Equity rules can help foreign law understanding

The popularity of English courts with the Russian business elite has provided our legal community with a fascinating opportunity to contrast not just the different legal concepts in the East and West but also the differing socio-economic historical factors and some of the human psychologies and cultures which underlie them.

In the course of the Berezovsky-Abramovich litigation, we have been able to peek behind the Iron Curtain, engaging in detailed post-Soviet historical analysis of business development – all necessary to help us understand the context in which major Russian business deals were done during that time. Our eyes have been opened to the concept of “krysha” (slang for “roof” or “protection”), the necessity of which Mr Abramovich explained in witness evidence by reference to the Russian political context of the time.

Legal and equitable ownership

However, krysha is not the only cultural particularity – and something that has now been recognised as a relationship giving rise to legal obligations – which needs to be explained by reference to the social sciences. It can, for example, be tricky to explain the concept of trust law to a Russian client who may find a legal mechanism allowing for the separation of legal and equitable ownership inconceivable. Again, to understand why that might be the case, we have to look to Russian, and for its part English, history and politics.

During the Soviet Union, the concept of private ownership was controversial and some would even argue that it did not exist at all. Certainly, under the Marxist-Leninist economy, it was not possible to own means of production, that is, assets enabling manufacture and trade. The only exception to this embargo was the right to own a sewing machine, and even then, for personal use only. This was barely worth the trouble as each sewing machine required a licence and the owner was subject to countless inspections by the competent authorities. The purpose of such inspections was to make sure that commercial activity was not taking place on the premises. Caught sewing without a licence, one was subject to the very real and present danger of losing not only the sewing machine but also one’s freedom.

Circumventing requirements

A small number of houses and cars were able to be privately owned under the Soviet regime, as these were classed as “personal property”. However, this was subject to all such property being registered. As Sir Francis Bacon once said, “knowledge is power” and the Soviet authorities agreed: in order to know who owned what and where, it was a mandatory requirement that all personal property was registered.

It was also unlawful to own more than one flat or one car. Although it was possible (again risking one’s freedom) to circumvent these requirements by registering personal property in the name of a friend or relative, these arrangements were not generally made with the expectation of resorting to the courts to enforce them. ?Arrangements of that kind were certainly very unsafe but generally operated on the ?basis of goodwill as, under Soviet law, the state property register was king: the registered owner was the ultimate owner and that owner had to be traceable and accountable. Any mechanism which could be seen to avoid this principle was highly likely to be treated as invalid and unenforceable.

Conversely, the concept of trusts under English law can be tracked back to the post-Norman conquest revolution of English law and society. By the Middle Ages when noblemen would set off to fight in the crusades and leave their worldly possessions in the hands of a trusted friend or a senior member of the church – a trustee. The legal title of the estate would be transferred to the trustee – in order to allow him to manage the estate – on the understanding that it would be transferred back to the nobleman in question on his return.

The beneficial entitlement would commonly remain with the wives and children. However, at the time, this agreement was not legally binding, and, on occasion, a returning knight would find that the “trusted” trustee would refuse to relinquish ownership. Equity, based of course on the principles of justice and conscience, was then developed as a necessity, in parallel to English common law, in order to prevent such abuse. English trust law came to be developed over hundreds of years to be commonly used as a tool for any number of reasons; preventing errant sons from squandering the family fortune or structuring one’s business affairs in a tax efficient manner - the English legal system recognising and enforcing (subject to principles of Equity) the separation between legal and beneficial ownership.

In exploring, albeit peripherally, the political and historical backdrop that underlies the concept of ownership of the two respective jurisdictions, it is perhaps easier to understand the reasons why the corresponding laws governing trusts have developed in the ways that they have. Russian law, to this day, does not recognise Western-style trusts. It will be interesting to see whether and how the modern Russia, having adopted a market economy, will ever seek to legislate to give force to a Western style trust relationship. It may be that the historical context that has thus far prevented such a relationship from being recognised under Russian law is too strongly entrenched in the culture for this to happen in the foreseeable future.