1. Introduction

By August 21, 2011, all EU member states had to transpose the new directive on public procurement in the fields of defense and security^[1],[2] (hereinafter: “Defense and Security Directive”) into national law. The directive introduces new rules for governments and their agencies when awarding security and defense procurement contracts, a market worth more than EUR 80 billion annually.^[3]

The significance of the directive is thus considerable. This note will describe the background of the directive and provide an overview of some of the major differences between the directive and the “Public Sector Directive”^[4] that until now have governed the award of all contracts above the relevant thresholds (with the exception of entities operating in the water, energy, transport and postal service sectors^[5]), including those in the defense sector.

2. Background

Prior to the enactment of the Defense and Security Directive, many member states regarded the rules of the Public Sector Directive unsuitable for awarding contracts in the defense sector.^[6] Hence, most member states avoided applying the EU procurement rules^[7] to the effect that in some member states as little as 1% of the annual defense procurement was awarded in accordance with the EU rules.^[8]

The purported legal basis for this was an almost automatic application of article 346 of the Treaty on the Functioning of the European Union.^[9],[10] This provision allows member states to “take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material”, provided that certain conditions – including a requirement of necessity^[11] – are met. The application of this exemption thus potentially permits member states to procure defense material without adhering to the EU treaties or secondary legislation such as the Public Sector Directive.^[12]

However, as the conditions for invoking article 346 are strict and according to the European Court of Justice limited to ”exceptional and clearly defined cases”^[13], an almost automatic application of the exemption was clearly unwarranted.^[14]

To improve the situation and limit the fragmentation of the European defense market, the Defense and Security Directive was proposed in 2007 as a legal instrument tailor-made to the specific nature of sensitive purchases within the defense sector. By taking into account the particular requirements of those purchases – such as security of information and security of supply – while at the same time providing the procuring entities with the necessary flexibility^[15], it was the Commission’s intention to create a level playing field aimed at establishing a truly European defense equipment market.^[16]

3. Applicability

The Defense and Security Directive applies to purchases made by the state, regional or local authorities, or bodies governed by public law, as well as certain “contracting entities”, that exceed the current thresholds^[17] and fall within the material scope of the directive. Thus, the personal scope of the directive (as well as the definition of what constitutes a public contract) is identical to the scope of the Public Sector Directive and the applicability depends only on the subject matter of the contract.^[18] If a purchase is covered by the Defense and Security Directive, the Public Sector Directive does not apply and vice versa.^[19]

The material scope is defined in article 2 as supply contracts for military and sensitive equipment (including parts thereof); works, supply and services directly related to this equipment; and works and services for specifically military purposes or works and services that themselves are sensitive.

The term “military equipment” includes equipment specifically designed for military purposes as well as equipment that have been adapted for military purposes.^[20] According to the Commission, in order for equipment originally developed for the civil market to be adapted for military purposes, the equipment must have “distinguishable military technical features” and be able to carry out clearly military missions.^[21] Regrettably, this definition leaves open a fair amount of room for interpretation. For instance, it remains very much an open question to what extent a rifle originally developed for the civil market, and thus not specifically designed for military purposes, must have been adapted for it to have “distinguishable military features”.^[22]

However, equipment not designed or adapted for military purposes is covered by the directive if the equipment can be considered “sensitive”. This requires that the equipment in question has a security purpose – e.g. border protection or police activities^[23] – and involves, requires and/or contains classified information.^[24]

4. Innovations and differences from the Public Sector Directive (2004/18/EC)

a. Procedures available to the contracting authorities

To ensure the flexibility, that – as described above – was one of the major concerns behind the enactment of the Defense and Security Directive, the directive gives contracting authorities unrestricted access to apply the “Negotiated procedure with publication of a contract notice” when awarding contracts.^[25] This is arguably the most substantial difference from the Public Sector Directive^[26] as the use of the “negotiated procedure with publication of a contract notice” under this directive is available only in a few, strictly defined, exceptional circumstances.^[27]

While this allows for a more flexible procurement process, the flexibility accorded to the contracting authorities should not be overstated. In order to secure competition, the procedure still requires the publication of a contract notice in the Supplement to the Official Journal on the basis of which at least three candidates shall be invited to submit tenders.^[28] Thus, prior to negotiating with the tenderers, the contracting authorities must still draw up the specifications that the tenders should be based on, and the negotiation itself has the limited purpose of adapting the submitted tenders to the contracting authority’s requirements.^[29] When considering furthermore the strict obligation to treat the participants in the negotiation on equal terms^[30] and the often substantial resources that separate negotiations with three or more parties require, the flexibility deriving from the “negotiated procedure with publication of a contract notice” is somewhat limited.

The flexibility offered by the Defense and Security Directive is additionally diminished by the fact that the directive – in contrast with the Public Sector Directive – does not allow the use of the so called “open procedure”. The view of the Commission is that this procedure is “inappropriate”^[31] considering that it would involve sending the specifications to anyone who requests them. This view might be correct with regard to some purchases but arguably not in all cases, such as procurement of ammunition, where the need to restrict the information flow is limited or even non-existing.

b. Rules on subcontracting and security of information and supply

The Defense and Security Directive allows a contracting authority to require a successful tenderer to subcontract a share of the contract (not exceeding 30 %) to subcontractors.^[32] This provision was inserted at the request of the member states to improve market access for small and medium-sized enterprises.^[33] The member states can choose to make it mandatory for the contracting authorities to require subcontracting in all contracts awarded under the directive, but it seems likely that most member states will let the contracting authorities decide themselves on a case-by-case basis whether to impose this obligation.

Either way, if the successful tenderer is required to subcontract part of the contract, the subcontract(s) shall be awarded by the tenderer according to specific procedures laid down in the directive^[34], which – unsurprisingly – resemble a simplified version of the normal procurement procedures. Thus, successful tenderers may now have to follow directive based procurement procedures when selecting their subcontractors; a situation which is likely to be a new experience for some, if not all.

In accordance with the stated purpose of facilitating the contracting authorities’ need for security of information and security of supply, the Defense and Security Directive includes a number of provisions relating to the selection of candidates^[35] and to the conditions for performance of the contracts awarded^[36] that seek to serve this end. This includes the authority to exclude from participating in a contract any candidate that has previously breached an obligation regarding security of information or security of supply^[37] or is found not to possess the reliability necessary to exclude risks to the security of the member state.^[38] Beside these two provisions, however, the new rules related to security of information and security of supply generally do not add much to the possibilities provided under the Public Sector Directive.^[39]

c. Exclusions from applicability

Like the Public Sector Directive, the Defense and Security Directive includes a number of provisions that exclude the applicability of the directive in certain situations.^[40] To some extent, the exclusions contained in the two directives are similar, but there are important differences.

For example, the Defense and Security Directive excludes from the application of the directive contracts for the purposes of intelligence activities^[41] and contracts awarded by a government to another government^[42], something which the Public Sector Directive did not. The latter exclusion provide a legal basis for member states to purchase U.S. military equipment and services through the “Foreign Military Sales” (FMS) procedure, in which the U.S. government act as an intermediary between U.S. suppliers and foreign governments, without complying with the Defense and Security Directive.

On the other hand, contrary to the Public Sector Directive, there is no exclusion in the Defense and Security Directive for contracts which are declared secret and contracts requiring special security measures.^[43] This omission might be motivated by the inclusion of the new rules regarding security of information, but considering that these rules arguably do not differ substantially from the Public Sector Directive, the lack of a similar exclusion in the Defense and Security Directive is noteworthy.

5. Concluding remarks

Overall, while the Defense and Security Directive does provide for a more flexible procurement process and to a certain extent improves the contracting authorities’ abilities to take into account security of information and security of supply, it is not a rose without thorns. Especially, the less than clear definition of what constitutes “military equipment” and the fact that it is no longer possible to exclude secret contracts and contracts requiring special security measures from the application of the directive are not likely to come across as improvements.

Time will tell if the Defense and Security Directive succeeds in achieving a common European defense market and reducing the widespread reliance on art. 346 as an automatic exemption to the EU rules on procurement. Notwithstanding the extent to which the member states embrace the new directive, however, the introduction of the directive is likely to make it more difficult to successfully invoke art. 346. Going forward, it seems that it will only on rare occasions be credible for a member state to claim that it is necessary to avoid applying the rules of the Defense and Security Directive to protect the essential interests of its security, when these rules – at least in the Commission’s view – now are tailor-made to the particular requirements of the defense market.

Endnotes:

[1] Directive 2009/81, of the European Parliament and of the Council of 13 July 2009 on the Coordination of Procedures for the Award of Certain Works Contracts, Supply Contracts and Service Contracts by Contracting Authorities or Entities in the Fields of Defence and Security, and amending Directives 2004/17/EC and 2004/18/EC, 2009 O.J. (L 216) 76 (EC).

[2] Defense and Security Directive, supra note 1, art. 72.

[3] Communication of December 2005, Communication from the Commission to the Council and the European Parliament on the results of the consultation launched by the Green Paper on Defence Procurement, and on the future Commission initiatives, at 2, COM(2005) 626 final (Dec. 6, 2005).

[4] Directive 2004/18, of the European Parliament and of the Council of 31 March 2004 on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts, 2004 O.J. (L 134) 114 (EC).

[5] The award of contracts in these sectors in governed by the – in many ways identical – European Parliament and Council directive 2004/17, 2004 O.J. (L 134) 1 (EC).

[6] Baudoin Heuninckx, Lurking at the boundaries: applicability of EU law to defence and security procurement, Pub. Procurement L. Rev., no. 3, 2010, at 91, 91.

[7] Communication of December 2005, supra note 3, at 4.

[8] Commission staff working document, Annex to the Proposal for a directive of the European Parliament and of the Council on the coordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security, (November 22, 2011, 12:48 p.m.), http://ec.europa.eu/internal_market/publicprocurement/docs/defence/impact_assessment_en.pdf, at 13-14.

[9] Communication of December 2005, supra note 3, at 4.

[10] A study from 2005 concluded that more than half of the defence procurement in the EU was conducted outside the framework of the EU procurement rules, see Baudoin Heunickx, Towards a coherent European defence procurement regime? European Defence Agency and European Commission initiatives, Pub. Procurement L. Rev., no. 1, 2008, at 1, 2.

[11] Whether the requirement is identical to the test of proportionality applied to other exemptions in the treaty (such as the exemptions to the rules of the common market), is not clear from the scarce case law regarding art. 346, see Nicolas Pourbaix, The future scope of application of Article 346 TFEU, Pub. Procurement L. Rev., no. 1, 2011, at 1, 6-7.

[12] Id. at 3.

[13] Case C-414/97, Comm’n v. Spain, 1999 E.C.R. I-05585 at par. 21.

[14] Interpretative Communication on the application of Article 296 [now art. 346] of the Treaty in the field of defence procurement, at 6, COM (2006) 779 final (Dec. 7, 2006).

[15] Proposal for a Directive of the European Parliament and the Council on the coordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security, at 3, COM (2007) 766 final (Dec. 5, 2007).

[16] Defense and Security Directive, supra note 1, recital 3.

[17] For supply and service contracts, the threshold is currently EUR 387,000 (which is higher than the corresponding threshold in the Public Sector Directive), while the threshold for works contracts is EUR 4,845,000 (identical to the corresponding threshold in the Public Sector Directive), Defense and Security Directive, supra note 1, art. 8, as amended by Commission Regulation 1177/2009, 2009 O.J. (L 314) 64 (EC).

[18] Heuninckx, supra note 6, at 91.

[19] Defense and Security Directive, supra note 1, art. 71 (which amends art. 10 of the Public Sector Directive, supra note 4).

[20] Id. art. 1(6).

[21] Interpretative Communication on the application of Article 296 [now art. 346], supra note 14, at 5.

[22] Heuninckx, supra note 6, at 99.

[23] Defense and Security Directive, supra note 1, recital 11.

[24] Id., art. 1 (7).

[25] Id., art. 25.

[26] Baudouin Heuninckx, The EU Defence and Security Procurement Directive: trick or treat?, Pub. Procurement L. Rev., no. 1, 2011, at 9, 14.

[27] Public Sector Directive, supra note 4, art. 30 and 31.

[28] Defense and Security Directive, supra note 1, art. 38 (3).

[29] Id., art. 26 (1).

[30] Id., art. 26 (2), which also states that the contracting authority shall not provide information in a discriminatory manner which may give some tenderers an advantage over others.

[31] Proposal, supra note 15, at 7.

[32] Defense and Security Directive, supra note 1, art. 26 (1).

[33] Heuninckx, supra note 26, at 19.

[34] Defense and Security Directive, supra note 1, art. 50-53.

[35] Id. art. 39-42.

[36] Id. art. 22 and 23.

[37] Id., art. 39 (2) (d).

[38] Id. art. 39 (2) (e).

[39] Heuninckx, supra note 26, at 27.

[40] It is important to note, that even when a purchase is exempted from the procurement directives, the treaties and the principles contained herein – such as the principles of non-discrimination, equal treatment, and proportionality – arguably still apply if there is a certain cross-border interest. See Adrian Brown, EU primary law requirements in practice: advertising, procedures and remedies for public contracts outside the procurement directives, Pub. Procurement L. Rev., no. 5, 2010, at 169.

[41] Defense and Security Directive, supra note 1, art. 13 (b).

[42] Id. art. 13 (f).

[43] Public Sector Directive, supra note 4, art. 14.

On January 14, 2011, the European Commission (the “Commission”) adopted new Guidelines on the Applicability of Article 101 TFEU to Horizontal Co-operation Agreements (the “Guidelines”), which replace the Guidelines issued in 2001.^[1] The Guidelines aim to clarify the Commission’s application of Article 101 TFEU with regard to horizontal cooperation and to provide undertakings with enhanced legal certainty.

Horizontal cooperation agreements, which restrict competition between the parties, may be prohibited under Article 101 TFEU. The Guidelines provide a framework for the analysis of the most common forms of cooperation between competitors. In particular, the Guidelines cover horizontal cooperation concerning research and development, production, purchasing, commercialization, standard setting, and information exchange.

This note focuses on the section of the Guidelines concerning standardization agreements. Section I describes the relationship between standardization agreements and competition law. Section II outlines the assessment of the standardization agreement as prescribed in the Guidelines and highlights the most important features. Section III briefly concludes.

I. Standardization Agreements and Competition Law

Standardization agreements can cover various issues, such as standardization of different sizes of a particular product or technical specifications for a product or service. Standardization agreements can also take different forms, such as agreements implementing legislation, agreements adopted by formal standard setting bodies, or agreements entered into by a few companies coming together on an ad hoc basis.^[2] However, standardization agreements that serve to execute public powers fall outside of the scope of the Guidelines.^[3]

Standardization agreements can result in substantial efficiency gains and consumer benefits. By ensuring that the products of different manufacturers are compatible and interoperable, standardization increases consumer choice and convenience.^[4] The increased fungibility of different manufacturers’ products may further result in lower prices.^[5] Standardization can also reduce transaction costs and allow manufacturers to achieve economies of scale.^[6] Moreover, standardization tends to enhance network effects, meaning that the value of a product to a particular consumer increases with the number of consumers using the same product or service.^[7]

Standardization can, however, also give rise to competition law concerns. First, discussions between competitors concerning standards may provide those involved with an opportunity to illicitly restrict competition by colluding on prices. Second, standard setting inherently reduces the number of formats or variations available. Once a standard has been set, firms using a different technology will face barriers to entry and may ultimately be excluded from the market. Thus, standard setting that is too far-reaching may restrict inter-technological competition.^[8] Thirdly, when the technology that has been set as a standard includes intellectual property rights (“IPRs”), market power will, in general, be conferred on the holder of these rights. Companies wishing to use the standard then become “locked-in” in their relation to the IPR-holders. The IPR-holders become gatekeepers to the market, and may try to charge excessive prices to firms willing to produce products in compliance with the standard.^[9] Prior to the adoption of the Guidelines, the Commission investigated allegedly excessive pricing and other misconduct by holders of IPRs included in a standard.^[10] The Commission’s experiences from these investigations have greatly affected the drafting of the Guidelines.^[11]

Thus, in its assessment of standardization agreements, the Commission must strike a balance that enables the market to benefit from the efficiencies generated through standardization while preventing undertakings from impeding competition.

II. The Assessment of Standardization Agreements under the Guidelines

The Guidelines divide agreements into agreements that are generally not restrictive of competition (agreements that fall within the “safe harbor” exception), and agreements that do not qualify for safe harbor treatment and thus require an effect-based assessment.

A. Agreements that fall within the safe harbor

A standardization agreement will fall within the safe harbor exception and thus normally be considered as not restricting competition as long as: (i) the standard-setting procedure is unrestricted and transparent, (ii) the standard is not compulsory, (iii) access to the standard is granted on fair, reasonable and non-discriminatory (“FRAND”) terms, and (iv) participants are obliged to make good faith ex ante disclosure of their IPRs that might be essential^[12] to the standard.^[13] The last two conditions are particularly important.

Ex ante disclosure. The Guidelines encourage ex ante disclosure of IPRs in order to allow the members of the standard-setting organization (“SSO”) to take potential IPRs into account when making their decision.^[14] Since IPRs risk impeding access to the standard, the members may wish to choose a technology that is covered by as few IPRs as possible. The Guidelines state, however, that in a sector where it can be presumed that all technologies are covered by IPRs, an IPR search would slow down the procedure and involve additional costs without providing the members with relevant information (since IPRs can be presumed regardless of the technology chosen). In such a context, no ex ante IPR disclosure is required in order to benefit from the safe harbor treatment.^[15]

Access to standard on FRAND terms. To ensure effective access to the standard the Guidelines state that the SSO must require IPR holders who wish to have their IPRs included in the standard to make an irrevocable commitment to license their IPRs on fair, reasonable, and non-discriminatory (“FRAND”) terms prior to the adoption of the standard.^[16] Such commitments prevent the IPR holders from impeding access to the standard by refusing to license their IPRs or by requesting unreasonably high fees once the industry has been locked in.

The participants of the standard-setting procedure themselves, and not the SSO, are to assess whether their terms and in particular their fees comply with the FRAND commitment.^[17] The Guidelines state that this assessment should consider whether the fees bear a reasonable relationship to the economic value of the IPR.^[18] In practice, such an assessment may be very burdensome. The Guidelines suggest, as a last resort, that the parties have recourse to national courts to determine what constitutes FRAND.^[19]

B. Agreements falling outside of the safe harbor

If a standardization agreement does not fulfill the safe harbor conditions mentioned above, the parties themselves have to assess whether the agreement falls within the prohibition in Article 101(1) TFEU and, if so, if Article 101(3) TFEU applies.

1. Assessment under Article 101(1) TFEU

The Guidelines provide the following considerations for the assessment of a standardization agreement under Article 101 TFEU: the possibility for the SSO members to develop alternative standards, the accessibility of the standard, whether participation in the standard-setting procedure is open to all market players, the market shares of the goods or services based on the standard, and the ex ante disclosure of the most restrictive licensing terms.^[20]

The consideration relating to ex ante disclosure of the most restrictive licensing term is of particular interest. Ex ante disclosure of licensing terms might raise concerns from a competition law perspective since such a system involves the discussion of prices within the SSOs. In the Commission’s view, however, such a system enables participants in the standard-setting procedure to consider price, in addition to technology, when deciding upon which standard to choose.^[21] The Commission thus considers that ex ante disclosure of licensing terms enhances competition between technologies and enables the price to be auctioned down before the standard is set.^[22] It should be noted that the Guidelines emphasize that an ex ante disclosure scheme that serves as a cover to jointly fix prices of substitute technologies or downstream products is considered to restrict competition by object.^[23]

2. Assessment under Article 101(3)

The Guidelines finally provide guidance in the assessment of whether the agreement may be exempted under Article 101(3).^[24] The Guidelines point out potential efficiencies that may arise through standard agreements and can justify an exemption (provided that the other three conditions for exemption are fulfilled). The Guidelines further outline certain restrictions that are not considered indispensible, and thus preclude the possibility to obtain an exemption. The Guidelines clarify, inter alia, that standardization agreements, which grant certain bodies the exclusive right of testing compliance with the standards, are not indispensible and those agreements do not, therefore, fulfill the conditions of Article 101(3).^[25]

III. Concluding Remarks

The Guidelines provide more detailed guidance concerning standardization than their 2001 predecessors. Parties to a standardization agreement may now have a better idea of how to design and implement their agreements in compliance with competition law. The Guidelines recognize that standardization increases competition but they also point out the potential restrictions on competition of such practice. To mitigate these restrictions, the Guidelines focus to a great extent on access to standards and in particular on IPR that is essential for the implementation of the standard. In order to ensure that holders of IPR do not refuse to license their IPRs or charge excessive prices, the Guidelines introduce ex antedisclosure of IPR and of the most restrictive licensing terms. These changes create conditions for a more transparent and pro-competitive standard-setting system. However, these new features are somewhat controversial as, to a certain extent, they impinge on the traditional rights of IPR holders for the benefit of increased competition.

Endnotes:

[1] Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, Jan. 14, 2011, 2011 O.J. (C11) 1 [hereinafter Guidelines], available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011XC0114(04):EN:NOT (last visited Apr. 12, 2011).

[2] Id. ¶ 257.

[3] Id. ¶ 258. See also Case T-155/04, Selex Sistemi Integrati SpA v. Comm’n, 2006 E.C.R. II-4797.

[4] Damien Geradin, Pricing Abuses by Essential Patent Holders in a Standard-Setting Context: A View from Europe, 76 Antitrust L.J. 329, 333 (2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1174922 (last visited Apr. 12, 2011).

[5] Marcus Glader, Open Standards: Public Policy and Competition Law Requirements, 6 Eur. Competition J. 611, 614 (2010).

[6] Herbert Hovenkamp, Standards Ownership and Competition Policy, 48 B.C. L. Rev. 87, 90 (2007), available at http://ssrn.com/abstract= 889335 (last visited Apr. 12, 2011).

[7] Glader, supra note 5, at 613.

[8] Id. at 615.

[9] OECD, Directorate for Financial and Enterprise Affairs Competition Committee, Working Party No. 2 on Competition and Regulation, Standard-Setting – European Union (Jun. 2, 2010) at 2, http://ec.europa.eu/competition/international/multilateral/2010_standardsetting.pdf.

[10] See, e.g., Case COMP/38.636 – Rambus and Case COMP/39.247 – Qualcomm.

[11] Gordon Christian and Simon Holmes, Standard setting – the Commission’s new approach, Competition L. Insight 10, 11(2011), available at http://www.sjberwin.com/Contents/Publications/pdf/49/58f3bea5_16ca_4f9a_9a3e_a608044e93f3.pdf (last visited Apr. 13, 2011).

[12] IPRs are generally considered to be essential when it is not possible, on technical grounds, taking into account normal technical practice generally available at the time of standardization, to make, sell, or use equipment or methods which comply with a standard without infringing that IPR. See, e.g., Annex 6 of the ETSI Rules of Procedure, Article 15.6, available at http://portal.etsi.org/directives/27_directives_may_2010.pdf.

[13] Guidelines, supra note 1, ¶¶ 280, 286.

[14] Id.

[15] Id. ¶ 327.

[16] Id. ¶ 285.

[17] Id. ¶ 288.

[18] Id. ¶ 289.

[19] Id. ¶ 291.

[20] Id. ¶¶ 293–96.

[21] Id. ¶ 299.

[22] OECD, supra note 9, at 11.

[23] Guidelines, supra note 1, ¶ 299, note 1.

[24] Id. ¶¶ 308–24.

[25] Id. ¶ 319.

I. Introduction

The “Lugano Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters of 16 September 1988”^[1] (hereinafter “LugC”) has been effective since January 1, 1992. The LugC, which is a ‘parallel convention’ to the “Brussels Convention of 27 September 1968”^[2](hereinafter “Brussels Convention”), was concluded between Member States of the European Communities (EC) and certain members of the European Free Trade Association (EFTA)^[3]. After a few years, the number of the EC Member States—later, the European Union (EU)—increased, and not all present EU Member States are parties to the LugC. As a consequence, the rules for jurisdiction, recognition and enforcement between the new Member States of the EU and the parties to the LugC diverged. Moreover, ambiguities and deficiencies in the text of the LugC soon became apparent. As a consequence, a joint expert group consisting of representatives of the Member States of the EU and EFTA created a revised version of the LugC in 1999, which aimed to clarify important questions of its application. However, the EU Member States abstained from ratifying the revised version as a convention, enacting it instead under the Brussels I Regulation^[4]—in lieu of a revised Convention. This is because it is substantially simpler for the EU to modify a Regulation through the majority decision procedure rather than an international treaty, which would require the consent of all parties. However, EFTA countries which were not members of the EU—Switzerland, Norway and Ice­land—could not implement the Regulation and still wanted to harmonize their regime again with the EU. They achieved this goal with the “Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial matters”, signed in Lugano on October 30, 2007 (hereinafter “revLugC”).^[5] The signatories of this revised Convention are the Swiss Confederation, the European Community, the Kingdom of Denmark, the Kingdom of Norway and the Republic of Iceland.^[6] The revLugC has essentially the same content as the Brussels I Regulation, viz., the revLugC amends the rules regarding jurisdiction^[7], recognition and enforcement and additionally expands their scope in certain ambits.^[8]

Furthermore, many of the provisions of the revLugC must be read in connection with the national laws applicable where the lawsuit is brought. This article describes the Swiss perspective, explaining the Swiss legislation relevant to the revLugC, with a particular focus on the newly enacted Swiss Federal Civil Procedure Code (hereinafter “CPC”) on January 1, 2011.^[9] Other amendments in the codified law, are also relevant to the application of the revLugC because matters related to the recognition and enforcement of judgments have to be applied in connection with the civil procedure law of the lex fori, that is the forum where the lawsuit is pending.^[10] These legislative changes are relevant for every party from a ‘revLugC-country’ which expects to face a lawsuit in Switzerland or wants to avoid a lawsuit there.

II. Amendments Regarding Jurisdiction

A. Sale of Goods, Provision of Services, and Other Contracts

The LugC contained a number of ambiguous provisions. Art. 5 No. 1 LugC—jurisdiction for “matters relating to a contract”^[11]— among all the articles caused the most problems in its application.^[12] Roughly fifty percent of LugC cases involved interpretative ambiguities related to this provision.^[13] The RevLugC tries to clarify this ambiguity with a revised version of Art. 5:

“Article 5

A person domiciled in a State bound by this Convention may, in another State bound by this Convention, be sued:

1. (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question;

(b) for the purpose of this provision and unless otherwise agreed, the place of performance of the obligation in question shall be:

- in the case of the sale of goods, the place in a State bound by this Convention where, under the contract, the goods were delivered or should have been delivered;

- in the case of the provision of services, the place in a State bound by this Convention where, under the contract, the services were provided or should have been provided.

(c) if (b) does not apply then subparagraph (a) applies; […]”^[14]

Art. 5 No. 1 revLugC only applies if a contract or the claims arising from a contract are the subject of a civil lawsuit.^[15] The structure of Art. 5 No. 1 distinguishes between two groups of contracts, (1) contracts involving the sale of goods and the provision of services^[16] and (2) those remaining contracts which do not belong to the first group^[17],[18]. In addition to the jurisdiction of Art. 5 No. 1 revLuC, claims can always be brought against “persons domiciled in a Member State […] in the courts of that Member State” (i.e., actor sequitur forum rei).^[19] In other words: Art. 5 No. 1 revLugC allows a claimant to bring a lawsuit in a Member State in which no party is resident if the place of performance lies in that (third) state.

1. Contracts Relating to the Sale of Goods and Provision of Services

Art. 5 No. 1 lit. b revLugC introduces new rules relating to jurisdiction for contracts involving the sale of goods and provision of services. For the purposes of the Convention, the place of performance of the contract and the jurisdiction of the contract has to be determined in a multi-step sequence. Where the parties agree on a place of performance for the contract, that agreement is binding and will constitute one possible forum for litigation related to the contract.^[20] In cases where there is no agreement regarding the place of performance, Article 5 introduces a default rule: the “place with the closest linking factor between the contract and the court”^[21] shall be a forum for litigation. For example, in the case of contracts for sale of goods or services, the “place with the closest linking factor between the contract and the court”^[22] is where the goods were delivered or should have been delivered, or where the services were provided or should have been provided.^[23] However, it is still not clear whether the determination of ‘place of performance’ is completely governed by the Convention, or if the substantive law of the lex causae (i.e., the law that governs the contract according to the relevant conflict of laws principles) must also be considered in matters of interpretation.^[24] For the ease of use of the Convention and for the harmonization of international law, a completely convention-specific determination of the place of performance (i.e., an interpretation derived solely from the Convention) should be preferred.^[25] In fact, if the lex causae (or even lex fori) were to be considered for the determination of the jurisdiction of the revLugC, the very purpose of the Convention—to facilitate the determination of jurisdictions for EU Member States, Switzerland, Iceland and Norway—would be undermined.^[26]

2. Other Contracts

The jurisdiction for contracts which are not for the sale of goods or provision of services^[27] has to be determined separately for each “place of performance of the obligation in question”^[28]. The courts have to analyze each claim independently;^[29] and such inquiry must also take into consideration the lex causae.^[30] One potential problem with this approach is the undesirable fragmentation^[31] of jurisdictions within one contract; for example, one country’s court might decide the claim about the main performance obligation and another country’s court might adjudicate matters of payment. Having several jurisdictions decide elements in multiple lawsuits over a single contract is inefficient because at least two different courts would judge different parts of the same contract. Even if all the parties, evidence, etc., involved are the same: one court would adjudicate the issues related to the payment; the other court would determine the legal situation related to the main performance of the obligation. In such cases, the ‘division of labor’ of the courts caused by the contract-jurisdiction-fragmentation does not reduce the paperwork of the all involved parties; it would increase the red tape for them. If a contract consists of multiple parts where a party has to perform in different jurisdictions, this jurisdiction-fragmentation issue would become even more aggravating. Therefore, it would be more efficient if the proceedings were concentrated in a single jurisdiction.

Before the revised provision was enacted, similar issues of jurisdiction-fragmentation occurred in the context of contracts for the sale of goods and provision of services; these contracts are now governed arguably by better rules, as discussed above.^[32] In future revisions of the Convention, it is advisable that this fragmentation of jurisdictions be conclusively resolved under a single, definite standard.

B. Additional Amendments

Additional amendments have clarified the application of other articles of the revLugC.^[33] For example, the provisions on matters relating to consumer contracts (particularly matters concerning electronic commerce)^[34] have been amended. The determination of the place of domicile for a company or other legal persons or associations^[35] is now convention-specific. In addition, the revLugC amends the articles regulating the jurisdiction for disputes relating to employment contracts,^[36] insurance contracts and matters concerning rights in rem in immovable property and intellectual property.^[37]

C. Lis pendens

Lis pendens (Latin for “pending lawsuit”) is the doctrine that confers exclusive jurisdiction on a specific court for a certain matter between parties. As soon as a lawsuit is pending, the same parties cannot file a lawsuit about the same matter in another court.^[38] For the determination of the date when lis pendens is established, the revLugC must be interpreted in connection with the applicable national law where a lawsuit is brought; in Switzerland, generally, Swiss civil procedure laws have to be applied. If parties were to engage in forum shopping before the 2011 Swiss Civil Procedure reform had been enacted, the party who wanted to sue in Switzerland had a comparative disadvantage under the lis pendens rules of Art. 21-23 LugC compared to the non-Swiss claimant.

In fact, before the CPC and the revLugC became effective in 2011, lis pendens was determined by the applicable cantonal civil procedure code. This often meant that parties had to engage in a conciliation procedure before a lawsuit could be filed to create the effect of lis pendens. In other countries, this step was not necessary and therefore provided a timing advantage for the other (non-Swiss) party.^[39] If Art. 30 revLugC were not applied in many European countries, lis pendens could only be established after filing the lawsuit and serving the document to the other party residing in a foreign jurisdiction. This is usually a lengthy procedure, burdened with highly technical rules on service of process.^[40] In several European states, the court documents must be served by the administration or the courts of the defendant’s country of residence, a process which can take many months and requires international judicial assistance.^[41] Under the rules of Art. 21 LugC, lis pendens is constituted as soon as all the necessary requirements of the applicable civil process rules were satisfied. In some jurisdictions these requirements included adequate service of process and conciliatory meetings.^[42] In order to create a level playing field for all signatory states of the revLugC, Art. 30 revLugC instead applies the “earliest possible step”^[43] of the various European rules of civil procedure to determine when lis pendens comes into effect. This effectively eliminates all incentive to forum shop on this aspect, and as such renders lis pendens a partially convention-specific manner:^[44] Jurisdiction of a court can either be established (1) “at the time when the document instituting the proceedings or an equivalent document is lodged with the court”^[45] or (2) “if the document has to be served before being lodged with the court, at the time when it is received by the authority responsible for service.”^[46] In both cases, the plaintiff is required to fulfill the following requirements for correct service of process to satisfy the requirement of Art. 30 revLugC and thereby establish lis pendens.^[47]

As mentioned before, Art. 30 revLugC is to be read in connection with the national civil procedure rules. The rules for lis pendens in Switzerland are inter alia defined in Art. 62 CPC. Article 62 tries to level the playing field between Swiss plaintiffs and other (non-Swiss) parties to the suit. Pursuant to Art. 62 CPC, Swiss courts acquire jurisdiction with the filing of a lawsuit^[48] or a conciliation procedure. However, a conciliation procedure^[49] can only be used to acquire jurisdiction of a court if the plaintiff subsequently files a lawsuit. Eventually, if all necessary steps in the litigation procedure are satisfied, the new regime of Art. 30 revLugC and Art. 62 CPC eliminates the disadvantage which Swiss plaintiffs face in forum shopping because it accelerates the Swiss procedure aimed at constituting lis pendens.

III. Recognition and Enforcement

According to Art. 31 No. 1 revLugC, “[a] judgment given in a State bound by this Convention shall be recognized in the other States bound by this Convention without any special procedure being required.”^[50] The recognition and enforcement procedure has been simplified because the available justifications for non-recognition have been substantially reduced by Art. 34 revLugC.^[51] For example, it is no longer possible to argue on first instance for denial of recognition of a judgment because it is “manifestly contrary to public policy.”^[52] Such claims can only be the subject of an appeal, according to Art. 43 revLugC in connection with Art. 327a CPC.^[53]

Another material novelty is the revision of rule, contained in Art. 27 No. 2 LugC, concerning the denial of the recognition of a judgment “if the defendant was not duly served.” Art. 34 No. 2 revLugC allows for the recognition and enforcement of a judgment, even if the defendant was not duly served, as long as the defendant was able to arrange for his defense within “sufficient time.”^[54]

IV. Significant Revisions in Swiss Codes related to The RevLugC

As stated in the introduction of this article, some provisions of the revLugC must be applied in connection with the national laws of the jurisdiction where a lawsuit is brought. On January 1, 2011, along with the enactment of the revLugC in Switzerland, several amendments in the Swiss Procedural Codes also became effective. Furthermore, the CPC itself was introduced with important consequences (especially regarding issues of lis pendens). Also noteworthy is the facilitated process for the enforcement of monetary liabilities contained in the Federal Code of Debt Enforcement and Bankruptcy (hereinafter “FCDEB”).^[55] With the amendment of Art. 83 Sec. 1 FCDEB, a review of exequatur^[56] (i.e., the declaration of a court that a foreign judgment is recognized or enforceable) is no longer allowed. Therefore, it is easier to enforce monetary liabilities in Switzerland. Another amendment facilitates the provisional protective measures relating to the seizure of money from a debtor (“arrest”).^[57] Before this amendment became effective, a creditor who wanted to arrest money from a debtor had to ask for a judgment of the court from each Canton where the debtor had his assets; now, a single judgment is sufficient to arrest the defendant’s assets throughout the whole of Switzerland.^[58]

V. Expansion of Territorial Validity

One of the important innovations for the practitioner results from the expansion of the territorial validity of the revLugC. The revised Convention is now valid vis-à-vis all present and future Member States of the EU. Moreover, non-member states are also free to join the revLugC.^[59] On May 1, 2011, the revLugC also became effective in Iceland. Since then, the revLugC is also applicable for international civil procedures between Switzerland and Iceland.^[60]

VI. Concluding Remarks

Important factors in the recent changes instituted by the revLugC are the enhanced territorial validity of the Convention, the new rules of jurisdiction—especially regarding contracts for sales of goods and provision of services, the amendments relating to the lis pendens, and the recognition and enforcement of judgments. Furthermore, with the enactment of the revLugC, the relevant legal regime for Switzerland, Norway and the EU is harmonized again. However, as a reform of the Brussels I Regulation is being discussed by the Commission,^[61] a further revision of revLugC might be foreseeable.

Endnotes:

[*] LL.M., Columbia Law School (2011); MLaw, University of Zurich (2009); Ph.D., University of St. Gallen (2008); M.A., University of Zurich (2004). Lukas Mueller is Postdoctoral Researcher at the Faculty of Law of the University of Zurich, Switzerland.

[1] Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, Sep. 16, 1988, 1988 O.J. (L 319) 9, available at http://curia.europa.eu/common/recdoc/convention/en/c-textes/lug-idx.htm.

[2] Übereinkommen über die gerichtliche Zuständigkeit und die Vollstreckung gerichtlicher Entscheidungen in Zivil- und Handelssachen [Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters], Sept. 27, 1968, 1972 O.J. (L 299) 32.

[3] See BBl II 272 (1990).

[4] Council Regulation 44/2001, Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 2001 O.J. (L 12) 1 (EC) (hereinafter “Brussels I Regulation”).

[5] Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, Oct. 30, 2007, 2009 O.J. (L 147) 5, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32007D0712:EN:HTML.

[6] Denmark is a Member State of the EU, however, there are historical reasons why both, Denmark and the EU, have signed the revLugC separately; see BBl 1788 (2009).

[7] See infra pt. II.

[8] See infra pt. III; infra pt. V.

[9] See Schweizerische Zivilprozessordnung [CPC] [Swiss Code of Civil Procedure] Dec. 19, 2008, SR 272 (Switz.). Switzerland’s civil procedure law operated on an individual Canton level, until the end of 2010 Switzerland had 26 cantonal civil procedure codes (plus an insignificant Federal Civil Procedure Code which had a very limited scope of application). The CPC replaces all these codes.

[10] See BBl 1778-79 (2009).

[11] Art. 5 No. 1 LugC; see also Alexander R. Markus, Vertragsgerichtsstände nach Art. 5 Ziff. 1 revLugC/EuGVVO – ein EuGH zwischen Klarheit und grosser Komplexität, 19 AJP 971-986 (2010) (Switz.).

[12] See BBl 1778 (2009).

[13] See id.

[14] Art. 5 No. 1 revLugC.

[15] Id.

[16] See infra pt. II.A.1.

[17] See infra pt. II.A.2.

[18] Please note that individual contracts of employment are now subject of art. 18-21 revLugC; they do not belong into the jurisdiction rule set of art. 5 No. 1 revLugC.

[19] See art. 2 revLugC.

[20] See art. 5 no. 1 lit. b revLugC. This provision says “unless otherwise agreed”; see also Markus, supra note 11, at 981.

[21] Case C-386/05, Color Drack GmbH v. Lexx International Vertriebs GmbH, 2007 E.C.R. I-3699, ¶ 40.

[22] Id.

[23] See art. 5 no. 1 lit. b revLugC; BBl1791-92 (2009).

[24] SeeBBl 1791 (2009).

[25] See id. at 1791-92.

[26] See revLugC, preamble. The place of performance of a contract depends on the national applicable conflict of laws principles and the applicable national laws. Compare e.g. Federal Act on the Amendment of the Swiss Civil Code (Part Five: The Code of Obligations) [CO], Mar. 30, 1911, SR 220, art. 74, sec. 2 (Switz.) (“Except where otherwise stipulated, the following principles apply: … where a specific object is owed, it must be delivered at the place where it was located when the contract was entered into”) with Bürgerliches Gesetzbuch [BGB] [Civil Code], Aug. 18, 1896, Reichsgesetzblatt [RGBl] 195, § 269, para. 1 (Ger.) (“Where no place of performance has been specified or is evident from the circumstances, in particular from the nature of the obligation, performance must be made in the place where the obligor had his residence at the time when the obligation arose”). See also Anastasia Vezyrtzi, Jurisdiction and International Sales under the Brussels I Regulation: Does Forum Shopping Come to an End?, 15 Colum. J. Eur. L. Online 83 (2009), available at http://www.cjel.net/online/15_2-vezyrtzi-2/ (last visited June 24, 2011) for a discussion with other rules, e.g., the United Nations Convention on Contracts for the International Sale of Goods (CISG).

[27] See art. 5 no. 1 lit. b and c revLugC.

[28] Id. If the place of performance is situated in a state, which has not ratified the revLugC, art. 5 no. 1 lit. c revLugC is applicable.

[29] See BBl 1790 (2009).

[30] See id. at 1790-91; Case C-12/76, Industrie Tessili Italiana Como v. Dunlop AG, 1976 E.C.R. 1473, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61976J0012:EN:HTML. If Swiss law is the lex causae, see art. 74 CO.

[31] See Markus, supra note 11, at 972.

[32] See supra pt. II.A.1. See also art. 5 No. 1 LugC; Markus, supra note 11, at 972.

[33] See BBl 1792-1804 (2009).

[34] See art. 15-17 revLugC.

[35] See art. 60 revLugC; BBl 1804 (2009).

[36] See art. 18-21 revLugC.

[37] See art. 6 No. 1 revLugC; BBl1778 (2009).

[38] See BBl1801 (2009).

[39] See id. at 1802-03.

[40] See art. I, sec. 1 of Protocol 1 revLugC; for Switzerland, all necessary practitioner’s materials are prepared on the website of the Swiss Federal Department of Justice and Police: Eidgenössisches Justiz- und Polizeidepartement, Zivilrecht, available at http://www.rhf.admin.ch/rhf/de/home/zivil/wegleitungen.html (last visited June 24, 2011). For an English summary see Federal Department of Justice and Police, International Judicial Assistance in Civil Matters. Guidelines (3ded. 2003) (updated July 2005), available at http://www.rhf.admin.ch/etc/medialib/data/rhf.Par.0064.File.tmp/wegl-ziv-e.pdf (last visited June 24, 2011).

[41] See BBl 1818 (2009).

[42] See BGE 123 III 414; Case C-129/76, Zelger v. Salinitri, 1984 E.C.R. 2397, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61983J0129:EN:HTML.

[43] BBl 1803 (2009). However, this earliest possible step is only known in civil law countries. Common law countries in Europe have a different system.

[44] See art. 27-30 revLugC.

[45] Art. 30 no. 1 revLugC.

[46] Art. 30 no. 2 revLugC.

[47] See art. 30 revLugC.

[48] See art. 198 and art. 199 CPC in combination with art. 62 CPC; see also Thomas Sprecher, Prozessieren zum SchKG unter neuer ZPO, 107 SJZ 273, 280 (2011) (Switz.).

[49] See art. 197 CPC in combination with art. 62 CPC.

[50] See art. 31 No. 1 revLugC. See art. 32 revLugC for the definition of the term “judgment”.

[51] Compare art. 34 revLugC with art. 26 revLugC.

[52] Art. 34 No. 1 revLugC.

[53] See BBl1825-26 (2009).

[54] See art. 34 No. 2 revLugC. This Article is an amended version of art. 26 LugC.

[55] See Bundesgesetz über Schuldbetreibung und Konkurs [FCDEB] [Federal Code of Debt Enforcement and Bankruptcy] Apr. 11, 1889, SR 281.1 (Switz.).

[56] See art. 39-42 revLugC.

[57] See art. 271 FCDEB.

[58] See BBl1823 (2009).

[59] See id. at 1779.

[60]See Bundesamt für Justiz, Das Lugano-Übereinkommen 2007, http://www.ejpd.admin.ch/content/ejpd/de/home/themen/wirtschaft/ref_internationales_privatrecht/ref_lugue2007.html (last visited June 24, 2011).

[61] See Commission Report to the European Parliament, the Council and the European Economic and Social Committee on the application of Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, COM (2009) 174 final (Apr. 21, 2009); Commission Proposal for a Regulation of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, COM (2010) 748 final (Dec. 14, 2010).

Introduction

This article discusses recent challenges for merger control in the Internet video-on-demand (VoD) sector in Europe, namely the definition of the relevant market and the assessment of effects on competition. Furthermore, the article illustrates the challenges competition authorities face with respect to dynamic markets and the coherence between merger control and other policy considerations in the media sector.

I. Video on Demand

VoD systems enable a user to choose what to watch and when. Originally, VoD was offered primarily through cable, satellite and digital terrestrial television (DTT).^[1] However, the advanced technical possibilities of Internet broadcasting have shifted the focus to the Internet as the predominant platform for delivering VoD content. Providers offer VoD either for rental, for purchase or on a free, advertising-funded basis.^[2]

Over the last years, broadcasting companies discovered the Internet in particular as an effective means for distributing their program^[3] either through their website or by licensing content to third parties, who distribute the content through their own VoD platform. As a consequence, joint ventures between broadcasters have emerged in the shape of joint Internet VoD platforms. The U.S. platform “Hulu”,^[4] a company jointly owned by NBC,^[5] FOX, ABC and private equity partners, is the world’s most prominent example. In Britain, on the other hand, the Competition Commission prohibited the creation of a similar joint VoD platform (“Kangaroo”) in the U.K. in 2009.^[6] The same is true for Germany, where the merger authority (Bundeskartellamt) prohibited a proposed VoD joint venture of the two biggest German private broadcasters ProSiebenSat.1 and RTL. In the wake of Hulu’s growing success,^[7] the German broadcasters planned to offer catch-up and archive content for a variety of their channels^[8] through a common VoD Internet platform (“German Hulu”^[9]). The Bundeskartellamt, however, expressed serious concerns regarding the effects on competition.^[10] The case challenges the efficiency and accurateness of merger control in Europe in the field of new technologies.^[11]

II. Market definition of VoD platforms

Identifying the relevant product market for the proposed joint venture is difficult. Demand substitutability of a certain product or service is the main criterion for determining the relevant market. Additional factors have to be considered as well, e.g., essential physical characteristics, prices, intended use, circumstances, the nature of the buyer.^[12]

Broadcasters can either distribute the content directly to the viewer or indirectly by licensing content to third parties, who distribute the respective content through their own platform. As a consequence, a “retail market” and a “wholesale market” exist.^[13] But, which products or services exactly constitute the relevant market? Taking the similar products market—namely joint video platforms of broadcasters—as a starting point, one can easily extend the relevant market by including, for example, single channels’ websites^[14] or VoD content offered by third providers^[15]. The market could as well be narrowed by, among others, taking the degree of the content’s professionalism, the creator^[16] or subject of the content (e.g. genre, target group) as market determining feature.^[17] Finally, the market definition can relate to the function of the platform. “German Hulu” offers catch-up and archive content. While catch-up content is only temporarily offered,^[18] archive content is permanently available for the user.^[19] This could lead to a distinction between catch-up market on the one hand and archive market on the other hand. In general, including other media than Internet VoD can extend all of the three mentioned ways to define the relevant market. One might for example argue that Internet VOD also competes with linear broadcast TV, Digital TV, movie theatres, DVD rental or technical catch-up devices (PVRs).

The ultimate decision on the relevant market depends on the specific demand substitutability of the respective product. After the U.K. Competition Commission had performed an extensive assessment^[20], it defined the supply of long-form VoD content^[21] as the relevant market. At the same time, it excluded film, short-form and user-generated content, DVDs, the use of PVRs and linear broadcast TV.^[22] Since the “German Hulu” announced to offer its content for free (as opposed to the British model),^[23] the price could be an additional factor for the German authorities to consider and lead to another market definition.

It seems plausible to assume that the geographic market will follow the VoD content’s language, because language can be seen as a natural barrier to demand substitution. Though “German Hulu” is accessible in any Member State of the EU, usually the German speaking content does not compete with French or Czech speaking content.^[24] As a consequence, specific VoD markets within the EU exist. Whether or not these markets share the same product definition—as e.g. the above mentioned—depends on the specific circumstances of the particular market, especially on the particular domestic demand. Demand substitutability can vary for historic, cultural or regulatory reasons respectively.

III. Effects on competition

Once the market is adequately defined, the authority has to evaluate, whether or not an approval of the joint venture causes a significant impediment for effective competition (SIEC-standard Art. 2(3) Merger Regulation^[25]). The EU Commission can prohibit all mergers, which create anti-competitive unilateral or coordinated effects.^[26]

The proposed ProSiebenSat.1 and RTL VoD joint venture can restrict competition. It might be difficult for third parties to obtain licenses from the broadcasters, which would be the only way for them to offer competitive content.^[27] Although entry barriers for setting up an Internet VoD platform are not considerably high, the content provided determines whether a platform is competitive or not. Once the broadcasters hold a strong position in the content-wholesale market, tacit coordination among them regarding licensing strategies can suppress competition.^[28] Before setting up the joint venture, their merging partners were each other’s closest competitors. But once they cooperate and no third parties exist as an effective competitive constraint,^[29] the parties have the possibility to offer less attractive terms to customers.^[30] Another competitive concern is monopoly leveraging. The broadcasters’ already dominant position in the broadcasting market can be easily extended to the Internet VoD market.^[31] This can backlash: successful branding in one market is likely to advance the position in the other market. For all of these reasons, the U.K. Competition Commission prohibited the British joint VoD platform “Kangaroo”. Also, the German Bundeskartellamt seems to follow that logic for the ProSiebenSat.1 and RTL joint venture. It stated that the threat of restricting effects outweighs the benefits.^[32]

What are these benefits? Several arguments can be put forward as an efficiency defense.^[33] First, it can be argued that the platform offers a new product to the customer. As a one-stop-shop service, it provides a wide range of catch-up and archive content of several broadcasting channels and is organized in a coherent and attractive manner.^[34] Second, joint investment limits risk in an uncertain, nascent VoD sector.^[35] It also allows the venture to commercialize archive content, because only a well known website can attract the critical mass of viewers, which is necessary for generating sufficient revenues through advertisement.^[36] Finally, the cooperative operation can cause cost savings through joint management and control of content, editorial coordination and cross-promotion.^[37]

IV. Discussion

The arguments illustrate that the VoD market is dynamic by nature, which is one of the main reasons why the competitive assessment is complicated. An accurate prediction of future demand for relevant products and of the development of respective markets seems crucial for a competition authority’s decision. However, those developments are hard to predict in this particular case. As a consequence, market definition can only be used as a non-conclusive starting point for the analysis and market dynamics must be taken into account when assessing competitive effects. In this respect, one could follow the radical assumption that linear broadcast TV is a phase out model and in a couple of years, entertainment will be entirely delivered through Next Generation Networks.^[38] Should VoD and TV markets converge, leveraging monopoly power can also be seen as a broadcaster’s strategic, forward-looking—though even more critical from an antitrust perspective—step to achieve dominance over two eventually merging markets.^[39] Furthermore, technical progress enables for an individualized, interactive relationship between users and media service providers.^[40] Therefore, innovative markets frequently emerge and established business models change rapidly under competitive pressure.^[41]

These scenarios of uncertain future developments in the media sector exemplify the general debate about the relation between innovation and competition and can illustrate two different regulatory approaches.^[42] One approach emphasizes competition within existing markets, which shall lead to incremental innovation.^[43] The other approach rather puts emphasize on competition for markets, which shall lead to substantial/destructive innovation.^[44] The restrictive decisions of the U.K. and German merger authorities seem to follow the first approach, since they prevent concentration within the VoD market.^[45]

Once one takes into account objectives beyond competition policy, the decision becomes even more complex. Network Neutrality is one relevant issue in the media sector. The principle of Network Neutrality prevents discrimination between different sorts or sources of content when delivering it. This is of practical relevance if broadband providers/network owners hold stakes in media companies—and in VoD platforms as a consequence—and have incentives for discriminating between content.^[46]

Another problem lies in the fact that VoD is an audiovisual service.^[47] These services are subject to European media regulation, which aims to realize a pluralist and diverse media offer of high quality.^[48] In this respect, the AVMS Directive^[49] can be seen as an additional sort of guidance for antitrust priorities, though the relation between media regulation and competition law is complex and lies beyond the scope of this paper.^[50]

V. Conclusion

Merger control in the Internet VoD sector is complex. Firstly, the nature of the product is such that it is difficult to determine the relevant market accurately. Secondly, a competitive assessment is complex, since the dynamic development (new emergence or convergence) of markets and of competing products can hardly be predicted. This points up the complex relation between competition and innovation. Finally, other relevant policy considerations (especially network neutrality and media regulation) complicate effective merger control. Finding a coherent approach can be seen as a challenging task for European competition policies as well as for further research. One way to master merger control challenges in such dynamic industries could lie in imposing a lenient threshold for approving mergers in general, but in imposing conditions and extending post-merger control at the same time. As a consequence, authorities could systematically (this means also by the collection of data and its empirical evaluation) assess the effectiveness of merger conditions for finding an appropriate balance between innovation and competition.

Endnotes:

[*] Research associate at the Free University of Berlin, Professor Bachmann. I wish to thank Professors Petros C. Mavroidis and Tim Wu for their valuable comments.

[1] See André Lange, Parameters for Business Models, in Legal Aspects of Video on Demand 23, 25 (2007), illustrating advantages and disadvantages of the respective platforms.

[2] See id. at 27 for the discussion of different existing business models.

[3] See id. at 24 for statistics in Europe (as of 2006), though due to the increased possibilities of internet transmission, the figures are likely to have changed over the last five years.

[4] See http://www.hulu.com.

[5] Recently, the cable operator and Internet service provider Comcast has acquired NBC. As a consequence, Comcast holds a 32 % interest in Hulu, see Federal Communications Commission, Memorandum Opinion and Order ¶ 15 (2011), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-4A1.pdf (last visited Apr. 2, 2011).

[6] The petitioning parties were BBC, Channel 4, and ITV, see Competition Commission, A report on the anticipated joint venture between BBC Worldwide Limited, Channel Four Television Corporation and ITV plc relating to the video on demand sector (2009), available at http://www.competition-commission.org.uk/rep_pub/reports/2009/fulltext/543.pdf (last visited Apr. 2, 2011).

[7] After its launch in 2008, Hulu became the second most popular platform for Internet video streaming behind YouTube, see Kai Simon, Das “deutsche Hulu” im deutschen und internationalen Kartellrecht (2010), available at http://www.telemedicus.info/article/1835-Das-deutsche-Hulu-im-deutschen-und-internationalen-Kartellrecht.html (last visited Apr. 2, 2011).

[8] Effectively, content of a broad variety of channels (e.g., RTL, Pro7, Sat.1, n-tv, VOX, Kabel 1) would be distributed through the joint platform.

[9] See Simon, supra note 7.

[10] See Bundeskartellamt, Press Release of February 24, 2011, available at http://www.bundeskartellamt.de/wDeutsch/aktuelles/presse/2011_02_24.php (last visited Apr. 2, 2011); see for the prohibition Bundeskartell­amt, Press Release of March 18, 2011, available at http://www.bundeskartellamt.de/wDeutsch/download/pdf/Presse/2011/2011-03-18_PM_RTL-P7S1__Final.pdf (last visited Apr. 2, 2011).

[11] In the following analysis, the case is discussed under European merger law. However, in fact, the merger authorities of the respective Member States decided the British and the German VoD case. In the “German Hulu” case, the European Commission referred the case to the German and the Austrian authorities, because the transaction did not raise any concerns in other EU Member States, see European Commission, Press Release of September 24, 2010, available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1174 (last visited Apr. 2, 2011) What happened in the British case? Was it similarly dismissed by the EU Commission?

[12] Joanna Goyder & Albertina Albors-Llorens, EC Competition Law 409 (5^th ed. 2009).

[13] See Competition Commission, supra note 6, ¶¶ 4.69–4.110.

[14] See Simon, supra note 7, ¶ 3.c.

[15] For the German market, e.g., Videoload, Vodafone Videothek, Myspass.de.

[16] E.g., user generated and professional content.

[17] See Competition Commission, supra note 6, ¶¶ 4.5–4.28.

[18] For the ProSiebenSat.1 and RTL joint venture, the planned period was 7 days, see ProSiebenSat.1, Press Release of August 6, 2010, available at http://www.prosiebensat1.com/de/presse/pressemeldungen/presse-lounge/prosiebensat1-media-ag/2010/8/prosiebensat1-media-und-mediengruppe-rtl-deutschland-planen-senderoffene,-zentrale-plattform-fuer-tv-inhalte-im-internet-28783 (last visited Apr. 2, 2011).

[19] See Competition Commission, supra note 6, ¶¶ 3.19–3.21.

[20] The U.K. Competition Commission based its decision on consumer surveys, parties’ internal strategy documents and VoD viewing data, see Competition Commission, supra note 6, ¶ 4.18.

[21] Quite remarkably, the Competition Commission saw Internet VoD in the same market as other technical platforms for VoD.

[22] See Competition Commission, supra note 6, ¶ 4.42.

[23] See ProSiebenSat.1, supra note 18; for the British “Kangaroo”, not the entire content was meant to be provided for free, see Competition Commission, supra note 6, ¶ 9.

[24] Even the Competition concluded that geographic market for „Kangaroo” should not be wider than the U.K., see Competition Commission, supra note 6, ¶ 17.

[25] Council Regulation 139/2004, On the control of concentrations between undertakings (the EC Merger Regulation), 2004 O.J. (L 24) 1 (EC), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:024:0001:0022:EN:PDF (last visited Apr. 2, 2011).

[26] See id. at Recital 25; Goyder & Albors-Llorens, supra note 12, at 416.

[27] See Competition Commission, supra note 6, ¶ 23.

[28] See id. at ¶ 26.

[29] If they do exist, it can be argued that the consumer faces no considerable switching costs for using other VoD services and significant impediment to effective competition is not to be expected, see id. at ¶ 5.82.

[30] See id. at ¶ 28.

[31] See Simon, supra note 7, ¶ 2.b.

[32] See Bundeskartellamt, supra note 10.

[33] See EC Merger Regulation, supra note 25 at Recital 29.

[34] See id. at ¶ 5.78.

[35] See id. at ¶ 3.18.

[36] See id. at ¶ 3.29.

[37] See id. at ¶ 3.24. Under European Competition Law, however, efficiencies are only considered if the parties prove that they are substantial, timely, merger specific, verifiable and will be passed on to the consumers, see Goyder & Albors-Llorens, supra note 12, at 428.

[38] A trend towards this direction can be seen the Google TV, which is a recently launched TV platform, connected to the Internet.

[39] See Goyder & Albors-Llorens, supra note 12, at 412, mentioning that in Commission Decision Comp/M.2416, Tetra Laval/Sidel, 2004 O.J. (L 43) 13 (EC), the merger was blocked, although the parties were technically operating in different product markets. However, the markets were closely related and likely to converge. The same ratio can be applied to linear broadcast TV and Internet VoD.

[40] See Natali Helberger, The Changing Role of the User in the “Television without Frontiers” Directive, in Legal Aspects of Video on Demand 77, 78 (2007), distinguishes between “consumers” and “prosumers”. While the “consumer” is considered to be a passive viewer, the “prosumer” can actively contribute to the content.

[41] Though YouTube and Hulu are the world’s largest streaming providers, the U.K. merger authority correctly distinguished the markets, since YouTube provides user generated content. However, business models can change. Although broadcasters allege YouTube to base its business concept largely on copyright infringement (Viacom International, Inc. v. YouTube, Inc., No. 07 Civ. 2103 (2010 S.D.N.Y.)), YouTube can also be used as a distributor or an advertisement tool for broadcasters. Due to the rapid change of business models, the VoD sector can be called an “experiment”, see Scott J. Wallsten, An Economic Overview of the Implications for Online Video of the Proposed Comcast-NBCU transaction (2010), available at http://www.techpolicyinstitute.org/files/comcast-nbc%20fcc%20chicago%20hearing.pdf (last visited Apr. 2, 2011).

[42] For a general discussion see Jonathan B. Baker, Beyond Schumpeter v. Arrow: How Antitrust Fosters Innovation, 74 Antitrust L.J. 575 (2007).

[43] See Katarzyna Czapracka, Intellectual Property and the Limits of Antitrust – A Comparative Study of US and EU Approaches 82 (2009).

[44] Id.

[45] Interestingly, the American authorities rather seem to follow the latter approach. When approving the Comcast/NBC merger the FCC ordered that Comcast can retain its stake in Hulu, but is obliged “not to exercise any corporate control over or unreasonably withhold programming from Hulu”, see FCC, Press Release of January 18, 2011, available at http://www.fcc.gov/Daily_Releases/Daily_Business/2011/db0118/DOC-304134A1.pdf (last visited Apr. 2, 2011).

[46] Network Neutrality concerns have been expressed regarding the Comcast/NBC merger, see David Coursey, Why the FCC should stop Comcast from Buying NBC, PCWorld (Dec. 9, 2009, 1:38 PM), http://www.pcworld.com/businesscenter/article/183640/why_the_fcc_should_stop_comcast_from_buying_nbc.html (last visited Apr. 2, 2011).

[47] See Helberger, supra note 40, at 80.

[48] Id. at 79.

[49] Parliament and Council Directive 13/2010, On the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the provision of audiovisual media services (Audiovisual Media Services Directive), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:095:0001:0024:EN:PDF (last visited Apr. 2, 2011).

[50] Media are mainly regulated on the level of the Member States.

The Anglo-saxon trust has not (yet) found its way into the Swiss legislation: there is currently no Swiss substantial law on trust. To date, a trust can only be established according to the foreign law the settlor chooses as governing law. However, despite the lack of substantial trust provisions, Swiss courts have been dealing with trusts since 1874 and the Swiss government authorized the settling of foreign business trusts since 1957^[1], so as to enable Swiss companies to transfer their assets abroad in case of war or invasion.^[2]

Until recently, Switzerland was one of the largest trust administration centers in the world which did not recognize the existence of trusts. The trust as unknown foreign structure was partly attributed to contractual law and partly to corporate law. ^[3] This led to several issues, among others conflict of law, segregation of trust assets from the trustee’s patrimony and taxation of trusts. With globalization of the financial markets and the demand for a reliable assessment of trusts administered in the country, Switzerland eventually ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1^st of July 1985 (the “Hague Trust Convention”) which eliminated those issues and led to the recognition of the trust as a legal structure sui generis.

The present article provides a summary overview of the substantive Swiss provisions applicable to trusts that, although trust-specific, need to be complied with. A selection of recent Swiss case law regarding trust-related issues follows, with an outlook on possible future developments in Switzerland regarding trusts.

II.Current Legislation in Switzerland Affecting Trust Relationships

Switzerland underwent a change of paradigm in recent years which peaked with its recognition of the trust as a legal structure sui generis. After the Hague Conference implemented the Hague Trust Convention, Switzerland ratified this Convention with effect as of 1^st of July 2007, pursuant to the Swiss Federal Council’s Bill of 20^th of December 2006^[4]. Although it is still impossible to settle a “Swiss trust”, a definition of trusts was introduced providing Swiss authorities and courts a useful tool in dealing with foreign trusts. However, it should be noted that the Hague Trust Convention does not deal with taxation issues.^[5]

Further, the implementation of the Hague Trust Convention led to the introduction of new provisions in the Swiss Private International Law Act (“SPILA“)^[6] and in the Swiss Debt Collection and Bankruptcy Act (“SDCBA“)^[7]. In the latter legislation, a new provision specifies that trust assets constitute a separate fund independent from the Trustee’s own patrimony.^[8] It did not trigger any changes of the Swiss Civil Code and Swiss Code of Obligations, notably no substantial provisions dedicated to trusts were introduced.

Moreover, there is no duty for professional trustees to register with a specific supervisory authority in order to operate in Switzerland unlike in some other countries.^[9] The private industry moved fast to establish an adequate regulatory framework. In 2007, some key Swiss trust companies founded the Swiss Association of Trust Companies (“SATC“), the purpose of which is furthering and developing trustees’ activities in Switzerland as well as promoting the adherence to certain professional and ethical standards. The association SATC published minimum standards of professional credentials and a code of ethics to provide security to clients and to ensure that Switzerland remains a highly-professional jurisdiction for trust business.^[10]

In addition to such ethical standards established by the private industry, Switzerland has implemented various financial regulations which are also applicable to trusts, namely to trusteeships provided they fall within the respective scope of application. As Switzerland has no interest in serving as a haven for the proceeds of crime, it has enacted comprehensive legislation for preventing unwanted proceeds from entering the Swiss financial system by adapting among others the Federal Act on Anti-Money Laundering (“AMLA“).^[11] Since 1998, AMLA provisions also apply to Swiss resident trustees if they qualify as financial intermediaries. Are deemed financial intermediaries all persons, whether legal entities or individuals, who on a professional basis accept, keep on deposit or help to invest or transfer assets belonging to third parties. The Swiss Financial Market Supervisory Authority^[12] (“FINMA“)’s practice states that trustees are deemed financial intermediaries, because the assets in trust are separate from their own personal patrimony.^[13] Trustees falling under the AMLA’s scope need to comply with due diligence duties, such as verifying the contracting partner’s identity, establishing the beneficial owner’s identity, clarifying the economic background and purpose of any prima facie unusual transaction, keeping track of every transaction, implementing adequate organizational measures to fulfill their duties etc. These due diligence duties are further completed by minimum standards enacted by the Swiss Banking Association, the so called Swiss Bank’s Code of Conducts[14] that compels Swiss banks to identify clients and beneficial owners. Specifically, in the case of trusts, Swiss banks must secure a specific written declaration from the trustee that varies depending on the nature of the trust considered: In case of revocable trusts, the trustee must identify the person entitled to revoke (not nominee) as the beneficial owner; for irrevocable discretionary trusts, he must provide a written declaration identifying the effective settlor (not nominee), listing the persons entitled to give instructions to the trustee, the persons likely to become beneficiaries by categories as well as any curator or protector.^[15] The AMLA further imposes reporting duties on trustees: if circumstantial evidence gives rise to a suspicion that the financial assets they hold stem from a crime, trustees must inform the competent authority, they must also clarify the background and purpose of a prima facie suspicious transaction, and if doubts remain, they need to inform without delay the Swiss Money Laundering Reporting Office and freeze the suspicious assets for up to five business days without informing the client.^[16]

Protectors may also fall under the AMLA’s scope of application if they are deemed financial intermediaries. This depends on the extent of their powers under the trust: they are not subject to due diligence duties if their sole function is to appoint and dismiss the trustee. Should they, however, be entitled to make financial decisions, by themselves or together with the trustee, they are deemed financial intermediaries and must thus comply with the above-mentioned duties.^[17] The power to distribute trust assets to beneficiaries and the power to select the beneficiaries are considered as financial decisions.

In addition to the AMLA, trustees may be subject to the Swiss Federal Act on Stock Exchange and Securities Trading (“SESTA”).^[18] Indeed, trustees who act as broker-dealers, underwriters or derivative houses and who are not expressly exempted from this legislation are required to obtain a business license from the FINMA and must comply with specific regulatory duties.^[19]

Finally, trustees, protectors and banks operating in Switzerland have a general duty to uphold the privacy of a client’s personal data. The settlor’s or client’s privacy is indeed protected under the general provisions of the Swiss Civil Code relating to protection of the individual as well as under data protection legislation, notwithstanding more specific provisions such as banking secrecy or attorney-client privilege.^[20]

III. Application of the Trust Concept– A Selection of Recent Swiss Cases
According the Hague Trust Convention, a trust is defined as “the legal relationship created – inter vivos or on death – by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose” (art. 2 par. 1). Further, the trust enjoys the following characteristics: the assets constitute a separate fund of the trustee’s own estate (art. 2 par. 2 lit. a), the trustee acquires ownership of the trust funds (art. 2 par. 2 lit. b) and the trustee has to manage the trust fund in accordance with the trust terms (art. 2 par. 2 lit. c). In contrast, the civil-law fiduciary agreement which some try to equate to the trust as an asset management vehicle, and specifically the fiduciary contract developed under Swiss law is based on a contractual relationship between the original owner of the assets and the fiduciary, whereby the assets become part of the fiduciary’s patrimony and are as such administered for the original owner’s benefit (and not for a third party).

The following selection of Swiss case law shows that, despite differences in civil-law and common-law understanding, Swiss courts apply common law principles and understand the trust concept by rendering judgments that have correctly implemented the trust in the Swiss legal landscape since 1874. Case law was particularly rich in recent years in the area of international mutual assistance, as triggered by American requests for information on Swiss bank accounts held by US persons. Further, trusts are also used to hold property in Switzerland and Swiss administrative courts have thus rendered decisions in this matter. Finally, some cases dealing with procedural aspects of trust-related disputes shall be summarized.

1. International mutual assistance
The Swiss Federal Administrative Court has been most active in the past years, dealing with trust-related matters in connection with the Agreement concluded between Switzerland and the USA regarding the transfer of information of US clients holding an UBS account.^[21] However, the cooperation of these two countries in tax related requests for mutual assistance reaches further back: Already in 1996, Switzerland and the USA had concluded a Double Tax Treaty agreeing to exchange information, “which is necessary for carrying out the provisions of their double tax treaty of for the prevention of tax fraud of the like in relation to the taxes covered by this double tax treaty“.^[22] In 2003 then, Switzerland and the USA further specified what “tax fraud or the like” meant and issued a series of examples. On 19^th of August 2009, Switzerland then concluded the said Agreement regarding information to be provided by the Bank UBS AG compelling Swiss authorities to hand over certain data of US clients holding an UBS account. An additional Protocol was concluded on 31^st of March 2010 that included tax evasion as well within the scope of application of the above agreements. Related to those agreements, the Swiss Federal Administrative Court rendered several decisions developing a substantial body of trust precedents.

In a leading case dated 18^th of March 2011,^[23] the Swiss Federal Administrative Court ruled that the concept of “beneficially owned” must be construed autonomously and that it differed from the term “effective beneficiary” (“bénéficiaire effectif”) provided by the 1996 Double Tax Treaty and the OECD Model Treaty. The Court held that the notion of “beneficially owned” is used in a different manner and for different purposes than in the 2009 Agreement. However, it considered that in all three conventions, the term served to describe the intensity of the relation between the tax subject (beneficial owner) and the tax object (trust assets) from an economic point of view.^[24] The Court further pointed out that recent scholars assert that this term needs to be determined by a “substance over form” approach, which takes into consideration the economic reality of things rather than a purely legal perspective based on civil law considerations. Accordingly, the Court denied the US request for international assistance by holding that the beneficiary of an irrevocable discretionary trust cannot be considered as the beneficial owner of the trust’s bank account. In this case, the appellant (who was named as beneficial owner in the UBS bank documents) succeeded to refute the presumption of beneficial ownership by showing that he had from an economic perspective no means to access or dispose of the trust assets held on the UBS account which was opened in the name of the trustee, the latter having discretionary power to distribute the assets. The Court recalled on this occasion that beneficiaries of an irrevocable discretionary trust only acquired an equitable ownership as opposed to a full legal title, and that such equitable ownership could be compared to a future interest but did not entitle its beneficiaries to dispose of the trust assets according to their needs.

These considerations were confirmed by subsequent judgments rendered by the Swiss Federal Administrative Court, in which it repeatedly affirmed its “substance over form” approach for all types of offshore companies and vehicles. In situations where an offshore company was only established for tax evasion purposes or solely serves to avoid one’s obligation to declare one’s assets, the term “beneficially owned” must be understood as the person having effective dispositive power of the offshore entity’s assets. In this respect, the Court specified that any entity – regardless whether it equates a corporate structure provided by Swiss or US law – that can enter into financial relations with a bank and that can hold assets through such financial institution may be qualified as an offshore entity for the purposes of the Agreement.^[25]

In another case, the Swiss Federal Administrative Court denied that assets held in trust were “beneficially owned” by the appealing individual taxpayer: the Swiss tax authority had argued that, even if the appellant’s mother was named as beneficial owner in the relevant bank documents, the appellant was apparently disposing in fact of the assets. Specifically, it claimed that the appellant was entitled to make investment decisions concerning the trust assets. However, the Court held that a mere power to make investment decisions does not meet the standard of proof necessary to qualify a person as beneficial owner of the trust’s assets. In fact, the evidence submitted by the bank showed that the appellant enjoyed such investment power, but that such power required the mother’s previous consent. Thus, the Court again denied the US request for international assistance by applying its “substance over form” approach to the appellant, who could not be deemed beneficial owner as his discretionary powers over the asset in trust were only limited to investment decisions, that were moreover  subject to a third party’s prior consent.^[26]

In a further case, the same Court again denied the US request for international administrative assistance where a Swiss resident settlor had settled two revocable trusts for the benefit of her two children both of them being US persons. These trusts held four underlying offshore companies, which each held bank accounts at UBS. The Court held that the beneficiaries did not enjoy any right to administer or dispose of the trust assets, because beneficiaries of a revocable trust were not entitled to any distributions and because the settlor has not divested herself of such assets when settling the revocable trusts.^[27]

On 1^st of July 2011, the Swiss Federal Administrative Court rendered another judgment deciding that potential future beneficiaries mentioned in a letter of wishes of a revocable trust (whose settlor was also its lifetime beneficiary) were innocent third parties and thus ordered the redacting of their names before the international administrative assistance was granted to the USA.^[28]

Besides the Swiss Federal Administrative Court, the Swiss Federal Supreme Court has also rendered judgments in the area of international mutual assistance. In a recent case, it confirmed that the trustee, as holder of the bank account affected by a request for mutual assistance in criminal matters, had standing to challenge the FINMA’s decision – rather than the settlor, the beneficiary or the account’s ultimate beneficial owner. This decision highlights the importance for banks (and other professionals in the trust industry) to avoid use of the term ‘client’ when dealing with beneficiaries of trusts, because this term ‘leaves little doubt on the effective role of the trust beneficiary in managing the trust’.^[29]

2. Swiss real estate law

Since 2002, EU nationals residing in Switzerland can freely acquire Swiss property. They no longer require a so called “Lex Koller”^[30] authorization, contrary to non-resident foreigners who are still submitted to a preliminary administrative authorization in order to become owners of a Swiss property. (Incidentally, EU nationals are also entitled to obtain a Swiss residence permit without gainful activity, provided they have a health insurance and sufficient financial means.) Further, since 2007, it is also possible to hold Swiss property in trust. However, in such case, the owner of the Swiss property will usually be the trustee.^[31]

In a case concerning a French national, the Swiss authority had authorized him to purchase property in Saanen, in the Canton of Bern. The French national was also settlor of a trust and wished to transfer the title of such property into the trust, which was administered by a Swiss national trustee. The authority held that the title transfer of a property held by a foreign resident to a Swiss national could take place without authorization and, thus, exempted the title transfer in trust from the Lex Koller. The authority also specified that such authorization did not entitle the French national settlor and former owner of the Swiss property to take up domicile in Switzerland and/or remain in Switzerland.[32]

In another case, the Land Register Commission of the Canton of Vaud, however, specified that the Lex Koller prohibits in general the “fiduciary acquisition” of Swiss property. An American couple, co-owners of a Swiss property in Canton of Vaud, had requested to secure an annotation as “belonging to a trustee” over their property in the Swiss land register.  Despite making reference to the Hague Trust Convention, the Commission held that a trust represented something between a fiduciary agreement and a foundation, that the settlement of a trust transferred assets to one or several trustee(s) with the duty to administer them and use them in a pre-defined purpose, and that trustees were holding the assets “on a fiduciary basis” (i.e. the trustee acquired full fiduciary ownership, although the trust assets were ring-fenced from his own assets). However, the Lex Koller generally excludes fiduciary acquisition of property in Switzerland. Thus, the Commission denied the request on the basis that Swiss property could only be held directly and not by way of “fiduciary acquisition”, thus denying the possibility of having a reference to a trust annotated in a Swiss land register. ^[33] The American couple rightly appealed this surprising decision. Unfortunately, as the appellant did not advance the court fees within the prescribed timeframe, their appeal was dismissed – rather sadly as it faired very good chances further to Switzerland’s ratification of the  Hague Trust Convention.

3. Procedural aspects – Standing to sue

Apart from the above substantial issues surrounding trusts, Swiss courts also have dealt with several procedural aspects involving trusts and their stakeholders.

In A. v the Federal Prosecutor Office^[34], the Swiss Federal Supreme Court had to decide on the standing to sue in trust matters.[35] In this case the Swiss federal prosecutor had frozen funds deposited in Switzerland with a Bahamian bank that related to an independent fund manager who was suspected of having administered assets belonging to a Spanish drug lord. These funds represented management fees and commissions that the manager had received for his professional services. However, they were deposited on the Swiss bank account which was held by an irrevocable trust settled by the manager, of which he was also the beneficiary. The Swiss Federal Supreme Court first recalled that the right to sue under Swiss law or the right to raise a specific claim in a judicial procedure is in principle granted to any holder of such claim. Established Swiss case law further states that only the direct owner of funds, e.g. the account holder, is entitled to challenge a freezing order.^[36] The Court then noted that the settling of a trust resulted in the split of ownership rights between the trustee (who enjoys legal title over the trust assets) and the beneficiaries (who held an equitable interest over such assets). However from the Swiss perspective, the latter could only be deemed an ‘economic ownership’, which did not equal to direct ownership necessary to have standing for challenging a freezing order. The Swiss Federal Supreme Court thus concluded that the wealth manager did not have standing to sue, as he was solely beneficiary of the trust, whose trustee was the sole account holder.

In another case, the Swiss Supreme Court found that a protector of a trust established by the deceased settlor – who had also been appointed as executor of the decedent’s will – has standing to sue, although not based on his role as protector, based upon his role as executor.^[37]

IV. Heading towards a Swiss Trust Law?

Given the above developments, where are trusts in Switzerland heading to?

Recently, international discussions in various forums on abusive tax shelters led to numerous reforms in European legislation. Countries around Switzerland are anxious to re-enforce their legislation in order to prevent assets to be distraught from taxation. Further, Switzerland has experienced a lot of foreign pressure to terminate its banking secrecy. These pressures have affected the political agenda in Switzerland and, on various occasions, the question was asked whether Switzerland needs to implement its own substantial trust law, notably in order to compete on a level playing field with other international financial centers. Indeed, among the 10 global financial centers (including China and Japan), Switzerland is the only country without its own trust legislation.^[38]

Already in 2009, Swiss parliamentarians complained about the lack of clear international regulations in order to determine the “beneficial owners” of foreign discretionary trusts, the lack of which may ultimately result in being able to shield assets from taxation. Asked whether new internal legislation was intended and whether international standards would follow, the Swiss Federal Council replied that there were no plans to introduce the “trust” as a proper legal institute into the Swiss Civil Code; thus, trusts can only be settled under foreign law and not Swiss law. On the international front, the Council added that the OECD regularly gathers information on each country’s regulations regarding beneficiaries’ and settlors’ identification, but that the OECD had no projects to do the same with regard to beneficial owner identification, although the Financial Action Task Force (FATF) had adopted standards regarding the identification of beneficial owners of trusts. The Federal Council moreover specified that it would take the necessary measures for enhancing the transparency within the Swiss financial markets, even if these were not provided by the OECD. Further, it pointed out that, with already more than 70 double tax treaties, Switzerland had strongly engaged itself to combat tax fraud as such cooperation encompassed the disclosure of information concerning beneficiaries of discretionary trusts who might be involved in a criminal tax procedure.^[39]

The problematic of trusts has been also raised in connection with Swiss banking secrecy. Several Swiss parliamentarians believe that foreign structures, such as the Anglo-Saxon trust has the same effect as banking secrecy, namely not to disclose the effective beneficial owner’s identity; thus, as long as such structures are legally allowed and protected, Swiss banking secrecy should not be terminated either. While emphasizing its preoccupations for protecting each client’s privacy and ensuring a competitive environment for the Swiss financial market, the Swiss Federal Council does not see any necessity to re-enforce internal regulation by introducing a Swiss trust law and considers the country to be at arm’s length with its contracting partners worldwide, including the USA as well as the UK and its offshore dominions.^[40] In general, Swiss parliamentarians seem keen to require the availability of similar financial means and structures than those at disposal in foreign financial centers in order to maintain Switzerland’s competitiveness.[41] This demand was taken up again in 2010 in relation with the Federal Council’s report on “Strategic Directions for the Swiss financial market policy” of 16^th December 2009, which calls among others for the creation of a Swiss trust law – the latter “having to be examined in minute detail” according to the Federal Council.^[42]

Despite the Swiss Parliament’s pressure for introducing a proper Swiss trust law or at least implementing some additional provisions on trusts, the Federal Council has left the question open to date. Thus, in the scope of the current revision of the Swiss foundation law, the Council held that the introduction of a Swiss trust law should be examined at a later stage^[43].

V. Conclusion

Positive developments have taking place in Switzerland with regard to trusts, especially since the ratification of the Hague Trust Convention. Further integration may be expected so as to enable Switzerland to maintain a leading position in the global financial market. Thus, it may only be a matter of (Swiss) time before the country introduces its own internal trust law.

1. Introduction

The Cyprus legal order reflects the cosmopolitan nature of the island and the diversity of influences on its history. Elements of Ottoman law and continental European law can still be found, particularly in its succession and constitutional law. However, the predominant influence on the Cyprus legal system is British: prior to independence in 1960 Cyprus was a British colony, and much of its law, including its trust law, reflects the British influence. Although many of the laws in place at the time of independence have since been repealed and replaced, or at least significantly amended, and new laws have been introduced, there is still a substantial volume of law which would be familiar to the English practitioner of the mid-twentieth century, including the Trustee Law of 1955 (Cap.193), which closely follows the English Trustee Act 1925 and continues to regulate domestic trusts.

When Cyprus became independent the Constitution provided that the existing laws should remain in force in the Republic until repealed or amended by its own laws. The English doctrines of equity were formally introduced into the post-independence legal order by section 29 of the Courts of Justice Law (14 of 1960), which requires the courts to follow English common law and equitable principles unless there are other provisions to the contrary under Cyprus law or such adherence would be inconsistent with the Constitution. However, very few trust issues have come before the Cyprus courts and domestic case law is limited.

In the early 1990s, as a step on the road to establishing itself as an international financial centre, Cyprus enacted the International Trusts Law, Law 69 of 1992 (“the International Trusts Law”), which provides a framework for the establishment of trusts in Cyprus by non-residents.

It should be noted in passing that there is also a law allowing the establishment of foundations (the Associations and Foundations Law of 1972) but it is outdated and has fallen out of use due to the high degree of bureaucracy involved.

Cyprus trust law follows familiar common law and equitable principles. Trusts are divided into two main types, namely private trusts, the object of which is to benefit private individuals, on the one hand and charitable trusts, with a charitable purpose (such as the relief of poverty or the promotion of education, religion or welfare) and a public benefit. Non-charitable purpose trusts (for example for the maintenance of family tombs), are permitted. Private trusts are enforceable at the instance of the beneficiaries. Charitable trusts are generally enforced at the suit of the Attorney General acting on behalf of the state.
Trusts may also be fixed or discretionary: a fixed trust is one in which the share or interest of the beneficiaries is specified in the trust instrument; a discretionary trust is one in which the trustees hold the trust property on trust for such member or members of a class of beneficiaries as they shall in their absolute discretion determine.

Rather than reiterating the general principles of common law and equity which Cyprus trust law follows (and which are readily available in any general textbook on trust law) this article will focus on the International Trusts Law of 1992, the considerable tax-planning and asset protection potential of trusts established under the International Trusts Law, and current proposals for amendment which will further increase its benefits.

II. The Cyprus International Trust

It should be noted at the outset that the International Trusts Law is not a self-contained statute, but rather a law built on the existing statutory base (particularly the Trustee Law of 1955). The general principles of trust law continue to apply unless and to the extent that they are overridden by a specific provision of the International Trusts Law.
An international trust must satisfy all the following requirements, set out in section 2 of the International Trusts Law:

• the settlor may not be a permanent resident of Cyprus;
• no beneficiary (other than a charity) may be a permanent resident of Cyprus;
• the trust property may not include any real property situated in Cyprus;
• at least one trustee must be resident in Cyprus at all times.

At the time the International Trusts Law was enacted Cyprus had a separate tax regime for "offshore" enterprises, with no activities in Cyprus. Section 2 contains a proviso that an offshore enterprise may act as trustee, and that an offshore company or partnership can be the settlor or beneficiary of an International Trust. Although the separate taxation regime has been abolished, these provisions remain effective.

Section 5 of the International Trusts Law provides that an international trust may remain in force for up to 100 years notwithstanding any statutory provision of Cyprus or any other country to the contrary. Charitable trusts and purpose trusts, which are defined in section 7 of the International Trusts Law, may continue indefinitely. The income of an international trust can be accumulated for the entire duration of the trust (section 6).
The International Trusts Law does not limit the trustees’ investment powers in any way, but merely requires that they be exercised in accordance with the trust instrument and with the diligence and the prudence which a reasonable person would be expected to exercise when he makes investments (section 8 ).
If the terms of the trust so provide, the applicable law of an international trust may be changed from or to Cyprus, provided that the law of the other jurisdiction involved recognises the validity of the trust and the respective interests of the beneficiaries, and the change of jurisdiction (section 9). The Cyprus courts have powers to vary the terms of an international trust along the lines of the English Variation of Trusts Act 1958. They may amend or cancel the terms of an international trust or the powers of the trustees to manage the trust if they are satisfied that the proposed arrangement will be in the interest of the person on whose behalf the application is made and no substantial prejudice is caused to the interests of any other party concerned (section 10).
There is a fixed stamp duty of €427 payable on the creation of an international trust, but there is no requirement for the trust to be registered. Section 11 of the International Trusts Law provides that no-one may disclose information regarding the trust to third parties except under an order of a Cyprus court.

In summary, in terms of establishment and maintenance, the Cyprus international trust provides convenience, security, simplicity, flexibility and confidentiality, based on a well-established legal framework. However, the Cyprus international trust has a number of important tax advantages and asset-protection features that set it apart.

III. Tax Advantages of the Cyprus International Trust

Cyprus international trusts enjoy a number of tax exemptions, providing significant tax planning possibilities:

• Income arising outside Cyprus is exempt from Cyprus tax.
• Dividends, interest and other income are exempt from tax and withholding tax, irrespective of source.
• Gains on the disposal of assets are not taxable in Cyprus.

Cyprus international trusts may also benefit from the application of the provisions of Cyprus’s wide network of double tax treaties, particularly in the area of capital gains.
There are no succession taxes in Cyprus.

IV. Asset Protection Features of the Cyprus international trust

The purpose of an asset protection trust is to establish a firewall around the settlor’s assets to protect them from claims that may subsequently arise. Asset protection trusts are popular with professionals, particularly medical professionals, to provide additional protection over and above professional indemnity insurance (and limited liability in certain professions). Limitation periods may be long, and medical conditions may not become apparent for many years, meaning that claims may emerge long after the event, perhaps even after the individual has ceased to practise and insurance has lapsed. The prudent practitioner may therefore add another bulwark to his defences in the form of an asset protection trust. In personal life, in the light of the substantial awards that courts in certain jurisdictions are making, an asset protection trust may be used to provide added reassurance against claims on breakdown of marriage or civil partnership. Certain countries have forced heirship provisions in their succession law, reserving a specified portion of the deceased’s estate for relatives, and an asset protection trust provides a means of regaining freedom of testation.

By their nature, all trusts provide an element of asset protection, by separating the assets held in trust from the settlor’s general assets, which would be available to satisfy his debts or, if the worst came to the worst, pass to his trustee in bankruptcy. However, the Cyprus international trust has four additional advantages.
The first is that the International Trusts Law contains a very strong presumption against avoidance of a Cyprus international trust. Section 3(2) provides that notwithstanding the provisions of any bankruptcy or liquidation laws in Cyprus or in any other country, and notwithstanding the fact that the trust is voluntary and without consideration, and notwithstanding the fact that it is made for the benefit of the settlor or his family members, the trust will not be void or voidable unless it is proved to the court that the trust was made with intent to defraud persons who were creditors of the settlor at the time when the payment or transfer of assets was made to the trust. The burden of proof of the settlor’s intent to defraud lies with the person who is seeking to annul the transfer. Section 3(3) requires any action for avoidance of the trust to be instituted within two years from the date of transfer or disposal of the assets to the trust.
These provisions, particularly the requirement to prove intent to defraud on the part of the settlor, set the bar very high for the claimant trying to set aside a transfer to a Cyprus international trust. While the standard of proof is the civil standard of "more likely than not" rather than the criminal standard of "beyond reasonable doubt", it is extremely difficult to meet in practice and the burden of proving fraud is higher than is usual for civil cases. In practice, the claimant would need to adduce strong evidence to demonstrate that the settlor intended to defraud his creditors.

The person challenging the trust must establish that he was a creditor of the settlor at the time the assets were transferred to the trust. The International Trusts Law does not elaborate on the definition of creditor, and it is not clear whether a contingent or prospective creditor would qualify and, if so, what likelihood of the claim crystallising would be required. The introductory commentary to the International Trusts Law says that its asset protection features are intended to offer “a legitimate protection to persons who may be engaged in high risk professional activities, such as surgeons, architects or members of Lloyds where very substantial damage awards made against them at some future time could result in the financial ruin of their families” and not a means for settlors to cheat their existing creditors. Almost twenty years have passed and the provisions have not yet been tested in a Cyprus court but it is not unreasonable to expect the courts to follow that guidance.

In 1976, Cyprus enacted a law to ratify the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, under which judgments obtained in courts of countries which are signatories to the Convention may be enforced in Cyprus provided that certain criteria are met. Article 1 of the Convention makes it clear that the provisions of the Convention do not apply to decisions about the capacity of persons or questions of family law, including personal or financial rights and obligations between parents and children or between spouses, maintenance obligations, questions of succession and questions of bankruptcy, including those relating to the validity of acts of a debtor. In view of the above, together with the contents of section 3(b) of the International Trusts Law, the possible enforcement of a foreign decree of bankruptcy in Cyprus, as well as the enforcement of any other foreign judgment obtained in respect of the settlor’s property, is effectively ruled out, and an aggrieved party may obtain relief only by bringing an action against the trustees within the two year period and would have to discharge the onerous burden of proving intention to defraud. A plaintiff domiciled outside the European Union would be required to provide security for costs under Order 60 of the Civil Procedure Rules.
For British settlors Cyprus has a distinct advantage over many other competing jurisdictions, including most Commonwealth countries, particularly the Caribbean islands and Bermuda, in that it is not a party to the arrangements established by section 426 of the Insolvency Act 1986, which commit British courts and the courts of certain other jurisdictions to co-operate in insolvency cases.
Finally, the Statute of Elizabeth 1571, which invalidates arrangements made to hide assets from future creditors and remains in its original or modified form on the statute books of many offshore trust jurisdictions, including the BVI, Gibraltar, Hong Kong, the Bahamas, Bermuda, the Cayman Islands and Turks & Caicos, is expressly negated in Cyprus.
In terms of freedom of testation, the International Trusts Law explicitly states that a Cyprus court will not enforce the inheritance rules of any country so as to upset the validity of a Cyprus international trust.

In summary, therefore, within Cyprus the asset protection defences of the International Trusts Law are likely to stand firm as long as the trust is properly constituted and is established to provide prudent protection against potential claims rather than as an attempt to fraudulently deprive existing creditors of their legitimate rights.
Antipathy in the large Western economies towards offshore jurisdictions and legitimate tax mitigation and wealth preservation techniques has intensified in recent years, particularly with the collapse of tax revenues in some of the developed economies. As a result, attacks on offshore structures are likely to attract popular sympathy and judges in those countries are likely to be ever more eager to set aside trusts. However, in the words of Munby J in the English case A v A (St George Trustees Ltd and others, interveners) [2007] EWHC 99 (Fam), while courts are entitled to adopt a “robust, questioning and where appropriate, sceptical approach” to offshore structures, they cannot “simply ride roughshod over established principle".

V. Proposals for amendment of the International Trusts Law of 1992

The Cyprus International Trust has proved very popular, especially with settlors from Russia and Central and Eastern Europe. The world has changed considerably since it was introduced and the laws of leading jurisdictions have undergone a transformation. There is general consensus that the International Trusts Law requires modernisation and a proposed amendment has been published for consultation.
The main proposed changes are in the following areas:

• the definition of a Cyprus international trust
• exclusion of overseas law
• reserved powers
• abolition of restrictions on duration of trusts
• redefinition of charitable purposes
• extension of trustees’ investment powers
• variation of trusts
• confidentiality
• directions hearings
• choice of law rules
• jurisdiction
• foreign law trusts.

They are analysed in paragraphs 0 to 0 below.

1.Definition of a Cyprus International trust

When the 1992 law was drafted, the availability of international trusts was restricted to non-resident settlors in order to prevent tax avoidance by Cyprus residents. Uncertainty over whether settlors could relocate to Cyprus after establishing a Cyprus International Trust has undoubtedly discouraged many of them from doing so. The first of the proposed amendments requires the settlor to be a non-resident at the time the trust is created. It removes the prohibition on resident beneficiaries and on ownership of immovable property in Cyprus, thus avoiding difficulties that might otherwise arise if the settlor or any beneficiary were subsequently to take up residence in Cyprus.

2.Exclusion of overseas law

The proposed amendment further reinforces the asset protection features of Cyprus International Trusts by inserting a new section 3(1)(A) providing that any question relating to the validity or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without reference to the law of any other jurisdiction, and that the law of relating to inheritance or succession in force in Cyprus or any other country will not in any way affect the validity of the international trust or any transfer or disposition of property to it. Section 3(1)(E) makes it clear that the trustees’ fiduciary powers and duties of trustees and the powers and duties of any protectors of the trusts are governed exclusively by Cyprus law.
A proposed new section 3(4) provides further explicit protection against the application of foreign law, as follows:

3(4) No international trust, and no disposition of property to or upon such a trust, is void, voidable, liable to be set aside, invalid or subject to any implied condition, nor is the capacity of any settlor, trustee, enforcer, protector or beneficiary to be questioned, nor is any settlor, trustee, enforcer, protector, beneficiary or third party to be subjected to any obligation or liability or deprived of any right, claim or interest, by reason that:
(a)the laws of any other jurisdiction prohibit or do not recognise the concept of a trust, or
(b)the trust or disposition
(i)avoids or defeats or potentially avoids or defeats rights, claims, interests, obligations or liabilities conferred or imposed by the law of any other jurisdiction on any person –
(A)by reason of a personal relationship to a settlor or any beneficiary, or object of a discretionary trust or power of any nature, or
(B)by way of heirship rights, or
(ii)contravenes or potentially contravenes any rule of law or any judicial or administrative judgment, order or action of any other jurisdiction intended to recognise, protect, enforce or give effect to any such rights, claims, interests, obligations or liabilities, whether by seeking to invalidate the trust or disposition or by imposing on a settlor, trustee, enforcer, protector, beneficiary or third party any obligation or liability or otherwise.

3.Reserved powers

A new Section 4(A) is proposed, similar to article 9A of the Trusts (Jersey) Law 1984, as amended and section 15, Trusts (Guernsey) Law 2007, permitting the settlor to reserve powers to himself, to retain a beneficial interest in trust property, or to act as the protector or enforcer (the equivalent role for a non-charitable purpose trust).

4(A)(1) Notwithstanding any other legal provision or rule of law, the reservation or grant by a settlor of a trust of –
(a) any beneficial interest in the trust property; or
(b) any of the powers mentioned in paragraph (2), whether reserved to the settlor or conferred on him in the capacity as protector or enforcer of the trust,
shall not in any way affect the validity of the trust nor delay the trust taking effect.
(2) The powers are –
(a) to revoke, vary or amend the terms of a trust or any trusts or powers arising wholly or partly under it;
(b) 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;
(c) 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;
(d) to give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, borrowing, pledging or charging of the trust property or the exercise of any powers or rights arising from such property;
(e) to appoint or remove any trustee, enforcer, protector or beneficiary;
(f) to appoint or remove an investment manager or investment adviser;
(g) to change the proper law of the trust;
(h) 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.
(3) Where a power listed in paragraph (2) has been reserved or granted by the settlor, or in his capacity as protector or enforcer of the trust, a trustee who acts in accordance with the exercise of the power is not acting in breach of trust.
(4) Where a power listed in paragraph (2) has been reserved to the settlor, or conferred on him in the capacity as protector or enforcer of the trust, no intention to defraud may be imputed to the settlor for the purposes of section 3(2).

4.Abolition of restrictions on duration of trusts

Section 5(1) of the 1992 law restricts the maximum life of an international trust to 100 years from the date on which it came into existence. Subsection 5(2) provides an exception for charitable trusts and non-charitable purpose trusts, which can exist in perpetuity. This was norm at that time, but in the intervening period many competing jurisdictions, including Jersey and Guernsey, have provided for perpetual trusts, unlimited in duration, removing a perceived disadvantage of trusts vis à vis foundations.
The proposed amendment provides that from the date the amendment takes effect and subject to the terms of the trust, there will be no limit on the period for which a trust may continue to be valid and enforceable, and no rule against perpetuities or remoteness of vesting or any analogous rule will apply to a trust or to any advancement, appointment, payment or application of property from a trust. Except where the terms of a trust expressly provide to the contrary, no advancement, appointment, payment or application of income or capital from the trust to another trust is invalidated solely by reason of that other trust continuing to be valid and enforceable beyond the date on which the first trust must terminate. Section 6 of the 1992 law, which provides that income can be accumulated for the duration of the trust, remains in effect.

5.Redefinition of charitable purposes

The definition of charitable purposes in section 7 of the Law is based on English law at the time the Law was enacted. The proposed amendment will align the definition of charitable purposes with the definition set out in the Charities Act 2006 (England & Wales):

Subject to the provisions of the Constitution of the Republic and notwithstanding the existence of any contrary legal provision of the law of the Republic or any other country an international trust shall be deemed to be charitable where the trust has as its main purpose the achievement of one or more of the following:
(a) the prevention or relief of poverty;
(b) the advancement of education;
(c) the advancement of religion;
(d) the advancement of health or the saving of lives;
(e) the advancement of citizenship or community development;
(f) the advancement of the arts, culture, heritage or science;
(g) the advancement of amateur sport;
(h) the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity;
(i) the advancement of environmental protection or improvement;
(j) the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage;
(k) the advancement of animal welfare;
(l) the promotion of the efficiency of the armed forces of the Republic, or of the efficiency of the police, fire and rescue services or ambulance services;
(m) other purposes beneficial to the public in general; or which may reasonably be regarded as analogous to, or within the spirit of, any purposes falling within any of paragraphs (a) – (l) above.

The amendment also provides that an international trust established for one or more of these objects will be deemed to be charitable, notwithstanding that:

(a) the object or purposes are not of a public nature or for the benefit of the public, but may benefit a section of the public, or that it may also benefit privately one or more persons or objects or persons within a class of persons; or
(b) the international trust is liable to be amended or to be terminated whether by the exercise of a power of appointment or disposition of assets; or
(c) the trustee has the power to defer the distribution of the benefits to any charity of the trust for a period not exceeding the period of the trust; or
(d) the international trust is or is deemed to be in the class of discretionary trusts.

6. Extension of trustees’ investment powers,

As noted earlier, the existing Law does not limit the trustees’ investment powers, but merely requires that they be exercised in accordance with the trust instrument and with the diligence and the prudence which a reasonable person would be expected to exercise when he makes investments. The proposed amendment gives trustees the same investment powers as those of an absolute owner, allowing them to invest in a broader range of investments for the best interests of the beneficiaries. This brings the trustee’s investment powers into line with those of a trustee in England and Wales, and other trust jurisdictions which have followed the English Trustee Act 2000, including Malta.
The proposed amendment also removes any doubt regarding trustees’ ability to invest in Cyprus by including a new section 8(3):

For the avoidance of doubt, the trustee may hold, retain or invest in movable property in the Republic and overseas (including shares in companies incorporated in the Republic); and immovable property located in the Republic and overseas.
The abolition of the prohibition on investment in Cyprus will remove an obstacle to inward investment and provide a boost to the real estate market, which has stagnated since onset of the global economic crisis.

7. Variation of trusts

The existing Law makes provision in section 10(1) for the court to approve the variation of international trusts on behalf of certain specified persons who cannot freely consent for themselves (such as the unborn and persons lacking legal capacity). A new section 10(1)(e) is proposed, based on section 57(1)(e) of the Trusts (Guernsey) Law 2007, allowing the court to approve a variation on behalf of any other person, with leave of the court. A further amendment to section 10 expressly states that any power to vary contained in the trust instruments is also valid, bringing the Law into line with the Trusts (Jersey) Law 1984.

8.Confidentiality

Section 11 of the existing Law imposes a duty of confidentiality on "the trustee or any other person, including government officials and officers of the Central Bank of Cyprus." The reason for the inclusion of government and Central Bank officials was to reassure settlors that confidence would be respected, when the Central Bank of Cyprus was responsible for investment promotion. The proposed amendment removes specific reference to these persons and adds the enforcer and protector to the list of persons specifically named.
The amended section 11 reads as follows:

Subject to the terms of the instrument creating an international trust and where the Court has not issued an order for disclosure in accordance with the provisions of subsection (2), the trustee, protector, enforcer or any other person shall not provide any documents or information:
(a) which disclose the name of the settlor or any of the beneficiaries;
(b) which disclose the trustee’s deliberations as to the manner in which a power or discretion was exercised or a duty conferred or imposed by law or by the terms of the international trust was performed;
(c) which disclose the reason for any particular exercise of such power or discretion or performance of duty or the material upon which such reason had been or might have been based;
(d) which relate to the exercise or proposed exercise of such power or discretion or the performance or proposed performance of such duty;
(e) which relate to or form part of the accounts of the international trust:
provided that where a request is submitted by a beneficiary to the trustee for the disclosure of the accounts of an international trust or any documents or information relating to receipts and payments of trustees which form part of those accounts, the trustee shall have the power to disclose those accounts, documents or information to the beneficiary. The trustee may only make disclosure to the beneficiary if, in the opinion of the trustee, such disclosure is necessary and in the best interests of the trust.

In order to avoid uncertainty the amended section goes on to specify the documents that may be disclosed as “the accounts of an international trust or any documents or information relating to receipts and payments of trustees which form part of those accounts”. This restriction of disclosure to the accounts and documents and information concerning receipts and payments is in line with English principles established in Clarke v the Earl of Ormonde (1821) Jacob 108, 117 and endorsed by the Privy Council in Schmidt v Rosewood Trust Ltd [2003] UKPC 26; [2003] 2 AC 709.
Under the existing law trustees are obliged to disclose accounts and accounting information to beneficiaries, regardless of the reason for the request, reflecting the accepted position in English law at the time the Law was enacted that those with proprietary rights were entitled to disclosure. The Privy Council’s decision in Schmidt v Rosewood introduced discretion for trustees to decline disclosure if it would be harmful, and the proposed amendment allows trustees to exercise their discretion in this regard.

9. Directions hearings

A new section 11A is proposed, giving the trustee and others power to apply to the court and empowering the court to make a wide range of orders, based on the corresponding provisions in the Trusts (Jersey) Law 1984 as amended:

11A(1) A trustee may apply to the court for directions concerning the manner in which the trustee may or should act in connection with any matter concerning an international trust and the court may make such order, if any, as it thinks fit. An application for directions must be made to a President of the District Court.
(2) The court may, if it thinks fit –
(a) make an order concerning –
(i) the execution or the administration of any trust,
(ii) the trustee or protector of any international trust, including an order relating to the exercise of any power, discretion or duty of the trustee or protector, the appointment or removal of a trustee or protector, the remuneration of a trustee or protector, the submission of accounts, the conduct of the trustee or protector and payments, whether payments into court or otherwise;
(iii) a beneficiary or any person having a connection with the trust, or
(iv) the appointment or removal of an enforcer in relation to any non-charitable purposes of the trust;
(b) make a declaration as to the validity or the enforceability of a trust;
(c) rescind or vary any order or declaration made under this Law, or make any new or further order or declaration.
(3)(a) An application to the court for an order or declaration under paragraph (2) may be made by the trustee, a beneficiary; a protector; and with leave of the court, by any other person.
(3)(b) In the case of a purpose trust, an application to the court for an order or declaration under paragraph (2) may be made by the trustee, the settlor or his personal representatives or by the enforcer of the trust; and with leave of the court, by any other person.
(4) Where the court makes an order for the appointment of a trustee it may impose such conditions as it thinks fit, including conditions as to the vesting of trust property.
(5) Subject to any order of the court, a trustee, protector or enforcer appointed under this section shall have the same powers, discretions and duties and may act as if the trustee, protector or enforcer had been originally appointed as a trustee, protector or enforcer.

10.Choice of law rules

The existing choice of law rules for trusts in Cyprus are based on common law. Numerous jurisdictions, including England and Malta have now placed their choice of law rules on a statutory footing, so providing clarity and predictability, and the proposed amendment introduces similar choice of law rules in a new section 12A, based on Articles 6 and 7 of the Hague Convention on the Law Applicable to Trusts and on their Recognition.
These rules make clear that a choice of the law of Cyprus to govern an international trust is valid and effective. They also establish rules for identifying the governing law of the trust in the absence of choice; and make it clear that where the law of closest connection to the trust in the absence of choice is the law of Cyprus, the application of the law of Cyprus is entirely effective.

11.Jurisdiction

Many competing jurisdictions, including Malta, Guernsey and Jersey, have developed statutory rules of jurisdiction for trusts which confer jurisdiction on their courts as of right. It is proposed to insert a new section 12B into the Law to expressly give the Cyprus courts jurisdiction in matters relating to an international trust governed by the law of Cyprus; and to allow them to assert jurisdiction over trusts governed by a foreign law but which might be administered there, have one or more Cyprus-resident trustees, or contain assets located in Cyprus; or to take jurisdiction if there was a jurisdiction clause in favour of the courts of Cyprus in the trust instrument or if the parties submitted to the courts of Cyprus.

12.Foreign law trusts

Most trust jurisdictions now have statutory rules regarding the degree of recognition in the jurisdiction of trusts governed by a foreign law. Cyprus has not hitherto had such rules and it is proposed to insert a new section 12C in order to remedy this deficiency. Under the proposed amendment, a foreign trust is governed by, and is to be interpreted in accordance with, its proper law. A foreign trust is unenforceable in Cyprus to the extent that it purports to do anything contrary to the law of Cyprus, or confers or imposes any right or function the exercise or discharge of which would be contrary to the law of Cyprus or to the extent the court declares it to be contrary to public policy.>

VI. Conclusion

As a country whose legal system is based principally on Anglo-Saxon foundations Cyprus has a well-established body of trust law. The enactment of the International Trust Law, just at the time the economies of the former Soviet Union were being transformed into market economies, combined with a common Orthodox religious and cultural heritage, made Cyprus a popular jurisdiction for trusts for wealthy Eastern Europeans, and helped put Cyprus on the road to becoming the major international financial centre it is today.
The International Trusts Law provides settlors with an effective asset-protection and tax planning vehicle in a reliable and transparent jurisdiction.
Over the twenty years since it was enacted, particularly as competing jurisdictions have updated their trust laws, a number of minor ambiguities and missed opportunities have become apparent. These are now to be addressed by the proposed amendments to the Law. Once they are in effect, Cyprus will have one of the world’s most beneficial trust regimes in a low-tax, highly reliable, EU jurisdiction.

[*] Head of the Corporate and Commercial department of Andreas Neocleous & Co LLC, Cyprus. Elias graduated in law from Oxford University in 1991 and is a barrister of the Inner Temple. He was admitted to the Cyprus Bar in 1993.

The Hague Convention of 1st July 1985 on the law applicable to trusts and their recognition was ratified by the Republic of Italy in 1989 and came into force in 1992.^[1]

The general consensus at that time was that the Convention concerned “foreign” trusts. “Foreign” was a very vague notion, for no article of the Convention refers to “foreign trusts”. However, the Convention had been conceived in the domain of private international law conventions (the Hague Conference on Private International Law) and it made sense to hold that its purpose was to have a trust “recognized” in legal systems other than the one to which it belonged: for instance, if the trustee of a New York trust intended to purchase an apartment in Venice, the Convention would ensure that he would be recognized as a trustee and that the notary in charge of the purchase would not raise objections on the basis that trusts were not known in the Italian legal system.

However, it soon appeared that if a “foreign” trust was to be “recognized” in Venice as a consequence of the purchase of an apartment by a foreign trustee all obstacles placed by the Italian legal system against trusts had to disappear automatically and in principle. Take the time-honored civilian misunderstanding that trusts involve two “real” rights or rights in rem, neither of which is recognized by the civil law; how would it be possible that a New York trustee acquired one of those unknown rights over the apartment in Venice and the trust’s beneficiary the other while the Italian owners of other apartments in the same building could not? Limitations concerning real property must concern either everybody (lex loci) or nobody.

Time has shown that legal structures that mirror the respective positions of trustees and beneficiaries did and at times do exist in the civil law and that trusts in their proper sense can live without a Chancellor and without an equity jurisdiction^[2]. The civilian misunderstanding rooted in the alleged existence of two “real” rights or rights in rem, however, still lingers on. It might then be useful to explain that its reason rests, as is the case in many other domains of trust law, on an English terminology that is liable to deceive lawyers belonging to different legal systems. By way of example, let us consider tracing. Tracing has often been described as a method to recover trust property. That is of course right, but once it is coupled with the notion that the beneficiary is the equitable owner of the trust fund the irresistible inference for a civil lawyer is that beneficiaries can “sue in tracing” and recover the trust fund. A nonsense for sure but a logical assumption as well, given the terms that civil lawyers find in English-language literature. “Equitable ownership” is equally troublesome for a civil lawyer, for he is told that a legal ownership to trust assets exists side by side with an equitable ownership. Hence the basic misunderstanding to which I referred above – two “real” rights or rights in rem, neither of which is known in the civil law. One should never surmise the meaning of foreign legal terms, as every student of comparative law knows well, but on the other hand why should a civil lawyer suspect that the meaning of “ownership” in “legal ownership” is different from the meaning of “ownership” in “equitable ownership”? Indeed it is, for “equitable ownership” is no more than a figurative expression employed by English Chancellors at a loss to find a specific expression to define the entitlements of beneficiaries under the early trusts.

Most civil law countries, including Italy, have a highly-formalized land registration system. Hence, an additional difficulty to accommodate trusts within their respective territories unless the two meanings of “ownership” are disentangled. That is what occurred in Italy quite soon after the ratification of the Hague Convention. Land registrars objected to registering trustees’ titles. It took six judgments from as many Italian courts to clarify this issue and, as a consequence, nowadays trustees regularly register their title as trustees. That does not conform with English practice, that has always shied away from registration of trustees’ titles, be they on land or on company shares, but is a necessary ingredient in Italian law to protect the trust assets and the interests of the beneficiaries.

The latest trend in Italy, supported by a 2011 decision of the Turin court, is to register title in the name of the trust.^[3] Civilians tend to see legal entities whenever they have a chance, but that is not the case. If you focus on the trust assets and look at trusts that perform functions very close to the traditional civilian foundation (for instance, trusts that own a university or a hospital or a museum) the drive towards equating them with a juridical person would be well-founded. The assets take precedence, so to speak, over the board of trustees. In addition, tax rules in many countries look at trust income as income of “the trust”. The latter view prevails in Italy where, since 2007, tax provisions exist that tax the income of the trust assets as if the trust were an entity. That explains why land registration may be in the name of the trust. After all, the trust is a taxpayer.

Those were the basic acclimatization issues, yet not the only ones.

First and foremost was the notion of trust “interno”. I propounded this notion in 1994 in order to describe a trust formed and operating in Italy with an Italian settlor and Italian beneficiaries and usually with an Italian trustee. The only foreign element of a trust “interno” would be the law by which it is governed, by necessity a foreign law. The Hague Convention would thus be applicable to a trust “interno”, just as it is applicable to “foreign” trusts.

The academic reaction was mostly negative, and strongly so.

One has to accept that the experts who drafted the Hague Convention on trusts had not considered trusts “interni” as a possible outcome of the Convention and certainly had no intention to allow trusts to become a permanent fixture of civil law systems. On the other hand, practitioners took rapidly to the trust “interno” and, what matters most, courts did likewise, thereby planting the seeds of a widespread acceptance in spite of the many operating difficulties that beleaguer trusts in a civil law context. For instance, it cannot be denied that in no civilian country can there be an efficient trust administration unless the courts are willing to step in as they would in the traditional trust countries. The inherent jurisdiction in trust matters is given for granted by, say, English or American lawyers and is never seen as a topic for discussion when trusts in civil law countries are discussed. That is one of the very many comparative law shortcomings that affect the present day debate on trusts.

Italian courts have understood this need and have gone so far as to replace trustees (English law was applied in a Milan case), to appoint a new trustee when the trust instrument had no applicable rule for the appointment of a trustee after the death of the initial trustee (Jersey law was applied in a Genoa case) and to approve a variation of the trust instrument where there was a beneficiary under tutorship (English law was applied in a Florence case). It has now become frequent to have court orders sanctioning trusts agreed to by the spouses in a divorce suit or for the administration of assets belonging to the parents of a handicapped child or to support the segregation of assets in favor of the creditors of a company in the context of bankruptcy proceedings. Almost 200 orders or judgments have been handed down by Italian courts (including tax courts) in trust matters over the last ten years.

The sheer number of judicial rulings shows how widespread the use of trusts “interni” is in Italy. One is bound to enquire into the causes of this.

The fundamental cause is that trusts provide answers to many shortcomings of Italian law. If an American client sends money to his Italian attorney in order to have the money ready should a purchase of shares of an Italian company be finalized, he believes that the attorney will place the money in a clients’ account. If an American client sends money to his Italian attorney in order to show to the other party of an Italian deal that he has the financial resources to complete the deal, he believes that the attorney will place the money in an escrow account. In other words, in both instances the American client is certain that his money is protected and that his attorney’s creditors shall never be able to reach it. That is not so under Italian law. It takes a trust “interno” to achieve the American client’s intended effects.

Italian law conceives of no legal relationship that efficiently goes beyond the life of the parties. One may appoint a testamentary executor to carry out his wishes but an executor must surrender the deceased’s estate in its entirety to the heirs of the deceased within one year (exceptionally, within two years) so that there is very little he can usefully do past that period. Under a recent addition to the Italian civil code (article 2645-ter), one may segregate land or registered personal property for a beneficiary but that is no more than a restriction on how that asset may be disposed of and is not coupled with a management structure, certainly not with a management structure that can go beyond the life of the manager.

The notion of “dedicated patrimony”, that is, assets devoted to the furtherance of an objective, is foreign to current Italian law other than through the formation of an entity, such as a foundation or a company, or through the creation of limitations on the use of the assets in question that act much in the same way as an easement would: they concern the thing, not the obligations of its owner towards those who are intended to benefit.

In this connection, it must be pointed out that also the notion of fiduciary obligation is foreign to current Italian law. Again, words may play dangerous tricks: we have “fiduciary agreements” but they have nothing to do with trusts. The concept of “fiduciary agreement” goes back to the German doctrine of the late XIX century (“fiduziarische Geschäft”)) and is no more than a mandate coupled with the transfer of assets to the fiduciary. He has to deal with the assets as provided for in the fiduciary agreement but third parties are not bound by that agreement, so that those assets are seen by the law as owned by the fiduciary and are available to his creditors. Moreover, the fiduciary has a duty to the party who appointed him, not to the beneficiaries (the latter being a notion that is foreign to the theory of fiduciary agreements under Italian law). Beneficiaries may well not exist at all and, if they do, they can at most be seen as the recipients of a contract in favor of third parties. That does not create any fiduciary obligation of the fiduciary towards them.

We also have “fiduciary companies” but they are not trust companies, they simply perform the role of a fiduciary under a fiduciary agreement and are subject to State supervision. The advantage of contracting with a fiduciary company is that the assets they receive are considered not to belong to them. That is so because the assets still belong in the eyes of the law to the party who entered into the fiduciary agreement. Not a shade of trusts can be detected in these arrangements.

The lack of the notion of “fiduciary obligation”, as understood in the common law, is crucial. Trusts are but one of the relationships that are worthy of protection because of their fiduciary nature. A still not totally explored domain exists in the common law^[4] and most of its components stem from “confidence”, a notion that left Europe’s ius commune or common law in the XV-XVI centuries to become embedded in English law, while on the Continent it progressively lost significance.^[5] “Confidence”, according to many, is at the root of fiduciary obligations. The semantic area of “confidence” is both very wide and subject to change over time. Hence, its prowess to encompass varying situations as they come to the attention of the courts and to provide a protection that a stricter conceptual system would be unable to achieve. It may be that the growing civilian familiarity with trusts shall bring “confidence” back to its original lands.

There are signs that it is more than a mere possibility. trusts “interni” could have been used by Italians as a means to hide their assets and to defeat their creditors, let alone those of their family members who are entitled by law to a share of the decedent’s estate. That has not occurred. Nor have trusts been devoted primarily to the management of wealthy estates. One the peculiarities of trusts “interni” is that they care primarily for everyday occurrences, in respect of which the shortcomings of Italian law are easily apparent. The fact situations I shall now summarily refer to correspond to the most common occurrences of trusts in Italy and cannot be efficiently dealt with in Italian law other than by means of a trust.

Separation or divorce agreements where assets of one of the spouses are to be put by in order to become owned by the children of the marriage at a given date or upon a certain occurrence – in the meanwhile those assets must be segregated and properly managed either by one of the spouses in a fiduciary capacity or by a third party.

The fate of a handicapped child after the death of his parents – he would probably own no assets in his own right and his future livelihood and personal care will thus depend on the assets that his parents will have devoted for that purpose without actually transferring them to him. Of course, there can be a tutor appointed by the court to look over those assets, but a tutor does not have to take care of the personal needs of his pupil (which in the case of a handicapped person may be of paramount importance) and, further, the deceased parents of the pupil cannot give binding instructions to a tutor. The insufficiency of the tutorship is shown by the fact that some civil law countries, such as the Spanish region of Cataluña, have enacted specific statutes to cope with those situations (Spain had enacted a national law in 2003 on this same subject matter but it was felt that it had not gone far enough to insulate the assets devoted to the handicapped person).

Setting aside an asset to assure that certain conditions relating to a transaction will be fulfilled – a pledge over a movable asset would take that asset away from its owner, while a hypothec would require a cumbersome procedure to be created, to be enforced and, if need be, extinguished. On the other hand, once the asset in question becomes subject to a trust, the interests of the parties involved are properly protected.

Skipping one generation in business matters – that is a common occurrence in the United States but it meets the obstacle of the reserved shares of family members in most civil law jurisdictions. The majority of Italian businesses are family-owned and it is not unlikely that no child of the owner of the business is apt to take over from him. A sale of the business is usually ruled out, the hope of the owner being that the second generation of his descendants will succeed where the first generation has failed. The first generation will receive the income of the business in the meanwhile.

Skipping one generation in family matters – that concerns families where the head of the family owns non-business assets and has little confidence that his children shall keep them within the family (at times, some of the assets have been owned by that family for centuries). There may be unmarried children without any obligation to keep a significant part of their assets within the family, divorced children, spendthrift children, and so on. The first-generation descendants will not only enjoy the income produced by the assets but also hold powers to direct the trustee as to their management and their disposition. Their position will thus be very close to the position of an owner, but they will never receive any part of the capital.

Some of the structures I have just outlined conflict with Italian succession law in that they deprive one or more family members of their respective entitlements. The legal consequence of transferring assets to a trustee rather than, by gift or will, to the family members in whose favor the law reserves a share of the estate of the decedent is not, however, that the transfers are void. They are and remain perfectly valid, without prejudice to the claim of a family member to have them set aside to the extent that that is necessary to make him receive the reserved share provided by the law. In spite of the many occurrences of trusts “interni” that would come within this rule, there has not been until now a single instance of a claim by a prejudiced family member. That shows the strength of family ties in Italian society and the respect paid to the wishes of a deceased parent. It probably also shows that the provisions of the trust instruments in question were reasonable and did not unduly prejudice the first-generation descendants.

Trust instruments creating trusts “interni” are of course drafted in Italian in spite of their being subject to a foreign law. Hence, two sets of problems.

Some English terms cannot be translated; therefore, “trust” and “trustee”, just as “charitable trust” and “willful default” are kept in English. The translation of other terms is possible but may be misleading; therefore, “power of advancement” or “protective trust” are translated into Italian but the corresponding English terms are added in parenthesis. Other terms can be translated without difficulty; for instance, “protector” or “enforcer” are translated as “guardiano”.

The acclimatization of trusts calls for the insertion into trust instruments of provisions that find no counterpart in foreign models, for trusts, just like any legal institution, cannot be transplanted into a foreign legal system without heeding the reactions of the receiving system. It is not a matter of adapting trusts. That cannot happen because the theory of trusts “interni” subjects any trust “interno” to a specific foreign law and as a consequence a trust “interno” has to abide by that law. It is a matter of modifying the working of trusts to make them conform to the applicable principles and rules of Italian law without in any way impinging on the foreign trust law by which they are governed. A good instance of this mechanism concerns the acts performed by a trustee. Italian trust instruments require the trustee to hold himself out as a trustee whenever he enters into a contract or registers title to land. That is not required by any foreign law and yet does not contradict any foreign law. At the same time, it follows Italian law rules relating to acts the consequences of which do not affect the personal assets of the person who performs the act. Here, as in many other domains, rules of procedure and of evidence interact with rules of substance. A defendant before an English court may prove by his own testimony as well as by the testimony of other people that a bank account he has opened in his own name is a trust account and that the money deposited into that account is not his own money. That would be most difficult before an Italian court, if not outright impossible, and explains why Italian trustees are bound to hold themselves out as trustees in every possible circumstance and to label every asset, including a bank account, as a trust asset (actually, as an asset included in the fund of a specific trust).

Acclimatization issues do not stop here.

The traditional English trust deed did not usually recite what the intention of the settlor and the purpose for which the trust was formed were; indeed, it recited that property had been transferred to A. e B. and then it set out the terms of the trust. Such a structure does not sit easily with many a civil law context, where property cannot be conveyed without showing a cause and, additionally, where the choice of a foreign law to govern a relationship that would otherwise be governed by the local law calls for an explanation when, as is the case with trusts, it allows the parties to achieve objectives that could not be achieved under the local law. Italian trust instruments regularly recite the intention of the settlor and the purpose of the trust. Once again, let us be cautious with words. Every trust has a purpose even when it is a trust for beneficiaries and there is nothing wrong in setting out that purpose in the trust instrument.

One might object that it is obvious that trustees must act in the interest of the beneficiaries, what other purpose could there be? This matter, however, is not so easily disposed of, for “the interest of the beneficiaries” in only a catch-sentence does not catch the actual structure of modern trust instruments. They usually allow the trustees to consider the interests of one or more beneficiaries, disregarding the interests of all other beneficiaries. The commonly-held view that a trustee does not have to provide any explanation as to how he has exercised his discretion is a compounded factor to the effect that “the interest of the beneficiaries” has little, if any, meaning left.

Another acclimatization issue concerns the structure of trust instruments as unilateral acts. It is a basic tenet of trust law that trusts are not contracts.^[6] That does not imply that trust instruments might be seen as “contrats” in French law, just as the French fiducie is a “contrat”. The same could be said with reference to “contratti” under Italian law. Here we have a simple comparative law issue, since it is well known that common law contracts do not correspond to “contrats” or “contratti”, but the question remains open: are trusts “contrats” or “contratti” in spite of their not being contracts? It is equally well known that the word “trust”, just as the expression “fiduciary obligation”,^[7] encompasses nowadays a wide array of legal arrangements, so that one might query whether it should be appropriate to devise new terms in order to identify as many categories of trusts. Trusts for purposes, for instance, have very little in common with trusts for beneficiaries. The same could be said of trusts for creditors compared with trusts for family members. It could be argued that some trust types are contract, while other are not. Even so, the comparative law issue would remain unsolved.

I would submit that under Italian law trusts must be seen as “accordi” (agreements) and kept outside the area to which “contratti” belong, basically because “contratti” entail an action for breach that terminates the contract. That would be a mischief and it would deny the very essence of trusts. A trust must go on in spite of a breach by its trustee and that is what occurs in trust law. Fiduciary law rules ensure that fiduciaries do not proffer compensation and keep illegal profits^[8]. Should it be any different, we would be facing a different legal institution.

The interplay between foreign trust law and Italian law is as complex as the interplay between foreign established practices and the developing Italian practice. At the same time, issues that foreign lawyers have seldom canvassed in depth have come to the fore. Trusts “interni” are a living comparative law laboratory.

[*] Professor of Comparative Law, University of Genoa.

[1]The Convention is currently in force in the following states: Australia, Canada (most provinces), China (Hong Kong), Italy, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, San Marino, Switzerland, United Kingdom (and Crown Dependencies).

[2] L. D. Smith, Trust and Patrimony, 38 Rev. Gén. de droit 379 (2008); G. L. Gretton, Trusts Without Equity, 49 Int’l & Comp. L. Q. 599 (2000).

[3] All Italian cases in trust matters are reported in the journal Trusts & Attività Fiduciarie.

[4] A. Scott, The Fiduciary Principle, 37 Cal. L.R 539 (1949); L. S. Sealy, Some Principles of Fiduciary Obligation [1963] Cambridge L.J. 119; E. J. Weinrib, The Fiduciary Obligation, 25 U. Toronto L.J. 1 (1975); P. D. Finn, Fiduciary Obligations, (Cambridge University Press, 1977); T. Frankel, Fiduciary Law, 71 Cal. L.R. 795 (1983); R. Flannigan, The Fiduciary Obligation, 9 Oxford J. Legal Stud. 285 (1989); P. Birks, The Content of Fiduciary Obligation, 34 Israel L.R. 3 (2000).

[5] M. Lupoi, Trust and Confidence, 125 L.Q.R. 253 (2009).

[6] Cf. J. H. Langbein, The Contractarian Basis of the Law of Trusts, 105 Yale L.J. 625 (1995).

[7] Birks, supra note 4.

[8] J. Getzler, “As if.” Accountability and Counterfactual Trust, 91 B.U.L.R. 973 (2011).

I. Introduction

The regulatory response to the financial crisis has necessitated (and it still is necessitating) the adoption of a vast array of legal reforms. However, some of the elements of these reforms have departed from their originally intended design. One example of such departures comes from the United States. Commenting on the rule named after him, following the adoption of the Dodd-Frank Act, Paul Volcker stated that “[I]t doesn’t have the purity I was searching for.”^[1] This paper aims to show that this outcome is not unique to the American experience. In fact, on the other side of the Atlantic, deviations have also occurred during the process that has led to the establishment of the European System of Financial Supervision (“ESFS”) and they have made it more complex than it was initially contemplated.

II. The structure of the ESFS in the early projects

Scholars and market associations already envisioned the ESFS before the financial crisis. The academic debate on the future structure of the European supervisory framework has been in lively progress since the beginning of the 2000s. This debate had initially focused on two main forces that, according to one scholar, could drive a change in the European institutional design, that is to say “the trend towards unification of supervisory authorities at the level of the Member States and the possible centralization of supervisory functions at the EU level.”^[2]

Many papers have been written about these topics.^[3] The limited scope of this article does not allow for a detailed account of the solutions proposed in these papers.^[4] According to a paper published in 2004, two models prescribed the adoption of a specific body with a European mandate. One of these models provided for the assignment of a pan-European mandate to the home supervisor of each financial institution, whereas the other advocated the need for a pan-European supervisor within an ESFS composed of national authorities. Interestingly, both models supported the establishment of “a decision-making body or agency at the centre” of the system.^[5] These two models were based on the example of the European System of Central Banks (“ESCB”), since both make several references to the ESCB’s structure.^[6]

In addition to scholarly proposals, market associations also pushed for certain reforms. Following the release of two papers in October 2003 and June 2004, the European Financial Services Round Table (“EFR”)^[7] issued a report, in June 2005, on the various options to reform the European financial regulation (hereinafter the EFR Report).^[8] The EFR Report focused mainly on the implementation of the “lead supervisor model”, complemented by the creation of colleges of supervisors.^[9] However, the EFR Report explicitly regarded these proposals as short-term solutions, treating the establishment of the ESFS as a longer-term option. According to the EFR Report, the ESFS should have been based on the model of the ESCB.^[10] In other words, the ESFS should have been centered on a European Financial Services Authority. This authority would have played, within the ESFS, almost the same role that the European Central Bank (“ECB”) plays within the ESCB.

III. The ESFS according to the de Larosière Report and the Commission’s proposals

The financial crisis provided the political momentum to undertake a comprehensive reform of the supervisory framework that existed at the European level. In order to accomplish this aim, the European Commission entrusted a group of experts with the task of providing recommendations about the way in which this reform could best be pursued. This group of experts, chaired by Jacques de Larosière, released its final report on February 25, 2009.^[11]

The de Larosière Report drew on the distinction between two levels of supervision: micro-prudential and macro-prudential.^[12] The micro-prudential perspective is the traditional form of financial oversight and focuses on the solvency of individual financial institutions. In contrast, the macro-prudential perspective is concerned about the stability of the financial system as a whole.^[13] However, the de Larosière Report plainly acknowledges that the micro and macro-prudential levels of supervision are interdependent.^[14]

According to the de Larosière Report, the ESFS should be established at the micro-prudential level only^[15] and it should be characterized by a largely decentralized structure.^[16] Indeed, the de Larosière Report does not provide that the ESFS should have a central authority, as in the case of the ESCB. Instead, it suggests that the ESFS should constitute an integrated network of European supervisors, working in cooperation with the three new authorities that would replace the Level 3 Lamfalussy committees.^[17] Along the lines of this structure, the de Larosière Report suggests that each of the three new authorities should be managed by a board comprised of the Chairs of the national supervisory authorities.^[18]

As already mentioned, the de Larosière Report provides that the new macro-prudential authority, the European Systemic Risk Council, should formally reside outside of the ESFS.^[19] However, in order to preserve the interdependence between the micro-prudential and the macro-prudential perspectives, the de Larosière Report advocated binding cooperation mechanisms allowing regular flows of information on micro-prudential developments and early warnings between these two levels of supervision.^[20] In addition, it suggested a connection between the ESFS and the European Systemic Risk Council. This link, nonetheless, is unidirectional in the Report. In other words, the Report suggested that the Chairs of the micro-prudential authorities would be members of the macro-prudential body’s board, but it does not provide that the Chair of the European Systemic Risk Council should participate in the micro-prudential authorities’ boards.^[21] The de Larosière Report also proposed that the ECB should be considerably involved in macro-prudential supervision and excluded from micro-prudential supervision.^[22] Accordingly, the Report proposed that the ECB should have no role in the internal organization of the micro-prudential authorities apart from its participation as an observer in the supervisory colleges.^[23]

The European Commission’s proposals, published in September 2009, essentially maintained the structure of the ESFS as outlined in the de Larosière Report.^[24] One significant change was that the proposals provided for the presence of a representative of the European Systemic Risk Board (i.e. the new name chosen for the European Systemic Risk Council) as a non-voting member in the Board of Supervisors of each micro-prudential body.^[25] The European Commission further proposed the establishment of a Joint Committee of the European Supervisory Authorities to serve “as a forum in which the Authority shall cooperate regularly and closely and assure cross-sectoral consistency” with the other authorities.^[26] According to these proposals, the European Systemic Risk Board would be invited to participate in the Joint Committee as an observer.^[27] Finally, the proposals provided for the establishment of an Advisory Technical Committee within the European Systemic Risk Board.^[28]

IV. The final configuration of the ESFS

On September 22, 2010, exactly one year after the release of the legislative proposals by the European Commission, the European Parliament voted in favor of the proposed reform of financial supervision and the ECOFIN Council endorsed this decision on November 17, 2010. The legislative package on financial regulation and supervision was published in the Official Journal of the European Union on December 15, 2010.^[29] Although the legislative texts had been extensively amended between September 2009 and September 2010, the basic scheme outlined in the Commission proposals remained largely unaffected, subject, nevertheless, to some changes in the structure of the ESFS.

A first change was that, according to the regulations that entered into force in December 2010,^[30] the ESFS should include the European Systemic Risk Board (“ESRB”), in addition to the three micro-prudential authorities, the competent or supervisory authorities in the Member States, and the Joint Committee.^[31] However, as set out in the de Larosière Report and the European Commission’s proposals, no authority seems to have prominence over the others and, according to the solution eventually adopted, no central authority seems to exist. The regulations thus confirm the departure from some solutions envisaged in earlier proposals.

A second change was the establishment of an Advisory Scientific Committee within the ESRB, in addition to the Advisory Technical Committee,^[32] and the involvement of the Chairs and some Vice-Chairs of these Advisory Committees in the General Board of the European Systemic Risk Board.^[33] If this change was aimed at fostering the influence of external experts in the decision-making body, it might turn to be an additional complication with limited effectiveness, given that these experts are nominated by the same body they are expected to influence.^[34]

Another change occurred as regards the role of the Joint Committee of the European Supervisory Authorities. The regulations establishing the micro-prudential authorities provide that the Chair of the Joint Committee, who shall be chosen (on an annual rotational basis) from among the Chairs of the new micro-prudential authorities, shall be the second Vice-Chair of the ESRB.^[35] This change was probably aimed at strengthening the interdependence between the micro and macro-prudential oversight,^[36] but it seems a quite redundant provision, given that the Chairs of the micro-prudential authorities were already effectively involved in the ESRB.

Finally, the micro-prudential authorities have been officially entrusted with tasks that were not detailed in earlier documents. For instance, the European Commission’s proposals contained only a few general references to crisis management and resolution.^[37] In contrast, the regulations that entered into force in December 2010 explicitly charged the new micro-prudential authorities with tasks prescribed by the regulation itself or by other legislations,^[38] in order to confer on them an active role in resolution procedures and fill some of the gaps evidenced during the financial crisis.

In conclusion, the final institutional architecture of the ESFS can be basically described as follows. The ESFS is composed of several bodies; namely the three new micro-prudential authorities and the new macro-prudential board created at the European level, the Joint Committee of the European Supervisory Authorities and the competent or supervisory authorities in the Member States.^[39]

Micro-prudential supervision at the European level is to be carried out by three bodies with legal personality,^[40] jointly called the European Supervisory Authorities (“ESAs”), and working along sectoral lines. More precisely, they are the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. The Boards of Supervisors of the ESAs are principally composed of the Chairs of the competent national supervisory authorities.^[41] The supervision of the ESAs is focused on the solvency of individual financial institutions and the tasks of the ESAs range from mere consultation with the European institutions to a potentially active role in crisis management.^[42]

Macro-prudential supervision at the European level is to be carried out by a single body without legal personality:^[43] the European Systemic Risk Board. The General Board of the ESRB is composed largely of members of the General Council of the ECB.^[44] The activity of the ESRB is logistically and administratively supported by the ECB^[45] and is focused on the detection of possible threats to the stability of the financial system as a whole.^[46] The ESRB is chaired, for the first five years, by the President of the ECB and the first Vice-Chair is elected, for a term of five years, from within the General Council of the ECB.^[47]

The interdependence of the micro and macro-prudential levels of supervision at the European level, as discussed above, is basically ensured by three main elements. First, binding cooperation mechanisms allow regular flows of information on micro-prudential developments and early warnings between the two levels of supervision. Second, the presence of the Chairpersons of the ESAs in the General Board of the ESRB and representatives of the ESRB in the ESAs’ Boards of Supervisors link the two levels of supervision. Third, the existence of a forum (i.e. the Joint Committee) helps to realize the cooperation among the ESAs and the ESRB.

V. Concluding remarks

This paper is not aimed at providing an exhaustive account of all the changes that occurred during the legislative process and that eventually led to the adoption of the package on financial regulation and supervision. Moreover, the limited scope of this paper does not allow inquiry as to whether specific changes in the structure of the ESFS can be justified by reasons of efficiency, legal obstacles^[48] or political interests. Nevertheless, it seems possible to conclude that the structure of the ESFS has become much more complex in the end than it was initially contemplated and it seems legitimate to wonder how this complexity might impact on its effectiveness. In a nutshell, it may be that, borrowing the words of Paul Volcker, the final structure of the ESFS does not have “the purity” originally envisioned.

Endnotes:

[*] LL.M., Columbia Law School (2011). The author received a LL.B. at the Bocconi University of Milan in 2004, a M.Sc. in Law and Economics at the University of Siena in 2008 and a Ph.D. in Law and Economics at the University of Siena in 2010. He was a visiting scholar at the Boston University School of Law; at the moment he is an Honorary Fellow in Business Law at the University of Florence (Italy) and a Max Weber Fellow at the European University Institute. The author is grateful to Prof. Lorenzo Stanghellini, Dr. Fabio Recine and Dr. Phoebus Athanassiou for their very helpful comments on earlier drafts of this paper. All errors are the responsibility of the author.

[1] John Cassidy, The Volcker Rule – Obama’s economic adviser and his battles over the financial-reform bill, The New Yorker, July 26, 2010, available at http://www.newyorker.com/reporting/2010/07/26/100726fa_fact_cassidy (last visited Oct. 12, 2011).

[2] See Rosa Maria Lastra, The Governance Structure for Financial Regulation and Supervision in Europe, 10 Colum. J. Eur. L. 49, 50 (2003). On the one hand, the trend toward consolidation of the supervisory authorities was evidenced by the British and German initiatives which led to the establishment of a single supervisor (namely the British FSA in 2001 and the German BaFin in 2002). On the other hand, the debate about the centralization of supervision was triggered by the launch of the Euro in 1999.

[3] See for instance Giorgio Di Giorgio & Carmine Di Noia, Financial Market Regulation and Supervision: How Many Peaks for the Euro Area?, 28 Brook. J. Int’l L. 463 (2003); Donato Masciandaro, Unification in financial sector supervision: The trade-off between central bank and single authority, 12 J. Fin. Reg. & Compliance 151 (2004).

[4] For a snapshot of various models see generally Sander Oosterloo & Dirk Schoenmaker, A lead supervisor model for Europe, 9 The Financial Regulator 34 (2004), available at http://personal.vu.nl/d.schoenmaker/Lead%20Supervisor%20FR9.3.pdf (last visited Oct. 12, 2011).

[5] Id. at 39–40.

[6] “(…) this European mandate can be created through some form of European system of financial supervisors, created by the national supervisors in tandem with a centralised body. Key supervisory decisions as well as the design of policy are done at the centre (in the same way as the ESCB takes decisions on monetary policy).” Id. at 41. See generally Dirk Schoenmaker, Central Banks and Financial Authorities in Europe: What Prospects?, in Handbook of Central Banking and Financial Authorities in Europe, (D. Masciandaro ed., 2005).

[7] The EFR is a Belgian based association consisting of chairmen and chief executives of leading European banks and insurance companies. See European Financial Services Round Table, www.efr.be (last visited Oct. 12, 2011).

[8] See generally EFR, On the Lead Supervisor Model and the Future of Financial Supervision in the EU, Brussels (2005) available at http://www.efr.be/documents%5Cpublication%5C22676EFRlsvfinal-June2005.pdf (last visited Oct. 12, 2011).

[9] See generally id. at 23-24.

[10] In 2005, the EFR suggested as a possible longer-term option the establishment of “a European System of Financial Supervision (ESFS) with an ESCB-type structure, with a new EU-level institution (a European FSA, or EFSA) which would supervise the systemically relevant financial institutions that operate on a pan-European basis and would be the final authority on interpretation and implementation of EU financial market rules in cases of conflicts between national regulators.” See EFR, supra note 8 at 40.

[11] See Report by the High-Level Group on Financial Supervision in the EU Chaired by Jacques de Larosière (Feb. 25, 2009) [hereinafter de Larosière Report], available at http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf (last visited Oct. 12, 2011).

[12] Id. at 38.

[13] For a more precise distinction between micro and macro-prudential supervision, see Claudio Borio, Towards a Macroprudential Framework for Financial Supervision and Regulation?, 49 CESifo Econ. Stud. 181, 183 (2003). In this respect, it is worth remembering that the roots of the macro-prudential approach to financial supervision can be traced back to the Cross Report on innovations in international banking released in 1986 by the Bank of International Settlements. See Ivo Maes, Alexandre Lamfalussy and the origins of the BIS macro-prudential approach to financial stability, 63 PSL Q. Rev. 265 (2010), available at http://scistat.cilea.it/index.php/PSLQuarterlyReview/article/viewFile/274/141 (last visited Oct. 12, 2011).

[14] See the de Larosière Report, supra note 11, at 38 (“Macro-prudential supervision cannot be meaningful unless it can somehow impact on supervision at the micro-level; whilst micro-prudential supervision cannot effectively safeguard financial stability without adequately taking account of macro-level developments.”).

[15] Id. at 46-47.

[16] Id. at 47.

[17] These committees (often simply referred as “Lamfalussy committees”) were the bodies charged with the implementation of the third level of the Lamfalussy process. As a background reference, see generally Duncan Alford, The Lamfalussy Process and EU Bank Regulation: Another Step on the Road of Pan-European Regulation?, 25 Ann. Rev. Banking & Fin. L. 389, (2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1341325 (last visited Oct. 12, 2011). More precisely, they were the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), and the Committee of European Securities Regulators (CESR). The de Larosière Report suggests that the Level 3 Lamfalussy committees should be transformed into three new authorities charged with micro-prudential supervision, namely a European Banking Authority, a European Insurance Authority and a European Securities Authority. See the de Larosière Report, supra note 11, at 48, 55.

[18] See the de Larosière Report, supra note 11, at 55. This setting is considered proper by the authorities; thus any comparison with the internal organization of the ECB may seem inappropriate. However, it must be noticed that some similarities exist between the internal organization of the ECB and the organization of the micro-prudential authorities: in both cases, certain ruling bodies are made up of the Chairs of national institutions (i.e. the Governors of the national central banks compose the Governing Council and the General Council of the ECB; the Chairs of the national supervisory authorities compose the Boards of Supervisors of the European micro-prudential authorities).

[19] See the de Larosière Report, supra note 11, at 57.

[20] Id. at 54, 57.

[21] Id. at 54-55, 57.

[22] “While the Group supports an extended role for the ECB in macro-prudential oversight (as discussed below), it does not support any role for the ECB for micro-prudential supervision.” See id. at 43.

[23] Id. at 47.

[24] Before the release of the proposals, the intention to follow the recommendations by the De Larosière Report was already clear in the Commission Communication on European Financial Supervision, COM (2009) 252 final, available at http://ec.europa.eu/internal_market/finances/docs/committees/supervision/communication_may2009/C-2009_715_en.pdf (last visited Oct. 12, 2011). See generally Pablo Iglesias Rodríguez, Towards a New European Financial Supervision Architecture, 16 Colum. J. Eur. L. Online 1 (2009), available at http://www.cjel.net/online/16_1-rodriguez (last visited Oct. 12, 2011).

[25] See Article 25 of COM(2009) 501 final – 2009/0142 (COD), Article 25 of COM(2009) 502 final – 2009/0143 (COD), and Article 25 of COM(2009) 503 final – 2009/0144 (COD).

[26] See Article 40 of COM(2009) 501 final – 2009/0142 (COD), Article 40 of COM(2009) 502 final – 2009/0143 (COD), and Article 40 of COM(2009) 503 final – 2009/0144 (COD).

[27] See Article 41 of COM(2009) 501 final – 2009/0142 (COD), Article 41 of COM(2009) 502 final – 2009/0143 (COD), and Article 41 of COM(2009) 503 final – 2009/0144 (COD).

[28] See Article 4 of COM(2009) 499 final – 2009/0140 (COD).

[29] See European Commission, Reforming the European financial supervision system, available at http://ec.europa.eu/internal_market/finances/committees/index_en.htm#package (last visited Oct. 12 2011).

[30] See Regulation (EU) No 1092/2010, Regulation (EU) No 1093/2010, Regulation (EU) No 1094/2010, and Regulation (EU) No 1095/2010.

[31] See Article 1 of Regulation (EU) No 1092/2010, Article 2 of Regulation (EU) No 1093/2010, Article 2 of Regulation (EU) No 1094/2010, and Article 2 of Regulation (EU) No 1095/2010. The Commission’s proposals do not list the ESRB among the members of the ESFS. See Article 39 of COM(2009) 501 final – 2009/0142 (COD), Article 39 of COM(2009) 502 final – 2009/0143 (COD), and Article 39 of COM(2009) 503 final – 2009/0144 (COD).

[32] See Article 4 of Regulation (EU) No 1092/2010, Article 4 of COM(2009) 499 final – 2009/0140 (COD).

[33] See Article 6 of Regulation (EU) No 1092/2010, Article 6 of COM(2009) 499 final – 2009/0140 (COD).

[34] According to Article 12(2) and Article 13(2) of Regulation (EU) No 1092/2010, the Chair and the Vice-Chairs of the Advisory Scientific Committee and the Chair of the Advisory Technical Committee shall be nominated by the General Board following a proposal from the Chair of the ESRB.

[35] See Article 5 of Regulation (EU) No 1092/2010, Article 55 of Regulation (EU) No 1093/2010, Article 55 of Regulation (EU) No 1094/2010, and Article 55 of Regulation (EU) No 1095/2010. The Vice-Chairs of the European Systemic Risk Board, according to Article 5(6) of Regulation (EU) No 1092/2010, substitute the Chair “in order of precedence”. Thus, it seems that the second Vice-Chair is hierarchically subordinated to the first Vice-Chair.

[36] The second Vice-Chair of the ESRB recently declared before the European Parliament that he sees his duties mostly related to ensuring the smooth interaction between micro-prudential and macro-prudential oversight. See Introductory Statement by Andrea Enria, 2nd Vice Chair of the ESRB at the Hearing on the ESRB before the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, May 02, 2011 (available at http://www.esrb.europa.eu/news/pr/2011/html/sp110502_1.en.html, last visited Oct. 12, 2011).

[37] See, for instance, Whereas 34 and Article 66 of COM (2009) 501 final – 2009/0142 (COD); Whereas 33 and Article 66 of COM(2009) 502 final – 2009/0143 (COD), and Whereas 34 and Article 66 of COM(2009) 503 final – 2009/0144 (COD).

[38] See, for instance, Articles 24, 25 and 27 of Regulation (EU) No 1093/2010; Articles 24, 25, and 27 of Regulation (EU) No 1094/2010; and, Articles 24, 25 and 27 of Regulation (EU) No 1095/2010.

[39] See Article 1 of Regulation (EU) No 1092/2010, Article 2 of Regulation (EU) No 1093/2010, Article 2 of Regulation (EU) No 1094/2010, and Article 2 of Regulation (EU) No 1095/2010.

[40] See Article 5 of Regulation (EU) No 1093/2010, Article 5 of Regulation (EU) No 1094/2010, and Article 5 of Regulation (EU) No 1095/2010.

[41] See Article 40 of Regulation (EU) No 1093/2010, Article 40 of Regulation (EU) No 1094/2010, and Article 40 of Regulation (EU) No 1095/2010.

[42] See generally Articles 8 and 9 of Regulation (EU) No 1093/2010, Articles 8 and 9 of Regulation (EU) No 1094/2010, and Article 8 and 9 of Regulation (EU) No 1095/2010.

[43] See Whereas 15 of Regulation (EU) No 1092/2010.

[44] See Article 6 of Regulation (EU) No 1092/2010. It is presumably for this reason that the schedule of the meetings of the General Council of the ECB and the schedule of the meetings of the General Board of the ESRB, at least in 2011 and 2012, coincide (see http://www.ecb.int/press/pr/date/2009/html/pr090508.en.html, http://www.ecb.int/press/pr/date/2011/html/pr110420.en.html, and http://www.esrb.europa.eu/news/schedule/html/index.en.html, last visited Oct. 12, 2011).

[45] See Article 4(4) of Regulation (EU) No 1092/2010 and, generally, Council Regulation (EU) No 1096/2010. In this respect, it is interesting to notice that the ESRB has its premises inside the Eurotower (see http://www.esrb.europa.eu/home/html/contacts.en.html, last visited Oct. 12, 2011).

[46] See Article 3 of Regulation (EU) No 1092/2010.

[47] See Article 5 of Regulation (EU) No 1092/2010.

[48] For an analysis of the legal obstacles to the reform of financial supervision in Europe, written largely in advance of the financial crisis, see generally Yannis V. Avgerinos, EU Financial Market Supervision Revisited: The European Securities Regulator, Jean Monnet Working Paper No. 7/03, (2003), available at http://centers.law.nyu.edu/jeanmonnet/papers/03/030701.html (last visited Oct. 12, 2011).

When the Court of Appeal handed out judgment in Dallah v Government of Pakistan ^[1] the arbitral community was surprised by the English court’s findings. When, on appeal, the Supreme Court upheld the judgment, the issue gained greater relevance as it was one of the only three instances in which an English court had refused enforcement of an arbitral award under the New York Convention.^[2] Even more remarkably, the French Cour d’Appel considering the same facts in February 2011, reached the opposite conclusion and held the Government of Pakistan bound to the arbitration agreement.

I. Facts:

The Saudi Arabian Dallah Real Estate and Tourism Holding Company (“Dallah”) entered into a memorandum of understanding with the Pakistani Government in July 1995 to provide accommodation for Pakistani pilgrims to the Mecca. Pakistan later established the Awami Hajj Trust (“The Trust”) to collect and invest the donations received from pilgrims for the project.^[3]

The Trust and Dallah entered into an agreement in September 1996 containing the terms which had been previously negotiated by Pakistan. The agreement also contained an ICC arbitration clause but did not specify a choice of governing law. While Pakistan was not a signatory to the agreement, the government guaranteed the Trust’s loan obligation and could be assigned the rights and obligations incurred by the Trust without Dallah’s authorisation.

In December 1996, the ordinance lapsed and the Trust ceased to exist. In January 1997, a government official from the Ministry of Religious Affairs wrote to Dallah purporting to terminate the agreement. Claims in Pakistani courts were later dismissed as the Trust no longer existed as a legal entity.

In May 1998, Dallah commenced ICC arbitration in Paris against Pakistan. The arbitral tribunal composed of Lord Mustill, Nassim Hasan Shah and Ghaleb Mahmassani, declared that according to French international arbitration law Pakistan was bound by the arbitration clause as an alter ego of the Trust. In June 2006 the tribunal made its final award of an excess of $20 million in favour of Dallah.^[4]

Dallah sought to enforce the award in England and France. Pakistan resisted enforcement in England claiming that it was not a party to the arbitration agreement on which the award was based. The High Court,^[5] the Court of Appeal ^[6] and the Supreme Court in November 2010 confirmed this view.

II. Supreme Court decision

In a judgment commended for its depth of analysis and clarity of style,^[7] the Supreme Court held that the arbitral tribunal’s findings on jurisdiction were not final, and concluded that Pakistan was not a party to the arbitration agreement.

The Court clarified the compétence-compétence of an arbitral tribunal’s jurisdiction. While a tribunal’s finding is relevant,^[8] they are not the “sole judges of their jurisdiction. That would be neither logical nor acceptable.“^[9] As a consequence, “their jurisdiction must instead be reviewed by the courts if an action is brought to set aside or to enforce the award.”^[10] In considering the level of scrutiny, the Court held that nothing short of a full investigation would suffice.^[11]

Having concluded that “a contract cannot give an arbitral body any power, much less the power to determine its own jurisdiction, if the parties never entered into it”^[12] the Court then proceeded to examine whether Pakistan was a party to the agreement. Dallah acknowledged that Pakistan was not a signatory to the agreement, but submitted that it was bound by the tribunal’s award as an alter ego of the trust or as it was the common intention of the parties that Pakistan should be a party to the agreement.^[13]

The Court dismissed the first submission as there was not “material sufficient to justify the tribunal’s conclusion.”^[14] Whether the parties had a common intention to be bound by the agreement was to be determined by French law, since the agreement did not specify the applicable law and French law was the law of the seat of arbitration. French law would allow an arbitral agreement to bind a non-signatory if:

“all the parties to the arbitration proceedings, including that person, had the common intention (whether express or implied) to be bound by the said agreement and, as a result, by the arbitration clause therein. The existence of a common intention of the parties is determined in the light of the facts of the case. To this effect the courts will consider the involvement and behaviour of all the parties during the negotiation, performance and, if applicable, termination of the underlying agreement.“^[15]

Lord Mance held that the arbitral tribunal had improperly applied this standard when concluding that Pakistan was a party to the agreement.^[16] In the Court’s view, any other conclusion would mean that “many third persons were party to contracts deliberately structured so that they were not party.”^[17] After a detailed examination of French and comparative law,^[18] the Court held that there was no “common intention” for Pakistan to be a party to the agreement.^[19]

As such the exceptions of Section 103(2)(b) of the Arbitration Act 1996^[20] and Article (V)(1)(a) of the New York Convention^[21] were applicable to deny the enforcement of the award.

III. Cour d’Appel ^[22],

Confident of the favourable ruling in London, Pakistan applied to the French courts to annul the awards previously decreed against it as permitted in Article 1502(1) of the French Code of Civil Procedure.^[23]

The Cour d’Appel concurred with the Supreme Court in recognising the courts’ inherent authority to review an arbitral tribunal’s conclusion on jurisdiction and applied the same standard for the law relating to non-signatories.^[24]

Yet, the French Court concluded that Pakistan had intended to be a party to the agreement. The Court drew particular attention to the government’s involvement in the pre-contractual stages and its active role throughout the agreement.^[25] The government was seen to act “as if the Contract was its own; … this involvement… confirm[s] that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction.”^[26]

IV. Analysis:

The divergence between the French and English judiciaries is an unwelcome sign for the arbitral community^[27] and for the consistency of comparative contractual law. Commentators have accused the English court of having “ultimately failed to appreciate the substance of French law and … [having] applied what amounted to a classically English approach to contract law.^[28] On the other hand, the Court’s expertise in the field of arbitration and its extensive analysis of comparative law “suggests that the position [adopted] should be similar worldwide.”^[29]

It might be the case that the French and English courts, while considering the same facts and the same principles, have approached the issue from a different and irreconcilable standpoint. The Supreme Court focused on evidence demonstrating Pakistan’s intent to be bound by the contract. In this perspective, the creation of a special legal entity like the Trust to avoid direct involvement was “indicative of an intent not to be bound by the contract.”^[30] The Cour d’Appel was more interested in understanding whether Pakistan was “the true party to the economic transaction,”^[31] and in this light, the active-yet-indirect role the government maintained throughout the contract (even despite the creation of the Trust), was sufficient to persuade the court of an intent to be bound by the arbitral provision.^[32]

Ultimately, whether the Supreme Court’s ruling has marked the beginning of a more interventionist era in the traditionally pro-enforcement regime of English arbitrations can only be determined by the judicial and legislative reactions to the judgment. Clearly, were the French case to be appealed and upheld at the Cour de Cassation a strong signal of discord would be sent to Parliament Square.

Endnotes:

[1] Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46.

[2] Irvani v. Irvani, [2000] 1 Lloyd’s Rep. 412 and  Kanoria v. Guiness, [2006] EWCA Civ 222, [2006] 1 Lloyd’s Rep. 701.

[3] The Trust was established by means of a Presidential ordinance in January 1996. It was subject to renewal every four months. The ordinance was renewed in May and August 1996 but not in December 1996.

[4] A detailed description of the findings of the tribunal is reported inDevika Khanna, Dallah: The Supreme Court’s Posivitely Pro-Arbitration “No” to Enforcement, 28 J. of Int’l Arbitration 127, 129-130 (2011).

[5] Dallah Real Estate & Tourism Holding Co v. Ministry of Religious Affairs, Government of Pakistan, [2008] EWHC 1901 (Comm).

[6] Dallah Real Estate & Tourism Holding Co v. Pakistan, [2009] EWCA Civ 755, [2010] 2 W.L.R. 805 (CA Civ Div).

[7] Salim Moollan, Dallah v Pakistan: “Worth the Wait”, 5(6) Global Arbitration Rev. 13 (2010); Khanna, supra note 4, at 135.

[8] “The tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue is whether the tribunal had any legitimate authority in relation to the Government at all… The court may have regard to the reasoning and findings of the alleged arbitral tribunal, if they are helpful, but it is neither bound nor restricted by them” Dallah, supra note 1,at 30-31.

[9] Dallah, supra note 1,at 22, referring to P. Fouchard, E. Gaillard, B. Goldman & J. Savage, Fouchard Gaillard Goldman on International Commercial Arbitration, 659 (1999). A similar view was expressed by Lord Hope when referring to the 1996 Report on the Arbitration Bill of the Departmental Advisory Committee on Arbitration Law. His Lordship stated that “an arbitral tribunal may rule on its own jurisdiction but cannot be the final arbiter of jurisdiction, for this would provide a classic case of pulling oneself up by one’s own bootstraps.” Dallah, supra note 1,at 159.

[10] Dallah, supra note 1,at 22, referring to P. Fouchard, E. Gaillard, B. Goldman & J. Savage, Fouchard Gaillard Goldman on International Commercial Arbitration, 659 (1999).

[11] “The starting point in this case must be an independent investigation by the court… The findings of fact made by the arbitrators and their view of the law can in no sense bind the court” Dallah, supra note 1,at 160. The heightened review imposed by the Supreme Court has been criticised as it undermines “the finality of arbitral awards, and the procedural economy and efficiency that arbitration is supposed to provide… [As a consequence] [d]e novo review at the enforcing stage takes back on the one hand what the doctrine of competence-competence had purported to give with the other.” Paul Tan, Competing priorities in international commercial arbitration, Int’l Arbitration Law Rev. 67- 68, 70 (2011).

[12]Dallah, supra note 1,at 92.

[13] Patrick Heneghan & Jonathon Egerton-Peters, Dallah v Pakistan: Vive la différence? 6(3) Global Arbitration Rev. 25, 26 (2011).

[14] Dallah, supra note 1,at 145.

[15] Dallah, supra note 1,at 17, this is the test set out in Cour d’Appel, [CA][regional court of appeal] Paris, Oct. 21, 1983 and affirmed in Cour d’Appel, [CA][regional court of appeal] Paris, Jan. 11, 1990: “an arbitration clause in an international contract has a validity and an effectiveness of its own, such that the clause must be extended to parties directly implicated in the performance of the contract and in any dispute arising out of the contract, provided that it has been established that their contractual situation, their activities and commercial relations raise the presumption that they have accepted the arbitration agreement, being aware of its existence and scope, irrespective of the fact that they did not sign the arbitration agreement.” It was referred to by Aikens J in the High Court judgment of Dallah at paragraph 85.

[16] Dallah, supra note 1,at 66.

[17] Id. at 40.

[18] For a detailed analysis of the French Law experts availableto the court, UK Supreme Court rules on Dallah v Pakistan, 5(6) Global Arbitration Rev. 10, 11 (2011).

[19]The court relied on several factors to justify its conclusion, including: Pakistan’s involvement in the pre-contractual stages was not indicative of an intention to be a party to the ultimate contract, [para 42]; the different contractual structure (the change from the previous memorandum of understanding to the January 2006 Trust-Dallah contract with the creation of a trust having separate legal personality) highlighted the government’s deliberate desire to abstain from direct contractual involvement.[para 134-136];  Dallah was advised by leading legal practitioners during the entire course of the conduct so that it must have been informed of the difference between contracting with a state and contracting with a state entity, [para 133]; while government officials corresponded with Dallah this element was not conclusive of an official involvement of the government [para 44, 46-61, 138]; the Trust had commenced legal proceedings in Pakistan against Dallah [para 137]. See the analysisby Alexis Martinez, A tale of two judicatures, Int’l Arbitration Law Rev. N4 (2011); Melanie Willems & Markus Esly, Dallah v Pakistan - French Courts Uphold the Award, 5 The Arbiter 3, 6 (2011).

[20] Section 103(2) of the English Arbitration Act, 1996, (c23), “Recognition and enforcement of the award may be refused…..if a) the arbitration agreement is not valid under the law to which the parties have subjected it, or failing any indication thereon, under the law of the country where the award was made“. While the jurisdiction of 103(2) is discretionary, the Court held that the permissive discretion should only be exercised when some “recognisable legal principle” might affect the prima facie right to have enforcement or recognition refused. Dallah, supra note 1,at 67.

[21] Worded identically to the 1996 Act.

[22] Gouvernement du Pakistan Ministere des Affaires Religieuses v Sociere Dallah Real Estate and Tourism Holding Company, Cour d’Appel [CA][regional court of appeal] Paris, Feb. 17, 2011, 09-28533, 09/28535 and 09/28541.

[23] Relying on a precedent of the Cour de cassation: “it is for the court to construe the contract in order to determine itself whether the arbitrator ruled in the absence of an arbitration clause” Cour de cassation [Cass.][supreme court for judicial matters], Jan. 6, 1987. Translation provided by Dany Khayat, France: Dallah, a whole new law and the Tecnimont decisions, (June 25, 2011), http://www.arbitration-ch.org/below-40/pdf/France.pdf .

[24] “What is reasonably clear, however, is that both courts proceeded to address the question of the jurisdiction of the tribunal and the validity of the arbitral award on the same basis – that is, to consider the matter afresh… While the court does not expressly state the test that it applied in order to determine whether or not Pakistan was party to the arbitration agreement, its approach does not appear to be inconsistent with the Supreme Court’s determination of the relevant test under French law.” Patrick Heneghan & Jonathon Egerton-Peters, supra note 13, at 26-27.

[25] Factors which persuaded the Cour d’Appel were: Pakistan’s important role in the pre-contractual negotiations, especially the fact that it was the sole contractual counterpart to Dallah until the creation of the Trust in January 1996; the fact the government was involved with lending institutions in its own name and the requirement of governmental approval before the project could be concluded. The court also focused on Pakistan’s active role throughout the entire duration of the contract, as highlighted by the extensive correspondence of leading government officials with Dallah (especially when these officials had no official position with the Trust), and concluded that the termination letter had been written on behalf of the government of Pakistan (unlike the conclusions of the Supreme Court). For an analysis, see, Martinez, supra note19, at N7; Melanie Willems & Markus Esly, supra note 19, at 6.

[26] Translation by Gary B. Born, Dallah and the New York Convention, Kluwer Law International (Jun. 25, 2011) http://kluwer.practicesource.com/blog/2011/dallah-and-the-new-york-convention/

[27] In particular, leading arbitration practitioner and academic Gary B. Born believes the different outcomes undermine the spirit and purpose of the New York Convention in ensuring “uniform treatment of arbitral awards.” “Those goals are undermined when, a decade after an arbitral tribunal decides that parties concluded a binding agreement, courts in different Contracting States reach conflicting conclusions as to the correctness of the tribunal’s award – with a foreign court disagreeing with the courts of the arbitral seat over the application of its own law.” Born, supra note 26. On the other hand, Patrick Heneghan & Jonathon Egerton-Peters argue that “a fundamental part of the ethos underlying the New York Convention – that only awards which are valid should be recognised and enforced – is upheld by the two decisions.” Patrick Heneghan & Jonathon Egerton-Peters, supra,note 13, at 28. A similar view is endorsed by Devika Khanna, “the Supreme Court’s unanimous “no” to enforcement is very much in line with the spirit of the New York Convention. The Convention… has not been weakened in any respect by this decision.” Khanna, supra note 4, at 127. Perhaps the answer is that “[while] Dallah is a textbook application of orthodoxy… when the practical result of the application of orthodoxy is that a three-day trial in England whitewashes a five-year arbitration presided over by a distinguished tribunal and in respect of which the now-successful party showed no interest in challenging or participating, one may be forgiven for asking whether something has gone wrong.” Tan, supra note 11, at 67.

[28] Born believes that the English courts were uncomfortable with the French standard, and thereby chose to heighten the requirements for binding non-signatories. Furthermore, he suggests a distinctively English approach can be seen from the court’s reluctance to focus on pre-contractual negotiations, while emphasizing the role of express terms – uncommon features in French contractual jurisprudence. He suggests the wording of Article V(1)(a) would have required the Supreme Court to apply the “substance and spirit of the legal rules specified” by the arbitral agreement. Born, supra note 26. That the English court adopted a narrower time frame when considering pre-contractual negotiations is suggested by Melanie Willems & Markus Esly, supra note 19, at 6.

[29] Arbitration E-Bulletin, Supreme Court unanimously rejects appeal to Dallah judgment refusing enforcement of a French ICC award, Herbert Smith (Jun. 25, 2011) http://www.herbertsmith.com/NR/rdonlyres/965CE371-A0EA-4EA8-BE68-5B5677DFC567/0/SupremeCourtunanimouslyrejectsappealtoDallahjudgmentrefusingenforcementofaFrenchICCawa.html

[30] Martinez, supra note 19, at N7.

[31] Id.

[32] Id.

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I.          INTRODUCTION

In the recent case of Hoffer v. Germany[1] the European Court of Human Rights[2] was called upon to determine whether the conviction for defamation of an anti-abortion activist for comparing abortion to the Holocaust was a violation of the right to freedom of expression.

Article 10 of the European Convention on Human Rights[3] guarantees the right to freedom of expression;[4] however, the European Court held there had been no violation Article 10 in Hoffer. The purpose of this article is to provide a critique of the judgment in Hoffer and demonstrate that it represents an aberration from the usually robust protection afforded to freedom of expression by the European Court.

II.        HOFFER V. GERMANY

The applicants in Hoffer were anti-abortion activists who had distributed pamphlets outside a medical clinic in Nuremburg. The pamphlets urged support for ending abortion in Germany; however, the pamphlets also named a doctor at the clinic, Dr. F., describing him as a “Killing specialist for unborn children.” Moreover, the back page of the pamphlet included the following statements: “Stop the murder of children in their mother’s womb on the premises of the Northern medical centre. Then: Holocaust; Today: Babycaust.”

The doctor and the medical center initiated criminal proceedings for defamation against the applicants. At first instance, the German courts held that the actions should fail, as the pamphlet was not intended to debase Dr. F., and only conveyed the applicants’ general rejection of abortion. However, on appeal, it was held that the statement “Then: Holocaust /Today: Babycaust” had to be interpreted as putting the lawful activity of Dr. F. on a level with the Holocaust, qualifying him as a mass murderer, which amounted to abusive insult. The applicants were convicted of defamation and fined.

The applicants made an application to the European Court, arguing that the convictions violated their right to freedom of expression under Article 10 of the Convention. When considering whether there has been a violation of Article 10, the European Court applied its usual four-step test:  (i) whether there had been an interference with a Convention right; (ii) whether the interference was prescribed by law (i.e. law was foreseeable); (iii) whether the law pursued a legitimate aim; and (iv) whether the interference was necessary in a democratic society (i.e. proportional).

The Court held that the conviction represented an “interference” with the right to freedom of expression; the law of defamation was sufficiently clear to be “prescribed by law”; and the conviction pursued the legitimate aim of protecting the reputation of Dr. F.[5]

The main question was therefore whether the convictions were “necessary in a democratic society”. Firstly, the Court noted that it must have regard to the special degree of protection afforded to expression of opinions which were made in the course of a debate on matters of public interest.[6] Secondly, the Court noted that the German courts had accepted that all other statements in the pamphlet, except the Holocaust reference, were acceptable elements of public debate.[7]

The crucial passages in the Court’s reasoning were as follows:

“In the view of the domestic courts the applicants, by comparing the performance of abortions to the mass-homicide committed during the Holocaust, had violated the physician’s personality rights in a particular serious way and could have been expected to express their criticism in a way which was less detrimental to the physician’s honour.

The Court further notes that the Federal Constitutional Court acknowledged the fact that the applicants’ statement could be interpreted in different ways, but considered that all possible interpretations amounted to a very serious violation of the physician’s personality rights.

The Court observes that the impact an expression of opinion has on another person’s personality rights cannot be detached from the historical and social context in which the statement was made. The reference to the Holocaust must also be seen in the specific context of the German past.”[8]

Thus, the Court concluded that there had been no violation of Article 10 as the convictions had represented an adequate balance between the applicants’ right to freedom of expression and the doctor’s personality rights.

III.       DISCUSSION

The reasoning in Hoffer is questionable in a number of respects: Firstly, in considering the meaning to be attributed to the Holocaust reference, the Court makes no reference to the fact the impugned statements were contained in a pamphlet, and distributed by campaign activists. In this regard, the Court failed to refer to its previous case law on campaigning leaflets, namely Steel and Morris v. The United Kingdom[9] where the European Court laid down three pertinent principles: (i) that in a campaigning leaflet a certain degree of hyperbole and exaggeration is to be tolerated, and even expected;[10] (ii) that campaign groups play a legitimate and important role in stimulating public discussion;[11] and (iii) that there exists a strong public interest in enabling campaign groups outside the mainstream to contribute to public debate on matters of public interest.[12]

The applicants were entitled to use provocative language to convey their disapproval of abortion, and it is to be expected that pamphlets will use such language. This view is supported by the fact that the message concerned abortion, an important issue of public interest, and which has historically been the subject of extremely provocative debate. Freedom of expression has long been held by the European Court to include speech which offends, shocks and disturbs.[13]

Secondly, while the Court expressly recognised that the statement was an opinion, the Court failed to apply the well established principle that: “in order to assess the justification of an impugned statement, a distinction needs to be made between statements of fact and value-judgments. While the existence of facts can be demonstrated, the truth of value judgments is not susceptible of proof.”[14] Comparing abortion to the Holocaust is a value judgment, not susceptible to proof. It is not for a court to determine the reasonableness of this view, and punish a person for holding such a view. While the main issue was whether the Holocaust reference was meant to refer to Dr. F., it being a value-judgment should have entered into the equation.

Thirdly, it is worth noting that a criminal conviction (albeit in the form of a fine) was imposed on the applicants. The Court does not consider the chilling effect a criminal conviction will have on activists generally, and discourage participation in similar leafleting campaigns, in direct contradiction to the statement in Steel and Morris that there is a strong public interest in enabling campaigners to contribute to society generally.[15] Criminal convictions deter such activity.

Finally, the Court failed to refer to its previous judgment in Scharsach v. Austria[16] where the Court held that calling someone a “closet Nazi” was a permissible value judgment, despite its special stigma.[17]

IV.       CONCLUSION

All in all, the judgment in Hoffer is particularly bereft of reasoning: failing to place the statements in the context of a pamphlet, where hyperbole is to be expected; and failing to place importance on the statement being a value-judgment. When these issues are considered together, it is highly questionable whether attributing the meaning of such a statement to refer to a particular doctor, and not to abortion generally, is consistent with the high degree of protection afforded to freedom of expression under Article 10 on matters of public debate. It is hoped that Hoffer will not be followed in the future and the European Court will have an opportunity to realign its principles with the jurisprudence referred to above.

Endnotes.

[1] Hoffer and Annen v. Germany, App. Nos. 397/07 and 2322/07, (Eur. Ct. H.R.) (2011), available at http://www.bailii.org/eu/cases/ECHR/2011/46.html (subject to editorial review ) (last visited Mar. 26, 2011).

[2] The European Court of Human Rights [hereinafter European Court] was established under Article 19 of the The Convention for the Protection of Human Rights and Fundamental Freedoms, 4 November 1950, Rome, 213 U.N.T.S. 221, available at http://www.coe.int (last visited Mar. 26, 2011)[hereinafter European Convention] to determine all matters concerning the interpretation and application of the European Convention. See generally David J. HARRIS ET AL., LAW OF THE EUROPEAN CONVENTION ON HUMAN RIGHTS (2d ed. 2009).

[3] The European Convention has been ratified by the 47 member states of the Council of Europe. For a current list of member states, see http:// http://conventions.coe.int/default.asp (last visited (Mar. 26, 2011).

[4] Id. at art. 10

1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises.

2. The exercise of these freedoms,  since it carries with it duties and  responsibilities, may be subject to such  formalities, conditions, restrictions or  penalties as are prescribed by law and  are necessary in a democratic society, in  the interests of national security,  territorial integrity or public safety, for  the prevention of disorder or crime, for  the protection of health or morals, for  the protection of the reputation or rights  of others, for preventing the disclosure  of information received in confidence, or  for maintaining the authority and impartiality of the judiciary.

[5] Hoffer and, supra note 1, at ¶¶ 40-41.

[6] Id., at ¶ 44.

[7] Id.. at ¶ 45.

[8] Id..at ¶¶ 46-48.

[9] Steel and Morris v. The United Kingdom, App. No. 68416/01, 41 Eur. H.R. Rep. 22 (2005), available at http://www.bailii.org/eu/cases/ECHR/2005/103.html (last visited March 28 2011).

[10] Id., at ¶ 90.

[11] Id., at ¶ 95.

[12] Id., at ¶ 89.

[13] Lindon, Otchakovsky-Laurens and July v. France, App. Nos. 21279/02 and 36448/02, 46 Eur. H.R. Rep. 35, ¶ 45 (2008), available at http://www.bailii.org/eu/cases/ECHR/2007/836.html (last visited March 28 2011).

[14] Id., at ¶ 55.

[15] Steel and Morris, supra note 5, at ¶ 89 (2005).

[16] Scharsach and News Verlagsgesellschaft mbH v. Austria, App. No. 39394/98, 40 Eur. H.R. Rep. 22 (2005), available at http://www.bailii.org/eu/cases/ECHR/2003/596.html (last visited March 28 2011).

[17] Id., at ¶¶ 41, 43.