusts and, 380 definition of trust, 137 membership, 379 South Pacific trusts and, 168 UAE and, 140 hekdesh (Jewish endowments), 7, 282–4 hibah trusts: adaptations, 10 English discretionary trusts and, 105–7 growing religiosity and, 107–8 hibah concept, 102–3 hybridity, 101–3 Malaysia, 4, 101–8 procedure, 103 purpose, 95, 103–5 unclaimed estates and, 103–4 Hinduism: India see India Sri Lankan trusts and, 4, 78–80, 91 honesty: trustee duties, 211–15, 249–51 Hong Kong: ancestral worship trusts, 33–51 British colonialism, 5, 33–7 choice of law, 376, 379 Confucianism, 33, 36 customary law colonial preservation, 34–7 English trust principles and, 41–2 tsos/tongs, 5, 33–51 expanding population, 43–4 Hague Convention and, 169, 379 indigenous inhabitants, 43 international finance market, 150 male only succession, 36 polygamy, 35 reservation of powers, 97 role, 11 trustee liability, 252 tsos/tongs common law and, 39–42 compensation, 45–6

creation, 36 customary law, 34–9 expert evidence, 46 inalienability, 44–5 modern anomalies, 43–50 perpetuities, 44 preservation, 34–7 public benefit, 47–50 whether charitable trusts, 46–50 India: 1882 Indian Trusts Act, 6, 56, 223–9, 231–40, 336, 340–2, 375, 377, 382 definition of trust, 382 choice of law, 375, 377 colonial charitable endowments controversies, 69–74 cy-près doctrine and, 71–2, 73 legislation, 67–9 constructive trusts, 339, 340, 342, 343 Hindu endowments colonial strategy, 60–2 English trust law and, 66–7 god-property, 62–6 imagined trustees, 57–62 philosophical tradition, 62–5 pre-colonial law, 58–9, 62–6 regulating misuse, 58–60, 74–5 uses, 58 tracing, 341 UAE-India Judicial Co-operation Agreement, 140 Indonesia, 375 intellectual property rights, 301, 320, 324 international relationship property trusts (IRPT), 166–8, 170, 173 Islam: financial prohibitions, 173 hibah trusts, 4, 95, 101–8 Islamic Wealth Management, 143 Labuan trusts and, 95 Malaysia, 94, 107–8 Sri Lankan trusts and, 80–2, 91–2 succession rules, 95, 102, 104–5, 173 unclaimed estates and, 104 waqf see waqf Isle of Man, 132, 169 Israel: Absentees’ Property Law (1950), 271–2 British mandate charitable trusts, 270–1, 273–4 legal system, 265–6, 276 waqf, 269–71 charitable trusts British mandate, 270–1, 273–4 Israeli law and, 274–5, 280, 283

Index  403 Christian endowments, 285 contract law, 277–8 counter-terrorism, 286 deeds of endowment, 278–9 development of trusts charitable trusts, 270–1, 273–5 history, 7, 267–86 independence period, 275–85 Israeli trusts law, 275–85 Ottoman period, 267–72, 284–5 waqf, 267–72 foreign trusts, 281–2 hekdesh (Jewish endowments), 7, 282–4 immigration, 150, 263–4, 269 independence period 1979 Trust Law, 277–81 creation of trusts, 277–9 legal system, 266–7 pre-1979, 275–7 trusts law, 275–85 international status, 263 legal system, 264–7 British mandate, 265–6, 269–71, 276 independence, 266–7 Ottoman Empire, 264–5 public endowments, 279–81 trusts of the church, 284–5 underlying companies, 281 waqf, 7, 134, 267–72, 284–5 Japan: accessory liability civilian system, 8, 330–2 common law inspirations, 337–9 family trusts, 328–30 recipients, 332–5 synthesis, 343–5 torts, 331–2, 335, 343–4 Cambodia and, 288, 302 choice of law, 375 common law inspirations, 335–43 accessory liability, 337–9 constructive trusts, 339–43 tracing, 339–43 constructive trusts common law inspirations, 339–43 synthesis, 345–8 creation of trusts, 382 family trusts, 329–30 fiduciary duty, 344–5, 346–7 implied trusts, 334 independence of trusts, 333–4, 346, 347 investment chains, 328–30 legal models, 336, 383

pension funds, 328–9, 344–5 tracing, 339–43, 345–8 trustees: death/bankruptcy, 333–4 Jersey trusts, 97, 130, 169, 177, 252 Korea see South Korea Kuwait: waqf, 134 Labuan trusts: assessment, 100–1 beneficiaries’ information rights, 98 choice of law, 376 flee clauses, 101 foreign law and, 100 foundations, 100 international trusts features, 96–9 Malaysia, 4, 94–101 midshore jurisdiction, 95–6 non-charitable purposes, 98 numbers, 99, 101 perpetuities, 97 protectors, 97–8 purpose, 94–5 registration, 98–9 settlors’ powers retained, 96–7 League of Nations, 266 Liechtenstein: 1926 Law of Persons and Companies, 336, 339–43, 345 civilian system and, 343 constructive trusts, 339–40 English model, 342 foundations, 132 implied trusts, 341–2, 345–6 Israeli recognition of trusts, 281–2 legal model, 336 tracing, 342 Malaysia: choice of law, 376, 379–80 constructive trusts, 392 corruption, 172 English law and, 93–4 growing religiosity, 107–8 Hibah trusts see Hibah trusts Labuan trusts see Labuan trusts offshore trusts, 172 political instability, 101 unclaimed estates, 103–4 Malta, 115 Marshall Islands, 151–2, 169 Mauritius, 98, 132 Medhātihi, 65 Meezan Bank, 224 midshore jurisdictions, 95–6, 150, 179

404  Index money laundering, 152, 170, 171, 176, 223, 224, 225–7, 230, 286, 347 Montserrat, 169 Mossack Fonsecca, 170 Nauru, 151–2, 169 negotiorum gestio, 384 Netherlands: foundations, 132, 133 Netherlands Antilles, 281 New Caledonia, 151 New Zealand: choice of law, 376, 379–80, 396 constructive trusts, 392, 396 disclosure regime 2019 changes, 258–61 2019 provisions, 255–6 assessment, 261 beneficiary protection v settlor autonomy, 258–9 memoranda of wishes, 260 nature, 259 pre-2019, 257–8 trust information, 259–60 family trusts, 241 foreign trusts, 169 offshore trusts, 152, 171–2 role, 11 settlors’ powers, 253–4 South Pacific islands and, 151, 152–3, 169–70, 179 trust law reform, 241–2 trustee duties assessment, 254–5 benefit of beneficiaries, 247–9 classification, 251–2 excluding mandatory duties, 251 gross negligence exemptions, 252–3 honesty/good faith, 245, 246–7, 249–51 mandatory duties, 246–52 Trusts Act 2019, 244–55 Trusts Act 2019, 6–7, 241–62 beneficiary protection, 243–4, 255, 258–9, 261 critics, 243–4, 252 disclosure regime, 255–61 principles, 243 purpose, 243 scope, 242 trustee duties, 244–55 Niue: asset protection trusts, 163, 164, 166 charitable trusts, 158 choice of law, 376 colonial history, 151, 169–70 offshore trusts, 5, 149–80 accumulations, 162 benefits, 178

certainty of objects, 159 closure, 176, 179 New Zealand and, 179 protectors, 155 Saunders v Vautier rule, 162 trustee liability, 161 OECD, 152, 176, 178, 179, 263 offshore trusts: characteristics, 96–9, 150–1 downsides, 151 finance curse, 177 Labuan trusts, 95–9 meaning, 149–51 problems, 176–9 protectors, 157 South Pacific, 5, 159–80 accumulations, 162 assessment, 179–80 certainty of objects, 156–9 conflict of laws, 168–9 firewall provisions, 168–9 legal adaptations, 154–69 perpetuities, 161–2, 171 politics, 174–6 protectors, 149, 154–6 reasons for adaptations, 169–79 Saunders v Vautier rule, 162–3 secrecy, 171 trustee liability, 159–61 users, 170–4 state capture, 178 subverting the law, 177, 180 Oman: waqf, 134 Ottoman Empire, 7, 134, 264–5, 266, 267, 268–9, 270, 274, 284–5 Pakistan: charitable trusts, 223 choice of law, 227, 375 counter-terrorism, 6, 10, 223, 224, 225–7, 230 foundations, 224 money laundering regulation, 223, 224, 225–7, 230 registration of trusts, 6, 226 regulatory overkill, 6, 223–40 1882/2020 Acts comparisons, 231–40 specialised trusts, 223, 225, 230 trustee duties, 6, 227–9 audits, 228 disclosures, 228 industry reaction, 229–30 waqf, 224 Palestine, 134, 264–6, 273, 275–6, 284, 285 Panama, 132, 180, 281

Index  405 Panama Papers, 151, 152, 170, 172 Pandectists, 301 Pandora Papers, 151, 173–4, 175, 178 Papua New Guinea, 151 Paradise Papers, 151, 175 perpetuities: England, 44, 97 Hong Kong, 44 Labuan trusts, 97 South Pacific trusts, 161–2, 171 protectors, 97–8, 101, 106, 132, 138, 149, 154–6, 157, 159, 165, 254 public policy: Australian trusts and, 183, 185, 187, 189–90, 196 Gulf Region trusts and, 141–3 South Pacific trusts, 169 Qatar: choice of law, 376 foreign trusts, 139 foundations, 132, 133 public policy, 142 trust law, 131, 136, 144–7 Red Cross trusts, 157–8, 163 religion: charitable trusts, 46–7 Hindu endowments in colonial India, 3–4, 55–75 Hong Kong ancestor worship, 33–51 Malaysian trusts, 4, 93–108 Sri Lankan gifts, 4, 77–92 resulting trusts: Australia, 192, 194 automatic resulting trusts, 387 choice of law and, 373, 379–80, 385–9 presumed resulting trusts, 387–9 sham trusts, 356 Singapore, 3, 16–31 Riyadh Arab Agreement for Judicial Cooperation, 140 Roman law, 79, 300–1, 303, 311, 324, 336, 382 Romania, 269 Russia, 269 Śabara, 64–5 St Kitts & Nevis: foundations, 132 Samoa: asset protection trusts, 163–6 charitable trusts, 158 choice of law, 376 colonial history, 151, 169 offshore trusts, 5, 149–80 accumulations, 162 assessment, 179

certainty of objects, 159 New Zealand and, 179 perpetuities, 161 protectors, 155–6 rationale, 170, 175–6 Saunders v Vautier rule, 162 trustee liability, 160 Saudi Arabia: waqf, 134 sham trusts, 356, 358–9 Singapore: boundaries, 93 charitable trusts, 48 choice of law, 376, 379–80 constructive trusts, 392, 396 common intention, 16–21, 17–18, 22, 24–6, 29 families, 3, 16–31 family norms, 22–9 communitarianism, 3, 27–8 filial piety, 31 informal understandings, 22–7 older generations’ attitudes, 27–8 parents and siblings, 29–30 strength of family bonds, 28–9 family trusts Chan Yuen Lan, 17–18 constructive and resulting trusts, 2–3, 15–31 England and, 15–16, 17–21 future, 30–1 post-Chan Yuen Lan, 18–21 international finance market, 150 offshore trusts, 171, 179 perpetuities and, 97 reservation of powers, 97 unmarried cohabitees, 19 Snell’s Equity, 352 South Korea: 1961 importation of trust, 311 adaptations, 10 beneficiaries rescission rights, 317–19 right against right, 323–5 unborn, 323 choice of law, 375 civilian approach, 312–19 common law proprietary rights and formalities, 320–1 money, 322–3 numerus clausus principle, 8, 319–20 proprietary agreements, 320–1 right against right approach, 323–5 torts, 321 unborn beneficiaries, 323 creation of trusts, 382 definition of trust, 312

406  Index independent fund mechanism, 8, 312–17 legal model, 383 limited liability trusts, 316–17 merger of rights, 314–15 pledge, 324 set-off prohibition, 314 subrogation of trust funds, 315 trustees bankruptcy, 313 death and divorce, 313–14 liability, 313 self-dealing, 315 uses of trusts, 325 South Pacific: asset protection trusts, 163–6 choice of law, 375–6 colonial history, 151 international relationship property trusts (IRPTs), 166–8 offshore trusts, 5, 159–80 accumulations, 162 assessment, 179–80 certainty of objects, 156–9 conflict of laws, 168–9 firewall provisions, 168–9 legal adaptations, 153–69 outside pressures, 151–3 perpetuities, 161–2, 171 politics, 174–6 problems, 176–9 protectors, 149, 154–6 public policy, 169 reasons for adaptations, 169–79 Saunders v Vautier rule, 162–3 secrecy, 171 subverting the law, 177, 180 trustee liability, 159–61 users, 170–4 Soviet Union, 287 Sri Lanka: choice of law, 375 forced inheritance and, 173 religious trusts assessment, 90–2 Buddhism and, 82–90 Hindu law and, 78–80, 91 Muslim law and, 80–2, 91–2 waqf, 80–2 Switzerland, 212 Taiwan: adaptations, 9, 10 choice of law, 375 creation of trusts, 382 crypto-assets see crypto-assets

definition of trusts, 112 crypto-asset custodians and, 116–22 formalism, 117–18 Financial Supervisory Commission (FSC), 112, 120–2, 126–7 legal model, 383 transfer of property, 118–20 trust 2.0, 112, 127, 128 trust enterprises, 115–16, 122–7 21st century, 124–5 historical development, 123–4 reform, 126–7 taxation: Australia, 183, 186–8, 194, 196 Cambodia, 288, 298, 307 charities, 185–90 double taxation, 173 Gulf region, 144 Israel, 150, 281, 282 Labuan trusts, 96 midshore jurisdictions, 95 New Zealand tax evasion, 152 offshore jurisdictions, 150, 151, 168, 169, 170–1, 173, 175, 176, 177–80 onshore jurisdictions, 149, 154 Sri Lankan temple properties, 84 Thailand: beneficiary: concept, 210, 217–19 choice of law, 375 freedom of trust, 220 licensing trusts, 206–7 Saunders v Vautier and, 210–11, 218 Securities Exchange Commission, 204, 209, 212, 217 trustee duties, 6, 206–15 draft bill, 219–21 duty to account, 208–11, 220 honesty and good faith, 211–15 listed public limited companies and, 216–17, 219–20 obligational view, 217–19 standard of care, 214–15 Tonga, 151–2, 169 tracing: civilian systems and, 335–6 India, 341 Japan, 339–43, 345–8 trading trusts: Australia, 183, 196–201 trustee duties: benefit of beneficiaries, 247–9 confidence, 204 core duties, 205–6, 246–52 classification, 251–2 excluding, 251 duty to account, 205, 208–11, 220, 221, 257

Index  407 good faith/honesty, 205, 211–15, 245, 246–7, 249–51 gross negligence exemptions, 252–3 New Zealand, 244–55 Pakistan, 6, 227–9 Thailand, 6, 206–15 Turks and Caicos Islands, 169 United Arab Emirates (UAE): Hague Convention and, 140 public order, 142 public policy, 141–2 trust law, 135–40, 144–7 UAE-India Judicial Co-operation Agreement, 140 waqf, 134 United Kingdom see also England colonialism Hong Kong see Hong Kong India see India Palestine mandate, 265–6, 269–71 Sri Lanka, 82–3 counter-terrorism, 230 money-laundering regulation, 230 trust law reform, 230 United States: accessory liability, 335, 337–8, 344 asset protection trusts, 150, 163, 164, 176

breach of fiduciary duty, 335, 337–8 constructive trusts, 336, 339, 340–1, 342–3, 345–6 crypto-asset custodians, 115 discretionary trusts, 105 legal model, 130, 336 383 perpetuities, 161 South Pacific and, 151, 152–3 tracing, 336, 340 unjust enrichment, 164, 218, 327, 333, 342, 345, 346, 347, 384, 392, 394 Vanuatu, 151–2, 169, 376 Vietnam, 287, 375 waqf: British Palestine mandate, 269–71 creation, 268 definition, 80, 129, 267 family waqf, 269 Gulf region, 129, 133–4, 141 Israel, 7, 267–72, 284–5 Malaysia, 94 Pakistan, 224 Sri Lanka, 80–2 trustees (mutawalli), 268 uses, 268–9

408