Overview of Trust Law in Japan

TRUSTS IN THE LAW OF JAPAN
HIROTO DOGAUCHI
PROFESSOR OF LAW, UNIVERSITY OF TOKYO

SUMMARY

1. - Legislative History of Trust Laws in Japan
   
2. - Use of Trusts in Japan
   
3. - Nature of Beneficiaries' Rights
   
4. - Relation between Trust and other Devices and Revival of the Theory of Rights in personam
   
5. - Conclusion

1. - The Legislative History of Trust Laws in Japan¹

(1) Although belonging to the civilian tradition, Japan has its own Trusts Act (Shintaku Ho), which was introduced in 1922. To understand the current law and practice of the trust in Japan, it is very helpful to look back at the legislative history of this statute.

The Japanese Civil Code, promulgated in 1898, was inspired by the French and the German Civil Codes. It does not have any provision on trusts. Under Japanese law, the title to property cannot be divided into legal and equitable ownership. However, shortly after codification, the need to adopt the concept of «trust» arose from unexpected circumstances.

From 1904 to 1905, Japan was at war with Russia. To finance the post-war restoration, the Japanese government sought capital investments from foreign countries. The usual way, at that time, was to issue international bonds in London. In accordance with the practice followed in that jurisdiction, bonds secured by certain property were issued and the secured rights held by a trustee as trust property for the bondholders.

In order to permit such arrangements, the Secured Bond Trusts Act (Tanpo-tuki Shasai Shintaku Ho) was adopted in 1905. This statute recognized trusts for this limited purpose, but did not clearly provide for the effects of trusts. However, it is worth noting three points: first, this statute introduced the trust concept into Japanese law; second, since the trust legislation was originally enacted to meet commercial needs, trusts have been understood as commercial devices or vehicles from the beginning; the third point relates to an unexpected consequence of the statute on trusts which must be discussed in more detail.

Probably because of the attractiveness of the newly invented word, Shintaku (Trust), companies appeared whose names contained the word Shintaku (Trust), like XYZ Shintaku Company. These companies, whose number reached 474 in 1912, did not carry trust business. Most of them were, in reality, lending institutions.

In order to regulate such companies, the first thing which had to be done was to define the term «trusts» and to prohibit the use of the word «trusts» by non-trust companies. After many drafts, the Trust Business (Regulations) Act (Shintaku-Gyo Ho) and the Trusts Act (Shintaku Ho) were adopted in 1922 and promulgated in 1923.

Japanese trust law was thus born in a business context. What drove the legislation was not the requirement of family trusts. This initial financial purpose for which trusts were introduced still influences the characteristics of trusts in Japan today.

(2) To understand the nature of trusts in Japan, one must also take into account the experience of the drafter of the first legislation on trusts. The Secured Bond Trusts Act 1905 was drafted by Torajiro lkeda, Chief Judge of the Tokyo District Court. Justice lkeda, the only expert on trust law at that time, also played an important role in the drafting of the Trust Business (Regulations) Act 1922 and the Trusts Act 1922. He had been taught trust law as a student by Professor Henry T. Terry who, at that time, was a foreign lecturer at the Tokyo Imperial University. Professor Terry's analysis which followed John Austin's analytical jurisprudence had a great influence upon lkeda's understanding of trusts.

Professor Terry classified rights into two categories, i.e. rights in rem and rights in personam (obligations), and defined the trust as a source of rights in personam².

Justice lkeda also relied on the Indian Trust Act and the California Civil Code as models of written trust law. These two acts had the following definition of trusts.

Both of these definitions characterize the trust as «an obligation». Ikeda followed these definitions and understood the trust as an obligation. Beneficiaries have only personal rights against the trustees. A trust is a matter of obligation, not a matter of property³.

We will come back to the theoretical analysis of trusts as it developed following the adoption of the legislation.

2. - Use of Trusts in Japan

As mentioned above, in Japan, trusts have been considered from the beginning as vehicles for commercial dealings. However this does not mean that trusts have been used as substitutes for corporations, like the Massachusetts Business Trusts. Its significance is two-fold.

Firstly, all the trustees in Japan have been commercial entities: trust banks.

Secondly, trusts have been used as substitutes for bank deposits or securities investments. Clients often chose trusts, comparing them with other financial vehicles on the basis of interest rates solely. It appears that trust schemes can provide more effective protection to investors (beneficiaries) than other investments in the event of bankruptcy of financial institutions. However, this advantage has not been a factor in attracting investors, because, in Japan, government regulations and administrative guidance have been able to prevent such bankruptcies.

Property which is transferred to trust banks by settlors is usually money (pecuniary trusts). Trust banks administer the property, investing and/or lending it. In September 1999, 84.4% of trusts administered by trust banks were pecuniary trusts, while real estate trusts accounted for only 0.6%. Moreover, 98.7% of the trust property being administered by trust banks was cash money claims or securities⁴.

3. - Nature of Beneficiaries Rights

(1) As the legislative history indicates, the nature of the beneficiaries' rights in trusts has been characterized as rights in personam. However, the Japanese Trust Act affords beneficiaries with protections that mere creditors normally do not enjoy. The additional remedies available to beneficiaries are as follows:

These protections have been explained as exceptions, because they are recognized in favour of beneficiaries even though they have only rights in personam against the trustee, who owns the trust property.

(2) Writing on Japanese trust law, Professor Kazuo Shinomya did not content himself with such an explanation. He argued that to accept simply that «those are exceptions an obligation» was to fail to give an explanation and, referring to P. Lepaulle's theory⁵, he proposed a different theoretical basis for the trust. He said that⁶,

(3) This theory, which describes the trust property as a legal entity, can explain various apparently inconsistent rules of Japanese trust law. The following is a typical example.

Japanese trust law admits that creditors who acquire their claims from the trustee's administration of the trust can attach trust property to satisfy their claims (art. 16 of Japanese Trusts Act). This is one of the important differences between Japanese trust law and English trust law, where the trustee only is personally liable, the creditors having no direct right to the trust property.

If one does not admit that trust property is a legal entity, the inevitable conclusion is that only the trustee is a party to the contract, even if the contract is made in the course of the administration of the trust. However, at the same time, the trust property is separate from the trustee's personal property. Therefore, his personal creditors cannot levy on the trust property. The same conclusion is reached by English law on this point.

Here, the Japanese Trusts Act clearly takes a different position, a position which is as rational as the English one, because the debt is owed for the trust anyway.

When the trust property is considered a legal entity, the solution of Japanese law is easily explained. The creditors, who acquire their claims as a result of the trustee's administration, can attach the trust property, because the trust property, as a legal entity, is itself the debtor.

Shinomiya's theory can also explain the independence of trust property. The property of a legal entity is, of course, independent from the property of its administrator. The beneficiaries' right to require the annulment of the trustee's acts which constitute breaches of trust can be understood like similar rights of shareholders.

(4) Although the theory which gives the trust property the status of a legal entity satisfactory explains the solutions given in the Japanese Trust Act, it has also undeniable defects.

Japanese law does not freely admit the establishment of legal entities. Groups of persons or pools of property acquire the status of legal entities only when they follow the requirements provided by statutes. Why should the trust property acquire that status without meeting the legal or administrative requirements prescribed? This is a first point.

Another weakness in Shinomiya's theory is that it does not give a clear picture of the relationship between the various devices for property administration in private law, such as mandate, agency, corporation etc., and trust. This may be a very important point in understanding trusts in the context of continental law.

4. - Relation between Trusts and other Devices and Revival of the Theory of Rights in personam

(1) Suppose X, mandated to acquire certain goods by Y, is delivered cash and does purchase the goods. Who is then the owner of the goods? In continental law, the conclusion is different depending on whether X is an agent or not.

In relationships involving representation, the contract made by X takes effect between Y, the person represented, and Z, the seller. The ownership is transferred directly from Z to Y. On the other hand, when X is a mandatary without being an agent (i.e. a representative), the obligation to transfer the ownership of the goods to Y, the mandator, is imposed upon X. Until the transfer of ownership is carried out, usually through delivery, X remains the owner of the goods.

This difference is significant if X goes into bankruptcy before delivering the goods to Y, because only the owner has a right of revendication of the goods.

(2) In a trustee-beneficiary relationship, property acquired by the trustee in the course of the administration of the trust automatically becomes trust property. No process of transfer is required. In the event of the trustee's bankruptcy, trust property does not form part of the bankrupt trustee's own property (Konkursmasse).

Therefore, from the viewpoint of the administrator's bankruptcy remoteness, property administration devices can be divided into two groups. Agency and trust belong to one group and mere mandate to another. This conclusion is both unbalanced and discordant, suggesting that these devices can be employed interchangeably for the same purposes. The case of mandate shall be discussed separately.

The Japanese Civil Code does not distinguish between the obligation to transfer and the act of transfer. Like the French Civil Code, it provides that ownership is transferred by the effect of the contract of transfer (art. 176 of Japanese Civil Code). This means that in a mandate under Japanese law, the ownership of the goods is automatically transferred to the mandator at the time of the acquisition of the goods by the mandatary, unless otherwise provided.

If the above description of mandate is accepted, the various devices for property administration would have no difference upon the administrator's bankruptcy remoteness. This would be a more balanced and more coherent solution⁷.

What are the characteristics of the trust, then?

In the case of mandate and agency, Y, the mandator or principal, has a right of revendication based on ownership. On the contrary, in a trust case, beneficiaries cannot rely on a right of ownership. The property belongs to the trustee, and, in such case, traditional continental law cannot bring the effect of bankruptcy remoteness which the Japanese Trust Act admits. Proprietary remedies, as a whole, are available only to holders of rights in rem in the continental legal tradition. On the other hand, under the Japanese Trust Act, proprietary remedies are available to beneficiaries, although they have neither ownership nor other rights in rem, which are severely restricted by numerus clausus (Japanese Civil Code art. 175).

Now, the picture is clear. The trust is a legal concept that makes proprietary remedies available to those who have no right in rem. The reason for this is to keep a balance and coherence between the various devices of property administration.

(3) The same applies to cases where the administered property is money.

The doctrine that money is always passed by delivery and that he who possesses money owns it, is widely accepted in Japan⁸ . However, adherence to this doctrine clouds the picture. The unavoidable conclusion follows that, in agency and mandate cases, X, as agent or mandatary, is the owner of the money he possesses and upon his bankruptcy, Y, the principal or mandator, has only personal and non-proprietary remedies, while in trust cases, beneficiaries have proprietary remedies. This is unbalanced and discordant, suggesting that these devices can be employed interchangeably for the same purposes.

To achieve a more balanced and coherent result, the principal or mandator should also be granted proprietary remedies. The simplest way to reach this result is to consider the latter as the owner of the money which is held for him. This is now accepted by a number of scholars. If this new doctrine is adopted, trusts can have a rightful place as a property administration device. The trust is a legal concept which makes proprietary remedies over money available to those who have no right in rem in order to keep a balance between the various devices of property administration⁹.

5. - Conclusion

As mentioned earlier, the traditional understanding of trusts in Japan was criticised by Professor Shinomiya. He thought that the effects of trusts could not be clearly explained when the beneficiaries' rights are characterized as rights in personam.

However, to explain the nature of the trust and, at the same time, to respect the traditional doctrines of continental law, i.e. numerus clausus and the theory of juridical persons, it seems preferable to adopt the understanding that the trust is a legal concept which makes proprietary remedies available to those who have no rights in rem. Japanese trust legislation was enacted in order to preserve balance and coherence between the various devices of property administration.

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¹ On the legislative history of laws relating to trusts, see Professor A. YAMANDA'S extensive works : Shintaku Rippo Katei no Kenkyu (Research on the legislative history of trust laws) (1981) and 2 Nihon Rippo Siryo Zenshu (Shintaku-Ho, Shintaku-gyo-Ho) (Series on the Documentary History of Japanese Law (Trusts Act, Trust Business (Regulations) Act), (1991). Also, see generally, M. ARAI, <<Chapter 21 Japan>>, in J. GLASSON (ed. by), International Trust Laws.

² H T. TERRY, An Elementary Treatise on the Common Law 522 ( 1898). He also noted that <<equitable rights are, nearly all rights in personam>>, <<[b]ut in practice, the commands of courts of equity are enforced by such heavy penalties that they are very rarely disobeyed )) (The First Principles of Law 176 (1878)).

³ T. IKEDA, Tanpo-tuki Shssai Shitaku Ho Ron (Treatise on Secured Bond Trusts Act) (1909).

⁴ The Trust Companies Association of Japan annually publishes a report, <<Trust Bank in Japan>> (written in English), which contains some usueful statistics. The Association also publishes an English language brochure, <<Trust Banking Business in Japan>>.

⁵ P. LEPAULLE, Traite theorique et pratique des trusts en droit interne, en droit fiscal et en droit international (1932).

⁶ K. SHINOMIYA, Shintaku-Ho (Trust Law) 61-62 and 71-81 (2nd ed. 1989).

⁷ See however, Supreme Court Case, 11 July 1968, Minshu (Report of the Supreme Court Cases) 22.7.1462.

⁸ The position of the Supreme Court has been understood as the same as this doctrine. The Case of the Supreme Court (24 January 1964, Hanrei-Jiho (Court Cases Review) 365.26) said that <<The owner of the money, without any special conditions, is the same as the possessor of the money, and a person who actually possesses and controls the money shall be a person to whom its value belongs, that is, an owner, regardless of the reason why he acquires it and independently of the existence of title which justifies his possession.>>
However, a recent case of the Supreme Court (10 April 1992, Kasai-Geppo (Report of the Family Law Cases) 44.8.16) said that the money which had been owned by the deceased was co-owned by the heirs, although it was possessed by one of the heirs. By this case, the Supreme Court of Japan admitted the separation between the possessor and the owner of money. As regards money deposited in a bank, the Courts have adopted solutions which are more favorable to benefit-holders. The insured paid the premium (cash) to the agent of the insurer. The agent deposited the money in his name, but separately from his own account. The agent went bankrupt. In this case, the courts admitted that the deposits belonged to the insurer. This conclusion cannot be justified without denying that the possessor of the money is always the owner.

⁹ H. DOGAUCHI, Shintaku Hori to Siho Taikei (Principles of Trust Law and the System of Private Law) (1996).