International Business Law Report: Trusts in Commercial Transactions

This report provides a comprehensive overview of trusts within the framework of international business law, focusing on the UK legal system and its principles of equity. It delves into the core concepts of trust law, including the roles of trustees, beneficiaries, and the settlor, as well as the requirements for establishing a valid trust, such as certainty of intent, subject matter, and beneficiaries. The report examines various types of trusts, including express and implied trusts, and explores specific applications like discretionary, interest in possession, bare, charitable, and protective trusts. Furthermore, the report analyzes the practical use of trusts in commercial transactions, such as investment environments, pension funds, and large funding deals, highlighting their significance in managing assets and ensuring compliance with corporate strategies.

International Business
Law

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The formation and security of asset funds, which have been typically owned by one party for
the benefit of another, are the subject of English trust law. Trusts are a product of English
property and responsibilities law, although they have a long tradition in Commonwealth and
American jurisdictions. When plaintiffs in property disputes were unhappy with the common law
courts, they petitioned the King for a fair and just outcome. On behalf of the King, the Lord
Chancellor established a parallel justice system in the Court of Chancery, known as equity.
England's courts of equity and common law were combined after the Judicature Act of 1873, and
equitable standards predominates1.
The goal of this work is to assess the basic concepts of equity as part of the UK legal
system, as well as to examine how trusts are used in commercial transactions and how issues are
handled as per contract and trust law norms.
TASK 1
A trust is a legal agreement in which one person (the 'trustee') holds property for the benefit
of another person (the 'beneficiary'). The concept of trust law is based on the idea that several
people can share property rights at the same time. A third party, known as the 'settlor,' may have
provided the trust's property. These roles are often filled by the same person in a commercial
trust. A valid trust requires three guarantees, according to the law. To begin with, there must be
assurance of intent – that is, the intent to establish a trust, while some trusts are implied by
statute2. Second, the subject matter of the trust must be clear – what properties or rights are
protected by it? Finally, beneficiaries must be certain.
Trusts of client or consumer funds are implied by statute in certain cases, such as insurance
law. A very classic applications of trusts in this field are specific trusts that operate in accordance
with insurance law to ensure that money paid to a broker is covered from the broker's possible
financial distress before it is passed over to the insurance company.
In general, trust instruments do not need to follow any specific formalities; they may be oral
or written. The only prerequisite is that they demonstrate a tendency to create trust. The
exceptions are when the trust is created in a will, when it is a transfer of property, when it is a
1 Yoon J, 'Measures For Effective Management Of Real Estate Trust Through Commercial Trust' (2020) 34
BUSINESS LAW REVIEW
2 Morgan J, “Relational Contracting: Trust, Business and Law” [2017] Contract Law Minimalism 61

transfer of existing equal interests, and when it is a transfer of land. A trust can be established
either explicitly (an "express trust") or implicitly (an "implied trust"). In certain cases, they are
expressly made by the individuals. When a "settlor" directly establishes a trust, it is known as an
express trust.
In English law, express trusts must have four elements in order to be enforceable: capacity,
certainty, constitution, and formality. The ability of the settlor to establish a trust in the first
place is referred to as capacity; in general, anyone capable of keeping property may create a
trust. There can be exceptional cases for regulatory authorities and companies, and minors who
cannot normally own property may create trusts under certain circumstances. The three
certainties needed for a trust to be true are referred to as certainty3. The trust instrument must
demonstrate certainty of purpose to establish a trust, as well as certainty of the trust's subject
matter and beneficiaries (or objects). The trust will collapse if there is any doubt for whatever
cause, but the courts have devised ways to circumvent this.
The property must have been passed from the settlor to the trustees for the trust to be
legitimate, according to its constitution. If property has not been sold, the future trustees and
beneficiaries are volunteers, and an equal maxim states that "equity will not support a volunteer,"
so the courts will not take the case into consideration. When moving land, formality refers to the
particular language or forms used. Unless it is made as a will, no formal language or
documentation is needed for chattels.
The beneficiaries are entitled to certain legal rights under the law. To begin with, they have
the legal right to sue a specific individual in a common law case. Second, in law, the right to
occupancy of a home may be exercised against others in particular4. Third, the right to take
action against trustees. This right can only be enforced in equity courts. Fourth, rights in rem
covering issues that can only be enforced in equity, such as property agreements and third-party
trust property receivers. Discretionary trusts, Interest in possession trusts, Bare trusts, Charitable
trusts, Protective trusts, and Accumulation and maintenance (“A&M”) trusts are all examples of
trusts.
3 Oh S, 'Limitation In The Application Of The Revised Trust Act In The Real Estate Trust Practice' (2018)
36 Commercial Law Review
4 Stoltenberg C, 'LAW, REGULATION AND INTERNATIONAL BUSINESS' (2019) 40 American
Business Law Journal

The most versatile type of trust is a discretionary trust, which allows the trustees to use and
allocate the trust's income and capital at their discretion. When the trustees of a discretionary
trust collect revenue, such as rentals on a property or dividends on stocks, they have the option to
keep or allocate it completely as they see fit. For example, the trustees may keep all of the
income in the trust or distribute some portion of it to one or more of the beneficiaries.
Discretionary trusts are usually formed by a settlor who wants the assets to support a group of
individuals but doesn't want to be too specific about how each person will benefit5. As a result, it
is common for the settlor to name a large number of beneficiaries, such as children,
grandchildren, and extended family members. The beneficiaries of a discretionary trust have no
automatic right to all of the trust's profits or property, and they have zero legitimate privileges
underneath the trust's provisions. The only hope or expectation the beneficiaries have is that the
trustees will use their discretionary authority to add some of the income or capital to its gain.
Beneficiaries of discretionary trusts may earn no income or capital at all in certain cases.
The trustees of a life interest or interest in possession trust do not have the authority to
accumulate profits within the trust. The trustees of an interest in possession trust are required to
pay the trust's income to a named beneficiary or beneficiaries. The trustees are not allowed to
retain any of the profits in the trust. A "life tenant" is the beneficiary of an interest in possession
trust. Every year, after taxation and expenditures, this life tenant is legally entitled to the trust's
net income. The trustees have no right to keep all of the trust's profits under this type of
arrangement – they don't have any accumulation powers6. The life tenant in a common interest in
possession trust would be entitled to profits for the remainder of his or her life. The word "life
tenant" simply refers to the individual who is entitled to the trust's income. A right to the trust's
profits for the remainder of one's life is not always implied by a life tenancy. A life resident, for
example, may be granted an income right until a certain age or point in time. An interest in
ownership arises if a person has a "current right to enjoy the profits of a settlement," as we'll see
later. Following that, the trust's money would transfer to another beneficiary known as a
"remainder-man." The remainder-man is also known as the "reversionary beneficiary," since the
trust capital will revert to this individual upon the death of the life tenant. For example, a trust
may be set up as such three beneficiaries each receive one third of the trust's annual income.
5 Tromans S, 'INTERNATIONAL LAW AND UNCED: EFFECTS ON INTERNATIONAL BUSINESS'
(2018) 4 Journal of Environmental Law
6 'Obligation Of A Depositary Of Trust Funds To The Cestui-Que-Trust' (2019) 4 Columbia Law Review

An A&M trust is a "hybrid" trust that combines the benefits of both a discretionary and an
interest in possession trust. It benefited from a number of tax breaks, which have since been
eliminated since March 22, 2006. Parents and grandparents often established A&M trusts for the
benefit of their children and grandchildren.
A "bare" trust is perhaps the most basic form of trust arrangement. A bare trust is perhaps a
nominee system in which the trustee maintains the beneficiary's property and acts in compliance
with the beneficiary's preferences7. Although the trustee is the legal owner of the trust property,
the trustee has no authority over the assets of the trust, and the beneficiary has absolute rights to
the trust's assets. A parent opening a bank or building society account for his child is an example
of a bare trust arrangement. The parent owns the property on behalf of the child as a bare trustee.
Any interest received on the bank or building society account is effectively the child's salary, and
the child has the right to both the income and the money in the account at any time.
The majority of charities are set up as charitable trusts under the law. A charity's Board of
Trustees will usually determine how the trust's profits and resources will be spent. Charitable
trusts are essentially discretionary trusts whose assets must be used for charitable purposes.
These trusts are tax-free since they are set up as registered charities.
A protective trust is a form of trust that provides the beneficiary with a right to the trust's
profits in the same way that an interest in possession does. The trust's terms, however, state that
the beneficiary's right to benefit will end if he or she files for bankruptcy or tries to sell or
otherwise dispose of his or her life interest. A settlor will consider a protective trust if he or she
wants a beneficiary have an income right but is concerned that perhaps the beneficiary might try
selling the life interest at a certain point in the future8. The settlor establishes a protective trust to
give the beneficiary an income stream while also ensuring that the trust's assets are not
jeopardized by the beneficiary's reckless behaviour.
Trusts aren't as successful as they once were at lowering tax liabilities. Since successive
governments have brought trust taxation in line with personal and corporate tax rates, there is
little tax benefit to setting up a trust – particularly when the cost of managing one is taken into
account. Trusts, on the other hand, give you more leverage over how your assets are used and
handled.
7 'The Beneficiary Of A Contract Not A Cestui Que Trust' (2018) 12 Harvard Law Review
8 Zikun I, 'The Construction Of Trust In Civil Law: Nonfiduciary Fiduciary Contract' (2017) 17 Civil Law
Review

TASK 2
Trusts are frequently associated with private wealth, but they can also be extremely useful in
business transactions. In practice, we've all encountered them in investment environments, where
they're known as unit trusts, and in pensions, where they're either the pension fund's arrangement
or employee benefit trusts that serve as storage mechanisms for stocks and assets. They can be
used to hold protection on behalf of enterprises of lenders in large funding deals, and they're used
to hold votes attached to shares in joint ventures or companies with various groups of
cooperating shareholders to ensure that negotiated corporate strategies are followed by the joint
venture business9. Trusts entail the establishment of three "legal certainties," which are unlikely
to be difficult in a commercial setting. First, the party offering the trust assets must demonstrate a
specific motive to create a trust. Second, it should be clear the properties are included in the trust.
Finally, it must be obvious who would profit from it. In a commercial setting, a trust document
would almost always define these.
Certain characteristics of the trust enable it a much more useful commercial vehicle.
Separate patrimony, beneficiary incapacity, versatility, tax treatment, and confidentiality are all
features of this structure. The segregation of the trust fund so that it does not form part of the
trustee's or beneficiary's patrimony is known as separate patrimony. It basically means that
neither the trustee nor the beneficiaries' personal creditors can have any claim to the trust land.
Incapacity of the beneficiary means that the beneficiary will not be able to retain property under
his own name under certain cases, whether due to a lack of legal ability or for fiscal or other
regulatory purposes.
The terms of any trust will, in general, be whatever the settlor and trustee agree on, which is
a flexibility feature10. Except for a few exceptions, such as mutual fund trusts, trusts are subject
to no regulatory oversight. Since the beneficiaries lack legal personality, they are often regarded
as direct holders of the corresponding trust assets so treated as such: this flow-through treatment
for tax purposes is especially relevant in commercial transactions. This is a feature relating to the
tax treatment. In both the establishment and operation of a trust, the right to hide property
ownership behind the trustee's office and within a community of beneficiaries is inherent, is the
feature of confidentiality.
9 Edelman J, and Degeling S, Equity In Commercial Law (Lawbook Co 2018)
10 Taylor R, Contract Law (Oxford University Press 2020)

Commercial trusts can indeed be categorized into three types. To begin, there are trusts for
investment purposes, which are a type of investment fund. Unit trusts, mutual fund trusts, and
employee benefit trusts are all examples of trusts. Second, trusts may be used as a security
system, as they are a tool for storing money or other assets in a different pool for a particular
reason. This may be for the purpose of providing coverage for a loan or as a means of self-
insurance to cover any future lawsuits against the trust's beneficiaries11. Debenture and bond
trusts, as well as sinking fund trusts, are examples of security trusts. Finally, trusts that operate a
company or trade. Voting trusts, investment trusts, financial products systems, structured
finance, and securitization are just some of the structures that fall under the corporate intent trust
umbrella.
While certain commercial arrangements can be examined through the lens of a beneficiary
trust, determining where the beneficial interest in the trust fund at any given time can be
challenging. Indeed, identifying an individual as the trust's beneficiary may not be appropriate
for tax or regulatory reasons. It is not possible to create a legal trust under English law without
beneficiaries, except under very specific circumstances12. Several jurisdictions, on the other
hand, have passed laws allowing the formation of trusts for specific purposes, or, in certain
circumstances, trusts including both beneficiaries as well as purposes.
A trust is an equity creation, not a common law one. Equity is the set of laws that originated
from the rules that were applied and enforced by the Court of Chancery prior to the Judicature
Act of 1873. All courts implemented and enforced the rules of equity and common law at the
same time. Equity gives common law founded on universal values a new sheen. The aim is to
give people who are disadvantaged by the English courts framework equality and justice. Certain
rights and principles that were not accepted by the common law have been recognized by equity.
When A and B enter into a contract, C cannot take full advantage of a contract, according to the
common law. The contract does not have any privity. If the settlor ends up dead, the confidence
becomes a bipartite arrangement. The beneficiaries cannot take advantage of the agreement
unless there is no privity. As a result, it's one of Equity's most complex principles. The trust is
widely regarded as the English legal system's most recent addition. The beneficiary's duty to the
11 International Trade And Business Law Annual (2018)
12 International Business Law (Hans Reitzel 2020)

trust was not one for which he could demand legal redress, since there was none. The
responsibility was one based on trust.
A contract is a tool for transferring control of something to someone else or entrusting
someone with a responsibility. The contract can give rise to any number of rights and
obligations. Furthermore, the contract will favour a third party, according to the civil code. The
same concept applies to trusts, in which the beneficiary benefits from the arrangement reached
between the settlor and the trustee13. The English contract law, on the other hand, is purely an
interparty matter. This rule does not apply to third parties who profit from a contract. Another
explanation for the trust concept's origins in equity is that it is a result of equity. As can be seen,
despite the civil law system's lack of a trust principle, there is the concept of a third party
benefiting from a contractual relationship.
The contract and the trust are similar in that they are both written documents that can be
used to manage the property of others. The contract is so versatile that it can be applied to almost
any area of law. Despite these similarities, it is important to remember that in a contract, the
consent of the contracting parties is required, while consent is not a deciding condition in the
trust definition. This is due to the fact that trusts can be established by legislation. A perfectly
unilateral act may also build trust.
In family matters, the trust is often used when parents set aside a portion of their property
for their minor children. Children under the age of eighteen are deemed incapable of managing
their finances14. As a result, a trust may be created, with the parents appointing a trustee to
oversee the properties. The guardianship device is used in the English law to control the property
of minors and those who are deemed unfit to manage their own property. Many people appoint
trust firms or a specific individual as executors of their estates in their wills. As a result, no trust
is created, and instead, a guardianship situation occurs.
A trust is not a legal body, but rather a legal agreement. Although the trustee must manage
the trust's properties for the good of said beneficiaries, any contracts prepared in accordance with
that of the trust should be in the trustee's name, not at all the trusts. The trustee may have a right
to indemnification from the trust fund for most damages incurred in connection with the trust,
although this is clearly limited to the trust fund's assets. This tends to mean that even if the
trustee enters into a contract with a third party relating to trust business (such as an agreement
13 Săraru C, Contemporary Challenges In The Business Law (2019)
14 Richard Schaffer, Filiberto Agusti and Lucien J Dhooge, International Business Law And Its Environment (2020).

signed or a loan), the third party will be entitled to sue the trustee directly. If the trustee has an
indemnity right, it is limited to the fund's assets at the time of the lawsuit. Any deficit would
have to be covered out of pocket by the trustee15. Trustees should be aware of this and, when
entering into contracts with third parties, should inform them of the trust's existence and aim
specifically to limit their responsibility to the amount of assets in the trust fund at any given time.
The value of the trust fund will fluctuate as the value of investments changes, and trustees must
be aware of this.
The Cayman Islands passed a trust policy reform with the aim of clarifying the issue of
"invalid testamentary dispositions" or "sham trusts." The amendment, known as the Trusts
(Amendment)(Immediate Effect and Reserved Powers) Law 1998, entered into force on May 11,
1998, and now is part of Part III of the Trusts Law (2011 Revision).
This case's decision serves as a valuable reminder that, in order to prevent being legally
liable, Trustees can first apply to the Court for permission to defend proceedings and an
indemnity out of the Trust funds to cover the costs and expenses of doing so (Beddoe relief).
Second, when entering into contracts with third parties, ensure that contractual restrictions and
restricted recourse clauses are in place; and third, make sure such contracts are signed into it by
Trustees "in its capacity as Trustees."
It's important that the trustee maintains his or her independence and maintains proper control
of the trust's assets. If the settlor proceeds to exercise authority over all the trust assets by
maintaining profit or control, or by giving orders to the trustees, the trust might well be deemed
invalid. Many who are unfamiliar with the trust principle are often worried about entrusting their
property to a trustee16. This problem can be alleviated if the trust principle and the distinction
between legitimate and advantageous ownership are clearly understood, and indeed the trust is
regulated by a trustworthy trust statute that can be implemented in a respectable jurisdiction.
CONCLUSION
It is concluded from the above discussion that, equity and trusts is a distinct branch of
English law based on a set of principles established by the Courts of Chancery with the goal of
balancing the legal system, especially the Common Law. The law of trusts was created as a
supplement to the law of property to address circumstances in which one individual has legal
15 Karl-Heinz Böckstiegel, Perspectives Of Air Law, Space Law, And International Business Law For The
Next Century (Carl Heymanns Verlag 2020).
16 Michael P Litka, Cases In International Business Law (PWS-Kent Pub 2020).

title to a property but the courts determine that it is reasonable, just, or "equitable" for another to
benefit from it. There is now a clear distinction between legitimate and beneficial ownership: the
legal owner is referred to as a "trustee" (because the property is "entrusted" to him), while the
beneficial owner is referred to as a "beneficiary." there exist relationship between the laws of
trust to that of the English law of contract. Both of them are different but have connection in
terms when any legal contract relates to the trust or any asset associated with it.

REFERENCES
Books and Journals
Edelman J, and Degeling S, Equity In Commercial Law (Lawbook Co 2018)
International Business Law (Hans Reitzel 2020)
International Trade And Business Law Annual (2018)
Karl-Heinz Böckstiegel, Perspectives Of Air Law, Space Law, And International Business Law
For The Next Century (Carl Heymanns Verlag 2020).
Michael P Litka, Cases In International Business Law (PWS-Kent Pub 2020).
Morgan J, “Relational Contracting: Trust, Business and Law” [2017] Contract Law Minimalism
61
'Obligation Of A Depositary Of Trust Funds To The Cestui-Que-Trust' (2019) 4 Columbia Law
Review
Oh S, 'Limitation In The Application Of The Revised Trust Act In The Real Estate Trust
Practice' (2018) 36 Commercial Law Review
Richard Schaffer, Filiberto Agusti and Lucien J Dhooge, International Business Law And Its
Environment (2020).
Săraru C, Contemporary Challenges In The Business Law (2019)
Stoltenberg C, 'LAW, REGULATION AND INTERNATIONAL BUSINESS' (2019) 40
American Business Law Journal
Taylor R, Contract Law (Oxford University Press 2020)
'The Beneficiary Of A Contract Not A Cestui Que Trust' (2018) 12 Harvard Law Review
Tromans S, 'INTERNATIONAL LAW AND UNCED: EFFECTS ON INTERNATIONAL
BUSINESS' (2018) 4 Journal of Environmental Law
Yoon J, 'Measures For Effective Management Of Real Estate Trust Through Commercial Trust'
(2020) 34 BUSINESS LAW REVIEW
Zikun I, 'The Construction Of Trust In Civil Law: Nonfiduciary Fiduciary Contract' (2017) 17
Civil Law Review