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on Japanese Law by Yoshihisa NOMI
(Prof.Emeritus Tokyo University)
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I A Short History of the Civil Code of Japan
(1) The Meiji Restoration and the Reform of Political and Legal System
The Tokugawa Shogun
returned his political power to the Emperor in 1867 and the new Government has
started. This is the beginning of the Meiji Restoration. The next year 1868 was
named Meiji to commemorate the Restoration. The Restoration was not a simple
shift of power from the Tokugawa Family to the Emperor. It was more of a
revolution by the lower Samurai class (Samurais belong to the
warrior class but they usually worked as bureaucrats in the feudal governments)
who feared that without a strong unified modern state Japan will be occupied by
the mighty western nations. Opium war between China and Great Britain was the
alarm.
The
Japanese Government rapidly introduced western political and legal system to
modernize the country. In 1868 the 1st year of Meiji the capital of the State
was moved from Kyoto to Tokyo. There were many things to do for the new
government. The priority was to establish a new political and administrative
structure of the central government and the local government. The top of the
state was the Emperor. To support the Emperor, the administration system Dajokan
(the Grand Council) was established. The head of the Dajokan was called
the Dajo-Daijin(the Chief of the Council). Under the Dajokan
there were 6 ministries, Minbu-sho (Ministry of Internal Affairs), Okura-sho(Ministry
of Finance), Hyobu-sho(Ministry of Military Affairs), Gyobu-sho(Ministry
of Criminal Affairs), Kunai-sho (Ministry of Imperial Household), Gaimu-sho(Ministry
of Foreign Affairs) and later Shiho-sho(Ministry of Justice ) and Monbu-sho(Ministry
of Education) was added. There was no division of powers. All the power was
concentrated in Dajokan and to the Emperor.
The
reform of the local government system was much more difficult. Under the Tokugawa
feudal regime, the Tokugawa Bakufu (the central government) did not directly
ruled all the territories in Japan, but only the important cities and places.
The rest of the territories were ruled by the local lords and the areas they
ruled were called Han. Under the new Meiji government it was absolutely
necessary to deprive the power of the local lords and abolished the local
political system of Han. It is amazing how this was achieved. Without
great turmoil all the local lords agreed to relinquish their power. In 1871
instead of Han now Ken(prefectures) were established. To make the
transition smooth the former land lords were usually appointed as the governor
of the prefecture, but gradually they were replaced by the bureaucrats
appointed by the central government.
Also
worth mentioning is the abolishment of the social classes. In Tokugawa era
the society was divided in 3 classes.The aristocrats, the samurais, and the
commoners (peasants, artisans, merchants).The aristocrats and samurais were the
ruling class and had privileges. What to do with these classes was a big
problem. The government decided to keep the aristocracy as a shield to protect
the imperial family, though reforming it by adding the former land lords and
those who contributed to new government. They formed the new aristocracy (Kazoku).
But the status of samurai was abolished. They were united with the commoners
[1] . This was especially necessary to create a modern military force which
cannot be supplied only from the samurai class but also from the commoners.
This brought strong discontent among the samurai class. There were many rebels
led by the former samurais against the new policy of the government. But they
were all suppressed by the government, sometimes by the army constructed by the
commoners.
F.N [1] Order of the Dajokan 1876 No.38 prohibited anyone to wear a sword, In
the Tokugawa era sword was the symbol of samurai.
(2) Judicial Reform
Along with the reform
of political and administrative system establishment of a new legal system was
necessary. In 1875 the Supreme Court of Judicature was established following
the French model of Cour de Cassation. Lower courts were also established. But
the new laws to be applied in the court were not ready. As for the civil cases
there was no Civil Code yet. The project to draft a new civil code has just
begun following model of the French Civil Code . Without enough laws and statutes
how did the judges ruled the cases? The government issued a guideline for the
judges how to rule in the court.[2]. This is the famous Dajokan Fukoku 1875
No.8 on Jorii (条理) which said the judges were to rule the caseｓ according to the statutes, if there were no statutes
according to the customｓ, if there was no custom
according to Jori. Jori could be translated as “reasonable senses” or
“natural law”. But what Jori actually meant was not clear. Many judges
who studied law in the Law School established in the Ministry of Justice where
Gustav Boissonade taught French law were familiar with the concept of natural
law. They thought Jori was the
natural law. Gustav Boissonade was eager to teach natural law in Japan. But other
judges simply understood Jori as the
western legal thoughts.
F.N.[2]
Order of the Dajokan 1875 No.8
(3) The Old Civil Code of Japan
Under the leadership of
Gustav Boissonade who came to Japan as an advisor of the Japanese Government,
the drafting of the Civil Code was accelerated. But it was only in 1890 that
the (Old ) Civil Code was finally promulgated and was to be enforced from 1893.
The Old Civil Cold consisted of 5 parts, Law of Property, Law of Acquirement of
Property, Law of Security, Law of Evidence, Law of Person. Except the Law of
Person and a part of Law of Acquirement of Property (the law of succession) the
Old Civil Code was drafted by Boissonade and translated into Japanese. The Law
of Person and the law of succession were drafted by the Japanese because it was
thought that these areas should consider the Japanese customs and not to be too
much westernized. But also in these areas the influence of Boissonade and
French law was apparent.
After the promulgation of the
Old Civil Code some Japanese scholars and lawyers opposed to the Old Civil Code
from various reasons. A radical opponent of the Old Civil Code Yatsuka Hozumi
wrote in his article a phrase “ Civil Code emerges but the Loyalty dies”. As
the date of enforcement nearing the controversy between the proponents and
opponents of the Civil Code became more and more heated. The Government wanted
to enforce the Civil Code, because the Treaties with the foreign governments
required establishment of legal system including Civil Law Rules as a condition
of abolishing the consular jurisdiction of the foreign governments. The
opponents wanted a place to discuss this problem and appeal to the people. On
February 11 1889 the Constitution of the Japanese Empire was promulgated and
the first National Diet was to be summoned in November 1890. The strategy of
the opponents was to bring the debate in the Diet and to stop or postpone the
enforcement of the Civil Code [4] . After heated debate in May 1892 the law to
postpone the enforcement of the Civil Code passed the Diet. It was to be
postponed until 1896.
The opening of the first Diet in 1890 (wood print)
The Official Gazette that promulgated the
Constitution
F.N.[3]
Many foreign lawyers came to Japan as an advisor. They were called Oyatoi
Gaikokujin (the employed foreigners). In the field of law Boissonade from
France and Herman Roesler from Germany were famous. Also Henry Terry from USA
taught Anglo-American law at Tokyo Imperial University. More about Terry see:
Y.Nomi,Terry’s analytical jurisprudence and trust law theory(PDF)
.
[4]
Also the Old Commercial Code by Herman Roesler was the target of the opponents.
（4） The New Civil Code
(a) The Drafters and the Judicial Committee
Thereafter the new drafting
members of the Civil Code were appointed, Kenjiro Ume, Nobushige Hozumi,
Masaakira Tomii. And the Committee to discuss the draft was established.
Ume was a proponent of the enforcement of the Old Civil Code but once the law
to postpone the enforcement had passed the Diet, he worked diligently for the
new draft. He had a profound knowledge of French law, was a docteur en droit of
the University of Lyon. Hozumi studied in England and had the title of
barrister but later moved to Germany and transplanted German elements into the
New Civil Code of Japan. Tomii studied in France but was more sympathetic with
German law.
（ｂ）Popularity of German Law
In the early years of
Meiji French law had a great influence. The Ministry of justice established a
Law School to teach law which was mainly French law. Boissonade was one of the
teacher in this school. His profound knowledge of law had influenced many
Japanese lawyers at that time. The government appreciated Boissonade highly.
But in the 1890s the tide was turning. Now German Law became popular. Why this
change? The reason is not simple. At a political level the government wanted to
follow the German State model, which has defeated France in the 1871 and was
the emerging Empire in Europe under Reichskanzler Bismarck. At a more
theoretical level the German law was thought to be more progressive. One of the
drafters of the New Civil Code Hozumi who studied in the Great Britain was
influenced by social Darwinism. He applied this theory to the development of
law. In his article titled ‘ The Great Revolution in Jurisprudence’ (Hogaku
Kyokai Zasshi, vol 7 no. 6 page 6) Hozumi wrote: We cannot sit
comfortably on the tower of Natural Law. We cannot hold on to the
transcendental idea of justice. What then is the momentum of the revolution of
law? It is the scientific evolution in physics, biology, anthropology,
sociology etc. …..The jurisprudence alone cannot avoid the influence of this
trend. ….The evolution of science in the modern world is so significant. Mr.
Darwin found the great principle of the Natural Selection. Herbert Spencer has
brought one step forward in the Theory of Evolution.
（Apr.2018.to be continued)
II TRUST LAW in JAPAN
A
brief sketch of the trust law in Japan
By Yoshihisa NOMI (31.03.2015)
1 Characteristics of Japanese Trust Law
2006
1.1 Creation of a trust
Trusts in Japan can be
created in three ways. By way of contract, will or declaration of a settler to
become the trustee.
1.1.1 Creation by contract
A trust can be created by a
contract between the settlor and the trustee. This is the most common way of
creating a trust in Japan. There is no special requirements other than the
agreement between the parties for the contract to be effective. A trust
property is necessary for the trust but it does not have to be transferred to
the trustee at the time of the creation of the trust. A trust can be created
without the trust property. Such a contract will bind both parties to perform
their duties. As for the settler, if the property is not transferred at the
time of the contract, he has a duty to transfer the trust property as agreed
between the parties. As for the trustee, he owes a duty of loyalty and other
duties of the trustee even though he has no trust property to manage yet. In
short, trust creation is not a disposal of a property, it is an arrangement.
In a case of a trust of a
land, transfer of the title in the land register is not a prerequisite for the
creation of the trust. It is the general rule of property that the ownership of
a land is transferred between the parties by a simple agreement and
registration is only a requirement to assert the transfer of title against a
third party. This general principle will also be applied to trust creation.
1.1.2 Creation of trust by will
A trust created by will becomes effective at the time of the death of
the settlor. If a certain person is designated in the will as trustee, the
executor of the will or the heirs of the settlor or other interested party
shall call on the person designated as trustee whether he undertakes the trust
or not.
In practice creation of a trust by will is increasing, but not very
much. Because people who are interested in disposing their property after their
death can during their lifetime create a trust inter-vivos with a condition
that the beneficiaries designated in the trust instrument acquire their
beneficial rights only after the death of the settlor. It resembles the
revocable trust in USA, but in Japan the settler does not have a right to
revoke the trust, only a right to change the beneficiaries.
1.1.3 Declaration of trust (self-trust)
Declaration of a trust or a self-trust is a new method of creating
a trust provided by the Trust Act 2006. The settlor declares himself to be the
trustee, though this declaration must be authenticated by a notarial deed. It
is expected to be used in asset securitizations. Also a business corporation
may think it useful to partition its business using self-trust. Using a trust
each division of the business will have a separate patrimony. This method of
trust creation was criticized by specialists of civil procedure that such a
method will make it easy for the settlor to hide his property and fraud the
creditors. I think this accusation is groundless. Besides, fraudulent creation
of trust can be annulled by the creditors of the settlor. In practice
declaration of trust is not used very much.
1.2 Fundamental structure of a trust
1.2.1 Trust property legally separated from trustee’s individual property
A trust property does not have a status of legal entity, nonetheless it is
treated as a separate property from that of the trustee. Thus the creditors of
the trustee cannot reach the trust property to satisfy their claims against the
trustee in person. Trust property will not be involved in a bankrupt of the
trustee.
For the trust property to be treated separate from the trustee’s personal
property, if such property can be registered at the registry, it must have the
registration that the property is held by the trustee as trust property.
1.2.2 Beneficial interest and its nature
The nature of beneficial interest is still theoretically an important
problem, but most of the problems related to the nature of the beneficial
interest is solved by the provisions of the Trust Act.
Article 2 of the Trust Act
defines the beneficial interest as follows; The term "beneficial
interest" as used in this Act means a claim based on the terms of trust
pertaining to the obligation of a trustee to distribute property that is
among trust property to a beneficiary or to make any other distribution
involving the trust property (hereinafter referred to as a "distribution
claim as a beneficiary"), and the right to request a trustee or any
other person to carry out certain acts under the provisions of this Act in
order to secure such a claim. Thus beneficial interest consists of two
elements or two parts. One is the claim against the trustee for distribution of
the trust property. This is not a proprietary right on the trust property,
rather a personal right against the trustee. The other is the right to
supervise the trustee including the right to rescind the trustee’s act
exceeding his power. The Trust Law does not characterize the nature of this
right. Therefore the nature of the beneficial interest as a whole is not clear.
The academics disagree on the nature of the beneficial interest. The majority
characterizes the beneficial interest as a personal claim against the trustee.
But there are some academics who argues that beneficial interest is a real
right restricting the power of the trustee.
1.3 Administration of trust
1.3.1 Trustee’s power
1.3.1.1 Trustee’s power in general
The trustee as the title
holder of the trust property has in general power to manage and dispose the
trust property. But this can be restricted by the trust instrument. The scope
of the trustee’s power is determined by the trust instrument and the provisions
of the Trust Law. Whether a trustee has a power to borrow money for the trust
is determined by the interpretation of the trust instrument. To what extent can
the trustee’s power be limited, whether a “bare trust” is allowed is not clear
under the Japanese Trust Law .
1.3.1.2 Delegation of trustee’s power to a third party
Delegation of the trustee’s
power to a third party was limited under the Trust Act 1922. But the Trust Act
2008 relaxed the rule and now the delegation of trust administration is allowed
even though there is no provision in the trust instrument to allow it, if the
delegation of power to the third party is reasonable in light of the purpose of
the trust.
The relation between the
beneficiary and the third party who is delegated the power from the trustee is
an issue. The Trust Act provides that the third party thus delegated the power
has no direct duty against the beneficiary. The third party has a contractual
duty only against the trustee.
1.3.2 Trustee’s Duties
1.3.2.1 Duty of Loyalty and Conflict of Interest
The Trust Act Article 30 provides the duty of loyalty of the trustee (“A
trustee shall administer trust affairs and conduct any other acts faithfully on
behalf of the beneficiary“). Also certain types of conflicts of interest are
prohibited, such as self-dealing, transaction between two trusts administered
by the same trustee (Art.31), and conduct of the trustee with a third party
competing with the interest of the trust(Art.32).
The trustee’s act
violating the Art.31 (self-dealing etc.) is voidable and is also a ground for
the liability of damages (Art.40). If the trustee’s act is in competition with
the interest of the trust (Art.32), the beneficiary may consider that the said
act has been conducted in the interests of the trust property. This is
so-called the right to intervene. Beneficiary can also claim damages for such
acts.
Violation of duty of
loyalty is in general a ground for damages (Art.40). The Trust Act provides
that if the trustee gained profits by the violation of the duty of loyalty the
amount of the profits gained is to be presumed to the amount of loss to the
trust property. This is functionally a relief of so-called disgorgement of
profits. But because of the Civil Law background of the Japanese Law which does
not acknowledge disgorgement of profits, the Trust Act provides only that “the
gain by the trustee” is “presumed to be the damages” of the trust property.
Therefore, theoretically the trustee can against the claim on disgorgement of
profits defend himself by proving that the actual loss was less than the amount
of profits gained by the trustee.
1.3.2.2 Duty of care
The trustee owes a duty
of care which can be exempt partly but not entirely (Art.29).
The duty of care is
provided as a separate duty from the duty of loyalty. The duty of care focuses
on the damage to the trust property by the trustee’s negligent conduct, but the
duty of loyalty focuses on preventing conflict of interests between the trustee
and the trust property. The effect of the breach of duty of care is damages,
but the breach of duty of loyalty gives a relief of “disgorgement of profits”
gained by the trustee (Art.40).
Some scholars argue
that the duty of loyalty is in nature not different from the duty of care. In
the field of company law where the Company Act provides the duty of loyalty of
directors, the Japanese Supreme Court made a judgement in 1975 saying that the
duty of loyalty is not different from the duty of care, that it is only a
concretization of the duty of care.
In the practice of
trust business, such as in pension trusts or in investment trusts, it is very
common that the settlor of the trust appoints a person (usually investment
advisers) with a power to instruct the trustee in the investment of the trust
property. In that case the trustee has a duty to follow the instruction. The
person with the power of instruction (they are called “investment advisers” or
“investment managers”) orders the trustee how and when to invest the trust
property. One problem related to this structure of trust is the conflict
between the trustee’s duty of care and the duty to follow the instruction of
the investment advisor. What happens to the trustee’s liability if the trustee
followed the inappropriate instruction of the investment adviser? Does it
constitute a breach of the duty of care? Or is the trustee exempt from the duty
of care to the extent that he follows the instruction? Also a related problem
is what would be the duty and liability of an adviser who has power to instruct
the trustee. The adviser is not a “trustee” in the strict sense, but he would
be liable for the negligent instruction. Who can claim damages against the adviser,
the trustee or the beneficiaries?
1.3.3 Expenses of trust administration
Trustees can reimburse
the expenses from the trust property. Before the revision of the Trust Act in
2006 the previous Trust Act allowed the trustee to claim reimbursement not only
from the trust property but also from the beneficiary. This gave rise to a
series of litigation between the trustee and the beneficiary. In the 1990s many
local governments created the so-called land trust in which the local
government transferred their land to the trustee (trust bank) and the trustee
built buildings or other facilities on the land borrowing necessary money for
the construction from other financial institutions. According to the plan the
trust property was to receive income from the tenants of the building and repay
the borrowed money in 20 or 30 years so that at the end of the trust term the
trust property will be constituted of the land and the building without any
debts. But because of the recession the plan did not go well. The trust
property was left with heavy burden of debt. The trustee repaid the borrowed
money and claimed reimbursement from the beneficiary (the trustee is liable
against the trust creditors unless there is an agreement of exemption of the
personal liability of the trustee).The defendant beneficiary argued that there
was a special agreement between the parties that the trustee does not exercise
the right of reimbursement, or that there was a negligence of the trustee in
planning such a land trust. But the courts basically acknowledged the claim of
reimbursement of the trustee. After this experience, the new Trust Act 2006
reexamined the reasonableness of the trustee’s right of reimbursement against
the beneficiary and decided to eliminate the statutory right of the trustee of
the reimbursement against the beneficiary.
The trust banks have not yet accepted land trust under the new Trust Act,
but are considering to accept land trust again with a new structure, that is
the trust banks using the limited liability trusts (the trustee’s liability is
limited to the amount of the trust property. See Art.232) or using a clause to
limited the liability of the trustee when borrowing money from other financial institutions.
1.4 Beneficiary
1.4.1 The Nature of the Beneficial Interest (already explained above)
1.4.2 Acquisition of Beneficial interest
If the settlor and the
beneficiary are different persons, there is a problem of when and how the
person designated as beneficiary in the trust instrument will acquire the
status of beneficiary. In a case of a contract for the benefit of third party,
the third party acquires the right at the time he/she consents to accept the
right. A trust created by a contract is considered to be one type of a contract
for the benefit of third party. But different from the general rules on third
party beneficiary, the Trust Act provides that the person designated as
beneficiary acquires the status of the beneficiary at the time of creation of
the trust.
Under the old Trust Act
in which the beneficiaries were liable for the reimbursement from the trustee,
there was a problem of whether a beneficiary can waive his status of
beneficiary to escape the liability of reimbursement. Under the present Trust
Act beneficiaries are liable against the reimbursement of expenses only when
the beneficiary personally agreed to accept the liability. This agreement is
not a part of the trust instrument. It does not bind the successive
beneficiary.
A trust can be created
with successive beneficiaries. For example, a husband creates a trust
designating his wife as the first beneficiary and if she dies his daughter will
be the next beneficiary etc. There are several problems related to this kind of
trust.
(1)Theoretically, by
designating successive beneficiaries it is possible to create a trust which can
last for several hundred years. The Japanese law does not have the rule of
perpetuity and therefore there is no rule except public policy (Art.90 of the
Civil Code which mollifies the juridical act against good moral and public
order.) to restrict such everlasting trust. But the Trust Act provides
limitation of such trusts. “Article 91 A trust
with provisions that upon the beneficiary's death, the beneficial interest held
by said beneficiary shall be extinguished and another person shall acquire a
new beneficial interest (including provisions that upon the death of the
predecessor beneficiary, another person shall acquire a beneficial interest as
the successor beneficiary) shall be effective, in cases where any beneficiary
who is alive when 30 years have elapsed since the creation of the trust
acquires a beneficial interest pursuant to said provisions, until such
beneficiary dies or until the beneficial interest of such beneficiary is
extinguished.”
(2)Practically, how to
tax such a trust is a very important issue, but I must omit this problem.
(3) If a creation of such a
trust infringes the right of a certain heir who has a legally reserved portion
to the estate of the settlor, the heir with legally reserved portion can claim
for abatement of the trust to the extent necessary to preserve that legally
reserved portion. The problem is the effect of the abatement of the trust. Is
it the creation of the trust itself that is to be nullified or only the acquisition
of the beneficial interest by the beneficiary? In the latter case the trust
remains unaffected and only the beneficial interest would be transferred to the
claimant.
1.4.3 Trust Administrator, Trust Supervisor, Agent of the Beneficiary
In a trust where the
beneficiaries cannot from various reasons protect their own interests it is
necessary to establish a mechanism for the protection of these beneficiaries.
The Japanese Trust Act provides three institutions; trust administrator, trust
supervisor and beneficiary’s agent.
In a trust in which all the
beneficiaries are of future beneficiaries, a trust administrator can be
appointed to protect the interest of the future beneficiaries (Art.123). The
trust administrator has all the powers of a beneficiary and exercise these
rights in its own name but for the benefit of the future beneficiaries.
In a trust where
beneficiaries exist but because they are infants or mentally handicapped and
are difficult to exercise their own right, a trust supervisor can be appointed
for the protection of these beneficiaries (Art.131). Also where the number of
the beneficiaries is large it is sometimes difficult to make a unanimous
decision of the beneficiaries. An appointment of a trust supervisor will in
such a case facilitate decision making of the beneficiaries. If a trust
supervisor is appointed he has the exclusive right and the beneficiaries cannot
exercise their rights. This may be uncomfortable for the beneficiaries who do
not want to hand over all his rights to a trust supervisor. Therefore instead
of appointing a trust supervisor, a beneficiary’s agent can be appointed (Art.
138). Even if an agent is appointed the beneficiaries retain their core
rights.
1.5 Modification, Partition and Merger of trusts
1.6 Termination of a trust
1.7 Special types of trust
1.7.1 Trust without beneficiaries (Art.258)
A trust can be created
for a certain purpose and with no beneficiaries. This is similar to the purpose
trust in UK. It can be created by contract or will, but not by a declaration of
a trust. Because there is no present or future beneficiaries in this type of
trusts, the settlor supervises the trustee instead. It is also possible to
appoint a trust administrator.
The duration period of a
trust without beneficiaries may not exceed 20 years.
1.7.2 Charitable trusts
Charitable trusts are
created by contract or by will, but need approval from the government or from
the local government. The structure of charitable trust is the same with the
trust without beneficiaries. At the time the revision of the trust law was
discussed also a new frame work for charitable organizations was planned in the
government. Because we thought charitable trusts should be under the same
framework for charitable organizations, the provisions on charitable trust were
excluded from the Trust Act 2006 and we waited for the law on charitable
organizations to be enacted. And in the meantime the provisions of the previous
trust act were maintained, though in a separate Act on Charitable Trusts. Now
that the new law for the charitable organizations has been enacted, the
government is planning to reopen the discussion on charitable trusts and
discuss the compatibility with the Trust Act 2006 and the relation to the
governmental approval system for the charitable organizations.
2 Trust Business in Japan
2.1 License for trust business
To do a trust business
the trustee must acquire a license for the trust business provided in the Trust
Business Act. Only stock companies with certain qualification can acquire
license for the trust business. Therefore individuals, partnership and other
type of organizations not in the form of a stock company cannot do trust
business. Trust banks are not trust companies which are given license according
to the Trust Business Act, but are allowed to do trust business by a special
law which allows banks to do trust business.
2.2 Commercial trusts and private trusts
In Japan many scholars
and practitioners use the term commercial trusts and private trusts. Trusts
used in the business is usually referred to as commercial trusts, such as
investment trusts or trusts used in a securitization scheme. And a private
trust is a trust in a family trust or a trust to support disabled individuals.
But as for the duties of the trustee or the rights of the beneficiaries there
is no difference between commercial trust and private trust. In Japan it is
more important to differentiate between trusts to which the Trust Business Act
is applied and trusts to which the Act does not apply. In the former type of
trusts a license of trust business is necessary. From this view point trust it
is appropriate to divided trusts as business trusts and non-business trusts.
For example, if a trustee undertakes a trust for the support of a disabled person
only once and not repeatedly, then this is a non-business private trust for
which a license for business trust is not necessary. But if the same person
undertakes the same kind of trust repeatedly several times, then this is
regarded as doing business and need license for business trust.
2.3 Some examples of trusts used in business
In practice the trusts
banks are the main player as trustee, though a trust company can also undertake
trusts.
Investment trusts,
pension trusts, trusts used in securitization scheme, trusts for the management
of the land, patent trusts, trusts for the support of disabled or mentally
handicapped person, trusts for the wealth transfer to the next generation,
charitable trusts are some example of trusts undertaken by the trust banks.
3
Cases
There
are not many cases which went to the court. The following cases are some of
them.
3.1 Land trust cases
In the 1990s many landowners
made a contract with a trust bank to create the so-called land trust. In a land
trust, (1) the owner of a land transfers the ownership the land to the trustee
to create a trust. (2) The trustee accepts the trust and constructs a
commercial building etc. on the land with money borrowed from other financial
institutions (the trust banks can lend the money to the trust but this was
considered to be a conflict of interest and therefore was avoided). (3) If the
land trust scheme had developed as planned the borrowed money would have been
repaid by the income from the commercial building and after 20 or 30 years the
trust property, now land and the building, would have returned to the settlor
or the beneficiary. But because of the recession the trust property did not
yield enough money for the repayment. Instead the trustee repaid the borrowed
money from its own pocket. (4) And trustee claimed reimbursement of these
expenses from the beneficiary. In these cases the old Trust Act 1922 was
applied. The Trust Act had a provision which allowed the trustee to claim
reimbursement of expenses against the beneficiaries.
In many of these
lawsuits actually the local governments were the settlor/ beneficiary and
became the defendants of the lawsuit. They argued that there was a special
agreement between the parties to exclude the trustee’s right of reimbursement.
But the courts acknowledged the trustee’s claim for reimbursement.
Under the new Trust Act an
individual agreement between the trustee and the beneficiary is necessary for
the reimbursement against the beneficiary.
3.2 Set-off
In Japan the trustee (a
trust bank) often lends money to the beneficiary. In a case of non-performance
of repayment by the beneficiary the trustee may seek to set off its obligation
to distribute trust property against the debt of the beneficiary. Whether to
allow such a set off was an issue in the lower courts.
Lower courts’ decisions
are divided in whether to allow the set off between these debts. Majority of
the academics allow the set off. They argue that if the beneficiary’s claim
against the trustee for distribution of trust property is in money, the
trustee’s debt and the beneficiary’s debt are of the same kind and therefore
the requirement of mutuality is met. Against this opinion some scholars
criticize that the trustee refusing to perform its obligation to distribute the
trust property to the beneficiary and instead claiming set off to satisfy
trustee’s own credit is against the duty of loyalty.
Similar problem arises
when the trustee creates pledge over the beneficial interest to secure its
credit against the beneficiary. The majority of academics consider that
creation of such a pledge and exercise of the pledge is not against the duty of
loyalty of the trustee.
3.3 Inappropriate instructions of the investment adviser and the trustee’s
duty of care
In investment trusts it
is common that an investment advisor is appointed by the settlor and the
trustee is to follow the instruction of the investment advisor. If such a
scheme is created by the trust instrument it the duty of the trustee to follow
the instruction of the investment advisor. The problem arises when the
instruction is inappropriate and will damage the value of the trust property.
Should the trustee reject the instruction of the investment advisor or follow
it? This is a problem of the scope of the duty of care of the trustee. Several
lawsuits were filed before the court but have not yet come to any conclusion.
4
Some fundamental theoretical problems
4.1 Compatibility of trust in the Civil Law System or the Nature of
Beneficial Interest
As already mentioned above the nature of the beneficial interest is the
core problem to understand trust. The majority of the academics characterize
beneficial interest as personal right against the trustee. But if so, how do we
explain the beneficiary’s right to rescind the transaction of the trustee which
does not fall within the scope of the trustee’s power and recover the property
from the third party? If the trustee has the title or the ownership of the
trust property what is meaning of the restraint to the trustee’s power over the
trust property?
And why does the beneficial
interest reflect the changes and fluctuation of the trust property? For
example, if the trust property increases the beneficial interest will also
increase.
All these phenomena
cannot be comfortably explained from beneficial interest=personal right
doctrine. But most of these problems are solved by the provisions in the Trust
Act, so that these questions, still important for the academics, are only of
theoretical nature.
4.2
Is a trust a contract?
Different from the
Anglo-American understanding of trust, under the Japanese law a trust created
by the settlor and the trustee is a contract. The existence of the trust
property is not necessary at the time of concluding a trust contract. Though the
majority of the academics understands that trust property is essential for the
trust so that at some point property must be transferred from the settlor to
create the trust property. But some academics goes further that trust property
is not essential for a trust. For example, a trust created without any initial
trust property can still borrow money from the third party if the trustee
guarantees the repayment. The borrowed money will constitute the trust
property. The trust will use this money for investment or to do business etc.
If this kind of trust is allowed trust becomes one step closer to a
corporation.
Another problem
discussed in the context of trust and contract is the nature of the duty of the
trustee. If a trust is a contract it is possible to exempt the trustee from its
duties. It is possible to opt out all the duty of loyalty or the duty of care
be a contractual agreement. If not how do we explain the limitation of freedom
of contract in a trust?
4.3 How do we explain the trust property being separated from the trustee’s
individual property?
Trust is not a legal entity
but the trust property is treated as a separate property from trustee’s
individual property. The French trust law or the Trust Law in Quebec explain
this with the notion of patrimony. A trust creates a separate patrimony. In
Japan there is no theoretical explanation. How to explain the nature of trust
property is a headache in Japanese Law.
4.4 Trust law rules vs Law of succession
Trusts create a tension
with the Law of Succession. The Trust Act 2006 allows the so-called successive
beneficiaries. A difficult problem arises when the beneficial interest of the
first beneficiary ends at his/her death and at the same time the second
beneficiary acquires his/her beneficial interest. The beneficial interest of
the second beneficiary will end at time of his/her death and at this point the
third beneficiary acquires his/her beneficial interest and so on. The Law of
Succession does not allow such kind of successive legatee or devisee. But using
trust the settlor can circumvent the restriction of the Law of Succession. The
trust lawyers explain that beneficiary and legatee/devisee are different and
therefore different rules are to be applied. But some specialist of Civil Law
strongly oppose to the rule provided in the Trust Act.