Professor Jonathan Harris QC (Hon.) from Serle Court, London discusses the distinctive features of Gibraltar's firewall legislation.
Gibraltar’s Trusts (Private International Law) Act 2015 entered into force on 17 September 2015, with retrospective effect. In adopting so-called “firewall” legislation, Gibraltar stepped into a somewhat crowded market. To make its presence felt, the statute sought to revisit, clarify and improve upon existing firewall templates that had been widely adopted elsewhere.
Gibraltar sought to provide world-leading levels of protection, where appropriate, whilst balancing this against the reality that foreign law cannot be ignored entirely where trust assets are located overseas; and that pre-existing rights and claims should be afforded some level of protection (within appropriate limits) where assets are transferred to a Gibraltar trust.
To this end, the Gibraltar firewall has a number of distinctive features. It seeks, for example, to: extend its firewall protection against the application of foreign laws further than many other jurisdictions; clarify the meaning of the derogations to foreign law that have been widely adopted in the offshore world since the original Cayman Islands’ firewall legislation was enacted; explain what an “inconsistent” foreign judgment means for enforcement purposes; and extend its protection to inconsistent arbitral awards.
Gibraltar’s constitutional status also raised unique issues: it is bound by the Hague Trusts Convention which lays down its own choice of law rules for trusts. At the time of enactment, it was also bound by EU Regulations containing rules facilitating the recognition and enforcement of foreign judgments across the EU (in particular, the recast Judgments Regulation (EU) 1215/2012); although it was not, of course, an EU Member State in its own right, still less a separate Member State from the United Kingdom.
Application Of Gibraltar Law And Exclusion Of Foreign Law
Against this background, in respect of trusts governed by Gibraltar law, section 4(1) of the Act sets out a range of matters which are to be governed by local law. These include the validity of the trust, its interpretation, and dispositions to a Gibraltar trust. The Act goes further than some of its competitors, however, by subjecting not just the capacity of the settlor to local law but also that of a trustee, beneficiary, protector, enforcer or object of a power. The Gibraltar statute also provides clarity by stipulating that the difficult question of the law applicable to a trustee’s fiduciary duties is governed by local law.
Section 4(1), however, expressly states that the application of local law to various issues is “without prejudice to Articles 8 and 9 of the Hague Trusts Convention”. Article 8 of the Convention specifies a wide range of matters to be governed by the applicable law of the trust. This also ensures that “inconsistent” foreign judgments on these issues are encompassed by the firewall. Furthermore, the possibility that a settlor might wish to “split” the trust so as to have more than one governing law (e.g. the law of state A to govern validity and the law of state B to govern administration) is expressly permitted by Article 9 of the Hague Convention.
As with other firewall legislation, section 4(2) of the Gibraltar legislation protects against foreign forced heirship claims and rights arising by virtue of a personal relationship. However, the latter protection extends further than many jurisdictions by applying to claims arising by virtue of a personal relationship to a settlor, beneficiary or an object of discretionary trust or power. Section 4(2) also provides that “nor is any settlor, trustee, enforcer, protector, beneficiary, object of a power or third party to be subjected to any obligation or liability or deprived of any right, claim or interest” by virtue of foreign forced heirship or matrimonial laws. Moreover, the language used was clarified to remove any doubts as to whether, in principle, this protection extended to both pre-existing and subsequent rights arising under foreign law.
Derogations To Foreign Law
Balanced against this, however, are rules which determine the proper extent of derogations to foreign law (for instance, where property is not owned by the settlor or subject to a power of disposition under the relevant foreign law). Similar wording had been used for such derogations in many offshore jurisdictions. The Gibraltar statute reworks those provisions in order to bring greater clarity. For instance, it avoids the language of the “recognition” of foreign laws widely used elsewhere, which arguably has no established meaning and may render it uncertain whether such application is mandatory or discretionary. It clarifies which foreign law may apply to issues, such as the requirement that the settlor should have power to dispose of the property and formalities for disposition of property, by referring to existing choice of law rules in these fields.
Most firewall jurisdictions also require that a testamentary disposition be valid according to the law of the testator’s domicile- a rule that is somewhat curious given that succession to land is typically governed by the law of the situs. Hence, the Gibraltar rule limits this provision to succession to movable property. It also makes clear that the rule does not reintroduce the potential for foreign rules of forced heirship to apply. At the same time, the Gibraltar statute also expressly preserves the derogations to foreign law permitted by Article 15 of the Hague Trusts Convention. Many jurisdictions are bound by the Convention but do not refer to this important provision.
Foreign Judgments And Arbitral Awards
It is also commonplace to protect in firewall legislation against “inconsistent” foreign judgments. That word is, however, ambiguous. It could mean: (i) that the foreign court applied a different law to that prescribed in the local firewall legislation (which will very often be the case); or (ii) that the substantive result was different to that which a local court would have reached (which might effectively require a retrial). The Gibraltar statute seeks to clarify matters by defining what “inconsistent” means and steers a middle ground, so that a judgment shall not be recognised:
“if and to the extent that the foreign court or tribunal applied a foreign law or laws whose relevant provisions are substantively different to those which would be applicable by virtue of the choice of rules in this section. The burden of demonstrating that there is no such substantive difference shall lie on the party seeking recognition or enforcement of the foreign judgment or order.”
In so doing, the firewall does not apply to foreign judgments applying a foreign substantive law that leads to the same result as Gibraltar’s law (which might be considered to be excessive) but maintains the strength of the firewall by placing the onus on the party seeking enforcement to show that there is no such inconsistency.
The Gibraltar statute’s protection is extended to inconsistent foreign arbitral awards. Gibraltar chose, however, not to adopt a provision (the like of which has been adopted in some jurisdictions) that even where the foreign judgment is consistent with the choice of law rules in the legislation, the court has a discretion not to recognise it in the interests of public policy or the proper administration of the trust. It is not obvious that such a provision is necessary and its discretionary nature may make it more difficult to advise clients as to the enforceability of a foreign judgment.
The Gibraltar firewall recognised and upheld the international commitments to which Gibraltar was subject. Hence, it expressly preserved all relevant EU Regulations (particularly the recast Judgments Regulation which, pursuant to the EU Withdrawal Agreement, remains applicable in certain transitional cases, including in respect of proceedings commenced before 1 January 2021 and the enforcement of ensuing judgments). The Gibraltar statute also continues to treat rulings from the UK courts as “foreign” judgment for enforcement purposes (with the consequence that the broad mutual recognition rules applicable between Gibraltar and the UK, which were modelled on EU legislation but which remain in force post-Brexit, still apply).
Of course, the most effective way to ensure that Gibraltar law is applied to Gibraltar trusts is for the local courts to exercise jurisdiction over them. To this end, section 3 of the Act contains jurisdiction rules which ensure that local courts have jurisdiction over Gibraltar trusts. At the same time, the rules are broader than this so as to enable the courts to take jurisdiction over a foreign law trust having a substantial connection to Gibraltar. The court has jurisdiction where:
“(a) the trust is a Gibraltar trust;
(b) a trustee of a foreign trust is resident in Gibraltar;
(c) any trust property of a foreign trust is situated in Gibraltar;
(d) administration of any trust property of a foreign trust is carried on in Gibraltar; or
(e) the trust instrument contains a provision referring disputes to the jurisdiction of the Courts of Gibraltar.”
Overall, the 2015 Act is a modern statute that revisits the scope, meaning and ambit of firewall legislation- retaining the best aspects of such legislation but seeking to improve upon it and to provide world leading but balanced protection and clarity within the framework of Gibraltar’s international obligations.
Professor Jonathan Harris QC (Hon.)
Jonathan is a barrister at Serle Court, London and one of the world’s leading experts on private international law. He is general editor (with Lord Collins) of the leading work Dicey, Morris and Collins, The Conflict of Laws and author of The Hague Trusts Convention. He has drafted firewall legislation for a number of offshore jurisdictions around the world, including Gibraltar. He has been instructed in numerous landmark cases around the world, including in the Supreme Court and Privy Council. Legal directories describe him as “absolutely fabulous” and having a “deep knowledge of the law; commercial, pragmatic advice; fantastic to deal with – the full package”. He is also part-time Professor of International Commercial Law at King’s College, London.