wh@rayyinlawyer.com;zy@rayynlawyer.com; lusinaho@hku.hk
Five years after China introduced trusts into its civil law-based system with the PRC Trust Law (2001), the courts have finally had the opportunity to decide on a trust dispute in Huabao Trust and Investment Co. Ltd. v Yanxin Co. Ltd.1 The court’s treatment of the PRC Trust Law provisions reveal significant differences from judicial approaches in common law.
Case Background
The dispute arose from a trust established in 2004 by Yanxin Co. Ltd. (Yanxin), the settlor, who appointed Huabao Trust and Investment Co. Ltd. (Huabao) as trustee to hold about Rmb4.5million (£300,000) worth of shares in a publicly-listed company for the sole benefit of Yanxin. The trust contract was to last for two years, and provided Huabao with a transaction fee if the beneficiary were to be changed.2
Shortly thereafter, Yanxin executed an agreement to assign its beneficial rights under the trust to Zhizhen Investment Co. Ltd. (Zhizhen) for about Rmb9.5million (£600,000), over twice the original price of the shares. Yanxin then paid and Huabao accepted a transaction fee to arrange for the change of beneficiary. The assignment agreement also imposed a Rmb1million (£70,000) penalty on Yanxin if it did not successfully arrange for the transferee to be appointed as beneficiary by April 15 2004. As it turned out, Huabao failed to do so before the due date; it subsequently returned the fee and refused to appoint Zhizhen, without giving any explanation. Accordingly, Yanxin sought to terminate the trust and claim damages of about Rmb6million (£400,000), being the Rmb1million penalty paid to Zhizhen and the difference between the bidding price and the subsequent sale price.
The court of first instance decided in favour of Yanxin and awarded the full amount of damages claimed. Huabao appealed to the Shanghai High People’s Court (SHPC), arguing that the purported transfer of beneficial rights is, in substance, an attempt of the settlor and beneficiary to assign all its rights as settlor and beneficiary, and an amendment of the terms of the trust. As such, Huabao’s consent was necessary, and so in refusing to appoint Zhizhen as the new beneficiary, it did breach the trust contract.
These arguments were accepted by the SHPC, which elaborated that, firstly, any transfer of beneficial rights should not involve amendment of the trust or imposition of additional duties on the trustee. Secondly, the SHPC accepted that the assignment was in substance a transfer of Yanxin’s rights as settlor.
Recasting The Transfer Of Beneficial Right As Amendment Of The Trust Contract
In spite of the unique features of the Chinese trust, the PRC Trust Law does not necessarily call for such a conclusion.
Insofar as the purported assignment sought to transfer any right that the assignor/beneficiary did not have (for example, a trust term beyond two years), the Court could have upheld the agreement for up to two years (thus merely striking down the additional term as invalid). Partial re-assignment and subsequent division of the beneficial interest was not prohibited by the original trust document. It could be said that the original beneficiary was not assigned any right it did not already possess; it was only providing for the possibility of sub-division of its beneficial interest.
Besides, even if the whole assignment was invalid, it did not entitle the SHPC to recast it as a different transaction, namely a settlor’s purported amendment of the trust contract. Although Chinese settlors enjoy overlapping powers with beneficiaries in monitoring the trustee, and Yanxin happened to be both the settlor and beneficiary, such a re-characterization of the assignment agreement is conceptually wrong and dangerous. The administrative powers granted to the settlor by the Trust Law, however extensive, only give him a monitoring role over the trustee (just like protectors) - they do not justify seeing him as reserving any right to amend the trust without the consent of the beneficiary.3 Of course, where the sole settlor is also the sole beneficiary, it can exercise its power under Article 50 of the Trust Law to terminate the trust, subject to express stipulation in the trust document to the contrary. However, this still does not justify a unilateral amendment – as opposed to termination – of the trust, nor did the SHPC base its decision on this provision of the Law. Instead, it resorted to the Contract Law, which was obviously not drafted with trusts in mind, for justification. It is hoped that future courts would appreciate that unlike a two-party contract, which may be freely varied upon the consent of the original parties, a trust contract involves creating and protecting the rights of ‘third-party’ beneficiaries.
Endnotes
1. Shanghai High People’s Court, March 16 2005, Decision No. 226 of 2004; on appeal from Yanxin Co. Ltd. v Huabao Trust and Investment Co. Ltd., November 25 2004, Decision No. 201 of 2004. For a fuller analysis of these decisions, see Wang, Ho, and Zhou, “Contract or Trust: Examining the First Trust Decision of the Chinese Courts” (Feb 2007) TQR .
2. Under Article 8 of the Chinese Trust Law, a trust must be executed in writing, by a trust contract, a will, or other documents authorized by law or regulations. There is no provision for unilateral declarations of trust.
3. Articles 21 and 51 of the PRC Trust Law permit the settlor to amend the administration of the trust or the rights of the beneficiaries respectively, but only in limited circumstances, such as when doing so is in the interest of the beneficiaries or when the beneficiaries have infringed the rights of the settlor.