The Czech Solution of a Trust
How did the Czech legislator solve challenges of legal system differences when implementing traditionally common law concept of a trust and is this solution
compatible with the main principles of civil property law?
Master Thesis LLM European Private Law 2018/2019 Author: Eliška Koštiálová E-mail: eliska.kostialova@gmail.com Student ID: 12242217 Supervisor: Selma de Groot Date of submission: 17 July 2019
Abstract
The Czech history was rewritten when the new Czech Civil Code came in force on the 1 January 2014. This Civil Code replaced the previous one from 1964 and brought severe changes to the Czech civil law system as it included a lot of formerly unknown legal constructions. One of these institutes is “Svěřenský fond” and it represents the Czech version of trust.
Trust institute is traditionally known from the common law legal system and the Czech Republic has civil law system. The differences between these two legal systems cause obstacles to civil law legislators who want to codify trusts or trust like institutes.
In writing this thesis I have two goals. First, I aim to determine how did the Czech legislator solve the challenges of a legal system difference when implementing trust into civil law system. Secondly, I will evaluate whether the Czech solution is in line with the basic principles of civil law. Therefore, the research question is: How did the Czech legislator solve challenges of legal system differences when implementing traditionally common law concept of a trust and is this solution compatible with the main principles of civil property law?
The initial chapter will first introduce the concept of trust in general, including its origin. The second chapter first evaluates the trust nowadays and its infiltration in civil law systems. Afterward, this chapter will determine the main obstacles which have to be faced when implementing trust into civil law system. The third and final chapter will introduce the Czech civil law system and the Czech trust construction, which will be evaluated from the civil property law principles perspective. The methods used in this thesis are descriptive, doctrinal, comparative, any analytical.
I conclude that the Czech trust construction is incompatible with the principle of absolute ownership and with the traditional notion of patrimony. The Czech trust is compatible with the principle of numerus clausus and principle of publicity. Even though the construction does not correspond with some of the main principles of civil property law, this fact does not create problems and obstacles while using this legal construction in real-life. It is therefore possible to implement institute of a trust into a civil law system.
Table of Content
Introduction ... 4
1. What is a trust? ... 6
1.1. Origin and characteristics of a trust ... 6
1.2. Trust in common law ... 8
2. Trust in a civil law ... 10
2.1. Trust nowadays ... 10
2.2. Civil law vs. Common law ... 11
2.3. Obstacles for a civil law legislator ... 12
2.3.1. Absolute ownership ... 12
2.3.2. The traditional notion of a patrimony in civil law ... 14
2.3.3. Numerus clausus ... 15
2.3.4. Principle of publicity of property rights ... 16
3. Czech trust ... 17
3.1. Czech civil law ... 17
3.2. Czech trust ... 18
3.2.1. General introduction and creation of a trust ... 19
3.2.2. Concerns regarding the abuse of a trust ... 20
3.2.3. Administration ... 22
3.2.4. Beneficiary ... 23
3.2.5. Changes and extinction ... 24
3.3. Evaluation from a civil property law principles perspective ... 24
3.3.1. Absolute ownership... 24
3.3.2. The traditional notion of patrimony ... 26
3.3.3. Numerus clausus ... 28
3.3.4. Principle of publicity ... 29
3.3.5. General conclusion ... 31
Conclusion ... 32
Introduction
The Czech history was rewritten when the new Czech Civil Code1 (further CCC), which was adopted by the Czech Parliament on the 3rd February 2012, came in force on the 1st January 2014. This Civil Code replaced the previous one from 1964 and brought severe changes to the Czech civil law systemas it included a lot of formerly unknown legal constructions. A lot of these new constructions came from the inspiration of Austrian Civil Code2 and some of the institutes are all new to the civil code of a country with purely civil law system. One of such institutes is called “Svěřenský fond” and is described in altogether 27 articles of the CCC.3 Svěřenský fond is the Czech version of a trust and is the first codified trust in the Czech Republic.4 According to William Swadling5 and other scholars6 it is a very modern and well-regulated concept concerning the fact that this institute is traditionally connected with a common law legal system. As it is not simply possible to implement any common law concept into a civil law system as it is, the matter is widely discussed and is also the main theme of this thesis.
The differences between these two legal systems cause obstacles to civil law legislators who want to codify trusts or trust like institutes. This matter is the main topic of this thesis. In writing this thesis I have two goals. First, I aim to determine how did the Czech legislator solve the challenges of a legal system difference when implementing traditionally common law concept of trust into Czech civil law. Secondly, I will evaluate whether the Czech solution is in line with the basic principles of civil law. Therefore, the research question is:
How did the Czech legislator solve challenges of legal system differences when implementing traditionally common law concept of a trust and is this solution compatible
with the main principles of civil property law?
To be able to answer the main research question, other sub-questions need to be answered first. Those questions are:
• What is a trust and what are its characteristics?
1 Act No. 89/2012 Coll, Czech Civil Code
2 Original name is Allgemeines bürgerliches Gesetzbuch with the origin in 1811. 3 Articles 1448-1474 of Act. No. 89/2012 Coll., Czech Civil Code
4 The norms of international private law enabled the recognition of foundations, trusts, and similar foreign
trust-like institutions even before this codification, but there was no Czech version of trust. (Ronovská, Lavický 2015)
5 Swadling 2016, p. 972
• How is the trust construction connected to the common law system? • What are the main principles of civil property law?
• Which obstacles are faced by civil law legislators when implementing trust construction?
• What are the features of the Czech trust?
• How does the Czech solution comply with principles of civil property law?
The structure of this thesis is divided into three main chapters and the content is as follows. The initial chapter will first introduce the concept of trust in general, including its origin. After the description of trust characteristics, this chapter will look at the common law system and how it is closely connected to the trust construction. The second chapter first evaluates the trust nowadays and its infiltration in civil law systems. Afterward, this chapter will focus on the main differences of civil and common law legal systems by analyzing civil property law principles. Main obstacles which have to be faced when implementing a trust into civil law system will be determined. The third and final chapter will introduce the Czech civil law system in general and the Czech trust construction, which will be evaluated from the perspective of civil property law principles. Finally, in conclusion, findings will be summarized and the research question will be answered.
This thesis will be written from an internal legal perspective. Regarding the common law system and the parts concerning non-Czech legislation, the perspective can be also seen as external as this thesis is written by a Czech law graduate. The research method will be descriptive, doctrinal, comparative and analytical with the goal to critically evaluate the solution of the Czech legislator. The descriptive approach will be used mainly in the part of introducing Czech civil law and the solution of a Czech trust. Doctrinal approach corresponds with the section dealing with civil law principles and the determination of main obstacles and issues connected with two separate legal systems of civil law and common law. This section also includes comparative approach regarding the differences between civil and common law principles. After all of the above mentioned will be determined, the Czech solution will be analyzed and evaluated from the civil law principles perspective.
1. What is a trust?
1.1. Origin and characteristics of a trust
In the literature, one can find various stories about the evolution of a trust and there is no generally agreed theory on where exactly the trust “was born”. All the narratives describing the use of a trust institute in the past have two main attributes in common: firstly, not only one person has rights in the same property at the same time7 and the relationship is in such a way that one person is required to deal with the property entirely for the benefit of the other person, and, secondly, these institutes were developed by practical people trying to solve real-life situations, as opposed to being created by a legislator or a judge setting out all of the appropriate principles in advance.8 Therefore, the institute which enables to entrust a property into a third party´s for a certain period of time was created as a result of a need of the society9 and following are some examples from the past.
To point out the main characteristics of trust I will now show a few examples of real-life situations from the past. Already in 12th century warriors traveled to the Middle East on crusades and were away from England for number of years. These warriors needed someone to take care of their property in their absence. The idea of split ownership has emerged as the person taking care of the property exercised all the powers of a legal owner of the property and at the same time, the crusader wanted to make sure to recover all his rights once he returned from the war. Other concepts are to be found in the literature but are not specified with the exact timeframe of their origin. One of them was developed by Franciscan monks who took a vow of poverty and therefore were not able to own property by themselves. In order to give them a donation of any kind, it was necessary that there was a third person holding the property on their behalf. The important factor was that this third person could not use the property for his own benefit but only for the benefit of the monks, which is the main feature of trust institute.10 And as a third example, the institute developed in the Middle East
7 In this regard one case think about the relation to co-ownership. It is possible that in the civil law system two
entities have both ownership rights towards one object. The difference is that the element of owning for someone else is not included here. All owners have full ownership rights towards their share of the co-owned property. Therefore, co-ownerships and trusts are two different proprietary relationships.
8 Hudson 2010, p. 43
9 Therefore, trust as institue was created by citizens who needed to solve day to day situations regarding their
property and its management. By its organic use it became part of some of the legal systems as a regular concept and on the other side, some jurisdiction do not have it as a codified/acknowledge institute, but perople still use it and the development went through jurisprudence and real use of the insitute. (For example in German with its treuhand)
called “waqf” was a common device used by Muslim families in order to hold a certain property in the ownership of “waqf” and to dedicate its profits to charity.11
All these institutes described in the previous paragraph have the main characteristics of a trust and here follows an explanation of this legal relationship: Person A wants to separate the management of certain property from its enjoyment. For this purpose, person A entrusts control over the property to a person B who is to exercise it according to the instructions of A in the interest of either A himself or a third person C, or for a specific purpose. The juridical constructions attributing the control to B may be very different. In general, it can derive either from the formal titularity of the rights of which the property consists or it may result from powers which have been transferred to B for the administration purpose.12
Above mentioned is the main principle of a trust relationship but at the same time, there is no generally accepted definition of a trust. As Martin said, many attempts have been made to define trust, but none of them has been wholly successful.13 Hayton also commented regarding the same matter and his opinion is that all one can do is to provide a description of the trust, which reflects the above-mentioned rules and which enables people, in a general way, to know what is meant when talking about trust.14
In the more modern times of a trust, a very broad definition was adopted in the Hague Trust Convention15 and says that trust is a legal relationship created - either inter vivos or mortis causa16 - by a person, who is called settlor, and in which assets have been placed under the control of a trustee for the benefit of the beneficiary or for a special purpose. In art. 2 of the same Convention one can find characteristics of a trust which are a) the assets constituting a separate fund which is not a part of the trustee´s own estate, b) title to the trust property standing in the name of the trustee or in the name of another person on trustee´s behalf and c) an accountable trustee with the power and the duty to manage, employ or
11 Hudson 2010, p. 42
12 Becker 1995, p. 1
13 Hanbury, Martin 2001, p. 47 14 Hayton 1993, p. 6
15 Hague Convention on the Law Applicable to Trusts and on their Recognition was concluded on the 1st July
1985 and entered into force 1st January 1992
16 Inter vivos with its meaning „between people who are alive“ and mortis causa with its meaning „in case of a
dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.17
1.2. Trust in common law
In order to introduce the institute of common law trust and the role of equity and common law, and how these two elements are important while talking about trust, I will first elaborate on the English legal history, which will help with the understanding of this concept. In the whole history of the United Kingdom until the enactment of the Judicature Act in 1873, the court system had two separate sets of court each dealing with their own system of law - common law and equity. This Judicature Act removed the physical separation of two systems of law but did not separate them intellectually. There is now only one set of courts which practices both legal systems in parallel and in case of a conflict, rules of equity prevail over the principles of common law.18
Beginning of the common law and equity system can be traced back to 1066 when the Norman invasion happened and after which William I.19 took control over the entire Kingdom of England and became the first Norman King of England. The grounds for the entirely new legal system were brought up and applied to all the previously miscellaneous areas which were created by the consolidation of warring tribes and in which the tribal customs were applied unequally.20 This new system was common to the whole of the kingdom and therefore is called the common law. This law was applied in England´s central royal courts. These courts in their practice founded rights and obligations which became the initial principles of the common law which was since then gradually developing.21 The exact structure and the name of the courts changed over time and such details are not necessary to be demonstrated in order to show the main differences of common law and equity.
In case a decision of these courts was thought to be unjust or in case there was no availability of access to justice and no decision was in place based on the common law part of
17 The reason this definition is so broad is that it has to fit several jurisdictions and therefore the approach
towards this definition has to be more functional. In that sense, the definition can cover both civil and common law trusts and also other trust like institutes.
18 Hudson 2010, p. 16
19 Also known as William the Conqueror or William the Bastard. He who lived 1028-1087 and reigned as the
first Norman King or England since 1066 till his death.
20 This situation is understandeble in regard to the fact that before the takeover of William the Conqueror, there
was no centralized power which would organize the whole country as one coherent system. Therefore, the tribes had their own customs and rules and lived in accordance with them. Those differed from tribe to tribe and only started to change into a legal system which was common for the whole country after 1066 as described in the text.
the system, there was an option for the parties to petition the king directly. As the amounts of such requests were rising, a separate position was created in order to deal with these matters. The position was called Lord Chancellor and later Court of Chancery became a separate institution in the English legal system. This court had the power to overrule a common law court decision as inequitable or they could grand extra right with its origin in equity.22 Originally, this court used to decide each case on its merits independently on previous cases and decisions. Over the time, precedents played a strong role and it got all the way to the point that a separate legal system called equity was developed.23 As said before, both, the legal system of common law and the system of equity were used by two different court systems and were developing separately.
As a result of this division, the fiduciary duties developed outside of the common law at courts of Chancery, which were the courts enforcing trusts. The system of the common law was unacquainted with trust as a legal instrument or as a practice.24 This division of a legal system and two separate views on the institute of trust defined its characteristics. One of the main features of the common law trust is the concept of dual ownership, which is unique for the system of the common lawn and which perfectly demonstrates the common law and equity system and their use. It shows those two views and separate titles. Those are the trustee´s ownership title according to the common law which sees the trustee as the absolute owner of the trust property, and the beneficiary´s equitable title to the assets of the trust.25 In other words, the ownership is divided into two parts, which are split between the beneficiary and trustee.26 Other features connected to trust in the common law will be described below in the chapter concerning obstacles which a civil law legislator has to face while implementing common law trust.
22 Rights of a beneficiary of a trust can be an example of a right with its origin in equity. The court can state that
the beneficiary will eventually become an owner or that the beneficiary can expose actions of the trustee in case they were not in accordance with the purpose of a trust.
23 Ibid, p. 15
24 Seipp 2011, p. 1011-1012 25 Zhang 2015, p. 902
26 Even though some English scholars would not agree with this explanation of dual ownership for the fact that
in their opinion there is no dual ownership in common law. In order to demonstrate the trust relationship structure in common law, the dual ownership theory provides a clear determination of rights and is therefore used in this thesis.
2.
Trust in a civil law
2.1. Trust nowadays
The previous chapter demonstrated several examples of the use of the trust construction in old times. The question is, what is the position of the trust in more recent times and how familiar is trust for civil law jurisdictions? Amos said already in 1937 that there was a remarkable circumstance in the fact that “English trust has everywhere planted itself like a
cuckoo in the nest of the Civil law.”27 This statement corresponds with the general tendency connected with the process of globalization which gives rise to the fact that forms and kinds of economic relations are becoming more diverse. As one of the results of such a process, the trust instrument is now used also in countries where in the past it was practically an unknown legal institute.28 The Czech Republic is one of such examples.
Trust constructions became familiar also outside of the English law and countries with common law systems. The fact that trusts are now part of legal practice in civil law jurisdictions motivated legislators to find a solution in an area of recognition and enforcement of these new instruments. In 1985 the Hague Convention on Trusts was drafted. This instrument, which is in force since 1992, provides a broad definition of trust as described above and signatory states agreed to recognize trusts of such characteristics. The Convention overcomes the common law institute of a trust and its main features such as dual ownership. Therefore, the tendency to use trusts also in civil law jurisdictions became even more evident.29
In January 1999, an international conference focused on “Principles of European Trust Law” took place in the Hague in order to discuss a book with the same title drafted by an International Working Group. This document also describes the main characteristics of a trust but does not have the same effect as the Hague Convention in terms of a legal force.30 Later there was also a tendency to create a European Civil Code. Regarding this goal, Draft Common Frame of Reference was published in 2009 and included one full book focused on trusts.31 This step would provide a uniform trust law for the whole European Union but it
27 Amos 1937, p. 1264 28 Grasis 2016, p. 46
29 Status of contracting parties available in English at:
https://www.hcch.net/en/instruments/conventions/status-table/?cid=59
30 Principles of European Trust Law is a book with the same title and not an official document with legal force
which could be use in practice. It can indeed be used as an inspiration for interpretation or for further negotiations or possible other codifications.
31 Draft Common Frame of Reference. Book X. p. 501-543. Available in English at:
never came into force and can therefore play a role only as another evidence of the increase of the interest in trusts outside of the common law jurisdiction.
2.2. Civil law vs. Common law
The civil law of continental countries and the common law of the United Kingdom are the two major legal traditions and are both based on different principles and mechanisms. Besides those legal traditions there are also different mixtures of these and other legal systems in the world nowadays. For the purpose of this thesis only the difference between the continental civil law and traditional English common law will be considered.
Civil law has its origin in Roman law, as codified in the Corpus Juris Civilis in 528 and 534 AD. This first codification was prepared by a commission appointed by Emperor Justinian and included four parts of rules.32 Since then the civil law has developed not only in Europe but also around the world. In continental Europe in seventeenth and eighteenth centuries countries started to act toward the codification of civil law. The drafters of these new codes were inspired by Roman law and its elements were incorporated into legal systems.33 Civil law is very structured and systematized, the main principles were codified and such codifications serve as a primary source of law.
On the other hand, common law has been developing as described above through the judicial decisions and main principles were developed at higher courts as a reaction to a specific real-life situation arising from the disputes. In general, we can say that common law rules are therefore much more specified and civil law rules are more general. This also corresponds with the fact that civil law creates rules upfront and common law in contrast does so as a reaction to a conflict. In other words, common law is judge-made and is often called as the law of precedents and civil law is the law of the code. Therefore, the law in common law jurisdictions is a judge-made complex of jurisprudence and in contrast civil law judges only apply law which was created by a civil law legislator.
Regarding the trust legal construction, it can be seen as a general common law concept which fulfils multiple functions whereas civil law systems use several different devices for different circumstances.34 As the institute of a trust deals with property, the main focus now
32 Corpus Juris Civilis includes the Code (compilation of imperial enactments from the time of creation of the
trext of the Code), the Digest and the Pandects (an encyclopedia including most brief extracts from legal articles from Roman jurists) and the Institutes (student textbook introducing the Code). All these parts had legal force and together these texts formed the sole source of law.
33 The first examples are to be found in Denmark (1683) and Sweden (1734) and later the two significant
European civil codes were enacted in Austria (1811) and in France (1804). Mousourakis 2015, p. 268
will be to the principles of a civil property law and whether they are compatible with the common law perspective.
2.3. Obstacles for a civil law legislator
This chapter will highlight the Lepaulle´s statement, which says that it is not possible to find a complicated set of secondary rights in one legal system that would exactly correspond to one primary right in another legal system.35 At the same time, he points out that if an exact identity is not possible, a substantial similarity may be reached and should suffice.36 The second part of his statement will be evaluated further in this thesis. The differences between the two major legal systems has to be faced by the civil law legislator. They create obstacles especially in the matters where no equivalent of the same provision or principle is to be found in both systems.
At the beginning when the first civil law legislators were trying to codify trust, two main theories were built. First, that the institute of a trust is so closely connected to the common law legal system that it is not possible to “translate” it into a civil law code. Second theory said that the characteristics of each trust are so unfamiliar to the civil law that it is not possible to adopt this institute.37
As described above the civil law system is based on codified legal rules adopted by the legislator. Those rules are based on the basic principles and several of them concerning the property law will be now demonstrated. The difficulties connected to these principles that a civil law legislator has to face will be determined.
2.3.1. Absolute ownership
The division of ownership between trustee and the beneficiary, which is the main feature of a common law trust, creates the first obstacle for a civil law legislator. The fragmentation or dismemberment of property into different estates or interests of different values, each belonging to a different person, finds no place in civil law systems. Simply, civil law is a unitary system connected to a codified set of rules and main principles which do not know duality similar to the one described above which is the main feature of common law. One of
35 This theory reflects the fact that each two legal systems are different and do not include same legal
constructions. If civil law system does not have a legal solution for something what in common law is a separate construction, the civil law legislator has to build it from different institutes and with work similar to patchwork and create a construction with similar effects.
36 Lepaulle 1927, p. 1127 37 Skuhravý 2010, p. 122
the most important principles of civil property law is the principle of absolute ownership and according to Zhang this is the greatest challenge in fitting the trust into a civilian system.38
Definition of an absolute ownership principle can be found for example in the French Civil Code,39 which can in the regard play a role of a representative of civil law codes. French Civil Code states that ownership includes a complete power of three types of rights over the thing. Those rights are usus (the right to use the thing), fructus (the rights to take the fruits of the thing) and abusus (the rights to destroy or alienate the thing). All these rights should belong to one person or a group of persons in relations to any particular thing.40 Even in the case of co-ownership, each of these owners have full ownership rights regarding their share of the property. Therefore, ownership, as absolute and indivisible right, is in conflict with the common law perspective of ownership, which can be divided into equitable and common law titles.
Thus, the question is whether or not a civilian system can simply replicate the duality of legal and equitable titles.41 The civil law legislator has to face this major difference and has to solve how to structure the legal relationship of trustee and beneficiary in a legal system, which is not familiar with the concept of dual legal entitlements.
According to Bolgár,42 this fact was one of the main reasons why so many civil law countries did not have a codification of the trust institute. I can now state, that there is already several civil law and mixed43 jurisdiction with trust as part of their civil code and therefore, this challenge has several solutions. Some states keep ownership for the trustee and provide the beneficiary with personal rights towards the trustee,44 or the other way around with ownership in beneficiary and management of the trust property performed by a trustee.45 There are also jurisdictions with the ownership vested in the settlor, for example, China.46 In Quebec, the trust property does not have an owner at all and as this solution became an inspiration of the Czech legislator, this situation will be evaluated in more details below.47 In case of any solution, the legislator has to think through the consequences and the connection between the rights of all three parties of the trust - the settlor, the trustee, and the beneficiary.
38 Zhang 2015, p. 903
39 Art. 544-547 of French Civil Code 1804 (Code Napoleon) 40 Zhang 2015, p. 902
41 Becker 1995, p. 33 42 Bolgár 1953, p. 204
43 Mixed jurisdiction is a system with blending civil and common law and can be found for example in South
Africa, Scotland or Quebec.
44 For example, the trust in the state of Louisiana. 45 Such as „bewind trust“ in South Africa. 46 Clarry 2014, p. 911-917
2.3.2. The traditional notion of a patrimony in civil law
The notion of patrimony is an old concept which can be traced back to Roman law and which was originally connected with inheritance matters and later with the responsibility of the debtor to his creditors. Patrimony in the traditional view of the civil law system can be defined as “the whole of the rights and obligations of a person having economic or pecuniary value” and as it includes all the rights and obligations. It can, in other words, be defined as “the totality of a person´s assets, and, in a broader sense, his liabilities also.”48 Patrimony is closely connected to ownership and can be seen as the total sum of what one owns, these assets and rights then equal to one´s patrimony. Patrimony, therefore, manifests the legal personality of every legal subject in the world of economic relations.
In accordance with the theory of C. Aubry and C. Rau, there can be three main statements made in regard to the perspective of the patrimony. Firstly, every person has a patrimony, secondly, every patrimony is vested in a person and thirdly, the personal patrimony is in its essence unitary.49 This theory is crucial in regard to the later evaluation of Czech solution in this thesis. The main point of this theory is in my opinion the fact that patrimony cannot be separated from a person. This setting is in conflict with the concept of a dual ownership under the common law and needs to be solved while implementing and the status of a trust property needs to be decided in this regard.
In common law, there is no such concept as unitary approach to a patrimony and this fact has several explanations. At first, English language uses the expression “patrimony” above all for convenience, but the meaning does not correspond to the one explained above, to the view of a civil law tradition. This linguistic explanation and absence of language equivalent shows the relevance of this argument and is a result of different opinion of a legal category. Another aspect of the difference in approaches towards a patrimony is that common law is influenced by pragmatic and liberal approach resulting in the saying that everything that is not forbidden is feasible. It is possible to create different patrimonial assets which are held by the same person, in other words one can held several “pools” of assets with different regulations and legal status.50 The view of the patrimony in common law is therefore dynamic and open for these situations which arise when trust is created.
This different approach to patrimony - dynamic in common law vs. static in civil law - creates a second obstacle for civil law legislators.
48 Zhang 2015, p. 904
49 Becker 1995, p. 102 50 Peroni 2018, p. 377
2.3.3. Numerus clausus
Another principle of a civil law which legislators need to take into consideration is the numerus clausus principle which has the effect that the law knows only a definite list of real rights.51 The list of real rights and interests provided in the code cannot be expanded by the parties because such a list is closed and not open for modification.52 In other words, numerus clausus principle can be seen as a closed list of rights in rem.
This principle is accepted in several major civil codes of continental Europe such as the one in France, Austria, Germany and Switzerland and can be considered as a doctrinal barrier for the reception of the common law trust into a civilian code in general.
To demonstrate this principle, it is the contrast to the freedom of contract regarding contractual rights and the freedom of the parties to agree on the conditions of their legal relationship. The numerus clausus principle prohibits the creation of new forms of property rights apart those codified as part of the law.53 Thus parties cannot invent a fiduciary relationship based on a new form of real rights - such as real beneficial interest - in case the jurisdiction does not provide a fiduciary institution in the code already.
This principle is faced also in the phase of a recognition as it complicates the situation on how to classify and handle the position of trustee and beneficiary in case of a dispute regarding a trust from a common law country. As this principle says, for a real right to be valid, it is needed that this right is recognised by the jurisdiction where the rights is to be exercised. In this regard, the matter was partially solved with the Hague Trust Convention, but there still are only 16 contracting parties to this convention and The Czech Republic is not one of them.54
Numerus clausus principle is closely connected to the principle of specificity of property rights. This principle is also connected with the communication of parties who want to transfer property rights. Standardized forms are helpful to reduce the information-processing costs. Unlike Merrill and Smith who put attention to the communication element of numerus clausus principle, Hansmann and Kraakman focus on the problem of verification of property rights.55
51 Real rights exist over things and are tied to patrimony. Real right can be defined as a right of a patrimonial
nature that is exercised directly upon the property. (Clarry 2014, p. 908)
52 Zhang 2015, p. 904 53 Barakas 2006, p. 5
54 The contracting parties are Australia, Canada, Peoples´s Republic of China, Cyprus, France, Italy,
Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, Panama, San Marino, Switzerland, United Kingdom of Great Britain and Northern Irelans and United States of America.
With such standard forms, the potential purchaser of an asset only needs to specify which of the standardized package of rights is being offered. 56 From this perspective it not easy to adopt an institute traditionally known in common law where it has endless modifications and types and where the legal system is open to these adaptations. Anyhow, this principle also exists in common law system, where it can be seen as a phenomenon as there is no exhaustive list of property rights and where the element of equity brings the option of creating diverse property rights.
Regarding the implementation of the trust institute into civil law code it has to be dealt with because the numerus clausus principle is not only seen as a phenomenon, but it is indeed an exhaustive list of property rights which the system recognised and enforces.
2.3.4. Principle of publicity of property rights
One of the major differences between property and personal rights is that property rights have the ability to bind third parties. This means that property rights have the erga omnes effect and principle of publicity is the result of this matter. The principle of publicity is also connected to the principle of numerus clausus from the economical perspective and arguments.
The major issue is that third parties should be able to verify the existence of a right in rem in order to maintain their economic relationships. Regarding this matter, in any relation there are always to be found either publicity rights or third-party protection rights.57 When the third parties have a way to access the information about property rights, they gain legal certainty in their relationship vis-à-vis the property rights holder or the property. According to this principle, it is presumed that the legal ownership belongs to the person who is registered as owner of an immovable property in a public registry or who holds a movable property by himself. In other words, the goal is that creditors can access information about all their debtor´s assets. Thus, it is thought to be precluded to have a hidden property rights.58 As a consequence of this principle the creation of oral or secret trusts is prohibited regarding the principle of publicity.
This principle is connected with the creation of a trust. Under the common law, which does not have the principle of publicity, there are in general no formal requirements to be fulfilled when creating trust and the act of creating a trust is not contractual, but a unilateral
56 Merrill, Smith 2000, p. 68
57 For example, security rights are public but with no third-party protection. In any situation, one of these
elements are present.
act. The trust can be created expressly or by implication, in an oral or written way. These flexible options open the door for secret or half-secret trusts.59 This flexibility is in conflict with the principle of publicity and therefore this fact stands for another obstacle for a simple implementation of trust construction into civil law code.
3. Czech trust
3.1. Czech civil law
The Czech Republic is a parliamentary democracy with a continental European civil law legal tradition. Historically, Czech Republic was a part of the Habsburg Monarchy and between 1918 and 1992 it established an independent state called Czechoslovakia, which split into two separate republics60 on the 1st January 1993.
The historical development included a lot of Roman law influence and also the newest Czech civil code still uses the old Roman institutes. The first codified civil code covering the Czech land was the Allgemeines Bürgerliches Gesetzbuch (ABGB) enacted in 1811 as a civil code of the Austro-Hungarian Empire, which Czech lands were part of between 1867 and 1918. This very modern and general code was in force even after the creation of Czechoslovakia and was applicable till 1951 when a new civil code came into force. This new civil code which became in force in 1951 was the first communist codification in the field of private law and it brought severe changes in the area of ownership.61 The basic form of ownership was a class, socialist ownership based on the assumption of a state power, that was taken over by the working proletariat. After the communist era, a new and very basic civil code of 1964 was enacted in Czechoslovakia.
After the separation of the states, the Czech legislator had an ambitious plan of recodification of the civil law and the result is a Czech Civil Code of 2012 (CCC).62 In general, we can say that after the well codified ABGB, which was considered as the spine of civil law, the civil law in the Czech lands changed the structure from a centralized code to separated blocks and the big role of a civil code slowly disappeared. The CCC has the ambition to bring this central role of a civil code back. This civil code includes a lot of institutes knows from Roman law and also institutes which were previously part of the ABGB. One of the new institutes is a Czech trust. There used to be a fiduciary institute in the
59 Heup 2016, p. 6
60 Czech Republic and Slovakia 61 Faber, Lunger 2011, p. 264
civil code from 1811 which was also used in the Czech lands. Since 1924 the institute is canceled and it slowly disappeared from the legal system in the Czech lands. From the perspective of the whole historical development, there used to be a similar legal construction in the past but from the perspective of the Czech Republic as an autonomous state, this is a new and previously unknown institute.
The Czech legislator got inspired by the Civil Code of Quebec, Canadian province, which adopted trust institute in 1994 and which now successfully uses this legal construction that keeps strong continental natures. Anyhow it was not a simple and basic process as the Quebec law is a mixed legal system with elements of both - civil law and common law.63 Czech legal tradition is a pure civil law with no aspects of common law known to the system. In other words, the Czech legislator had to face all the above-mentioned obstacles. At the moment, the Czech trust is still quite new and both academic and public worlds are going through the process of getting to know this institute and its features. Apart from few basic articles introducing the trust to the Czech audience, there are no extensive studies about the Czech trust construction. Therefore, the further introduction and evaluation of a Czech trust and its evaluation is based on the wording of a Czech Civil Code and above-mentioned general principles.
3.2. Czech trust
The Czech institute of a trust (Svěřenský fond) is covered by Articles 1448 – 1474 of the Czech Civil Code. These provisions are systematically located in Book 3, which covers absolute property rights. In the second title of this book, called rights in rem, the section of trust is located in its chapter 6 which covers matters connected to administration of property of others. The trust is covered by the last division 4 of this chapter.64 This systematic placement of trust institute is not so easy to evaluate because trust comprises some features of several other institutes known to civil law (legal person, obligation relationship, ownership) and at the same time is none of those. Czech legislator put the trust institute together with absolute property rights as special type of administration of property of others. This systematic decision follows the Quebec inspiration as the whole chapter 6 is very similar to the Quebec Code.
63 Quebec law has several sources – statutes, regulations, case law, custom, contracts and doctrine. As far as
private law is concerned, Quebec law is codified. Therefore, Quebec property law is also codified. This codification is not exhaustive and there are also outside sources of private law which can be found in statutes and in the jurisprudence. (LeMay 1992, p. 190)
64 Chapter 6 of CCC consists of 4 divisions. 1) General provisions on administration of property of others 2)
The legislative ground of Czech trust is quite complex and is divided into 27 articles.65 Those articles of division 4 are divided into following subdivisions: 1) definition of a trust and its creation, 2) administration of a trust, 3) ultimate beneficiary, 4) supervision over the administration of a trust, 5) changes of trust and 6) extinction of a trust. In the following section, I will introduce the main features of the Czech solution of trust which is called “Svěřenský fond”.
3.2.1. General introduction and creation of a trust
Article 1448 CCC gives the following definition: „A trust is created by setting aside part of
the property owned by the founder in such way that the owner entrusts the trustee with the property for a particular purpose through a contract or disposition mortis causa, and the trustee undertakes to keep and administer the property.“
The rights arising from the right of ownership in the property in a trust are exercised by the trustee in his own name and on the account of the trust, however, the property in the trust is not owned by the administrator or the settlor, or the person entitled to receive a performance from the trust - the beneficiary. The separated trust assets thus form an independent property not belonging to anybody. Separate patrimony is created and the trustee exercises ownership rights without being owner.66 Every trust needs to have a designation containing the words ’svěřenský fond’ and designated purpose which is stated in the trust by-laws. The purpose of the trust can be public or private67. It is necessary to say that private trusts can also be established in order to invest and make profit to settlors68, employees, shareholders or other persons. On the other hand, it cannot be a main purpose of a public trust to invest and make profit or to operate an enterprise.
The trustee has to accept his role to administer the trust property and the trust is created once a record is published in the registry of trusts. In case of a trust created by a disposition mortis causa, the moment of creation of a trust is the death of the settlor. In this case the official registration is only declaratory. This registry69 is a new feature in force since
65 It is not common for a civil law systems to have implementation of a trust in a civil code and for those that
have, it is not common to have a complex legal ground of trust. For example German Bürgerliches Gesetzbuch (BGB) version of trust called „Treuhand“ is dealt with in only two provisions (§667 and §670 BGB).
66 Czech legislator explains this construction in a way that the trustee is not an owner because he does not
possess the right to freely dispose the trust property and therefore the definition of ownership is not fulfilled. In fact, he is obliged to take care of the trust property for the benefit of someone else and he has a duty to increase the value of trust property and to take care of beneficiary´s interests.
67 Private purpose means that the trust aims to benefit a certain person or a memory of this person. Public trust
has to have its main purpose for a public benefit and not for making a profit.
68 In a situation that he is also a beneficiary.
1 January 2018 and was added to the Czech trust construction in order to bring higher transparency about the trust property. The registry is partly public so that anyone can access the date of a creation of a trust, the designation, purpose, name of the trustee and registered address for correspondence regarding the trust. The rest of the information, such as identification of the settlor and beneficiaries or the by-laws of the trust, are not public and can only be disclosed in case of a request with reasonable interest in such information.
The settlor can be anyone with full legal capacity,70 private person, and also a legal person. The settlor can also be represented by his legal representative and it is also possible that there are more than I people acting together as settlors. Multiple settlor could be for example in a situation when the origin of a trust property is in assets which were in co-ownership or in community property. Unlike in Quebec, it is not possible to establish trust by a law, court decision, or any other public decision. It is also not possible to establish a trust by a unilateral act (this would be possible with foundation for example).71
Every trust must have by-laws which indicate the main information about the trust. Its designation, identification of the trust property, definition of the trust purpose, conditions under which the trustee will provide performance from the trust, the duration of the trust72 and identification of the ultimate beneficiary. The by-laws must be in the form of a notarized public document.
One can see a similarity with common institute of civil law – foundation. The biggest difference between foundations and trust are that trust does not have a legal personality. There is also a difference as trusts can be only created on a certain period of time, unlike foundations which are legal persons with no set period of its existence. In both cases the founder has the possibility to choose the purpose and to specify rules of management. Both foundations and funds are listed in a public registry and both legal constructions have system of control of the administration and are subjects of taxation.73
3.2.2. Concerns regarding the abuse of a trust
This chapter will clarify few concerns which are the most discussed and which are reasons why not many civil law countries have codified trust construction. As there is still more countries with no codification of trust institute and as those are the most discussed arguments
70 Full legal capacity means that the person is entitled to enter into contracts, to sue and to be sued in his own
name. The term includes the capacity to have rights and to act upon those rights. Someone who is shortened on his legal capacity by the court for example because of his mental illness is therefore not entitled to be a trustee.
71 Petrov 2017, p. 1186
72 If there is no information about the duration of the trust, it is considered as established for an indefinite period. 73 Ronovská, Lavický 2016, p. 644
why not to codify such institute, I consider crucial to mention them and to shortly elaborate on their solutions in the Czech civil code.
The first concern is third-parties protection regarding the trust property. For example, French civil code explicitly states that it is not possible to use trust construction to commit fraud and that previous security rights vested in the trust property stay also once the property becomes a trust property. Czech Civil code does not include any of those statements in regard to the creation of trust and I have also not found any articles or other sources which would clarify this situation regarding Czech trust.
If we analogically use provisions which deal with third party protection in case of change of ownership, these rights remain also with trust property once the trust is created. The act of change of ownership should be interpreted widely because in regard to the Czech trust construction, there is no stricto sensu change of ownership. The ownership does not change but the property becomes a separate patrimony without an owner, towards which the trustee exercises some ownership rights. The change of ownership can be seen in the fact that the absolute ownership is set aside for the period of existence of trust. Therefore, if there is a pledge vested in a property, the pledge will not disappear by the fact that such property is set aside to be trust property
The second concern is that the settlor will create trust in order to avoid tax responsibility. This argument is solved by the fact that Czech trust is from the taxes point of view considered to be a legal entity and pays taxes with the same scale as other taxpayers. Also, the beneficiary has to pay income tax from the benefits he has from the trust.
The third biggest concern is connected to the bankruptcy of the settlor and to his intentions to keep property which would otherwise be taken in the insolvency proceeding and used for the satisfaction of creditors. I would like to state that by putting aside trust property becomes a separate patrimony and no creditors of settlor, trustee or beneficiary can satisfy their claims against these persons from the trust property.74 Trust property is separate patrimony and is not affected by insolvency of the settlor. The solution is that creditors have the right to claim that there was a behaviour which shortened their rights and therefore the court would rule that such behaviour was invalid. As a result of such ruling, the trust would be stated as not existing. It is therefore not possible to create a trust one day before going bankrupt or to create a trust with a property which was gained in a crime.
74 It is only possible to seize the beneficiary´s benefit from the trust as it counts as his income. This is not the
3.2.3. Administration
The trust property is administered by the trustee who has the obligation to perform ownership rights in his name and in compliance with the trust purpose which was formed by the settlor and which is stated in the by-laws of the trust. The performance of ownership rights is done with the respect of the beneficiary’s rights.
The role of a trustee can be done by anyone with a full legal capacity or by a legal person. It is also possible that the founder or the beneficiary will have the role of a trustee. This situation brings some risks and for that reason if such situation would arise it is necessary that this person is not the only trustee and that there are more trustees deciding and acting jointly. The trustee is appointed and removed primarily by the settlor. If the trust property includes immovable property registered in land registry, the trustee is registered with this property with the note that his role is not an owner but a trustee. As said before, the property is not in anyone´s patrimony and the trustee does not have ownership of the trust property. As the trustee is technically administering someone else´s property75 and as for the location of trust provisions in the CCC, the trustee is also bound by all the general rules on the administration of someone else´s property which are stated in the previous divisions of chapter 6 CCC.
Those obligations are for example the duty of care, duty to be impartial towards the beneficiaries in case there are multiple beneficiaries. This rule corresponds with the fact that the trustee is appointed to take care of the property and make sure that in long term the property value will increase or stay. The trustee is only in charge of property administration and is not involved in a matter regarding beneficiaries besides performing in accordance with the by-laws. Another duty is the duty to prevent potential conflict of interests76 or prohibition of the mixture of the property of the trustee and the trust property. The trustee is liable for breach of his duties.
The administrator is supervised by the founder, the beneficiary or a third party if stated in the trust by-laws. In case the beneficiary does not exist at the moment of creation of the trust, the founder will appoint a third person who will do the supervision over the trustee
75 To be exact noone´s property, independent set of assets which are to be someone´s property once the trust
cease to exist.
76 The trustee has to announce in case his personal business or other behavior would have a property benefit
which would be in conflict with the interest of the beneficiary. Trustee has to inform the beneficiary and the person who exercise control over his activities. In case the trustee is not aware of such conflict of interests, he announces that as well.
in the interest of this „unborn“ or „not yet existing“ beneficiary.77 These persons with the supervision rights may request the trustee to show them documents regarding the trust administration, accounts, and other reports. The same people are also entitled to request at a court that the trustee is prohibited or ordered to do a certain act, the same stands in case they want to remove the current trustee and appoint a new one.
3.2.4. Beneficiary
Even though the Quebec´s inspiration includes the definition of a beneficiary, there is no such provision to be found in Czech Civil Code. Beneficiary is appointed by the founder or otherwise in accordance with the by-laws of the trust and is registered in the trust registry in the non-public section. Beneficiary can be granted right to the fruits and revenues from the trust, right to property from the trust or for example a share. The by-laws state under which conditions the beneficiary can make a use of his right of performance from the trust.
The time period of existence of a trust is not regulated in the CCC, but in case of private trusts the CCC says that the beneficiaries right to request those fruits or other profits should be available no later than 100 years since the creation of the trust, or until till beneficiaries death whichever comes later. During the duration of the trust, the beneficiary can request performance in accordance with the by-laws.
By the interpretation of the section providing information about the beneficiary, I can conclude that beneficiary has no right in rem regarding the trust property and that there is no entitlement to manipulate with the trust property in any way. The beneficiary can only perform his rights towards the trustee, which afterward has his own obligation to satisfy the beneficiary from the trust property which is under his administration. The beneficiary has the right to dispose his right in form of a notarized public document.78 This option is in accordance with the principles that nobody should be forced to accept a performance in a civil relationship. It is not stated whether the beneficiary´s right is transferable or not. Regarding the fact that the trust was created to fulfil a certain purpose and that the beneficiary is stated in the by-laws of the trust, it is in my opinion not possible to transfer the rights of beneficiary to someone else.
77 It is possible to appoint an unborn child as a beneficiary and for his protection this third person is appointed in
order to have someone who will exercise the controlling rights.
78 For example, a private trust was created by a father and two sons are appointed as beneficiaries. Later the
father gave some property to one of his sons and this property is not part of the trust property. In order to keep a good relationship between brothers, the brother who got a property in form of a gift can waive his rights of the beneficiary so that his brother gets the full profit from the trust property.
3.2.5. Changes and extinction
The court is entitled to modify or cancel the trust under certain circumstances. Not by its own motion but on an application of someone with legal interest, the court can cancel the trust if it will rule that it is impossible or difficult to achieve its purpose. This statement is included primarily for the situations where the founder is not aware of such circumstances. The court can also modify the trust´s purpose in case the original purpose was public and the new one is similar to the original one. The court is also entitled to amend the laws. This change of by-laws must be in accordance with the original aim of the settlor and with positive outcome which is possible to achieve and better for the benefit of the purpose. Before the court rules in a way described above, a consultation with founder, beneficiaries, trustee and person with supervision rights takes place.
The trust can cease to exist for several reasons. Either the time period for which the trust was established expired, or the purpose of the trust is achieved, or the court can rule a decision with this consequence. In case of private trusts, the administration shall end once the beneficiaries waive their right to receive full performance in accordance with the trust by-laws. Once the trust cease to exist, the trustee surrenders the property to an entitled person (beneficiary, settlor in accordance with by-laws; in absence of both of them the property pass to the State). Once the trustee transfers the property to the entitled person the trust is extinct. The trustee then submits a request of removal of the trust from the trust registry no later than 30 days afterward.
3.3. Evaluation from a civil property law principles perspective 3.3.1. Absolute ownership
As stated above, the main feature of a common law trust is the division of ownership reflecting the common law ownership title of the trustee and the equitable ownership title of a beneficiary. This section will evaluate whether it is possible to maintain trust relationship without divided ownership and the Czech solution will be analyzed. All the aspects of traditional common law trusts were described in Chapter 1 of this thesis and I will therefore not repeat the content and will go directly to the assessment of the effect of civil law principles on the institute of a trust.
As Clarry points out, the split of ownership in its strict view is not needed in order to maintain a trust relationship. According to his theory, the main focus while creating a civil law construction of trust should be on the administration of the property in order to fulfil a certain purpose. He also states that such function of a trustee means that the trustee is being
vested a title to the trust property which constitutes him as the owner, but at the same time, that the title gives the trustee only the capacity regarding the trust property as agreed in the conditions of the trust.79 He also says that the whole dualistic concept of ownership is misleading because the parties are not free in the use of their ownership rights and are tied by the trust by-laws/purpose/construction. Zhang as well agrees, that dual ownership of common law should not have the role of an a priori obstacle for the civil law legislator.80 Therefore, it is not essential that the complicated web of relationships and rights is called a split ownership.81
Hayton, Kortmann and Verhagen also dealt with the same matter in their paper and constituted that the relationship within a trust should be interpreted in a way that specific rights towards the trust property should be discussed and not the ownership right as it is. Especially the beneficiary´s position should not in their opinion be called an ownership, because the beneficiary is someone in whose favour the trust property is being managed and also someone entitled to trust´s benefits. They see the main feature of a trust in the separation between the management and the benefits of the trust property and not in the division of an ownership which is emphasised in common law.82 Therefore, the approach of a civil law legislators should be more functional and pragmatic in order to maintain the rights and position of each interested subject of the trust relationship.
The Czech legislator solved this challenge by a creation of an independent and autonomous property which is not owned by anyone. To be more specific, there is no ownership in its traditional interpretation. Traditional concept of civil law ownership is connected to patrimony and as stated above, one person has one patrimony towards which he has full ownership rights. The Czech trust construction is therefore in conflict with this principle and its strict interpretation. The trustee acts like an owner, has the trust property in his possession and the trust property does not count as res nullius, but at the same time the trustee is not an owner of the trust property in the sense that he would be an absolute owner. Ownership rights as describe above are performed by the trustee who acts in his name and on behalf of the trust. The trustee´s position cannot be compared to any other institutes and it is indeed a unique institute in a Czech legal order.
The Czech trust is based on an autonomous conception of ownership and what is also important, all the rights establishing within the concept of a trust do not have contractual
79 Clarry 2014, p. 930 80 Zhang 2015, p. 908 81 Ibid. p. 928
character. Those relationships and rights need to be considered as sui generis type of rights. From the perspective of ownership of the trust property, we can say that it was a subject of ownership rights before it became a trust property and that it will be again reconstituted in traditional ownership once the trust will end.83 During the period of duration of the trust, the traditional notion of ownership goes aside and the rules stated in CCC are in effect.
The question comes to mind whether this solution is compatible with the civil law principle of absolute ownership. Following the Swadling´s interpretation84 of the CCC, the ownership describes a way in which a right can be held and according to the CCC, there is a new way of holding a right - on trust. This would explain the situation that rights forming the subject matter of the trust are held by the trustee and at the same time are not owned by him. None of the persons within the trust relationship have the ownership way of holding a right and no one has the usus, fructus and abusus powers over the trust property. Trustee only holds rights towards the trust property in a non-beneficial way and as described in the provisions of CCC and in the by-laws of the trust. In my opinion, this solution is not fully in conflict with the principle of an absolute ownership. The construction puts the absolute ownership aside for the time period of trust. The Czech solution shows very pragmatic and flexible interpretation of civil law principles and does not create a conflicting situation in which the institute would not fit into the legal system at all. It is indeed an innovative approach which a unique solution.
There is no other institute which would create a separate and independent patrimony without it being connected to absolute ownership. In my opinion this construction fits into the Czech civil law code without creating problems or being in conflict with other civil law institutes and legal constructions. For the use of trust in real-life situation the construction is functional and only when strictly interpreting the concept of absolute ownership, the construction does not fit the basic grounds of the civil law legal system. This is understandable as the civil law evolves together with the society and in this situation a flexible and pragmatic approach helped a civil law legislator to implement construction which is typically connected with common law system.
3.3.2. The traditional notion of patrimony
The discussion about a traditional notion of patrimony when each person can have only one patrimony is closely connected to the ownership as described above. It can be found in
83 And the trust property will become again the property of the settlor or property of the beneficiary of will be
handled otherwise in accordance with the trust by-laws.
