BY G. K . SIMONS A N D L. G. R A D I C A T I * *
Document préliminaire No 4 de juin 1982 Preliminary Document No 4 of June 1982
1 Introduction
One of the objects of the Bank for International Settle-ments, as laid down in Article 3 of its Statutes, is 'to act as trustée or agent in regard to international financial settlements entrusted to it under agreements with the parties concerned'. This text was adopted pursuant to the Final Act of the Hague Conférence of 20th January 1930, and has remained unaltered since then. In fact it formed an annex to the Constituent Charter of the Bank, the text of the Constituent Charter being itself embodied in the Convention respecting the Bank for International Settlements entered into at The Hague be-tween the Governments of Germany, Belgium, France, the United Kingdom, Italy and Japan of the one part and the Government of the Swiss Confédération of the other part. This Convention was one of the many sepa-rate but related agreements which were simultaneously executed, or approved in form, at The Hague on 20th January 1930 to give effect to the Young Plan and thus settle the réparations question.
The purpose of this study is twofold. It will first exam-ine the question why the state treaties which were con-cluded at The Hague in January 1930, and certain relat-ed agreements and documents executrelat-ed pursuant to the Young Plan adopted at the Hague Conférence, express-ly required the Bank to act as trustée. This question is especially relevant because the seat of the Bank is in Switzerland, a civil law country in which the common law concept of trusts is largely unknown. The study will then give doser attention to the trustée or quasi-trustee functions undertaken by the Bank in 1954 in accordance with the Act of Pledge concluded with the High Author-ity of the European Coal and Steel CommunAuthor-ity (ECSC).
As the Act of Pledge was in many sensés a traditional common law trust indenture for the purpose of creating and enforcing security interests, the study will then at-tempt to show how the underlying trust concept of the rôle of the BIS, which was named 'Depositary' in the Act of Pledge, was adapted to the differing légal require-ments of the civil law countries in continental Europe in which the ECSC granted loans to corporate enterprises from the funds borrowed by the ECSC and secured under the Act of Pledge.
2 The background to the trusteeship rôle of the Bank as laid down in the Hague Agreements of 1930
One of the initial reasons for the création of the Bank, but by no means the only reason, was the carrying into effect of thè proposais of the Young Plan of 1929 for a complète and final settlement of the German répara-tions question. In the Report of the Committee of Ex-perts, under the chairmanship of the American expert, Mr Owen D. Young, which was delivered in Paris on 7th June 1929' (Young Plan), the key innovation, as compared with the earlier Dawes Plan of 1924, was the création of an international banking organisation, com-mercial in character and independent of political influ-ence,^ which would exécute the Young Plan as the agent or trustée of the governments concerned. Paragraph 38 of the Report of the Committee of Experts expressed this proposai in the following terms:
In the exploration of the problem of substituting the au-thority of an external, financial and non-political charac-ter for the présent machinery and controls of the Dawes Plan (viz., the administration of the Agent General and of the various Commissioners in Berlin, and those func-tions of the Réparation Commission which were involved), they immediately met with the necessity for a Trustée to whom the payments in foreign currencies and Reichs-marks should be made by Germany, and by whom the distribution to the appropriate récipients should be man-aged.
The succeeding five paragraphs of the Report proposed that the newly-created organisation should handle problems of mobilisation and commercialisation of the annuities to be paid by Germany, exercise control over deliveries in kind, take action in the event of postpone-ment of the postponable part of the annuity, act as in-termediary between the creditor governments and the Reichsbank regarding obligations to be discharged in Reichsmarks within Germany and undertake the task of transferring the payments due into foreign currencies.
Thèse additional tasks were to be performed as agent of the creditor powers, and this is one reason why the Statutory objects of the Bank, referred to above, require the Bank to act both as trustée and as agent in regard to international financial settlements.
At the time when the experts were drawing up their report, and determining which documents would be needed to give effect to the Young Plan it had not been decided where the proposed new financial institution, the Bank for International Settlements, should have its seat. It was only in January 1930 that the Swiss city of Basle was finally chosen from among several possible sites, which included such other cities as London, Paris, Brussels and Zurich, in accordance with the décision taken on 9th November 1929 at the Conférence of Baden-Baden.
The Baden-Baden Conférence, which took place from 4th October until 13th November 1929, was attended by représentatives from the central banks of the seven countries directly concerned with the Young Plan^ and acted as an organisation committee. Its purpose was to take the preliminary steps necessary for the création of the Bank", in particular the drawing up of a Charter for the Bank consistent with the Young Plan' and the
draft-* T h i s document is a revised and slightly expanded version of the document origi-nally submitted by the Bank for International Settlements.
* • Members of the Légal Service of the Bank for International Settlernents.
' See C m n d . 3343.
^ See paragraph 21 of the Y o u n g Plan.
* T h è s e countries were Belgium, the United Kingdom. France, G e r m a n y , Italy.
Japan and the United States of America.
* See paragraph 12 of Annex I to the Y o u n g Plan.
* See paragraph 13 of Annex I to the Y o u n g Plan.
ing of the final version of the Statutes of the Bank.' So far as the proposed trustée functions of the Bank were concerned, the mandate given to the organisation committee was in the following terms:
The Bank shall be Trustée of the Creditor Governments in dealing with the German annuities and shall have such gênerai powers of administration consistent with the Plan as are necessary to the prompt and complète exercise of its duties in that respect. The Organisation Committee shall draw up appropriate forms of trust agreement be-tween the Creditor Government and the BankJ
It is interesting to note that the 'form of trust agreement' drawn up by a sub-committee of the Baden-Baden or-ganisation committee (the final text of which formed Annex V I I I to the Agreement with Germany executed at The Hague in January 1930) was in the French lan-guage and was entitled 'Contrat de Mandat (Trust)'.^
Furthermore, unlike the majority of the documents drawn up at The Hague, where the English and French texts were expressed to be equally authentic, the bind-ing language of the trust agreement was French, even though it was clearly a translation from an English draft' and its terminology was largely based on anglo-saxon drafling techniques for trust deeds securing cor-porate borrowing opérations.
Under this trust agreement, which was executed by the parties on 17th May 1930, the Bank was appointed by the creditor govemments'" to act as their joint and sole trustée {'commun et seul mandataire (trustée)') in the exécution of the Young Plan. As a corollary to this func-tion, the Bank also held a Certificate of Debt of the
German Government ('Schuldbescheinigung des Deut-schen Reichs') dated 8th April 1930, together with the annuity coupons relating to the annuity payments due from Germany under the Young Plan. The Bank also held a Certificate of the German Railway Company ac-knowledging the latter's liability under the Young Plan.
Finally, in connection with the plan for partial mobili-sation of the annuities due by Germany which was put forward by the Young Plan, it should be recalled that early in 1930 the Bank was appointed as Trustée for the German Government International Loan 1930 (the Young Loan). The functions to be performed by the Trustée were laid down in the General Bond entered into between the Government of the German Reich and the Bank in its capacity as Trustée. The Bank's primary duties in this connection were to receive from the debtor government the funds required to service the Loan and to distribute thèse funds to the varions paying agents in the countries in which bonds had been issued.
3 The subséquent expérience of the Bank when its func-tions as Trustée for the Young Loan had to be examined by Swiss Courts of Law
Although the major part of the Bank's trustée functions pursuant to the Hague Agreements were those, describ-ed above, as trustée and agent of the crdescrib-editor govern-ments, thèse duties proved in practice to be shortlived.
The Hoover Moratorium of 20th June 1931 and the sub-séquent London Conférence of July 1931 brought the réparations mechanism of the Young Plan to a
stand-still. As a conséquence, the Bank's principal function of distributing the payments received to the various credi-tor countries was suspended. It was only after the Sec-ond World War that, as a resuit of a séries of arrange-ments made by the Bank with the creditor countries and with the Fédéral Republic of Germany, the outstanding questions relating to the Bank's suspended functions under the Young Plan were settled. The final step in this procédure was not reached until April 1966, whereupon the Bank ceased publishing a separate section in its annual balance sheet dealing with the spécial long-term deposits made with the BIS by the creditor governments and their investment by the Bank in Germany in exé-cution of the Young Plan."
It was with respect to its functions as Trustée for the Young Loan of 1930 that the Bank obtained expérience of the difficulties to which the common law concept of trusteeship can give rise in civil law jurisdictions. In 1935-36 the Swiss courts had to consider the concept of trusteeship when dealing with a claim brought by a Young Loan bondholder against the Trustée with re-spect to the amounts payable on his bond. The claim in question arose because the 1930 Young Loan bonds had a gold clause, but from May 1933 the German Govern-ment only paid to the Trustée the nominal value of the coupons of bonds whose currencies of issue had left the gold standard.'^ The bondholder, who held bonds of the Swedish issue of the Young Loan, demanded that the Trustée should pay out a much higher Swedish K.rona amount than that actually received by the Trustée from the principal debtor, the German Government, with re-spect to the Swedish issue.
It was not without some difïiculty that the court of first instance,'^ the appeal court'" and finally the Tribunal fédéral in Lausanne'^ dismissed the claim against the Bank. Since neither the General Bond nor the individu-al Young Loan bonds themselves determined which law was to be applied as between the Trustée and the bond-holder, the Swiss courts decided, in accordance with the conflict rules of the lex fori, that Swiss law applied, as this was the law of the place of performance (Basic) of the Trustee's obligation to transfer to the respective pay-ing agents the amounts due to individual bondholders.
Furthermore, in determining the nature of the duties of the Bank as Trustée for the Loan, the Swiss courts came to the conclusion that, unlike a trustée under common law, the Bank was merely an intermediary between the principal debtor and the bondholders and that its duty was limited (a) to passing on to the bondholders the payments in respect of their bonds which had actually been received by the Trustée from the principal debtor, and (b) to reserving the rights of the bondholders to any additional amounts which might be due to them under the terms of the Loan. In dismissing the bondholder's claim, the Swiss courts thus refused to détermine that anglo-saxon légal principles and practice as regards the concept of trusteeship should govern their décision, partly for the good reason that English or American trust law could not be properiy applied in Switzeriand in the absence of the Swiss équivalent of an anglo-saxon Equity Court.
The expérience underlined the inescapable fact that, in undertaking any functions as trustée or agent under
Ar-^ Sec paragraph 14 of A n n e x 1 the Young Plan.
" See paragraph 64 of Annex 1 lo ihe Young I^lan.
^ See "Agreements concluded at the Httgue C o n f é r e n c e . Januarv 1930" Pub, H . M . Stalionery Office. 1930; 104 /.<>«i;i«' of iVaiioiis Treiilr Séries 244.
' See F . WeLser. Triisls on ihe Conlincnl iif Europe (1936) at p. 73.
'° T h e creditor governments in the Tru.st Agreeirtenl were Belaium. the United Kingdom. Canada, Ausiralia. New Zealand. South Africa. IndiaT France. Greece.
Italy. Japan, Roland. Portugal. R u m a n i a . Czechoslovakia and Yugoslavia,
" See the A n n u a l Reports of the Bank from 1930 to 1966,
Although the gold clau,se of the Y o u n g Loan was dulv enforced when the United Kingdom and Sweden lefi the gold standard in Seple'mher 1931. il ceased to bc applied by the G e r m a n Government after Ihe U S A left the gold standard in A p r i l '-' Judgmenl of the C i v i l Court of Basel-Stadt of 20th April 1935, See F Wciser on eil.. p, 80,
" Judgment of the Court of Appeal of the Canton of Bascl-Stadt of 29lh Noveinber 1935, See F Weiscr. op. ch.. p. 81.
" Judgment of the Swi.ss Fédéral Court (Lausanne) 26th May 1 9 3 6 ( B G E 6 2 1 1 140).
ticle 3 of the Statutes, it was advisable for the mandate given to the BIS to be defined as clearly as possible and for the functions taken on by the Bank to be, so far as possible, functions of a technical nature clearly defined in advance. The Bank has consequently preferred, when agreeing to take on new functions in accordance with its Statutory objects, to avoid entering into arrange-ments which did not comply with thèse criteria. This attitude reflects the problems which can arise when the common law concept of trusteeship has to be applied in civil law countries and, in particular, the c o n s é q u e n t difficulty of knowing the full extent of the Bank's res-ponsibilities as trustée when viewed from a civil law System.
4 The Bank as Depositary under the Act of Pledge con-cluded with theECSC in 1954
The rôle of Depositary undertaken by the Bank in 1954 for the E c s c is a good example of how the Bank contin-ues to perform trustée or quasi-trustee functions, but takes care to define as cleariy as possible the nature of the duties involved and the légal responsibility to which they give rise.
The ECSC was established by a Treaty dated 18th April 1951"" between Belgium, France, the Fédéral Republic of Germany, Italy, Luxembourg and the Netherlands with a view to establishing a common market in coal and Steel. This supranational entity, the forerunner of the European Economie Community, had power to bor-row and to apply the proceeds of such borbor-rowing in granting loans to enterprises within the member coun-tries with a view to modernising and developing the latter's natural resources. The first substantial borrow-ing opération was concluded by the ECSC" with the United States Government in April 1954. Under this arrange-ment the Expprt-Import Bank of Washington (Exim-bank), acting as agent for the Government of the USA, provided a 25-year loan of us$ 100 million carrying in-terest at 3% per cent per annum. This was the first time that a loan had been extended to the ECSC, as distinct from the separate sovereign states which were its found-ers and membfound-ers.
In exchange for each advance made to the ECSC by Exim-bank pursuant to the Loan Agreement," the ECSC was to issue its Notes to Eximbank in an aggregate principal amount equal to the amount of the advance. The Loan Agreement also provided that the Notes would be secur-ed by the plsecur-edge of ail obligations, and any relatsecur-ed secu-rity, issued by borrowing enterprises for loans they re-ceived from the ECSC out of the funds obtained from the US Government. Since it was recognised that the ECSC might deem it advisable to obtain additional funds for the purpose of making such loans to Community enter-prises, it was decided to find a way to create a common pledge of ail obligations, and the security therefor, issued by Community enterprises for loans granted by the ECSC, whether from the initial us dollar borrowing or from the proceeds of any future borrowings from the same or other sources. Such a common pledge would be for the equal pro rata benefit of ail lenders to the ECSC.
To bring this common pledge into being, the Act of Pledge" was executed by the ECSC and the Bank for International Settlements on 28th November 1954, the
Bank being appointed 'Depositary'. The rôle of the De-positary was to receive for the account of the ECSC ail funds borrowed by the ECSC and to hold such funds in pledge until their disbursement by the ECSC in the form of loans to Community enterprises." Each time the ECSC decided to grant such a loan, the borrowing en-terprise was required to deliver to the Depositary the instrument or instruments constituting the ECSC'S claim"
against that enterprise for repayment of the principal of the loan and interest thereon, to be held in pledge by the Depositary. The Depositary was also required to hold in pledge the security required by the Act of Pledge to be given by borrowing enterprises for project loans from the ECSC. This security was either a 'négative pledge' regarding subséquent indebtedness of the enter-prise, whereby any future security granted by such en-terprise would also be extended to the ECSC loan, or a mortgage or other lien in favour of the ECSC precluding the issue of other security in priority to that granted to the ECSC, or a guarantee issued by a government, or by a recognised community banking institution or business or industrial concern.
The whole portfolio thus held by the Depositary, con-sisting of borrowed funds yet to be disbursed, the en-terprise obligations deriving from project loans together with the security therefor, and ail moneys and any other property delivered to the Depositary, was thus the 'pledged property' for the purposes of the Act of Pledge, and it was to be held by the Depositary for the equal
The whole portfolio thus held by the Depositary, con-sisting of borrowed funds yet to be disbursed, the en-terprise obligations deriving from project loans together with the security therefor, and ail moneys and any other property delivered to the Depositary, was thus the 'pledged property' for the purposes of the Act of Pledge, and it was to be held by the Depositary for the equal