Abstract
Trusts have existed for centuries, while societies and economies have developed in the intervening years. This requires renovations, or new judicial interpretations, of what a trust is in order to adapt it to modern circumstances. Based on a discussion about the theoretical basis for the research – the new role of trusts in a commercial context and the essence of the trust – the author provides a developed understanding of the beneficiary’s interest to adjust the traditional trust notions to meet the demands of commercial practices. She argues that, based on a case study of Chinese law, a beneficiary’s right can be explained as a special personal claim consisting of three parts: the main claim (personal claims), appurtenant rights (rights of supervision) and security rights (rights of revocation). The theory of beneficiary’s special personal claim provides a more unified and comprehensive understanding of the nature of the beneficiary’s interest, particularly in newly developed commercial trusts.
Introduction
Trusts, originally used in common law to protect family landholdings over generations, have developed into a vehicle that is not only adopted as a guardian of family property, but also for entrepreneurial and commercial uses. The new role that the trust plays in financial markets has also spurred the introduction of trusts into civilian jurisdictions, including China. This evolved role of trusts invites scholars to rethink some fundamental concepts and theories of the traditional common law trust, such as the ownership of trust property, the essence of the trust and the nature of the beneficiary’s right.
This article seeks to provide a developed understanding of the beneficiary’s interest through a comparative study of Chinese law. In particular, this helps to respond to the new evolved role of trusts for commercial use and the consequence of the introduction of trusts in civil law. As one of the centres of world trade, and one of the first socialist and civil law jurisdictions to introduce a domestic law of trusts, China’s legislation and practice of trusts has important research significance. Because of the trust’s advantages in investment, banking and financing, China took the bold step of introducing its domestic trust law in 2001. Chinese trusts are mainly in the form of the evolved commercial trusts. With the development of international trade, both common law and civilian jurisdictions were anxious to develop their trust rules and improve their competitiveness or collaboration opportunities. This international trend has stimulated the need for a more unified understanding of trusts. A comparative study of Chinese trusts − an example of trusts in civil law and for commercial uses − not only provides advice on the legal reform of Chinese law, but also sheds light on a developed, unified understanding of trusts in modern financial markets. The author employs critical/reformist, comparative, theoretical and interdisciplinary methodologies.
To provide a developed understanding of the beneficiary’s interests, particularly in commercial activity, and to explain how or where the case study of Chinese law sheds light on the re-examination of traditional theories of trust, this article is divided into three parts and makes comparisons between the Chinese trust and the common law trust as mainly found in England and Wales. The first section examines the new role of trusts in the commercial context, which is also the notion of the trust in China. The second section critically analyses the essence of the trust – which aspects of trust law relating to property and obligations are essential to the trust. In the final section, after discussing these issues as the theoretical basis for the research, the author provides a developed understanding of the beneficiary’s interest – a special personal claim.
A new role for trusts to play in the commercial context: An example of the notion of the trust in China
The origin of trusts can be traced back to the 13th century, when it was used to protect family assets. The trust was essentially a conveyancing device for the holding of land to avoid financial liability and restrictions on the inheritance of property. 1 In the modern world, however, it has also developed to become, and is more often used as, a valuable device for commercial business in various forms, including investment vehicles, pensions trusts, securitization trusts and many others. 2 The trust is of particular use in international financial markets. It permits the legal relationship between persons and assets to remain secure and flexible at the same time, with property or priority rights relating to a changing pool of assets being enjoyed by a changing class of persons and being subject to concurrent interests and/or enforcement restrictions. 3 In financial terms, the most important role a trust plays in today’s world is related to the holding of incorporeal wealth. 4
Because of its advantages in investment, banking, financing and property management, the use of trusts in commercial applications 5 has promoted the introduction of trusts into civilian jurisdictions. With the development of international trade, the civilian jurisdictions, whether pure or mixed, were anxious to improve their opportunity to collaborate with or even compete with common law jurisdictions. Trusts no longer exist only in common law systems. 6 In fact, both the United Nations 7 and the Hague Conference on Private International Law (HCCH) 8 have attempted to introduce the trust to civilian jurisdictions and respond to the evolution of trusts in commercial context. This international trend makes the case study of Chinese trusts – trusts for commercial uses – of great interest as a comparator when analysing the differences between traditional trusts and commercial trusts, and how traditional trust notions can be adjusted to meet the demands of commercial practices.
The notion of trust in China has evolved differently from traditional common law’s conception of trust. It has mainly been used for commercial applications. The traditional trust that used to manage inter-generational property never took root in feudal dynastic China. Inheritance was predominantly regulated by customary law, and there was little room for testamentary disposition by individuals. The history of trusts in China only started from 1911, when dynastic rule ended and the Chinese Nationalist Party took control of the country. Trusts were set up as trust administration departments within banks, governmental trust institutions and trust companies – a type of trust was broadly adopted at that time and still exists as a major use of trusts in China. 9
With the growth of private wealth in China, from 1979 to 1988, the number of trust and investment companies rose to more than 1,000. 10 This period also saw the introduction of a new form of commercial trust, the collective capital trust, only operable by trust companies. 11 However, due to the lack of legal requirements for the segregation of investor and trustee funds, whatever profits or losses accrued went to the trust and investment companies rather than to the customers. 12 To correct the inappropriate promotion of trust companies and to regulate trust business, the Chinese government implemented a series of ‘rectifications’ between 1988 and 1998 in which trust institutions were separated from banks. 13 A further culling of companies with payment difficulties, insufficient assets or poor management reduced the number of trust and investment companies to 58. 14
The experience of those rectifications became one of the primary reasons for drafting the Trust Law of People’s Republic of China 15 (Trust Law of China), which makes China one of the first socialist, civil law jurisdictions to have introduced a domestic law of trusts. This Trust Law has attracted much attention, both in China and overseas. 16
When the Trust Law of China was drafted, it mainly provided for commercial trusts, and thus contains some unique regulations compared with its common law counterpart. Professor Jiang Ping, the Trust Law of China’s main drafter, considered it an innovation of the Chinese law to leave open the issue of the location of ownership. 17 Instead of adopting the term of ‘transfer’, the Chinese law chooses the expression of ‘entrusting’ (委托) the property to describe the relationship between a settlor and a trustee. Article 2 of the Trust Law of China provides that: ‘the settlor, based on his faith in the trustee, entrusts his property rights to the trustee and allows the trustee to, according to the will of the settlor and in the name of the trustee, administer or dispose of such property in the interest of a beneficiary or for any intended purposes.’ 18 In the drafters’ perspective, the choice of the term ‘entrust’, as opposed to ‘transfer’, was not an oversight. The Trust Law of China only needed to provide that a trustee is authorized to manage and administer trust properties, and draw an adequate balance between the need to grant trustees the right to dispose of trust property and to protect beneficiaries’ rights. Moreover, because most of the trusts established in China aim to be collective investment schemes, the investors would transfer their investment to the trustees anyway. Therefore the drafters might not have thought it necessary to state that the ownership of trust property had to be transferred to the trustees.
Although specific rights of the beneficiary are regulated in various provisions (Articles 43–49), there is no explicit provision in the Trust Law of China that stipulates the nature of the beneficiary’s interests. It does not indicate whether the right to claim against the trustees and the right to exclude interference from third parties are in the nature of real rights or personal claims. Moreover, apart from the right to receive distributions, the beneficiary’s entitlements to monitor the trustee and bring actions for breach are granted by way of duplication of the settlor’s rights. Those unique regulations of the settlor’s rights imply that most Chinese trusts are ‘bare trusts’: the investment trusts that are prevalent in China are ones in which investors are both settlors and beneficiaries. 19 However, when the settlor is not the sole beneficiary, granting the same rights to both settlors and beneficiaries, or more specifically retaining the beneficiary’s rights as to settlors, as regulated in Article 49, will cause conflicts between those two parties. Although these conflicts can be solved by the court, the efficiency of the trust’s management will be decreased. For those reasons, the research of this article is significant: it not only provides a case study of a developed understanding of the beneficiary’s interests, but also advises on the legal reform of Chinese law.
The essence of trusts
To provide a developed understanding of the beneficiary’s interests in commercial trusts, which could respond to the evolved needs for commercial uses and also maintain the fundamental rule of the trust as a separate mechanism, the question that needs to be answered is which aspects of trust law relating to property and obligations are essential to a trust. The essence of trusts – a split between the management and the enjoyment of trust property – gives life to commercial uses of trusts.
A trust depends upon properly elaborating the various personal and proprietary rights, powers and duties that make up this relationship. The essence of the common law trust is the imposition of an equitable obligation on a trustee requiring the trustee to act in good faith when dealing with trust property in favour of the beneficiary. The beneficiaries have no direct control over the trust property. Thus the realization of their rights depends upon trustee performance. This means that the beneficiaries’ rights are the converse of the obligations of the trustee owed to them in respect of the trust property. The focus of the trust is on property. There will be no equitable proprietary remedy available where the property at issue is unidentified or where that property has disappeared leaving no traceable substitute. 20
In a sense the whole point of the trust is to separate the benefit of property from the right to exercise the powers that go with having legal title. The essence of the traditional common law trust is not in the separation of legal titles – a trustee’s legal ownership of the assets of the trust and a beneficiary’s equitable title to those same assets – but is ‘a split between management/administration and benefit/enjoyment’. 21 The idea of separate funds and a split between administration and enjoyment is not confined to common law systems. It has also been admitted by other legal systems. Indeed, ‘there is a much greater acceptance of the idea in modern civil law that the owner of an asset may hold it for the benefit of others rather than for his own.’ 22
The common law concept of dual ownership is not the essence of trusts, and it does not prevent the introduction of trusts in civil law or the worldwide development of trusts for commercial purposes, also because that the definition of ownership in common law and civil law is different. As Wesley Newcomb Hohfeld put it, the difference in terminology used to study the trust is misleading, as the language used to discuss the law of trusts in both the civil and common law system is so disparate as to be misleading. 23 Additionally, Frederic William Maitland holds that some of the basic terminology of trust law, such as ownership, almost carries unexpected meaning, which tends to deviate from its strict definition. 24 As a result, the argument, which is based on the misunderstanding of the essence of trusts, that a civil law trust or commercial trust is not a ‘real’ trust is a mistake.
In Chinese law, ownership is both perpetual and exclusive. It comprises four kinds of rights: rights of possession, use, beneficial enjoyment, and disposal of property. 25 Article 39 of the Property Law of the People’s Republic of China 26 (Property Law of China) stipulates that ‘[t]he owner of a realty or chattel is entitled to possess, utilise, seek profits from and dispose of the realty or chattel in accordance with law.’ 27 In contrast to the civilian model of ownership, however, ‘[t]he old common law never thought in terms of absolute ownership’, 28 and people do not own things (a physical approach), they own rights in things (a metaphysical approach). Ownership tends to be a practical gathering together of uses and entitlements over the property under common law.
To clarify the different terminology of ownership also helps to provide a theoretical basis for the case study of Chinese law, or any comparative studies, because different meanings of ownership lead to differences in the rights and obligations of trust parties. The true meaning of terminology should be interpreted based on a review of its context and function.
The nature of the beneficiary’s right
After examining the essence of trusts, redressing misunderstandings relating to civil law trusts and commercial trusts, and clarifying the theoretical basis for the research, namely the difference in terminology of ownership, the real question now is how to interpret the nature of the beneficiary’s right in order to facilitate the evolved role of trusts in commercial activity.
There are various academic theories about the beneficiary’s rights. Taking China as an example, in 1987, He Xiaoyuan suggested that the ownership of trust property be transferred to a trustee, while a beneficiary has the right to revoke the trustee’s disposition of trust property in breach of trust purpose and a right to follow the trust property. 29 Xie Zaiquan considered the trustee’s right as a limited real right, that is to say, a real right on the property of other people and for their interests. 30 On the other hand, Wen Shiyang proposed a different explanation in 2005. He stated that a beneficiary’s equitable right is a genuine ownership whereas trustees’ ownership is only a right of administration. 31 As early as in 1994, Jiang Ping raised the dual attributes of real rights and personal claims. He indicated that the trustee’s right to administer the trust property in his own name has the nature of a real right, but his obligation to distribute the trust income is a personal claim. 32 In addition, Zhou Xiaoming in 1996 33 and Li Qunxing in 2000 34 raised the argument of a new type of right or right combination.
The author argues that, to better fulfil the function of a trust, especially its commercial aspect, a better understanding of the trust is a binary system of real rights and personal claims, where the trustee is entitled to a prima facie ownership that is limited to the right to control and administer the trust property (although settlors may retain the ownership), and the beneficiary holds a right in the nature of ‘a special personal claim’.
The trustee’s ownership is a prima facie ownership because the trustees cannot obtain benefits arising from trust assets. Moreover, the trustee cannot arbitrarily dispose of trust property. This can be demonstrated in several ways: unlike a real owner, the trustees cannot freely abandon trust property but have duties to safeguard the trust property and exercise reasonable care over it, they have no right to put up trust property as collateral on their own personal obligation and they are not liable for any accidental losses of the trust property, or for costs awarded to a third party in an action against the trustees as legal owners of the trust property. 35 Those differences between a trustee’s ownership and real ownership are due to the fact that the real purpose of the trust is not to give the trust property to the trustees as a gift, but simply to authorize them to manage and administer the trust property for the benefit of the beneficiaries or a specified purpose. Therefore, obligations, especially fiduciary duties, are imposed on the trustees so as to ensure that they exercise their unitary ownership for the interests of beneficiaries or for the fulfilment of a certain purpose.
The nature of beneficiary’s interest is a special personal claim. Unlike typical personal claims, the beneficiary’s rights are special because their rights go beyond enforcing the trustee’s duties to distribute benefits to them under the trust. They have rights to enforce ‘due performance of the trust’ in a broader sense, which involves holding the trustee to its administrative and dispositive duties. The ‘special personal claim’ is adapted to the evolution of trust for commercial uses as well as being equally applicable to traditional family trusts. Compared with the traditional common law argument of equitable rights, which may be both personal and proprietary, the ‘special personal claim’ provides a more developed and unified understanding of the beneficiary’s interest.
In the following part, to support the position of ‘special personal claim’, the author first criticizes the beneficiary’s real right before analysing the personal claim theory and then explains why it is a more unified and broad understanding of the beneficiary’s interest, in particular in the commercial context.
Problems with theories that the beneficiary has a real right
First, it is worth nothing that a trustee is the person who should be granted exclusive powers of management over the trust assets in order for a trust to function. Therefore, even if the ownership of trust property were granted to beneficiaries, the right of management would still be conferred on the trustees.
If the beneficiary, but not the trustee, were the owner of the trust property, there would be a number of weaknesses: it would be hard to explain why the trustee can transfer good title to a third party because it violates the principle of nemo plus juris ad alium transferre potest quam ipse haberet (nobody can confer a greater right on another than he has to give), which precludes the non-owner trustee from transferring title to the trust property. Although an agent can dispose of property on behalf of a principal, a trustee is distinct from an agent and their rights are different in nature. Furthermore, in the absence of ownership, the trustee’s administration of trust property is less convenient and less efficient. He or she needs to request and wait for the property owner’s permission and cooperation in the trust management, such as a permission to enter into a transaction. Additionally, if the beneficiary’s real right theory were to prevail, the ownership of trust property would be in legal limbo for a certain period in some cases, such for a charitable trust, private purpose trust or discretionary trust, where there are no certain beneficiaries. For example, in the civil law case Royal Trust Co. v. Tucker, primary beneficiaries did not exist when the deed of donation and the trust were made; consequently, for a certain period of time ownership of the property in the trust would have been vested in no one. 36 Last but not least, secrecy is deemed to be one advantage of the trust system. If the beneficiary’s right was considered as a real right, it should be registered and in that case the beneficiary’s identity would have to be revealed.
In China, the beneficiary’s real right theory faces a number of challenges. First, the beneficiary’s right does not satisfy the definition of a real right (物权) in the Property Law of China. Article 2, paragraph 3 of the Property Law of China stipulates a real right as ‘the exclusive right of direct control over a specific thing in accordance with law, and includes (exhaustively) ownership, usufructuary rights, and security rights.’ 37 Nevertheless, the Trust Law of China grants the beneficiary no exclusive right to manage or control the trust property. Moreover, the beneficiary’s right cannot be viewed as a usufructuary right since a usufructuary right requires the possession of the relevant property. 38 As noted, because in trusts it is the trustee rather than the beneficiary who holds the possession of trust property, this right would appear to be immediately precluded. In a similar vein, the beneficiary’s right is not a security right because a security right gives a secured creditor a priority over unsecured creditors in having his claim paid with the trust property. 39 However, the beneficiary has no priority against other trust creditors except for the personal creditors of a trustee due to the independence of trust assets. 40
Furthermore, the beneficiary’s right cannot be attributed to any specific type of real rights. Pursuant to Article 5 of the Property Law of China, ‘[t]he varieties and contents of real rights shall be prescribed by law.’ 41 Nevertheless, the beneficiary’s right is not expressly or implicitly regulated as a type of real right by the Trust Law of China or other legislation. In order to avoid recognising the beneficiary’s right as a right directly enforceable against trust property, the Trust Law of China stipulates that the legal bases of the enforcement of the beneficiary’s rights are the trust documents but not the legislation itself. 42 Moreover, although Article 5 of the Property Law of China does not prevent legislation from creating new types of real rights, it is still difficult to classify the beneficiary’s right as a real right because of the instability inherent in the nature of (typically fungible) trust property. While a real right requires stability of the property, the particular assets which make up the trust fund are liable to change from time to time dependent on the trustee’s management. For example, the trust fund could readily be converted from cash to securities depending on the trustee’s management decisions. Additionally, if the beneficiary’s right is viewed as a real right, it will result in assets held in charitable trusts becoming ownerless, as there is no beneficiary as such, rather that the trust exists for a purpose. Incidentally, charitable trusts exist in English law but they do not preclude the finding that the beneficiary has a proprietary interest. As a consequence, the beneficiary’s right cannot be defined as a real right. The Chinese trust law does not recognize it as a real right, at least not until the trust is terminated and the ownership is transferred to the beneficiary.
In addition to the real right theory, the beneficiary’s interest is also argued as an in-between right that is neither completely real right nor personal claim. It takes a bold step in the theoretical ideas of the nature of beneficiary’s right. This effort, however, is not fully successful. The weakness of this theory is that a type of right belonging to both real rights and personal claims has never been recognized in civil law systems.
The beneficiary’s right as a special personal claim
Compared with the above two theories, the main argument proposed appears to be close to the personal claim theory. It differs, however, in its assertion that the beneficiary’s right has a broader meaning compared to a typical personal claim. First, the beneficiary’s rights are beyond the scope of personal claims, such as the right to supervise trust affairs. Furthermore, unlike a typical personal claim, which binds two parties in a creditor-debtor relationship, 43 a beneficiary’s right can affect a third party’s right in the trust property. Although the beneficiary’s claim is not directly against a third party, it can affect the third party’s rights in trust property by annulling the trustee’s transfer of the property to the third party.
The special personal claim theory is different from the recent argument of common law scholars, which claims that equitable property rights are best understood as rights against rights, but not as property rights (rights against things) or as personal rights (rights against persons). 44 First, the notion of rights against rights, a type of right belonging to neither real rights nor personal claims, finds no place in the Chinese or maybe other civilian legal frameworks. More important, the broader meaning of personal claims in interpreting a beneficiary’s interest under the special personal claim theory nevertheless does not prevent the beneficiary’s right from being characterized as a personal claim, as opposed to a real right. Although in general only real rights are exigible against third parties, secondary personal claims can arise against third parties who are guilty of interference in the performance of the trustee’s performance of their primary duties to the beneficiary. As Professor Smith argues, ‘[t]his idea is not alien to the civil law, which also recognizes that while a personal obligation does not create a real right but only a claim against a particular debtor, nonetheless it is possible that there might be claims in delict against third parties who wrongfully interfere in the performance of an obligation’. 45
This article argues that the beneficiaries’ right to supervise trust affairs and annul a trustees’ wrongful disposal of trust property, both of which are beyond the narrow scope of personal claims, can be interpreted as the appurtenance and the preservation of the personal claims respectively. The reasons for this are outlined below.
First, jurists have interpreted the beneficiary’s right to supervise trust affairs as appurtenant to or incidental to their personal claims to enforce the trustee’s duties to distribute assets according to the trust terms. 46 It is suggested that although the right of supervision directly falls into neither personal claims nor real rights, it is in essence derived from the beneficiary’s personal claims to ensure that the trustee carries out the terms of the trust. The reason to support this opinion is that the right of supervision must be transferred along with the transfer of beneficiaries’ personal claims. In the same fashion, once the beneficiaries waive their personal claims, the right of supervision must also be waived. 47 From the perspective of its function and position, therefore, the right of supervision is in a subordinate position, to support and realize the beneficiaries’ personal claims. Thus, the right to supervision is essentially an auxiliary and derivative right of the personal claims which are the beneficiary’s core rights.
Second, with regard to the beneficiary’s right to annul the trustee’s disposal of trust property against the trust purpose, the view advanced here is that this right also exists to preserve the beneficiaries’ personal claims. This right comes from the nature of a creditor’s right to revoke, rather than a right of recovery based on real rights.
Taking Chinese law as an example, the beneficiary’s right of revocation is stipulated in Article 22, paragraph 1 of the Trust Law of China: Where the trustee disposes of the trust property in breach of the purposes of the trust, or causes losses to the trust property due to his departure from his administrative duties or improper handling of trust business, the settlor shall have the right to apply to the People’s Court for annulling such disposition and the right to ask the trustee to restore the property to its former state or make compensation. Where a transferee of the said trust property accepts the property while knowing the violation of the purposes of the trust, he shall return the property or make compensation.
48
Where the obligor waives its creditor’s right against a third party that is due or assigns its property without reward, thereby harming the obligee’s interests, the obligee may petition the People’s Court for cancellation of the obligor’s act. Where the obligor assigns its property at a low price which is manifestly unreasonable, thereby harming the obligee’s interests, and the assignee is aware of the situation, the obligee may also petition the People’s Court for cancellation of the obligor’s act.
51
This article argues that the beneficiary’s right of revocation is in the nature of a creditor’s revocation right but not a recovery of real rights. That is because, on the one hand, in contrast to the recovery of real rights for which the purpose is to resume the control of property, 53 the right of revocation in the trust aims mainly at preserving the trust property instead of controlling them. Even when the trust property is returned to the trust as a result of the beneficiary’s right of revocation, it reverts back to the control of the trustee while the beneficiary still has no power over the trust property. On the other hand, unlike the right of recovery of real rights, the beneficiary’s right to annul trustees’ act is not tied to real rights in the trust property. This power to annul is instead the same as the characteristic of a creditor’s right to annul. For example, when a trustee releases the debts that are held as trust property, the beneficiary’s right to annul this disposal can only be by a creditor’s right to annul for the reason that an application of the recovery of real rights requires the trustee to dispose of the trust property. 54 By contrast, a creditor’s right to annul can be used to preserve the trust property. 55 As a result, it is more reasonable to characterize the beneficiary’s right to annul trustee’s disposal as a creditor’s right of revocation, rather than a right of recovery connected to real rights.
In sum therefore, we may define the beneficiary’s right as a special personal claim consisting of three parts: the main claim (personal claims), appurtenant rights (rights of supervision) and security rights (rights of revocation). Working together with the basic rule of trusts − the independence of trust property that requires the trust assets to be separated from trustees’ personal assets, the beneficiary’s interest is secured in the event of the trustees’ bankruptcy or death.
The theory of special personal claim provides a developed understanding of the beneficiary’s interest
The ‘special personal claim’ provides a more unified and developed understanding of the beneficiary’s interest, because (a) it suits better in civil law systems comparing with the theory of rights against rights, and (b) it is applicable to both traditional family trusts and modern commercial trusts. The ‘special personal claim’ causes no fundamental change to neither the basic rule of trusts nor civil law framework.
As discussed above, the recent common law theory of rights against rights is hard to fit into civil law systems, because it proposes a type of right belonging to neither real rights nor personal claims. In contrast, the ‘special personal claim’, which does not prevent the beneficiary’s right from being characterized to a personal claim, is more suitable into civilian jurisdictions.
Furthermore, compared to the traditional common law argument of equitable rights, which may be both personal and proprietary, the ‘special personal claim’ provides a more developed and unified understanding of the beneficiary’s interest that is applicable to both traditional family trusts and the use of trusts in commercial applications.
Under common law, a broadly accepted theory of the nature of a beneficiary’s right holds that a beneficiary has a variety of equitable rights arising from the trust, which may be both personal and proprietary. That is, a beneficiary’s rights can be predicated both on his or her personal rights against the trustees and on any proprietary interests in an external relationship with a third party. 56 By this reading, a beneficiary may bring proceedings in personam against trustees for a breach of trust; however, such a claim may be subject to time limits imposed by a limitation statute. 57 Moreover, a proprietary right may be instituted against the trustees to recover (trace) the trust property. 58 As Professor Smith notes, ‘[t]he rights of beneficiaries in the common law trust are neither purely personal rights against the trustee, nor are they real rights in the trust property, but rather they are rights over the rights which the trustee holds as trust property; they have a proprietary character since they persist against many third party transferees of the trust property.’ 59 Specifically, a beneficiary’s proprietary rights under common law were recognized by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington LBC. 60 The beneficiary has a proprietary interest in the trust property, which is, in equity, enforceable against any subsequent holder of the property other than a purchaser for value of the legal interest without notice. Noland makes a classic statement on the nature of a beneficiary’s proprietary rights: ‘The key proprietary features of a beneficiary’s interest under a trust are his primary negative right to exclude non-beneficiaries from enjoyment of trust assets and secondary rights to vindicate that primary right if it is infringed.’ 61
While maintaining the fundamental rule of common law, the theory of a beneficiary’s special personal claim is more developed than the traditional common law argument of equitable rights, which may be both personal and proprietary. This is because the ‘special personal claim’ theory provides a simple, unified restatement of the beneficiary’s interests that applies to different types of trusts, both fixed and discretionary. In contrast, traditional common law analysis perceives the nature of a beneficiary’s rights as dependent on the type of trust. 62 The proprietary right is recognized in fixed trusts but not in a discretionary trust. In Gartside v. IRC, 63 Lord Wilberforce made clear that the object of a discretionary trust, a trust under which the trustee has the discretion to select for distribution amongst members, does not have a proprietary right to trust property. Since ‘[o]ne consequence of the beneficiary having a proprietary interest in the trust property is that, if the trustee becomes insolvent, the property will not be available to the trustee’s creditors’, 64 the common law theory of personal and proprietary rights seems to suggest that a beneficiary cannot be protected from the claims of a trustee’s personal creditors in a discretionary trust. This notion conflicts with the essence of trusts: that trust assets are independent from trustees’ personal property. Furthermore, according to the common law proprietary theory, the beneficiary in a discretionary trust is unable to recover trust property when the property is misappropriated by the trustee and transferred to a party, which is another consequence of bringing a proprietary claim. Therefore, when comparing with the common law theory of personal and proprietary right, the theory of special personal claim provides more comprehensive protection to beneficiaries, which is beyond the limits of the consequences of a proprietary claim.
A universal restatement of the nature of a beneficiary’s interests not only resolves any discrepancy in applying the law to different types of trusts, but also corresponds to the development of trust in a commercial context. Commercial dealings have significantly influenced the beneficiary’s rights. 65 Influences drive the development of the law. First, nowadays virtually all of the litigation surrounding the proprietary tracing claim and the ‘knowing’ stranger personal actions are ones where parties are in a contractual relationship and at least one of the parties is a commercial actor, such as in Halifax BS v. Thomas. 66 It is also the case that beneficiary’s actions commonly involve those who have been victims of fraud or theft, even outside of the context of a contractual relationship. 67 In both cases, whether a contractual relationship or a tort, personal claims have been used as the main remedies. Thus, the theory of special personal claim provides a consistent understanding of a beneficiary’s rights in commercial trusts. Furthermore, as envisaged by some of the key common law advocates themselves, commercial cases would seek to accommodate the proprietary entitlement of owners in law and in equity alike, and allow the simplicity of the common law’s approaches, namely Lord Millett’s envisioned unified set of tracing rules. What has encouraged this has been the huge volume of commercial fiduciary litigation that has continued to simultaneously affirm and question the requirement for a universal set of tracing rules. 68 The theory of special personal claim just conforms to the envisioned universal, simplified rule, and provides a solution for it.
Last but not least, the theory of a beneficiary’s special personal claim can be drawn from a case study of the Chinese law of a civilian jurisdiction, and fits well into the civil law property system where ownership is absolute. There is a long-standing historical debate on the nature of a beneficiary’s rights, and it is particularly concerned with the application of the civil law notion of ownership − rights in rem and rights in personam to the English law of property − where it is ill-fitting. 69 The theory of a beneficiary’s special personal claim overcomes such difficulty, and provides a developed understanding of the beneficiary’s interests that not only provides a response to the evolution of trust for commercial uses, but also broadly applies in a worldwide context, where the concept of equitable ownership does not apply.
Conclusion
In the modern world, trusts have developed to be more often used as a valuable device for commercial applications. Because of the trust’s advantages in investment, banking, financing and property management, China, like other civilian jurisdictions, took the bold step of introducing the trust into domestic law. The evolution of trusts and their introduction in civil law requires a developed understanding and new judicial interpretations of the beneficiary’s interests.
Through a comparative study of Chinese trusts − an example of trusts in civil law and for commercial uses − this article provides a developed, unified understanding of the beneficiary’s interest in modern trusts, arguing that the beneficiary’s rights can be explained as personal claims, as opposed to real rights, yet they are special because beneficiaries have some rights beyond the traditional scope of personal claims. The special personal claim consists of three parts: the main claim (personal claims), appurtenant rights (rights of supervision) and security rights (rights of revocation).
It is hoped that this article will give rise to a reassessment of the traditional theory of the beneficiary’s interest.
