The interest and scope of the enquiry

The topic to which this book is dedicated is of great interest for anybody concerned with the expanding field of European private law. In several European countries business transactions commonly require the use of trusts. The litigation of trust law issues in a business context is becoming more frequent than in the past. At the European level, legal instruments enacted by the European Community make explicit reference to trusts, or regulate transactions involving both trusts and other investment vehicles. Principles of European Trust Law, drafted by a distinguished group of scholars, are now available to provide guidance on the development of trust law in European jurisdictions. At the international level, the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition has entered into force in several countries, providing much-needed solutions to conflicts problems raised by trusts, but also posing fresh questions on its impact and its implementation.

The great practical importance of the subject closely matches its burning academic interest. Trusts straddle the law of property and the law of personal obligations. Located at the intersection of core categories of private law, they pose problems that turn on the proper understanding of fundamental notions of private law. From the academic point of view, trusts also raise essential questions about competing claims to property, as well as about the management of property in the broadest sense. Both sets of questions involve hotly debated subjects.

This book is the result of a genuinely collective enterprise. As a project, it was conceived at a preliminary meeting of one and a half days in March 1998 at the University of Trento, within a small group made up of two of the editors (Graziadei and Mattei), the chairman of the property group of the Common Core project, Professor Antonio Gambaro, and leading trust scholars Professor John Langbein from Yale, Professor Hein Kötz from Hamburg and Professor Shael Herman from Tulane. At that meeting general issues of applicability of common core methodology to the domain of trust were discussed, and a clear sense emerged that the focus should be on trust law in the commercial setting.

The trust project was officially launched in July of the same year at the general meeting of the Common Core project, in Trento, where a rudimentary first draft questionnaire was discussed in depth under the leadership of Professor Antonio Gambaro, at the property session. At that meeting Lionel Smith (at that time of Oxford University) joined the editorial team and the first participants joined in. In June 1999 all the participants to the project met in Como for a three-day conference sponsored by the University of Insubria. At that meeting draft responses to the new version of the questionnaire were discussed together with Professor John Langbein, who also gave a speech on institutional investors and the law of trusts.

Case

Alternative 1

Tom is a real estate agent. One of the immovables he is trying to sell is an apartment belonging to Samantha. Bill is interested in buying this apartment. To show his seriousness in entering into negotiations, Bill writes a cheque for €10,000 as a deposit, which is to be refundable if the sale does not proceed. On Tom's instructions, Bill makes the cheque payable to Tom, and Tom deposits this cheque into his own bank account. The negotiations between Samantha and Bill break off with no contract, and Bill tells Tom to refund the money. Tom, who has made no withdrawal from the bank account in the intervening time, has become insolvent. Does Bill's claim to his deposit have priority over competing claims, or is he treated as a general creditor? Would it make a difference if Tom were a practising lawyer?

Alternative 2

Tom is a travel agent. He sells tickets from various airlines to his customers. The money paid for the tickets by his customers is deposited in a bank account in Tom's name. When Tom becomes insolvent, some customers already have their tickets and some do not (and those who do not have tickets have no contractual claims against the airlines). The customers who have not been issued tickets claim back their money. The airlines claim payment from the bank account for tickets that have been issued. Tom's general creditors also claim the money in the bank account.

Case

John is a professional investment manager. Sam decides to make use of John's services after learning that he is a skilful manager. In John's office, Sam signs a document granting John full investment powers over a capital value of €2,000,000. The terms of the document indicate that John's powers are to be irrevocable for the term of five years. These powers enable John, inter alia, to buy and sell any kind of asset, including immovables. The document also provides that John will credit all the income produced by the managed capital to Sam's bank account. It stipulates that John will be entitled to deduct an annual fee, calculated as a percentage of the capital value of the managed assets. Sam then writes a cheque payable to John for €2,000,000.

Alternative 1

In the second year of their relationship, Sam reads in a newspaper that John is implicated in the international trafficking of stolen works of art. He does not know whether the allegations are true but he decides to terminate their relationship. He communicates this to John. He demands restitution of the managed assets, as well as a full account of the investments that have been made. Upon John's refusal, Sam sues, asking for: (a) a judicial declaration that the relationship is terminated; (b) a remedy enjoining John from entering into any further transaction related to the assets; (c) a full audit of the previous period; (d) restitution of the managed assets; and (e) damages.

Case

A pension fund for employees of a company, that provides a specified benefit upon retirement, has been running for several years. Both the employer and the employees make contributions to the fund. The managers of the fund are of the opinion that there is a surplus of funds as a result of successful investments.

1. a. Can the employer suspend making contributions?

2. b. To whom does the surplus belong?

Discussion

AUSTRIA

An employees' pension fund that provides a specified benefit upon retirement, several years after the employer and the employee have made contributions to the fund, is not a ‘pension fund’ according to the Austrian Investment Fund Act. However, Austrian private law recognises alternative concepts that meet the requirements described in Case 8. These alternatives are based on a specific statute called the Betriebspensionsgesetz (BPG). There are basically three pension fund schemes under s. 2 BPG.

The first scheme is called Pensionskasse (s. 2 Z 1 BPG). This pension scheme is an insurance solution that allows the employer to organise the insurance entity. The insurance entity has its own legal personality based on a specific statute, the Pensionskassengesetz (PKG). Both the employer and the employee pay contributions to the insurance entity on behalf of the employee. The employees can claim benefits upon retirement, regardless of whether they still have an employment contract with the same employer.

The second pension fund scheme is a direct promise pension (direkte Leistungszusage) (s. 2 Z 2 BPG).

Case

Jane manages property in the interest of her client, Monica. The property is located in your country, where both Monica and Jane live and are domiciled. In their agreement they introduce a clause stating that their relationship is a trust governed by Jersey law. Litigation arises between them. Jane claims the invalidity of the trust provision of the arrangement, and claims that local law should govern the relationship. What is the result?

Discussion

AUSTRIA

Austria has not ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition. Since both of the parties live and are domiciled in Austria, and the property is located there as well, the proposed relationship does not include any foreign element; this precludes the application of the Austrian conflicts law (IPRG). Therefore, the validity of the ‘choice of law clause’ between Jane and Monica is governed by the general rules of Austrian law.

Due to the contractual autonomy of the parties, the clause is legally valid and Jersey law governs the trust or fiduciary relationship. This, however, is only true as far as the default part of Austrian law is concerned; the parties cannot ‘contract out’ of the application of mandatory provisions of Austrian law. As a result, contractual autonomy permits the applicability of Jersey law regarding the contractual part of the trust, whereas the proprietary or real aspects of the relationship follow the lex rei sitae, which is Austrian law in this case.

Introduction

In June 1982 the delegates to a Special Commission that was to prepare for the Fifteenth Session of the Hague Conference on Private International Law met for the first time. They represented twenty-one states which were members of the Hague Conference, a number that was to swell to thirty-two at the meeting of the Fifteenth Session in October 1984. The common law states represented were the United Kingdom, the United States, Australia and Canada. There were observers of various international organisations both to the Commission and to the Fifteenth Session. The task of the Special Commission, set by the Fourteenth Session in 1980, was to design a Convention for presentation to the Fifteenth Session on the applicable law to govern trusts and on the recognition to be accorded the trust by a state that ratifies the Convention.

The text of a draft Convention was completed in October 1983, and a year later, following a full consideration of this text and significant changes, the final text of the Convention was adopted by the Fifteenth Session held in October 1984. The Convention came into force on 1 July 1985.

The present writer, representing Canada, was one of those delegates. This chapter looks back to the Convention that the Fifteenth Session adopted, and to the reception of the Convention during the following twenty years. It is intended as an entirely personal view of both events, the international agreement and its reception. There is one caveat.

Some difficulties

The second part of this volume collects reports that are the outcome of the discussion of eleven hypothetical cases.

In searching for the relevant law, all the respondents have characterised in one way or another the legal relationships between the parties, even when the questions posed did not require them to do so. It appears that, in principle, a number of general options are usually available (both across and within the legal systems under consideration) to analyse the relevant transactions. At this level of the investigation, concepts and names are important. They frame the ways each case is discussed. Here we find a rich variety of approaches to the cases, though the options available are, of course, not unlimited.

The reports above, however, also show that the labels attached to the facts do not necessarily provide the ultimate key to know what operative rules will govern each case. It would be wrong to assume that categories and names at this point do not count any more; they still play a role in explaining the outcome of the case. Nonetheless, the country reports cover issues more closely related to the circumstances of each case than they would have done if simply engaged in the discussion of the main features of mandate, fiducia, trust, etc., and they spell out answers that focus on the facts outlined in the case descriptions.

Case

John is a professional investment manager. Sam decides to make use of John's services after learning that he is a skilful manager. In John's office, Sam signs a document granting John full investment powers over a capital value of €2,000,000. The terms of the document indicate that John's powers are to be irrevocable for the term of five years. These powers enable John, inter alia, to buy and sell any kind of asset, including immovables. The document also provides that John will credit all the income produced by the managed capital to Sam's bank account. It stipulates that John will be entitled to deduct an annual fee, calculated as a percentage of the capital value of the managed assets. Sam then writes a cheque payable to John for €2,000,000.

Alternative 1

In the second year of their relationship, Sam learns that John has made very risky investments that have done poorly. As a result, he has lost 50 per cent of the value of the capital. Does Sam have any legal recourse?

Alternative 2

In the second year of their relationship, Sam learns that John does not use his own judgement to make any of the investment decisions. Instead John relies exclusively on the recommendations in a well-known monthly financial newsletter. Does Sam have any legal recourse?

Discussion

AUSTRIA

Alternative 1

The contract between John and Sam is to be qualified as a contract of mandate in accordance with ss. 1002 ff. ABGB.

Case

A company, XYZ Ltd, wishes to raise money in the financial markets. It is willing and able to give real security to secure the debt. The transaction must be structured so that XYZ Ltd can issue secured debt instruments to multiple investors, in such a way that each investor holds the same kind of real security over the same assets, and so that the enforcement of the security will be practicable. How can these goals be realised?

Discussion

AUSTRIA

There exists in Austrian law an old statute which governs the transaction. This is the Gesetz vom 24. April 1874 betreffend die gemeinsame Vertretung der Rechte der Besitzer von auf Inhaber lautenden oder durch Indossament übertragbaren Teilschuldverschreibungen und die bücherliche Behandlung der für solche Teilschuldverschreibungen eingeräumten Hypothekarrechte. This statute deals with Teilschuldverschreibungen. These are bonds negotiable on the capital market, issued by the company in situations like those of Case 10.

Such bonds can be secured by a mortgage on the immovable property of the company issuing the bonds. The statute enacts special provisions for such a security. The mortgage is created by presenting a mortgage deed to the court responsible for the land register. This document deed has to be drawn up by the company issuing the bonds. The individual bondholder is not registered in the land register. Only the total amount for which the bonds are issued, the number of bonds issued and the dates at which they are to be paid are registered.

Case

A financial services company wishes to launch a collective investment scheme. It hopes to choose a vehicle that will allow the free transfer of the interests of investors, and which will permit the rules governing the scheme to be changed where necessary.

What options are available to it?

Discussion

AUSTRIA

Austrian private law recognises one type of collective investment scheme, namely, investment funds that fall under the Austrian Investment Fund Act (InvFG). Austrian investment funds are open-ended funds that work on the principle of risk diversification and lend themselves to an open clientele. It is also possible to create special funds that only have a limited number of investors. All types of Austrian investment funds allow for changes of terms and conditions and for changes of investors, although there is no secondary market for trading the investment fund ‘certificates’. Under the Austrian Investment Fund Act, the investors have the right of redemption.

A change of the terms and conditions of an investment fund, under s. 22(3) InvFG, does not require the consent of the investors, but it must be made in their interest, must be approved by the supervisory board and must be published. Section 22(3) InvFG deals only with the public law of the modification.

Different supervision schemes apply for Austrian investment funds. Supervision under the InvFG includes a bank supervisor, a supervisory board, an investment company (a special bank) and the depository bank. The investment company manages the fund and makes the investment decisions.

Case

Roberto is a professional investment manager. He manages assets in the interest of different clients, namely Simon, Rebecca and Ruth. The managed assets are bought with money transferred to him by his clients. Roberto offers different forms of services: (a) individual management services, under which he is to keep separate the position of each client; (b) participation in a collective investment scheme, whereby the assets managed for his clients are pooled and each participant in the scheme will share pro rata the returns on the collective investments; and (c) shares of an investment company (DEF Ltd) which holds investments chosen by Roberto.

One year after receiving the money from his clients, Roberto becomes personally insolvent. Which of his clients is better off: Simon, who chose option a; Rebecca, who chose option b; or Ruth, who chose option c?

Discussion

AUSTRIA

Option a

Professional investment managers, who offer the individual management services enumerated in s. 1 (1) ((19)) BWG, are not allowed to take over money from their clients. The managed assets are deposited in bank accounts in their clients' names. Professional investment managers do not carry out their services on a fiduciary basis, because they are obliged to act in the name and for the account of their clients. They are direct representatives, who are mandated and authorised by the clients to carry out specific investment services.

This book brings ‘The Common Core of European Private Law’ over the threshold of a half dozen published results. The project was launched in 1993 at the University of Trento under the auspices of the late Professor Rudolf B. Schlesinger. The methodology used in the Trento project is novel. By making use of case studies it goes beyond mere description to detailed inquiry into how most European Union legal systems resolve specific legal questions in practice, and to thorough comparison between those systems. It is our hope that these volumes will provide scholars with a valuable tool for research in comparative law and in their own national legal systems. The collection of materials that the Common Core Project is offering to the scholarly community is already quite extensive and will become even more so when more volumes are published. The availability of materials attempting a genuine analysis of how things are is, in our opinion, a prerequisite for an intelligent and critical discussion on how they should be. Perhaps in the future European private law will be authoritatively restated or even codified. The analytical work carried on today by the nearly 200 scholars involved in the Common Core Project is a precious asset of knowledge and legitimization for any such normative enterprise.

We must thank not only the editors and contributors to these first published results but also all the participants who continue to contribute to The Common Core of European Private Law project.