The Common Law Bermuda Trust (A Comparative Analysis for Our Civil Law Clients)
Michael J. Mello, Q.C., J.P., T.E.P. · March 1st, 2001
Background
The Trust was developed in England during the Middle Ages primarily as a means of preserving family wealth for future generations and to provide continuity of management over the family’s assets. The Trust continues to be widely used in common law countries and more recently by clients from civil law jurisdictions. Bermuda is a common law country and by Act of its Parliament adopted the common law, the doctrines of equity and the Acts of Parliament of England of general application that were in force in England at the date when Bermuda was settled, namely the 11th day of July, 1612. Since 1612, Bermuda has closely followed England’s trust laws and has enacted very similar, and in some cases identical, trust legislation.
It has been our experience that clients from civil law countries, and sometimes their professional advisors as well, have difficulty in comprehending the nature of a common law jurisdiction trust. In an effort to understand the Trust, frequently they attempt to compare it with other common law concepts, which are also known to the civil law, such as bailment, contract, agency and powers. It’s as if to say because a zebra (read trust) has four legs, a tail and an equine head it must be a common horse (read bailment, contract, agency or powers). Although they share similar characteristics and although the zebra is in fact a member of the equine family, the zebra is clearly not a common horse. The zebra, like the trust, is an entirely different and distinct member of the horse (read legal) family.
Definition of a Trust
A Trust is an equitable obligation, binding a person (e.g. a trustee) to deal with property over which he has control (e.g. the trust property) for the benefit of persons (e.g. the beneficiaries, of whom the trustee may himself be one), any one of whom may enforce the obligation.
Difference Between Trust and Bailment
Bailment is a relationship where one person (e.g. the bailor) delivers his personal property to another (e.g. the bailee) upon the condition that the property shall be given back to the bailor or be otherwise delivered in accordance with his directions. Unlike a trustee, the bailee is not the legal owner of the goods bailed. Although a bailor has a special but limited proprietary interest to the extent that he may recover damages from a person who wrongfully damages the property, when the bailment is determined the right to possess the property reverts back to the bailor. The most striking difference between trust and bailment is that bailment only applies to personal property whereas the trust applies to both real and personal property.
Difference Between Trust and Contract
Contracts are a type of agreement where legal obligations are created and defined by the parties to the contract. A contractual agreement is usually supported by consideration; in other words, something of value passes between the parties to the contract. In the case of a trust there is no need for valuable consideration, whereas most contracts will fail where there is none (as always there are exceptions i.e. contract under seal). Trusts on the other hand are equitable obligations where no valuable consideration passes and unlike contract, the beneficiaries (who are usually not a party to the trust agreement) may enforce the obligations of the trustee and bring him to account. In a legal contract only the parties to the agreement may enforce the obligations of the other parties.
Difference Between Trust and Agency
Although trustees and agents are both fiduciaries with obligations (in the first case to the beneficiaries and in the second case to the principal) conceptually the position of agent and trustee is quite different. The agent is the representative of his principal and is empowered to contract with third parties on his behalf and thereby legally bind the principal. The trustee, on the other hand, is not a representative of the beneficiaries (though he must always act for their benefit) and when the trustee contracts with third parties, he does so in his own name as trustee, not as agent for the beneficiaries. Usually the agent does not himself have control over his principal’s property, but is himself subject to the control of his principal. The trustee is the legal owner of the trust property, but is not subject to the control of the beneficiaries; although, the person establishing the trust (i.e. the settlor) will usually retain the power to appoint and remove the trustee, and the beneficiaries may compel the trustee to carry out the terms of the trust, and if they all agree, terminate it.
Difference Between and Trust and a Power
Basically a power of appointment gives the donee of the power the right to allocate property (which he does not himself own) in such manner as he may direct. A power of appointment is discretionary and should the donee not exercise it, the objects of the power (i.e. the potential beneficiaries) can do nothing, nor can the court force the donee of the power to act. If there is no gift over in default of the power of appointment, then there will be a resulting trust in favour of the donor’s estate. In comparison, the trustee is under a duty to act in accordance with the terms of the trust deed and, should he fail to act, any potential beneficiary may apply to the court and force the trustee to act. In other words the trustee is under an equitable obligation to exercise his power in favour of the beneficiaries in accordance with the terms of the trust and the court will see to it that the terms of the trust are carried out.
Conclusion
It can readily be seen from the foregoing comparisons that the common law trust, notwithstanding that it shares some identical characteristics with its legal brethren of bailment, agency, contract and powers; and notwithstanding that it is a recognised member of their legal family, is clearly a unique creature in its own right.