The Reasons behind the Absence of Trusts in Civil Law Countries such as France and Germany - Essay Example

 1. Introduction In most countries around the world the development of various investment initiatives is considered to be not affordable by potential investors mostly because the financial aspects of the whole project is proved finally not to support the interests of the investors involved. In order to minimize the costs related with investments internationally, legislators in most countries around the world have decided to create a legislative framework, the trust, that will protect the interests of potential investors minimizing the whole cost of their initiative (investment on specific commercial projects on various industrial sectors worldwide). However, in practice it has been proved that trusts cannot effectively operate in all countries around the world; in fact, through the years trusts have been related mostly with the countries of the English legal system, or else the common law countries. On the contrary, in countries of civil law trusts have been proved rather ineffective – their implementation cannot fully completed under the principles of law applied on countries of civil law. Current paper focuses on the identification and the evaluation of the reasons of absence of trusts in civil law countries, like France and Germany. The various aspects of this phenomenon will be analyzed presenting the forms of investment that have been introduced instead in these countries. It should be noticed that the absence of trusts in civil law countries is not proved to reduce the protection provided to beneficiaries of property; rather the rights of beneficiaries in civil law countries are protected through alternative frameworks that have been considered by legislators to offer a more completed protection compared to the particular scheme, i.e. trust. 2. Trusts – characteristics and types – reference to common law characteristics In order to understand the reasons for the absence of trusts in civil law countries it would be necessary to refer primarily to the general characteristics of trusts as they can be observed in countries of common law. In these countries traditionally trusts have been related with favourable terms of investment; for this reason, trusts are preferred by investors around the world as they can offer a credible ‘vehicle’ for the development of wealth of the investor. It should be noticed that trusts in common law countries are mostly used for the protection (and perhaps the development) of the property that will be given in future generations – under the terms and conditions described in the relevant contract. Under the specific scheme, the property that is incorporated in the trust is set under the control of trustees who have the responsibility of keeping the property at a good condition using in at the most appropriate way – referring to the increase of the value of the property through the years – until it is given to the beneficiaries. The appropriateness of trusts used in various jurisdictions internationally has been doubted in the literature. In this context, the following question has been often set in theorists and legal professionals internationally: ‘what the choice of law rules is for claims involving the assertion that property is held on a resulting or constructive trust’ (Chong, 2005, 855). Despite the fact that the laws included in the Hague Convention on trusts have to be considered as most appropriate for regulating the various aspects of this trust, it has been supported that different handling of the specific issue is also possible. For this reason, it is supported that ‘some doubt exists as to whether the Hague choice of law rules apply to all resulting and constructive trusts; it is therefore important that the common law choice of law rules for such trusts is clearly elucidated’ (Chong, 2005, 855). The above issues involve in specific types of trusts – that are developed as noticed above only in the common law countries. The problem referring to the specific type of trusts – a problem that can also appear in other type of trusts – has been presented in order to prove that trusts are schemes that can have weaknesses; they are not perfectly developed. For this reason, it is necessary that relevant measures are taken by legislators in countries internationally so that the specific scheme – trust – where used to be appropriately aligned with the local culture and ethics. In any case, trusts cannot survive in countries of the civil law where different schemes regarding the administration of property that belongs to an inheritance have been developed. Trusts are quite important for the growth of economy in common law countries. More specifically, because the economy of these countries is strongly based on the investment made on property, the value of trusts as incentives for investors to invest on property cannot be denied. Referring to the house market of Britain Barrell et al. (2003, 53) notices that ‘the housing market, which has been particularly cyclically volatile in the past 30 years, has contributed to cycles in consumption through its impact on housing wealth; increased house prices increase the value of assets held, and impact on consumption, making the economy more cyclical’. In accordance with the above, radical changes on the property market could influence a country’s economy; for this reason, the legal rules related with trusts – where applicable, i.e. in the common law countries – are quite important for the development of local economy. For this reason, governments in the common law countries try to regularly update their rules/ practices regarding the formation/ administration of trusts ensuring that the interests of all parties (including those of the state) are protected. The specific issue has been examined by Weale (2006) who tried to identify the main aspects of the government’s initiatives in Britain regarding the administration of property. In accordance with the above researcher, the following initiatives characterize current governmental policy in Britain regarding the administration of property: ‘(i) maintaining a tax-favoured treatment which has the effect of raising prices despite the fact that this imposes a burden on future generations … (iii) probably adjusting the inheritance threshold to protect the direct descendents of house owners from the collective burden on future generations created by high and rising house prices’ (Weale, 2006, 7). It is under these conditions that the various aspects of trusts are regulated in England - the country - source of the common law. Similar practices and priorities are expected to be observed in all common law countries regarding the formation/ administration of trusts. Potential differentiations in the rules regulating the various aspects of trusts among the common law countries are possible under the influence of the local social and cultural ethics; however these differences are expected to be limited and not lead to severe diversifications in the development of trusts in common law countries – this is a phenomenon totally contradictory with the one observed in the civil law countries – differences in the political systems of these countries have led to differentiations in their legal framework – as a result legal schemes like the trust are not viable in civil law countries. The development of trusts in common law countries could be understood if the particular characteristics of common law – observed in all countries that have adopted the specific legal system – are analytically presented. Such a description could be also help to understand why trust cannot survive in civil law countries. In accordance with a definition given by Ritter (1910) ‘the common law is that which derives its force and authority from the universal consent and settled customs of the people; it has never received the sanction of the Legislature by express act, which is the criterion by which it is distinguished from the statute law; it has never been reduced to writing’ (Ritter, 1910, 86). The common law as presented above is characterized by a series of advantages but also disadvantages. In accordance with Chiarloni et al (1999, 17) ‘it is well recognized that the existing system of civil procedure in England and Wales is beset by excessive costs, delay, and complexity’. As noticed above, common law is characterized by the absence of a written Code and the extensive use instead of the case law. Of course, there are Acts published periodically which regulate specific issues that are of high importance for the law; however, no written legislative text exists applicable on a wide area of disputes – as in countries of the civil law. It should be noticed that through the years, changes have been made on many aspects of the common law. In this context, it is noticed by Geldart (1995, 174) that ‘in addition to the enactment of codes to cover specific areas of crime, the Law Commission in 1989 and 1992 published draft codes for the major portion of the whole range of English criminal law, and in 1993 a comprehensive Bill to codify the whole of the law relating to non-fatal offences against the person’. Apart from the criminal law, other aspects of common law are also under process – in terms of the efforts made for their restructuring and the development of a written text – code that will regulate all issues belonging to a specific area of law. However, despite the changes made in many aspects of common law as well as of civil law, the development of common legal features in the above two systems is not feasible yet. The rate of development of these two systems’ functions and the differentiation of their scope should be considered as the main reason for the delay in establishing common legal features in the countries of common and civil law. In accordance with Chiarloni et al. (1999, 16) that ‘while the changes made to the basic structure of procedure are modest, the changes in the philosophy of procedure and the approach to its operation are far reaching’. For this reason, the establishment of trust in civil law countries cannot be expected yet – as long as the basic characteristics of the specific two legal systems present significant differentiations. 3. Trusts and civil law countries The existence of trusts in common law countries and their absence in the civil law countries could be explained by referring to the differences in inheritance applied on countries belonging in the particular two legal systems. In this context, it is noticed that ‘civil and common-law traditions treat surviving spouses and children differently; the surviving spouse has come to be increasingly protected in common-law and civil law countries; but civil law countries restrict testamentary freedom to protect the shares of children, whereas common-law countries allow the children to be disinherited’ (Willenbacher, 2003, 208). Under these terms, the development of trusts in the common law countries was necessary in order to ensure that the rights of children in countries of common law will appropriately protected. The limitation of the costs related with the inheritance is included in the purposes of the specific legal framework. In accordance with the above view, the development of trusts in common law countries has been related with the provision of increased protection to the beneficiaries, at least this has been the target of legislators in common law countries – no other particular advantage of the specific legal framework could be identified compared to the inheritance rules applied on civil law countries. From another point of view, it is noticed that ‘controlling for contemporaneous and initial conditions, civil law states have substantially higher levels of constitutional instability at the end of the twentieth century; this effect is attributable to instability in property rights caused by the change in national governments and to the legacy of the civil law system’ (Berkowitz, 2005, 62). In accordance with the above view, the development of trusts in common law countries has been the result of the different rate of political development of these countries compared to the civil law countries that have faced a period of long term instability mostly due of the differences in the political systems applied on this countries; in the countries of English legal system the common political structure has led to the increase of stability and the potential of development of forms of investment that can offer a reduced taxation compared to the usual systems of inheritance that are applied on the civil law countries. Of course, in civil law countries the existence of written constitution could be regarded as offering an increased protection of the rights and the interests of beneficiaries (referring to the specific part of the law). However, because the terms of these constitutions were developed differently in accordance with the social and cultural characteristics of each nation, the establishment of a common form of inheritance system that will provide reduced taxation has not been achievable in countries of civil law; such a scheme would require an harmonization of the political systems of countries of the civil law; however such a condition has not been able to be achieved. Through the years, the development of various schemes regarding the administration of property that is part of inheritance has been attempted in civil law countries. The update of existing Codes in this case has been necessary – as already known the civil law countries are based on written Codes rather than in case law which is used only as a supplementary source of law. The study of Chambaz (2007) refers to the case of France. More specifically, it is noticed that ‘the French Government has been considering the introduction of a fiduciary trust-like relationship into the Civil Code; thirty new Articles were inserted into the Civil Code as a consequence of the adoption on 19 February 2007 of the fiduciary law instituting the fiducie’ (Chambaz, 2007, 255). It should be noticed that the above initiatives have not led to the radical change of existed legal framework regarding the administration of property – part of inheritance in France; rather they can be characterized as indicative efforts for the upgrade of the existing legal system; however these efforts could not be successful unless additional/ radical changes are made to the political system’s various operational principles – as noticed above the political systems are closely related with the legal systems in all countries internationally. Moreover, it has been proved that in the countries of civil law the above differences are more and for this reason there is no political stability that could support the development of a trust or a similar scheme. In accordance with Chiarloni et al. (1999, 13) ‘in most civil law countries the state of the administration of justice is a source for concern’. In other words, the development of the various legal processes in countries of the civil law also presents delays mostly because these processes are not appropriately regulated – the existence of written Codes that regulate all the issues that need the intervention of the law in civil law countries cannot lead to the assumption that in these countries the provision of protection by the courts is quicker compared to the one provided by the countries of common law. Even if the latter there are no written Codes providing the legal framework for the resolution of various disputes brought before the courts, there are no particular effects on the time required for the provision of legal protection either by the courts or by the administrative authorities that have the power to intervene in a particular dispute. One of the major characteristics of the countries belonging to the civil law is the fact that in these countries the freedom of the judge to decide on the development of a specific decision regarding a dispute brought before the court is higher compared to that of the common law countries. Regarding this issue, it is noticed that in civil law countries ‘the judge, in his application and interpretation both of enacted law and of the general principles which will always underlie and supplement enacted law, is not bound by previous decisions of the same or any other court, but is free and indeed is bound to decide according to the best of his own judgement’ (Geldart, 1995, 14). Such an aspect cannot be observed in countries of the common law where judges are bounded by the existing case law; the solution provided to a specific case has to be similar with the one provided to other case with the same characteristics/ legal base. The above issue is of significant importance regarding the potential development of trust in countries of the civil law. More specifically, if trust could be applied on civil law countries, then it would be possible that different evaluations of the rights/ obligations of trustees/ beneficiaries are recognized by the courts (if this framework could be developed in civil law countries). But in this way, the whole framework of trust would then face a severe instability and it would have to be gradually differentiated in order to respond to the changes in the environment in which it would be introduced. It should be noticed here that despite the fact that trust is a concept that cannot be developed in the countries of the civil law, exceptions could be observed in the above rule – referring to the case of specific civil law countries like Russia. Indeed, it is noticed that ‘trust management is a concept of Russian civil law; it therefore should not be regarded as a Russian form of trusts because it is familiar to the Anglo-Saxon system of law, and these two instruments, despite their confusingly similar terminology, are still based on different principles and differing nature and characteristic features’ (Chugunova et al., 2008, 277). It is not made clear however whether the concept of trust developed in Russia is quite similar with the Anglo-Saxon pattern of trust or it is just a framework that has certain characteristics of a trust but it is different in its fundamental structure and characteristics. It should be noticed that the absence of trusts in civil law countries cannot lead to the assumption that beneficiaries in these countries are left without the appropriate legal protection. In fact, in these countries different concepts have been developed in order to ensure that the property will be transferred to beneficiaries without a heavy taxation. However, it depends on each country’s legal framework – no common practices on inheritance and other legal areas like in countries of the common law. 4. Conclusion One of the most important reasons for the development of different legal concepts in countries of civil and those of common law has been the difference in the political systems applied on the countries involved. In fact, in accordance with the study of Lupoi (1999, 967) ‘the so-called dialogue between civil law and common law was the basic feature of post-World War II comparative law; all civil law countries belonged to one family and all common law countries to another’. Indeed, the issues developed above lead to the assumption that trusts in civil law countries have not been possible to be developed mostly because the political systems of these countries present significant differences and for this reason it has not been possible for common legal frameworks, like trusts, to be developed in these countries. Of course, the provision of legal protection in civil law countries could be characterized as being more rapid if compared to common law countries – where delays in the provision of legal protection can be observed because of the lack of written Codes – under the terms explained above. On the other hand, another potential reason for the lack of appropriate framework in civil law countries in order to incorporate trusts is the inconsistency of information provided within the context of a particular legal issue. In common law, where the absence of written Codes can cause delays in the provision of justice, there is no issue – or it is limited – of inconsistency of information related with the various issues that are valuable for the law. In this context, it is supported that ‘one of the characteristics of civil law is that uncertainty, complexity and asymmetry of information is supposed to be reduced as compared to common law; that characteristic results from the codification of law, the limitations of jurisprudence, and centralization of the judicial system’ (Deffains et al., 2001, 208). In accordance with the above, trusts in civil law cannot be developed for two major reasons: a) lack of stability in the political systems of the countries involved – this lack of stability leads to the lack of specific legal framework in which trust will be developed and b) lack of consistency in the information provided to the courts regarding a specific case. On the other hand, the development of trusts in common law countries has led to specific problems that need to be resolved as soon as possible in order to reduce the chances for the development of criminal behaviour – like the money laundering. The specific issue has been examined by Darling et al. (2007) who noticed that ‘representative bodies, including the Law Society of England and Wales and the Society of Trust and Estate Practitioners are intended to implement the Third European Money Laundering Directive in England; however, many are fearful about the impact of Part 2 of the Draft Regulations which deals with customer due diligence (CDD) and, in particular, how the requirements will apply to trusts’ (Darling et al., 2007, 116). Trusts should be used by legislators to increase the confidence of investors regarding the administration of their property – especially regarding the transfer of this property to the future generations. In no case the use of trusts for other reasons could be justified and for this reason their whole framework should be continuously examined by the state as of the alignment of their rules with the relevant principles of common law. In countries of the civil law, where trusts cannot be developed, the risks for the development of criminal behaviour using similar legal concepts – as trusts – is also high. References Barrell, R., Choy, A., Riley, R. (2003). Consumption and Housing Wealth in the UK. National Institute Economic Review, 186: 53-57 Berkowitz, D., Clay, K. (2005) American Civil Law Origins: Implications for State Constitutions. American Law and Economics Review, 7(1): 62-84 Chambaz, L. (2007) Is France adopting trusts wholesale? The answer is no, but … Trusts and Trustees, 13(7): 255-261 Chiarloni, S., Gottwald, P., Zuckerman, A. (1999). Civil Justice in Crisis: Comparative Perspectives of Civil Procedure. Oxford: Oxford University Press Chong, A. 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