Published in STEP Journal - October 2007 issue

Introduction

The Hague Convention on the Law Applicable to Trusts and their Recognition (the Convention) was ratified by the Swiss parliament on 20 December 2006. The changes came into effect, along with some consequential changes to Swiss law, on 1 July 2007. (The consequential changes are to the Swiss private international law act of 18 December 1987 (the SPILA) and the Swiss debt enforcement and bankruptcy act of 11 April 1889.) This is great news for people doing trust business in or with Switzerland because, even though trusts have been used in Switzerland for many years, the legal framework has not been completely satisfactory.

This article suggests what model might be used increasingly by fiduciary services providers and then goes on to look at the issue of governing law.

Can I now have a “Swiss trust”?

Yes, you can now have a “Swiss trust” in the sense of a trust of which the trustee is a Swiss resident person (probably a corporate), with Swiss situs assets and the administration carried on in Switzerland. However, Switzerland is still a civil law jurisdiction with no substantive trust law of its own (the “hole in the cheese”) and so there is an open question regarding the choice of governing law.

What does the Convention say?

Article 6 of the Convention gives settlors the freedom to choose the governing law of their trust. As mentioned above, you can’t chose Swiss law so a foreign law will have to be chosen. The question is, which one?

Governing law versus forum for administration and jurisdiction clauses

Historically, relatively little thought has been given to the issue of governing law and perhaps even less to the interaction between the choice of governing law and any other choices relating to fora for trustee applications or wider dispute resolution.

At this point it may be helpful to consider a few terms. “Governing law” is relatively clear, although the terms “proper law” and “applicable law” are also used, and it is the third alternative that is used in the Convention.

“Forum for administration” can be confusing. It does not, typically, mean the place where a trust is administered on a day-to-day basis; rather it may be intended to mean the tribunal to which the trustee may apply for directions relating to the administration of the trust. To complicate matters, various references are made in the Convention and the SPILA to the “place of administration” of the trust and it is not completely clear how these references dovetail with the meanings described above. By contrast, a “jurisdiction clause” will refer to a tribunal (typically a court, but it could refer to arbitration or mediation) which it is intended would have jurisdiction in the event of a dispute relating to the trust.

A detailed discussion of these points (and the issue of whether or not jurisdiction clauses can be enforced against beneficiaries who were not party to the trust deed) is outside the scope of this article. Below we simply use the term “jurisdiction clause” in a wide sense to mean a clause which is intended to confer jurisdiction on a tribunal to deal with either or both of administrative issues and dispute resolution.

So, it is worth considering whether an option for Swiss trusts might not be to choose a foreign governing law (as will have to be done) paired with a jurisdiction clause referring to the Swiss courts (or perhaps arbitration in Switzerland). An alternative, and the typical fallback position, is to choose the courts of the place of the governing law. That may work in theory, but if you are a Swiss trustee will you really want to apply for directions or litigate your beneficiary dispute outside Switzerland, and perhaps somewhere on the other side of the world?

Conversely, if a Swiss tribunal were chosen, it would be relatively well placed to apply a foreign law. There is a special body in Switzerland (the Swiss Institute of Comparative Law) which is often used to provide legal advice to Swiss tribunals when they have to consider matters of foreign law, and this is a relatively common occurrence.

A possible model

Thus, we see the following as a possible model for “Swiss trusts”.

The settlor and all beneficiaries will be resident outside Switzerland (there appears to be an emerging market for trusts for Swiss residents but many issues are not yet clear, not least of all tax). The trustee will be a Swiss corporate trustee and the trusteeship and administration will be undertaken in Switzerland. An appropriate governing law will be chosen, and consideration will be given to the jurisdiction clause, with perhaps (but only perhaps) a Swiss tribunal being chosen.

Issues impacting on the choice of governing law

There are a number of factors impacting on the choice of governing law. Some of these will be particular to the place of residence of the settlor and beneficiaries, but others may point to particular jurisdictions being obvious choices for Swiss trusts. We concentrate on the latter.

Is it the law of a well respected trust jurisdiction?

The authors would argue that Jersey law is the law of one of the world’s most respected trust jurisdictions, and while they would concede that a number of other laws would also pass this test, they would suggest that there are a number which would not.

Is the jurisprudence highly regarded?

The jurisdiction providing the governing law should have a substantial and respected body of case law. One does occasionally have conversations with people who say they would rather not choose such a jurisdiction on the basis that, if lots of trust cases are heard there, there must be problems with that jurisdiction. However, this is clearly a misconceived argument.

Has the jurisdiction also ratified the Convention?

In the Swiss context, and assuming that litigation may end up in front of a Swiss tribunal, it may be helpful to choose a jurisdiction which has also ratified the Convention. Jurisdictions which have ratified the Convention should have approaches to trusts which dovetail with the Convention. In the case of jurisdictions which have not ratified the Convention, there is no such guarantee. Further, the Swiss Federal Court has already indicated (in the case of G v C Trust Co (Jersey) Ltd - SJ 2000 269) that the fact that the governing law is from a jurisdiction which has also ratified the Convention will be helpful in resolving issues argued before the Swiss courts. This case concerned a trust governed by Jersey law and the judgment suggests that it may be prudent to choose a governing law from such a jurisdiction.

It is interesting to see which jurisdictions have ratified the Convention and which have not, not least of all because there is no apparent consistency of approach. By way of example, all the Crown Dependencies (Jersey, Guernsey and the Isle of Man) have ratified the Convention, but some Caribbean jurisdictions have and some have not (BVI has but Cayman has not).

Is the law up-to-date?

It will be helpful if the law is consistent with modern expectations regarding the duties and liabilities of trustees and the potential involvement of third parties. Thus, the law will ideally offer a number of elements, including, for example, reserved powers, to make the concept palatable to settlors who may come from jurisdictions where trusts are not well known.

Is the law set out in clear language?

Do the trustee and the settlor understand the trust deed and the implications of the governing law? This sounds obvious but how many trustees have trusts whose governing laws they do not fully (or even adequately) understand? Further, if the settlor doesn’t adequately understand the terms of the purported trust he may not be able to create a trust on those terms.

It is likely to be very helpful if the law is codified (or mostly so) rather than being made up solely, or primarily, of case law; trustees (and lawyers) want something that is accessible and if they can put a photocopy of an excerpt from the law under a client’s nose to explain a point, so much the better.

Are the lawyers in the same time zone?

Trustees need to have easy recourse to lawyers qualified to advise on the governing law. This must point to a jurisdiction in a similar time zone.

Enforcement of foreign judgments

This may be a consideration for settlors. However, while the choice of governing law may impact on the ability of creditors or former spouses to enforce judgments against trustees, the question also has much to do with the jurisdiction issues mentioned above and is thus outside the scope of this article.

So which law is it?

Jersey law fulfils the above requirements better than most, but there may be a case for using Guernsey law or English law or other laws depending on the circumstances.

Conclusions

The Swiss trust industry has an exciting future but, like a good Gruyere, it needs a bit of “affinage”. The tax issues (particularly for trusts involving Swiss residents) are going to take time to resolve and issues such as forced heirship avoidance will be interesting.

In the meantime, lots of trusts are going to be created and one thing trustees will need to do is choose the right governing law.