Background: the need for conflict of laws rules

Since trusts governed by the laws of the British Virgin Islands ("BVI") usually have significant legal links with the laws of one or more other jurisdictions, it is essential for the BVI to have adequate rules for resolving "choice of law" questions relating to trusts. Although the majority of the provisions of the English Recognition of Trusts Act 1987 (incorporating as it does most of the provisions of the Hague Trusts Convention) have been extended to the Territory, so ensuring a certain amount of certainty in relation to many of the relevant conflict of law rules relating to trusts, specified matters are expressly excluded from that Act, meaning that it is vital for these rules to be reinforced by additional statutory provisions.

Section 83 of the Trustee Act

In 1993 the BVI introduced legislation which was intended to deal with various issues which were expressly excluded from the Hague Trusts Convention, article 4 of which stated that the Convention "does not apply to preliminary issues relating to the validity of wills or other acts by virtue of which assets are transferred to a trustee". Section 83 of the Trustee Act was designed to plug this gap in the Convention by providing that "if a person transfers or disposes of personal property to a trustee of a trust he shall be deemed to have capacity to do so if he is at the time of such transfer or disposition of full age and sound mind under the law of his domicile".

Heirship claims

Certain countries have laws under which surviving relatives of a deceased (e.g. his children) can claim a fixed share of his estate. In common with the laws of most other offshore centres, the BVI has also passed legislation expressly preventing such claims from being made against lifetime trusts. Prior to 1 March 2004, the BVI’s statutory provisions outlawing these claims were also to be found in section 83 of the Trustee Act. However, for a number of reasons, particularly when reviewed in the light of the relevant laws of certain other offshore trust jurisdictions, these provisions were not considered to have been sufficiently watertight.

Overhaul of section 83 of the Trustee Act

The provisions of section 83 of the Act were recently analysed in conjunction with the corresponding provisions of other offshore jurisdictions’ legislation with a view to replacing this section by a new section containing a much more comprehensive set of statutory conflict of laws rules for trusts.

Since certain commentators had pointed out that the corresponding laws of many offshore trust jurisdictions were deficient in that they did not deal with preliminary issues relating to the validity of all trusts, a further objective of the review was to establish conflict of laws rules which apply to trusts generally, rather than merely to those which are governed by BVI law.

Furthermore it was recognised, when carrying out the review, that offshore trust jurisdictions’ conflict of laws rules were somewhat inadequate in that they made no distinction between what are now generally regarded as two separate preliminary issues of capacity, namely (1) capacity to make the disposition and (2) capacity to subject the property disposed of to a trust.

Another very significant objective of the review was to set up a regime which was likely to command a substantial degree of international recognition. Those of the rules dealing with matters which are excluded from the Hague Trusts Convention which are summarised below have therefore been drawn up with the objective of reflecting current common law trends. Whilst it cannot be guaranteed that these rules will necessarily correspond exactly with case law as it eventually develops in other common law jurisdictions, they are rules which are likely to command a certain degree of academic support. For that reason these rules should be seen by the courts of other jurisdictions as a legitimate and rational approach.

Finally, a further important objective of the review was to include in the Trustee Act some additional provisions which are significantly more robust in their defence of potential heirship claims.

The new section 83A of the Trustee Act

The Trustee (Amendment) Act, 2003, which came into effect on 1 March 2004, repealed section 83 of the Trustee Act in relation to trusts established after that date and replaced that section by a new set of conflict of laws rules which are now contained in section 83A of the Trustee Act.

The provisions of the new section 83A may be summarised as follows:

  • The formal and essential validity of a disposition of immovable property, or tangible movable property, is determined in accordance with the law of the State in which the property is situated at the time of the disposition; capacity to make such a disposition is similarly determined.
  • The formal and essential validity of a disposition of intangible movable property is determined in accordance with choice of law rules which are specified in a new Schedule to the Act (and in section 83A (8)).
  • Capacity to subject property to a trust (as distinct from capacity to dispose of the property) is determined in accordance with the law governing the essential validity of the trust.
  • Where a person declares a trust of his own property, there is no requirement for compliance with the rules on formal or essential validity applicable to a disposition of property.
  • Where, pursuant to the above rules, an issue falls to be determined by BVI law, the doctrine of "renvoi" is in applicable.
  • Subject to the above rules, all questions arising with regard to the validity, construction, effect or administration of a trust, including powers, obligations, duties, liabilities and rights of trustees, and the existence and extent of powers, is determined by the proper law of the trust.
  • The above rules for determining the "preliminary" issues which are excluded from the Hague Trusts Convention apply to trusts generally (other than testamentary trusts) and are not confined in their operation to trusts governed by BVI law.
  • The new section contains robust, comprehensive and carefully crafted provisions protecting BVI trusts (and dispositions to their trustees) against heirship claims. These provisions, which have been modelled largely on the equivalent laws of the Cayman Islands, the Isle of Man and The Bahamas (but subject to a number of refinements and modifications to reflect the Territory’s other laws), also prevent foreign judgments based on such heirship claims from being recognised or enforced in the Territory. The Act provides that these new rules apply notwithstanding those of the other provisions of section 83A which are summarised above. Of course if the settlor wishes the dispositive provisions of the trust to be Sharia law-compliant then it is perfectly possible for the provisions of the trust to be crafted so this is achieved. (Similarly the special new "VISTA" trust regime which has been created by the Virgin Islands Special Trusts Act, 2003 is ideally suited, inter alia, to enable the underlying assets of the trust to be invested in accordance with the requirements of Sharia law - if this is the settlor’s wish.)
  • Subject to one minor exception, section 83A only applies to trusts which have been created on or after 1 March 2004, with the result that section 83 of the Trustee Act continues to apply to trusts created before that date. (The exception relates to trusts created before 1 March 2004, but the proper law of which is changed to that of the Territory after that date.)
  • The above rules apply solely to trusts.

Jurisdiction of the BVI court

Section 82 of the Trustee Act provides that the BVI court has jurisdiction inter alia where the proper law of the trust is that of the Territory, where the trustee is resident or incorporated in the Territory, where the administration of the trust is carried out in the BVI and in respect of trust property situated in the Territory. The original subsection 82 (f) also provided that it had jurisdiction where the court "thinks it appropriate". However the Trustee (Amendment) Act has repealed subsection 82 (f) on the grounds that it was too loose, and this has been replaced by three further subsections, giving the Territory’s courts jurisdiction to resolve trust disputes where they are the natural forum for the litigation, where the parties submit to the court’s jurisdiction and where the trust instrument contains a provision referring all disputes to the Territory’s courts. These amendments also came into effect on 1 March 2004.

Conclusion

In the words of Professor Jonathan Harris of Birmingham University ‘The [Trustee (Amendment) Act] contains arguably the most sophisticated set of choice of law rules dealing with both ‘rocket’ and ‘rocket-launching’ aspects of the trust to be found in any offshore jurisdiction… . Overall, the BVI rules are a highly sophisticated attempt to regulate both rocket-launching and rocket aspects of the trust. They strike a balance between respect for standard conflict of laws principles wherever possible, and the demands of a pragmatic set of rules which embrace settlor autonomy and insulate BVI trusts from attack by foreign laws. The combination of such rules with wide bases of jurisdiction for the BVI courts should make the conflict of laws rules applicable to trusts in the BVI an attractive package.’1

Footnote

1. Launching the Rocket – Capacity and the Creation of Inter Vivos Transnational Trusts in Glasson (ed.) International Trust Laws (Jordans, loose-leaf). The new BVI provisions are now contained in sections 82 and 83A of the Trustee Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.