Conclusion: Borderline between the Trust Law and the Lex Rei Sitae

This broadly sketched comparison reveals that, contrary to appearances, Swiss law yields solutions substantially similar to equity in the case of alienation by a titleholder with limited powers of disposal.

The main difference between them lies in the treatment of the pur-chaser whose purchase, even if made in good faith, is not protected³³⁵. The principles of equitable tracing require him to restore the property itself, the income received therefrom and the proceeds of sale or the reinvestments (provided that these assets have not been dissipated while ignoring, through no fault of his own, the duty to make restitution). Swiss law does likewise, except for income received in good faith, even if it has not been consumed³³⁶. The difference appears minimal and does not seem to affect any essen-tial principle of the Swiss legal system. Does this mean that, in addition to the action to recover the property itself, pursuant to Article 11 par. 3.d of the Convention³³⁷, the Swiss courts should apply the tracing rules of the

333ATF 120 II 191 c. 4c.

334Case law tends to apply CC Article 940 to alienation by a holder in bad faith, see ATF 84 II 253; ATF 121 III 71 c. 3b, JdT 1995 I 576, 578; Commercial Court SG, RSJ 1985 167. Like Article 938 (supra The Right to Trace Income and Sale Proceeds and note 323), CC Article 940 concerns the damage caused by improper detention, but not by disposi-tion. Here also, the general rules (CO, Art. 62 et seq. and 423) are preferable and produce a similar result.

335In Swiss law as in trust law, he is almost always a transferee without valuable consid-eration, see supra VIII.A.1.

336CC, Art. 938 par. 1, cited supra note 320.

337According to its the text, Article 11 par. 3.d of the Convention implies “that the trust assets may be recovered” where authorised by the law applicable to the trust, but does not refer to the income, sale proceeds, reinvestment etc., pertaining to such assets. The Con-vention suffers from a lacuna in this respect, which provides the member states with the margin for manoeuvre under discussion here.

law applicable to the trust to determine the scope of this restitution in re-spect of income, profit and reinvestment? One must seriously doubt it. Unlike the sparse provisions of the Swiss Civil Code and Code of Obligations, which are sometimes rather simplistic, the rules on tracing are extraordi-narily complex. A reading of the chapters devoted to them in authoritative textbooks amply demonstrate this fact. For a jurist untrained in the myste-rious workings of equity, the challenge would be daunting and would com-promise the effective and predictable application of such rules by our courts.

One should also bear in mind that Swiss case law on the bad faith of a holder without right does not necessarily coincide with the abundant, com-plex and occasionally contradictory English and US decisions, mentioned earlier. Again, application by a Swiss judge of criteria defined by numerous complex rulings could not guarantee fast and predictable adjudication.

Consequently, in the search for the dividing line between the scope of application of the trust law and that of the law applicable to property rights and to possession, the Convention should be interpreted with the aim of ensuring a rational and reasonably predictable solution to disputes. The earlier finding that the principles of Swiss law on this subject are remark-ably similar to those of equity guarantees that the solutions will not seem surprising in either system. It appears that this dividing line should be drawn as follows:

– The Convention Article 11 par. 3.d, 1^st sentence, states that the action to trace trust assets disposed of in breach of trust will be recognised insofar as the law applicable to the trust so requires. Thus, it is the law of the trust that determines whether the trustee who acts in breach of trust transfers to the third party the asset (or a right over the asset, e.g., a pledge) free of the trust which encumbered the asset. In particular, the law applicable to the trust governs:

– The protection of the bona fide purchaser for value without notice; in the appreciation of the circumstances that may lead to a finding of constructive notice, it is advisable to consider the perspective of the purchaser who, in a country with a civil law tradition, is not necessarily familiar with trusts and the limitations on a trustee’s power of disposal;

– The existence of a right to trace the asset itself, i.e. the right to require the first purchaser and every subsequent purchaser to restore the asset, standing to exercise this right as well as the conditions on which the purchase price must be returned to the purchaser bound to make resti-tution;

– The extinction of the right to trace by the passage of time or by the beneficiaries’ consent (statute of limitations, laches, estoppel)³³⁸ or by the defendant’s behaviour (change of position, dissipation). Swiss rules on acquisitive prescription³³⁹ cannot be varied voluntarily and they concern the transfer of title and the protection of third parties in good faith. Under the Convention, Article 15 paras. 1.d and f, the Swiss rules would take precedence over any longer limitation period set forth in the law governing the trust.

– The conditions and extent of restitution of the income and sale proceeds of the asset in question, the assets acquired by way of reinvestment, the repayment of expenditure by the holder, and his potential liability for damages caused to the asset are not addressed in either the first or the second sentence of Article 11 par. 3.d of the Convention. Applica-tion of the law governing the disposal (transfer of title to an asset, creation of limited property rights, transfer or creation of another right) to these questions would ensure that, whether in good or bad faith, the purchaser of the asset in trust is subject to the rules applicable to any irregular purchase. When, as it is often case, the lex rei sitae is the law of the forum, its application guarantees a more efficient and predictable adjudication. Consequently, if Swiss law applies as the lex rei sitae³⁴⁰, the extent of the restitution owed by the unprotected purchaser and his potential liability to the beneficiaries should be governed by the rules applicable to the holder without right, and not by the law applicable to the trust.

Because it is based on an interpretation of the Convention faithful to the drafters’ intentions, the dividing line we have just drawn can be imple-mented by the Swiss courts without legislative intervention. However, the reasoning is here particularly complex because, in a private international law context, this is the line of confrontation between the property laws of two legal systems and of two major legal traditions (civil law, common law) which are based on opposing principles. Therefore, it might be helpful to facilitate the task of the courts by adopting a provision that clarifies the conflict rules on a point where the Convention is incomplete. Such a provi-sion could have the following content:

338See BOGERT (1987) §§ 169-170.

339CC, Art. 661 et seq. (immovable property) and 728 (movable property).

340SPILA, Art. 99 to 107.

“¹ In cases covered by Article 11, par. 3.d of the Convention, the law designated by Chapter II of the Convention shall determine the condi-tions on which the purchaser must restore the trust asset or give up the right over the asset transferred to him in breach of trust. This law shall also govern the repayment of any valuable consideration supplied by the purchaser.

“² The law designated by [the SPILA of 18 December 1987] shall deter-mine the subject and extent of restitution of the benefits and revenues of the asset, the sale proceeds, the reinvestments or equivalent value. This law shall also govern compensation for use and enjoyment as well as reimbursement of expenditure.”