Trust in Saudi Arabia: Court of Appeal interprets Hague Trusts Convention in lifting stay of English proceedings

10/12/14

The Court of Appeal has delivered judgment in a case that raises fundamental questions of private international law in relation to trusts. The judgment considers the interpretation of the Hague Trusts Convention, as enacted in the United Kingdom by the Recognition of Trusts Act 1987.

Saad Investments Company Ltd (‘SICL’) is in liquidation in the Cayman Islands. In a claim brought in England against Samba Financial Group (‘Samba’), a Saudi Arabian bank, SICL and its liquidators allege that certain shares transferred after the commencement of the winding-up to Samba by Mr Maan Al-Sanea, a Saudi Arabian businessman, in purported discharge of his liabilities to Samba, were beneficially owned by SICL. They claim that the transfers were void dispositions of SICL’s property under Section 127 of the Insolvency Act 1986. The disputed shares, alleged to be worth over US$300 million, are shares in five Saudi Arabian banks, which until transferred to Samba were registered in Saudi Arabia in the name of Mr Al-Sanea. SICL’s rights are alleged to arise from a series of share sale agreements and from documents described as declarations of trust executed by Mr Al-Sanea and SICL. The share sale agreements are expressly governed by either Saudi Arabian or Bahraini law but the declarations of trust contain no provision as to governing law. The claimants allege that the declarations of trust gave rise to trusts governed by Cayman Islands law under which SICL acquired equitable proprietary rights in the shares. It is common ground that under Saudi Arabian or Bahraini law SICL would have acquired no such proprietary rights.

The proceedings were served on Samba as of right in England but the Chancellor of the High Court, Sir Terence Etherton, granted a stay on the ground that Saudi Arabia was clearly and distinctly the more appropriate forum. The Chancellor considered that it was not reasonably arguable that SICL had acquired proprietary rights in the shares under trusts governed by Cayman Islands law.

Allowing an appeal against the order of the Chancellor, the Court of Appeal has lifted the stay. The main question addressed in the judgment is whether Article 4 of the Convention has the effect that the alienation of an equitable interest in property upon the creation of a trust is excluded from the scope of the Convention and hence subject to the common law rule that questions of title to property are determined by the law of the place where the property is situated (the lex situs). This involved consideration of the decision of Lord Hodge in Joint Administrators of Rangers Football Club plc, Noters 2012 SLT 599 in which it was held that, where an agreement governed by English law sought to create a trust over Scots assets, the recognition of the trust was governed by Scots law. Having discussed academic commentary on that judgment, the Court of Appeal concluded that the question for the lex situs was whether the trustee has capacity to alienate the property at all, but that once it was clear that the property was alienable in some form under the lex situs, the validity and effects of the trust were a matter for the law identified by Chapter II of the Convention.

The Court of Appeal went on to consider Samba’s argument that, even if the law identified by Chapter II was prima facie applicable to the alienation of an equitable interest upon the creation of a trust, Article 15 preserves the application of non-derogable provisions of the lex situs relating to the transfer of title to property, including the principle of Saudi Arabian law that no division of legal and equitable title is recognised. While it was common ground that Saudi Arabian law does not recognise equitable title, the Court of Appeal held that expert evidence was required in order to determine whether this, and certain other principles relied upon by Samba, amounted to non-derogable provisions of Saudi Arabian law. It further held that the questions as to the scope and applicability of Article 15 were better left to be determined at a trial.

Finally, the Court of Appeal discussed whether Saudi Arabian or Bahraini law would, in any event, be the governing law of the alleged trusts under Articles 6 and/or 7, or at common law if Article 5 disapplied the Convention, or whether it was at least arguable that Cayman Islands law would apply under these provisions. The Court held that these questions too would be better determined in the light of the factual findings made at trial, and accordingly lifted the stay.

The judgment is here.