Jersey & Guernsey Law Review – February 2010

The Foundations (Jersey) Law 2009: A Civilian Perspective

Not so plain vanilla and possibly a tad wacky

1. Introduction and summary of conclusions

1.1 Introduction

1  When, as a young Swiss lawyer, I attended a Master class on international trust law taught by David Hayton and Paul Matthews at London’s King’s College, I struggled to understand the trust concept. My main problem was that I was trying to understand the trust relationship by reference to legal institutions that were already known to me, including foundations.

2  Fast forward to the present, and most of the advice I give nowadays as an English solicitor relates to trusts. However, I continue to advise on foundations and what fascinates me are the numerous functional similarities that exist between trusts and foundations. That is, of course, until I read the new law on foundations recently enacted in Jersey.^[1]

3  In the first part of this paper, I will put the new law in context and look at the functional similarities between common law trusts and traditional civil law foundations and explain why these similarities matter.

4  As will become apparent, many of these similarities do not appear in the Jersey legislation. In the second part of this article I will enquire whether this result was intended and more importantly comment on its implications for potential founders.

5  In the second part, I will also focus on pure foundation law principles (i.e. without reference to trusts) and consider the implications of a fundamental difference that exists between the Jersey foundations law model and the traditional civil law model. This difference relates to the independence of the foundation from its founder. Civil law foundations are generally independent from their founder (that is not to say that he may not have a role in the governance of the foundation), whilst Jersey foundations generally are not. This difference may have significant implications for the classification and tax treatment of Jersey foundations in foreign countries.

6  The third and final part will look at some other differences between the Jersey foundation model and its civil law counterpart and attempt to draw some practical conclusions. These are summarised in the next paragraph, not only for ease of reference, but because of their relevance for professionals and prospective founders alike.

1.2 Summary of conclusions

Jersey foundations as “super trusts”

7  Due to their limited liability, absence of fiduciary duties^[2] and lack of owners,^[3] Jersey foundations offer a valid alternative to private trust companies. In addition, the absence of information rights^[4] and enforceable fiduciary duties make a Jersey foundation a valid alternative to STAR trusts (a form of trust with powerless beneficiaries known only in the Cayman Islands).

Jersey foundations offer less protection to founders and beneficiaries than traditional trusts and foundations

8  Whilst most civilian founders will be familiar with the foundation concept, some of them will find it difficult to accept that the foundation documents may not limit the power of the foundation council to bind the foundation.^[5] Secondly, some families may feel uncomfortable with the idea that the chosen service provider will owe a lower standard of care under a foundation than a trust. The lack of any fiduciary duty on the part of the guardian is also like to give rise to thorny issues, at least where the beneficiaries have no right to information. For all this reasons, anyone looking for a traditional foundation as an alternative to a plain vanilla trust should handle Jersey foundations with care.

Jersey foundations as quasi-companies

9  The lack (by comparison with civil law foundations) of any restriction on the rights and powers that may be reserved by the founder and the free transferability of these rights (subject to the terms of the foundation documents) blurs the divide between foundations and companies. This may have adverse tax consequences and may affect the classification of Jersey foundations in foreign countries.

2. The new law in context: traditional civil law foundations

2.1 Like trusts, just different

10  Under most civil laws, a foundation is created when a person (the “founder”) dedicates^[6] assets to a specific purpose observing certain formalities. “Dedicating” assets to a purpose means that the assets will only be able to be applied towards the purpose of the foundation, which in some countries may include the benefit of beneficiaries.

11  Like trusts, therefore, foundations enable the creation of a segregated pot of assets which (by virtue of their “dedication”) cease to be comprised in the estate of the person who created the structure (settlor/founder) and do not form part of the estate of the person (trustee/foundation council) who is called to administer the funds in accordance with the terms of the constitutional documents (trust deed, foundation charter) and the law. In both cases, the assets should only be applied towards the purpose (whether a “pure” purpose or a purpose to benefit beneficiaries) set out by the creator of the structure.

12  In addition, most trust laws and some foundation laws provide that the creator of the structure may retain a right of revocation as well as certain intervention rights (including the right to change the constitutional documents and the right to act as trustee/foundation councillor).

2.2 Direct cross-reference to trust law principles

13  The functional similarity that exists between trusts and foundations is confirmed by the fact that the very first of the 19 articles that made up Liechtenstein’s foundations law before its overhaul in 2009 contained an explicit cross-reference to the provisions on “business trust enterprises”, also known as “Trusts Reg.” (a special type of trust under Liechtenstein law modelled on US “business trusts”^[7]).

14  Art 554 of Liechtenstein’s PGR^[8] (in force until 1 April 2009) provided that—

“the rules that apply to Trusts Reg. apply mutatis mutandis to foundations, in particular in relation to the position of the founder, council and beneficiaries, unless the foundation documents or the law on foundations provide otherwise.”

This direct cross-reference was abandoned in favour of a comprehensive set of rules dealing with the position of beneficiaries under a foundation as part of the overhaul of Liechtenstein’s foundation law (which came into force on 1 April 2009^[9]). However, the consultation report issued by Liechtenstein’s government clarified that the decision to drop the express cross-reference to the Trust Reg. rules was not motivated by perceived differences between the general principles of trust law and foundations law. The problem with the old art 554 PGRwas that the Trust Reg. rules contain certain atypical features (e.g. the fact that it may, in exceptional circumstances, have members) which made the cross-reference technique difficult to apply in practice, hence the decision to replace it with a comprehensive set of rules spelling out the position of beneficiaries under a foundation.^[10]

Beneficiaries’ right to information in particular—where structural similarities converge

15  In light of the above, it is therefore unsurprising that, notwithstanding the deletion of the cross-reference from Liechtenstein’s foundations law, the new rules contain provisions that could find their place in any modern trust law.

16  Art 552, §9 and 12 of Liechtenstein’s new PGR provide as follows^[11]—

Ҥ9

1) Any beneficiary under a foundation is entitled to inspect the main foundation document, any supplemental constitutional document as well as any regulations, in so far as it relates to his own rights.^[12]

2) In addition, to the extent that it relates to his own rights, any beneficiary may request the foundation to provide information and the production of reports and accounts. For this purpose, he has the right to inspect and take copies of any foundation books and documents and make enquiries (either personally or through a representative) in relation to any facts and circumstances, in particular in relation to the foundation’s bookkeeping. However, this right to information may not be exercised for improper purposes, abusively or in a way which is contrary to the interests of the foundation or the other beneficiaries. In exceptional circumstances, a beneficiary’s right to information may be denied for grave cause relating to the protection of the other beneficiaries.

3) The ultimate default beneficiary may only exercise a right of information upon dissolution of the foundation ...”

Ҥ12

1) Where the founder has provided for a supervisory body in the foundation document, a beneficiary may only obtain information in relation to the purpose of the foundation, its internal organisation and such beneficiary’s own rights against the foundation and to this end he may verify the correctness of the information by inspecting the foundation document, any supplemental constitutional document and the regulations (if any).

2) The following persons may be appointed as supervisory body:

1.      any independent auditor appointed in accordance with §27;

2.      any individual or individuals appointed by the founder, who shall have sufficient knowledge in the fields of law and securities to enable them to discharge their duties; or

3.      the founder.

3) Any such supervisory body must be independent from the foundation. §27(2) applies accordingly.

4) Any such supervisory body shall be under a duty, to be exercised at least once a year, to ensure that the foundation’s assets are being administered and applied in accordance with the purposes of the foundation. It shall report its findings to the foundation. If everything is in order, the report may consist in a mere confirmation that the foundation’s assets have been administered and applied in accordance with the purposes of the foundation, the law and the terms of the foundation document. If this is not the case, or if the supervisory body becomes aware of circumstances which endanger the existence of the foundation, it shall inform the beneficiaries (to the extent that they are known to it) as well as the court …

5) Where there is a supervisory body, any beneficiary may request copies of the annual reports mentioned in the preceding sub-paragraph, either from the foundation or directly from the supervisory body.

6) Where a beneficiary claims a right to information under §9, the burden of proof that the supervisory body satisfies the requirements under sub-paragraphs 2 [qualified persons] or 3 [founder] rests with the foundation.”

Thus, §9 contains the beneficiaries’ general right to information, whilst §12 limits such right where there is a supervisory body with standing to bring the foundation’s council to account.

17  In relation to the general right to information, the Liechtenstein government’s explanatory report dated 19 February 2008 clarified that §9 was modelled on the Trust Reg. rules and referred to the existing case law on foundations, notably a decision dated 23 July 2004 in which Liechtenstein’s Supreme Court^[13] held that—

“§68 of the law on Trust Reg. on the beneficiaries’ right to information under a trust also applies to foundations … The main rationale of this information right is to ensure the proper supervision of the foundation council … This right is not limited to beneficiaries with a current interest, but extends to beneficiaries with a future interest^[14] … Now, it is possible that a beneficiary’s right of information might collide with another beneficiary’s right to confidentiality. In these cases, the court may have to balance the competing interests of different beneficiaries.”^[15]

18  This decision is highly reminiscent of the decision in Re Rabaiotti Settlement 1989,^[16] where (at paras 26 and 27) the Royal Court of Jersey held that—

“In our judgment, the Court does have a discretion to refuse to order disclosure of trust documents that a beneficiary is normally entitled to see. Clearly, the general principle is that a beneficiary is entitled to see trust documents which show the financial position of the trust, which assets are in the trust, how the trustee has dealt with those assets etc. This is an essential part of the mechanism whereby the trustee can be held accountable for his trusteeship to a beneficiary. But the need for an individual to obtain trust documents has to be weighed against the interests of the beneficiaries as a whole …”

19  The same rationale permeates the Privy Council decision in Schmidt v Rosewood^[17] and the English High Court decision in Breakspear v Ackland.^[18] Proper governance and accountability as a fundamental principle of trust law is a recurrent theme and in the English case of Armitage v Nurse^[19] (which related to the validity of an exemption clause) it was held that—

“I accept the submission made on behalf of [the claimant] that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts.”

20  In light of the decisions in Rabaiotti, Schmidt v Rosewood and Breakspear v Ackland, there appears to be little doubt that a trustee’s duty to account to beneficiaries for his stewardship of the trust is one of the core obligations, and (as I promised to give a civil law slant to this article) I should like to end the discussion on the importance of the right to information in relation to both trusts and foundations with a quotation taken from a report published by the Swiss government ahead of Switzerland’s ratification of the Hague Trust Convention (which took place in 2007). In that report, the Swiss government compared the position of beneficiaries under a trust with that of a supervisory body of a company—

“In addition to any claims against the trustee in relation to the enjoyment of trust assets, the beneficiaries have certain control and supervisory rights which puts them into a similar position to officers [of a company].”^[20]

21  Similarly, art 1287(1) of the Code Civil of Québec (another civil law jurisdiction), under the heading “Measures of supervision and control”, provides that—

“The administration of a trust is subject to the supervision of the settlor or his heirs, if he has died, and of the beneficiary”.

22  Back to foundations. §30 of Austria’s Private Foundations Law of 1993 provides that—

“A beneficiary may request information concerning the fulfilment of the foundation’s purpose and may also inspect the yearly accounts, the annual report, the auditors’ report, the foundation document, any supplemental constitutional document as well as other documents.”

23  There is therefore no doubt that governments and courts on both sides of the common/civil law divide think that a beneficiary’s right to information forms an important role in the governance of structures under which one or more persons (trustees/foundation council) administer assets that have been entrusted to them for the benefit of beneficiaries or some other specific persons. Only a few governments have taken the bold move of departing from this principle. In my view, the only jurisdictions which have taken this route are the Cayman Islands (with the introduction of the STAR^[21] Trust in 1997)—and now, also Jersey.

3. Is it really a foundation?

3.1 Irreducible core of obligations—Beneficiaries’ rights under attack

(a) Jersey model draws inspiration from Cayman STAR trust law

24  Under the laws of the Cayman Islands, a STAR trust may be established for any purpose, which may include the purpose of benefiting beneficiaries.^[22] Thus, a STAR trust is similar to an ordinary purpose trust or an ordinary trust for beneficiaries. However, the STAR trust legislation provides that—

“Enforcers

100.(1) A beneficiary of a special trust does not as such have standing to enforce the trust or an enforceable right against the trustee or an enforcer, or an enforceable right to the trust property.

(2) The only persons who have standing to enforce a special trust are such persons, whether or not beneficiaries, as are appointed to be enforcers …^[23]

Duties of enforcers

101.(1) Standing to enforce a special trust may be granted or reserved as a right or as a duty.

(2) Subject to evidence of a contrary intention, an enforcer is deemed to have a fiduciary duty to act responsibly with a view to the proper execution of the trust.

(3) A trustee or another enforcer, or any person expressly authorised by the terms of the special trust has standing to bring an action for the enforcement of the duty, if any, of an enforcer.

Rights and remedies of enforcers

102 Subject to the terms of his appointment—

(a) an enforcer has the same rights as a beneficiary of an ordinary trust—

·        to bring administrative and other actions, and make applications to the court, concerning the trust; and

·        to be informed of the terms of the trust, to receive information concerning the trust and its administration from the trustee, and to inspect and take copies of trust documents; and

·        in the performance of his duties, if any, an enforcer has the rights of a trustee of an ordinary trust to protection and indemnity and to make applications to the court for an opinion, advice or direction or for relief from personal liability; and

·        in the event of a breach of trust an enforcer has, on behalf of the trust, the same personal and proprietary remedies against the trustee and against third parties as a beneficiary of an ordinary trust.”

25  The introduction of the STAR Trust back in 1997 was defined as “semi-wacky” by Paul Matthews. His article Shooting STAR: the new special trusts regime from the Cayman Islands^[24] asked whether a STAR trust was a trust at all and warned against potential recognition problems in other trust law jurisdictions.^[25] This provoked the fiery reaction of one of the proponents of the legislation, who penned an article belligerently entitled STAR WARS: The colony strikes back.^[26]. The last word in what became an epic trilogy of articles was spoken by Paul Matthews, who in his article STAR: Big bang or red dwarf?^[27] summarised his concerns as follows—

“So, must a UK court recognise a STAR trust … by virtue of the [Hague Trust] Convention? I do not think so … There is no denying the usefulness of an institution such as that represented by STAR. And the offshore market is big enough, and developed enough, to accept new products. But the consequences of the new institution—whatever its name—have yet to be evaluated. Readers can judge for themselves as whether it will help them and their clients. They can also judge whether it should be called a trust at all.”

(b) Concerns associated with STAR foundation approach

26  The problems associated with STAR trusts must have been on the minds of the members of the working party behind the FJL (as that party included prominent Jersey trust lawyers). At the same time the working group must have seen a unique opportunity of using the foundation legislation to introduce the STAR concept onto the Islands without bastardising the local trust law. This intent was never openly declared, but the resemblance between the Cayman STAR legislation and the FJL is striking. But that is not quite the end of the story. As the STAR trust legislation seeks to maintain a level of coherence by replacing the trustees’ fiduciary duties towards the beneficiaries with (arguably) fiduciary duties towards the enforcer,^[28] it is arguable that the Cayman legislation seeks to ensure the same standard of care under a STAR trust as under an ordinary trust. By contrast, the FJL goes out of its way to ensure that the foundation council (and any supervisory body) does not owe any fiduciary duty towards anybody.

27  Problems may also arise because there is no strict requirement in the FJL for the council and guardian to be independent of each other. According to art 14(3) FJL, the qualified member of the council may also be the guardian. Whilst the appointment of a Jersey fiduciary should guarantee a minimum standard of professionalism, art 14(3) FJL does not fully eradicate the potential conflicts of interests that may lead to litigation. Given the radical nature of the default position relating to information rights under the FJL, it would have been sensible to exclude any potential for conflicts of interest in these circumstances. In the post-credit crunch world, conflicts of interest and counter-party risk have assumed a central role and the success of a jurisdiction as a platform for legal structures largely depends on how it tackles these issues. Unsurprisingly, Liechtenstein, which has been the focus of much international criticism for some time now, has just tightened its rules to prevent conflicts of interests and increase the level of governance of local foundations through the introduction of a “four eyes principle” (according to which there should be at least two independent counsellors at all times)^[29]

28  In the eyes of a civilian, Jersey’s use of double standards for trusts and foundations as regards the position of beneficiaries looks like an attempt to use foundations as a test-ground (if not a dustbin) for semi-wacky ideas which one dares not apply to trusts. Whether this was intended or not, the problem remains that accountability plays a central role both under trust law and traditional foundation laws. Without proper accountability, the keeper of the purse may abscond with the money unpunished. Even if the idea of a guardian turns out to work (which is not clear at this stage), the double standards reserved to trusts and foundations under the Jersey legislation are cause for concern.

29  This is not to say that Jersey’s “STAR” foundations with defenceless beneficiaries may not be useful in certain circumstances. However, prospective founders should be warned about the potential risks associated with “STAR” foundations. What is clear is that they are not, as the policy statements that accompanied the introduction of the FJL suggested, alternatives to plain vanilla trusts. ^[30]

30  Finally, where the foundation documents confer a right to information on beneficiaries, the requirement of a guardian appears redundant and makes the structure clunky. From a civilian perspective, therefore, Liechtenstein’s opposite solution (which builds on the principle of full disclosure, but allows for an opt out subject to certain safeguards) appears more apt and is evidence of a robust understanding of the foundation concept.

3.2 Potential lack of independence from the founder also a problem

31  The Consultation Report published by the Economic Development Committee in 2004 contains the following policy statement—

“The Island needs to consider how, in addition to the excellent opportunities arising from the Trust Law, it can identify a wealth management/estate planning product that … can legitimately meet the needs of clients who want to retain more directional power over their assets than trustees of discretionary trusts can normally permit settlors.”^[31]

32  Accordingly, art 18(1) FJL provides that—

“A founder of a foundation has such rights (if any) in respect of the foundation and its assets as are provided for in the charter and regulations. Any rights a founder of a foundation may have in respect of the foundation and its assets may be assigned to some other person if the charter or regulations of the foundation so provide …”

33  From a civilian perspective, the policy statement that a foundation may accord more control to the creator of the structure than a trust appears quite bewildering, given the amount of powers that a settlor of an ordinary Jersey trust may retain for himself under art 9A of the Trusts (Jersey) Law 1984 (2007 revision) without turning it into a sham or nomineeship—

“Powers reserved by settlor

9A.(1) The reservation or grant by a settlor of a trust of … any of the powers mentioned in paragraph (2), shall not affect the validity of the trust nor delay the trust taking effect.

(2) The powers are—

·     to revoke, vary or amend the terms of a trust or any trusts or powers arising wholly or partly under it;

·     to advance, appoint, pay or apply income or capital of the trust property or to give directions for the making of such advancement, appointment, payment or application;

·     to act as, or give binding directions as to the appointment or removal of, a director or officer of any corporation wholly or partly owned by the trust;

·     to give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust property or the exercise of any powers or rights arising from such property;

·     to appoint or remove any trustee, enforcer, protector or beneficiary;

·     to appoint or remove an investment manager or investment adviser;

·     to change the proper law of the trust;

·     to restrict the exercise of any powers or discretions of a trustee by requiring that they shall only be exercisable with the consent of the settlor or any other person specified in the terms of the trust.”

34  Even without any prior knowledge of foundation law principles, it is difficult to imagine a wealth management structure under which the founder may retain more powers than those described under art 9A TJL without exposing such a structure to an attack based on sham.

35  Indeed, the statement contained in the Consultation Paper flies in the face of a fundamental principle of traditional foundation law according to which a foundation should be independent from its founder. Whilst this principle was systematically trampled on by Liechtenstein service providers for a number of years (which perhaps explains the misunderstanding), in a seminal decision taken in 1998, Liechtenstein’s Supreme Court held that—

“As soon as a foundation is established, it becomes independent from its founder ... The founder may reserve to himself the powers under art 559(4) PGR [i.e. the power to revoke the foundation and the power to modify its charter]. However, if the founder retains a right of intervention with the intention of continuing to use the assets of the foundation for his own benefit and not for the purpose of the foundation, there is a simulated transaction which is invalid.^[32] In addition, a foundation may be identified with its founder (so that there is no separate legal personality), if it can be shown that its establishment was abusive, in particular where the foundation was interposed merely for the purpose of hiding unfair or damaging practices of the founder. Such a foundation may not be enforced against the founder’s heirs or executors.”^[33]

36  In another recent decision, the Liechtenstein Supreme court upheld a claim brought by a creditor (the wife) of the founder and pierced the foundation veil on the basis that the founder had exercised a “mental reservation” when he created the foundation, i.e. treated the foundation in the same way as a personal account.^[34]

37  These arguments are not too dissimilar from those used by the courts in trust jurisdictions the world over in relation to sham trusts—although the civil law ideas of “simulation” or “mental reservation” are not identical to the common law concept of sham.^[35]

38  However, sham is not the only problem. The very idea that a foundation acquires separate legal personality requires an amount of independence between the foundation and its founder without which there cannot be any separation of legal personalities. Thus, civil law legislators and courts alike are generally very restrictive with regard to the possibility of the founder retaining wide intervention powers over the foundation.

39  This does not mean that the founder may not be involved in the governance of the foundation, if this is what the terms of the foundation document provide. Subject to sham arguments, it should not be a problem for a founder of a civil law foundation to retain some of the powers mentioned under art 9A TJL. Whilst the founder is generally free to set the “DNA code” of the foundation (including any reservation of powers along the lines of art 9A TJL) at the outset, any subsequent change of the DNA of the foundation by the founder is treated in some countries as being contrary to the idea that, once created, a foundation must become independent of its founder. As an exception to this rule, some laws provide that the founder may reserve the right to amend the constitutional documents of the foundation and/or revoke it (which is the ultimate negation of the foundation’s separate legal personality).

40  However, these are exceptions to the general rule that a foundation should have a separate and independent legal personality. Accordingly, the new Liechtenstein law provides that a corporate founder may not reserve a right to revoke or modify a foundation; and if reserved by an individual, these rights are not transferable and die with the founder. Looking at Liechtenstein’s neighbouring countries, Austria adopts the same approach. By contrast, Switzerland has recently relaxed its rules in an attempt to boost its position as a jurisdiction of choice for the establishment of charitable foundations. Under the new rules, founder’s rights are not transferable (as in Liechtenstein), but as a concession a corporate founder may retain founder’s rights for a maximum period of 20 years.

41  Art 18(1) FJL puts Jersey foundations on a direct collision course with traditional continental European foundation laws, and whilst prospective users may find the added flexibility afforded by the FJL appealing, they should consider the tax implications of retaining transferable intervention rights in relation to the foundation and its assets, as a foreign tax authority may be tempted to look at such a foundation as something akin to a company (e.g. by equating transferable founder’s rights to voting shares).

3.3 Other quirky features of the Jersey foundations law

(a) No initial endowment required

42  Traditional foundation laws require the “dedication” of property to a specific purpose.^[36] Thus, like an ordinary trust, a foundation is a product of property law, as there can be no foundation until property has been identified which can be “dedicated”. Art 7(1) FJL provides that “a foundation need not have an initial endowment”. From the point of view of a civilian practitioner, the lack of any “dedicated fund” requirement confirms the general perception that the Jersey legislator has approached foundations as if they were some sort of company, rather than a fundamentally distinct legal concept.

(b) Registration requirement

43  The requirement that a foundation be registered is also likely to raise eyebrows amongst civilian practitioners. In particular, they will wonder why a foundation requires registration whilst a trust does not. It is understood that the registration requirement was popular with the Jersey regulatory authorities to ensure a degree of transparency that would prevent the use of foundations for money laundering purposes. However, a trust may well be abused for the same purposes. The example of trusts shows that money laundering is best combated through the regulation of the service providers who create and administer wealth management structures, rather then through registration requirements. In any event, civilian practitioners will note an additional use of double standards between trusts and foundations which is unlikely to increase Jersey’s appeal to some of them as a jurisdiction of choice to establish foundations. Before I forget, I should mention that private family foundations are exempt from registration in both Switzerland^[37] and Liechtenstein^[38] (though they require registration in Austria^[39] and Panama^[40]).

4. Exclusion of fiduciary duties: is it a good idea?

44  The concept of fiduciary duty (at least in the common law sense) is alien to civil law. Some, but not all, continental European civil law systems provide for a form of fiduciary relationship whose origins date back to Roman law and its two sub-divisions of “fiducia cum amico” and “fiducia cum creditore”. The exact nature of this relationship varies from country to country,^[41] but a common feature is that the fiduciary holds an asset to the order of the principal. Seen from the perspective of a civilian, therefore, the word “fiduciary” generally refers to a friend or trusted adviser who simply carries out instructions and “fiduciary duty” generally means “do as you are told”.

45  As the concept of fiduciary duty (in the common law sense of the term) is alien to civil law, the existing foundation laws do not ask themselves whether a member of the foundation council is a fiduciary, and if so, to whom he is accountable.

46  Interestingly, most traditional foundation laws appear to negate a direct relationship between the foundation council and the beneficiaries. §29 of the Austrian Private Foundation Law provides that each member of the foundation council is liable to the private foundation for any loss caused by a culpable breach of his duties. The Swiss civil code does not deal with the liability of foundation councillors (with the exception of pension foundations). One leading commentator^[42] has argued against an application per analogiam of the rules that apply to limited companies, thus effectively excluding any direct claim by a beneficiary against the foundation council.^[43] Similarly, Liechtenstein’s new foundation law is silent as to whether the beneficiaries have a direct claim against foundation councillors or whether any claim for breach of trust should be brought by the foundation itself. Either way, art 552 §24 provides that a remunerated foundation councillor may not exculpate himself for ordinary negligence, which is a clear sign of the wind of change in that country.

47  It remains to be seen whether the Jersey Court will interpret art 22(1) FJL^[44] as containing a fiduciary duty owed by the foundation council to the foundation itself. Given the functional similarities between trusts and foundations, it is difficult to see how an ownerless structure might be preserved from abuses without fiduciary duties. Even leaving aside the functional similarities between trusts and foundations, there is no doubt that the members of the council of a foundation have some of the attributes of the directors of a company, which once again raises the question of the nature of their duties. As Lord Porter said in the English case of Regal (Hastings) Ltd. v Gulliver,^[45] “Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company whose board they form”.

48  Another question relates to who has standing to bring a claim against the members of the council of a foundation for breach of their duties under the foundation documents and the law. Presumably, if the position is that the duties outlined under art 22 FJL are owed to the foundation, any member of the foundation council should have standing to bring another member of the same council to account. The guardian should also be “a person of standing” under art 43 FJL, but what about the beneficiaries? As the foundation council does not owe any fiduciary duty to them, this appears questionable. In addition, to allow a beneficiary to bring a claim of the foundation against a member of the council of the foundation would raise the spectrum of “dog-leg” claims, which in a trust context have been struck out in Jersey as recently as 2007.^[46]

49  Even if one accepted that beneficiaries were “persons with standing” for the purposes of art 43(1), their position would be very fragile where they do not have any right of information. In this case, the only person with some power over the foundation council would be the guardian. This brings into question the nature of his duties (as opposed to the nature of the duties of the members of the foundation council). Art 25 FJL extends to guardians, so that they do not owe any fiduciary duty to the beneficiaries. But what about his duties to the foundation? At least where the beneficiaries have no rights to information, it is difficult to see how a Jersey foundation might work unless it is accepted that at least one person (the guardian) owes strict fiduciary duties to the foundation. This begs the question as to who may enforce those duties. As the guardian is supposed to supervise the foundation council, it is perhaps unlikely that the foundation council would bring a claim against the guardian for breach of the guardian’s (fiduciary) duty to supervise the foundation council. This leaves the beneficiaries, who however may not have any information as to what the foundation council and the guardian have been up to.

50  In conclusion, from the perspective of a civilian it is difficult to see why the draftsmen of the new law have gone out of their way to negate any form of fiduciary duties within a foundation structure. This reinforces the perception that Jersey applies two standards: one (high) for trusts and another (low) for foundations. This may shake the confidence of civilians who are considering using Jersey as a platform for their foundation business.

5. Conclusions

51  From the perspective of a civil lawyer, the first thing that becomes apparent when reading the new FJL is that it draws inspiration primarily from ordinary companies, rather than traditional civil law foundations. In many respects, this is unlikely to be relevant in practice and adds to the exotic flavour of the new law. However, the issues surrounding founder’s rights beg the question as to whether the new law effectively blurs the divide between foundations and ordinary companies. Prospective founders who are concerned about the possible classification of “their” foundation as a company, will have to tread carefully. On the other hand, the company-like treatment of a Jersey foundation may have unexpected advantages (e.g. where the founder wants to “check the box” for US tax purposes).

52  The fragility of the beneficiaries’ position under the FJL represents a major difference between the Jersey model and that of traditional foundations. Whilst these complexities may be “drafted away” by conferring information rights on the beneficiaries, the requirement of a guardian in all circumstances makes Jersey foundations unnecessarily clunky.

53  Also, it is abundantly clear that the foundation was drafted by trust lawyers who, regardless of the headlines and policy statements (needed to attract civilians), sought to provide creative solutions to certain difficulties that arise in connection with ordinary trusts. In a way, the FJL is evidence of their desire to introduce potentially wacky provisions that would not easily fit with the ordinary Jersey trust legislation. This might open interesting planning opportunities, e.g. by using trusts and foundations together. In particular a foundation may be a viable alternative to a private trust company, as it would do away with the need to establish a purpose trust to hold the shares of the private trust company. It also removes the arguments concerning the validity of self-serving purposes (is the holding of shares really a purpose or merely a means to some other purpose?). These concerns may only partially be addressed by using alternative company structures such as companies limited by guarantee (as they require members).

54  The absence of fiduciary duties may also favour the use of foundations as alternative to private trust companies. Whilst the recent Jersey case in Alhamrani v Alhamrani^[47] and the English decision in Gregson v HAE Trustee Ltd^[48] dismissed the viability of a “dog-leg claim”^[49] by a beneficiary against the directors of a corporate trustee for breach of duty of care by the trustee, the use of a foundation may provide a radical solution to any remaining concerns relating to dog-leg claims.

55  One thing, however, is clear. Jersey foundations are very different from their traditional civil law counterparts and any founder who wishes to establish a new foundation or migrate an existing foundation to Jersey should take expert advice from a local practitioner who should preferably be assisted by a civil law practitioner with a full understanding of foundation law principles.

Filippo Noseda is a partner at Withers LLP, London, email: filippo.noseda@witherswordwide.com. The author is a dual qualified Swiss/English lawyer.