18.01  The principality of Liechtenstein is a very attractive venue for international clients looking for an asset protection or estate-planning instrument. Liechtenstein trust law adheres to the common law model.¹ Therefore, the basic principles of the Liechtenstein trust law should be well known in common law jurisdictions. Also, the liberal tradition of the Liechtenstein law system² allows international clients to arrange different asset protection and succession planning instruments according to their needs.

18.02  In addition, Liechtenstein is an offshore jurisdiction, which makes it even more suitable for asset protection. Indeed, Liechtenstein is not a party to (p. 409) international agreements on the recognition and enforcement of court decisions. The principality only has bilateral agreements with Switzerland and Austria.³

18.03  Arbitration has recently become an appropriate means of resolving international (commercial) disputes.⁴ This is especially true for Liechtenstein, which recently adapted its arbitration law and which now provides a confidential forum where arbitral tribunals chosen by the parties apply tailor-made procedures to arrive at internationally enforceable decisions.

18.04  For this reason, trust and foundation deeds in Liechtenstein often provide mandatory arbitration. In this context, two major problems arise. Are all internal trust disputes really capable of settlement by arbitration? And does the arbitration agreement also bind the beneficiaries of a trust or a foundation? These questions are treated in detail in section IV of this chapter.

18.05  However, first it is useful to provide a brief introduction to Liechtenstein trusts and foundations and to Liechtenstein arbitration law to lay a basis for the discussion. Section II of this chapter describes the characteristics of the Liechtenstein trust and explains the basic concept of the Liechtenstein foundation. Section III introduces Liechtenstein arbitration law and considers a set of specialized rules: the Liechtenstein arbitration rules issued by the Liechtenstein Chamber of Commerce in cooperation with the Liechtenstein Arbitration Association.⁵ The chapter concludes with some final observations in section V.

18.06  This text focuses primarily on the law of Liechtenstein. Detailed discussions pertaining to the Austrian trust and foundation law have been deliberately left out because Austria does not recognize trusts, and establishing private foundations (especially for tax purposes) is no longer particularly attractive under Austrian law.⁶ However, some characteristics of Austrian foundation law will be presented. Because arbitration law is relatively similar in both Liechtenstein and Austria, Austrian arbitration law will not be discussed in great detail.

18.07  As mentioned above, the basic principles of the Liechtenstein trust law are similar to those used in common law jurisdictions. However, Liechtenstein trusts have a few unusual characteristics. Liechtenstein also recognizes two legal concepts similar to trusts: fiduciary mandate agreements and foundations. The following sub-sections will outline what a Liechtenstein trust is, compare the trust with the fiduciary mandate agreement, and describe the Liechtenstein (as well as the Austrian) foundation in detail.

18.08  This analysis is important because some of the characteristics of Liechtenstein trust and foundation law can prove problematic for arbitration. This discussion also provides an understanding of the Liechtenstein trust and the Liechtenstein foundation, which can be useful not only to foreign trust law experts but also to foreign non-specialists.

18.09  Liechtenstein was the first European country that codified its own genuine trust law.⁷ By 1926, Liechtenstein legislation had included provisions of trust law in the Persons and Companies Act, known as the PGR.⁸ Two years later, in 1928, the law regarding trust enterprises (TrUG) was passed.⁹

18.10  The Liechtenstein trust is based on the common law model and is clearly inspired by the English Trustee Act of 1925.¹⁰ However, Germanic traditions involving ‘legal institutions similar to common law trustees’ also influenced Liechtenstein trust law.¹¹ This is noteworthy because the common law trust is a ‘phenomenon of property’,¹² while the Germanic tradition focuses on the contractual relationship between settlor and trustee. Therefore, Liechtenstein trusts usually show elements of property law, which are supplemented with elements of the law of obligation.¹³

18.11  However, the influence of the common law is certainly predominant, which is shown by the fact that Liechtenstein courts regularly refer to common law principles (p. 411) for interpretation purposes.¹⁴ Indeed, the small number of reported cases on trust disputes means that Liechtenstein courts rely heavily on trust law from England and other common law countries.

18.12  According to Article 897 of the PGR, a Liechtenstein trust ‘is in existence’¹⁵ if the settlor transfers assets to a trustee with the obligation to administer or use such property in the trustee’s own name for the benefit of the beneficiaries. The trustee must hold, manage, and use the trust property in accordance with the settlor’s wishes and in compliance with the trust instrument.¹⁶

18.13  Liechtenstein trusts are strongly connected to property, just as trusts in common law countries are.¹⁷ This is shown especially by the fact that Liechtenstein trust law recognizes a right to follow (trace) the trust property.¹⁸ Therefore, in the case of a breach of trust, the beneficiaries may, under certain circumstances, reclaim the trust property from a third party.¹⁹

18.14  As under common law, a Liechtenstein trust requires the existence of the so-called three certainties to be valid:²⁰ (i) the certainty of intention (ie it must be clear that the settlor wished to create a trust); (ii) the certainty of subject (ie the settlor must define the assets to be transferred to the trustee); and (iii) the certainty of object (ie the trust must have a purpose).

18.15  Liechtenstein also follows the common law with respect to the competence of the court as involving powers that go beyond mere dispute resolution.²¹ Instead, courts also retain a strong supervisory jurisdiction.²² Thus, for example, Liechtenstein courts have the power to remove trustees and protectors.²³ According to Article 919 paragraph 6 of the PGR, the trustee may even seek the court’s guidance in cases of (p. 412) doubt. These supervisory powers are generally exercised in non-contentious proceedings called Ausserstreitverfahren.²⁴

18.16  However, Liechtenstein trusts have their own unique characteristics as well. First of all, a Liechtenstein trust can be set up for any purpose (charitable or otherwise) provided it is not illegal or immoral.²⁵ Indeed, Liechtenstein law recognizes (without restriction) pure purpose trusts, where there is no individually ascertained or ascertainable beneficiary.²⁶

18.17  Liechtenstein trust law is very flexible. Many legal rules are optional and come into effect only if the trust deed does not stipulate otherwise.²⁷ This allows the settlor to arrange the trust according to his or her needs and makes it particularly suitable for asset protection and succession planning. In addition, Liechtenstein trust law allows the reservation of powers such as the power of amendment of the trust deed, the power of consent, or the power to appoint or remove trustees.²⁸ These powers may be reserved by the settlor and exercised by the settlor or by a third party such as a protector. However, according to Article 918 paragraph 1 of the PGR, it is not permitted to bind the trustee to the continuous instructions of the settlor.²⁹

18.18  The position of the beneficiaries of a Liechtenstein trust ‘is weak in its nature’.³⁰ For example, the rule in Saunders v Vautier³¹ stating that the beneficiaries are entitled to ask the trustee to transfer the assets to them and to terminate the trust does not apply. Beneficiaries are not entitled to give joint instructions to the trustee and although the PGR contains rights to information for beneficiaries, the settlor may exclude these rights in the trust deed.³²

18.19  Furthermore, unlike the common law trust, the formation of a trust in Liechtenstein requires a written agreement (the trust deed) between the settlor and the trustee. Alternatively, the trust may be formed through a written unilateral trust declaration by the settlor which is subsequently accepted by the trustee in writing.³³ In this context, it is important to note that the trust deed can be in any language.

(p. 413) 18.20  There is no rule against perpetuity³⁴ or against accumulation in Liechtenstein. Therefore, a trust can accumulate earnings and can be created for an indefinite period of time.

18.21  In Liechtenstein, trusts can be formed under foreign law.³⁵ Indeed, settlors are allowed to form a trust in accordance with (for example) English law. However, the foreign law provisions must be set out in detail in the trust deed.³⁶ If this is the case, the applicable foreign law will govern the relationship between settlor, trustee, beneficiaries, and protector (if any), while Liechtenstein law applies in relation to third parties. According to Article 931 paragraph 2 of the PGR, a mandatory arbitration tribunal shall decide the disputes arising between the settlor, trustee(s), and beneficiaries if the trust is created under foreign law.

18.22  It is possible to appoint natural or judicial persons as trustees irrespective of their residence or nationality.³⁷ This may be one of the great advantages of a Liechtenstein trust over other similar legal concepts, in particular the Liechtenstein foundation, which provides that a Liechtenstein licensed fiduciary is required to hold office as board member or director.³⁸ Accordingly, foreign settlors may settle a Liechtenstein trust without needing to appoint a Liechtenstein trustee.

18.23  The trustee is personally liable without limitation for all obligations undertaken by him or her on behalf of the trust. This, however, applies only when the trust fund is exhausted,³⁹ in which case the trustee has a right of recourse against the settlor and, under certain circumstances, against the beneficiary.⁴⁰

18.24  The taxation of trusts is very favourable in Liechtenstein. Trusts are not subject to unrestricted (corporate) income tax liability under Liechtenstein law because they are not a legal entity. They are subject to the minimum income tax of CHF 1,200 per year.⁴¹ Finally, the Commercial Register must be notified about trusts created for a period of longer than twelve months.⁴² The following information must be provided to the Register: (i) a description of the trust, (ii) the date of creation, (iii) the trust period, and (iv) the name and place of residence (head office) of the trustee. Alternatively, the trust deed (or a certified copy) may be deposited with the (p. 414) Commercial Register.⁴³ However, neither of these processes allow the name of the settlor nor the beneficiaries to become publicly available.

18.25  In this context, it must be noted that Liechtenstein, as a member of the European Economic Area, will implement the European Union’s fourth anti-money laundering directive (2015/849) in the near future.⁴⁴ A new register containing the beneficial ownership data (in particular from the settlor, the trustee, the protector, and the beneficiaries) is likely to be established pursuant to this directive. Access to this register must be granted not only to law enforcement and relevant government bodies but also to the public, such as investigative journalists and non-governmental organizations, if they can prove a legitimate interest. However, there will be an exemption for trusts such that information about trusts will be available only to government bodies but not to the public. However, it is yet unclear when Liechtenstein will implement the respective European Union directive, since there is a two-year grace period for implementation.

18.26  The trust is not the only type of fiduciary relationship in Liechtenstein. Liechtenstein law also recognizes fiduciary mandate agreements which allow the transfer of assets from one party (the principal) to another party (the agent) who is at the same time charged with fiduciary duties relating to the maintenance and management of the assets in his or her own name, albeit for the benefit of the principal. However, there are important differences between the two models. In particular, the agent of a mandate agreement is constantly subject to the control of the principal, which means there is no need for the courts to retain any sort of supervisory powers.

18.27  In 2000, the Liechtenstein Supreme Court held that the Liechtenstein trust was not a concept which absorbed all conceivable fiduciary relationships entirely.⁴⁵ Instead, the court held that the Liechtenstein trust coexisted with other important fiduciary models, in particular with the Roman law fiduzia on which the statutory provisions on mandate agreements (found in section 1002 and following of the Civil Code (ABGB)) are applied. Moreover, the court held that any such fiduciary relationship was deemed to be a mandate agreement rather than a trust absent a clear intention of the parties to the contrary.⁴⁶

(p. 415) 18.28  In the past, the Liechtenstein Supreme Court has had to deal with fiduciary relationships quite often, most importantly with regard to the relationships between (economic) founders of Liechtenstein foundations and professional trust services providers who acted (and still do) as (legal) founders of foundations. Until 2000, such relationships were, as a general principle, considered Liechtenstein trusts. The Liechtenstein Supreme Court classified the fiduciary services of Liechtenstein lawyers and other professionals in trust terms when setting up legal entities on behalf of their clients. According to this view, the client is the settlor, the Liechtenstein service provider the trustee, and the legal entity formed and administered in a fiduciary capacity is the trust property.

18.29  In 2000, the Supreme Court decided a case in which the plaintiff authorized the defendant to manage his assets on an account which again was in the name of the defendant.⁴⁷ The Supreme Court first qualified the described asset management agreement, according to which the defendant accepted the assets of the plaintiff in order to manage them as a mandate agreement pursuant to section 1002 and following of the ABGB but admitted that the contractual relationship also showed trust elements due to the fact that the assets were transferred into the defendant’s property. The Supreme Court then summarized the previous case law and doctrine, which stated that all trust relationships, including fiduciary relationships, were subject to Article 897 and following of the PGR (treuhandrechtliche Generalsubsumption). Ultimately, the Supreme Court ruled that there were essential differences between the trust pursuant to Article 897 and following of the PGR and the fiduciary mandate agreement. Therefore the PGR did not regulate all sort of fiduciary relationships. The Supreme Court also recognized that Liechtenstein law provided for other contractual relationships with more or less fiduciary elements particularly in the Civil Code, which meant that Article 897 and similar provisions of the PGR are not a priori and globally applicable to cases that differ from the legal concept of the Liechtenstein trust. Consequently, the Supreme Court qualified this type of contractual relationship as a mandate agreement primarily subject to section 1002 of the ABGB.

18.30  In 2001, the Liechtenstein Supreme Court reconfirmed the new ruling.⁴⁸ Accordingly, if one party (principal) provides another party (agent) with assets and (p. 416) instructs the agent to set up a company on the principal’s behalf and on a fiduciary basis to which such assets are to be transferred, the agent becomes the legal owner of the shares of the company and the principal can only claim the transfer of shares from the agent.⁴⁹ Ever since this decision, the Supreme Court has construed many fiduciary relationships as mandate agreements.⁵⁰ Furthermore, the Supreme Court has held that there are no form requirements for such agreements and allowed parties to conclude such agreements orally.⁵¹

18.31  Liechtenstein law thus recognizes a fiduciary mandate agreement whenever one party transfers assets to another party who is at the same time charged with fiduciary duties of holding and managing the assets in his or her own name, albeit for the benefit of the transferee. Only if the parties made specific reference to trust law, which they intended to govern their relationship, does trust law override the law on mandate agreements.

18.32  Contrary to trust law, the law on fiduciary trusts and mandate agreements is based on the reserved control powers of the principal.⁵² The agent is obliged to effect transactions (Geschäftsbesorgung), including management of assets, negotiations of a contract, execution of a contract, etc, for the benefit of the principal.⁵³

18.33  Thus, one of the most important differences between trusts and fiduciary mandate agreements is that a trustee of a Liechtenstein trust must not follow continuous instructions of the settlor, whereas the agent of a mandate agreement is constantly subject to the control of the principal.⁵⁴ However, other differences also exist. For example:

• •  Trusts must be in written form whereas fiduciary mandate agreements may be oral.

• •  Trusts require the coincidence of the so-called three certainties, while fiduciary mandate agreements do not require this as they are governed by the principles of the law on contracts and they are thus generally deemed established with sufficient certainty if both parties agree that the fiduciary shall act for and on behalf of the principal and/or the beneficiaries in a certain manner.

• •  Trusts are to be construed by exploring the settlor’s intentions, whilst fiduciary mandate agreements shall be construed in accordance with the ‘principle (p. 417) of trust’, which also looks at what the fiduciary perceived and relied on when dealing with the principal.

• •  Trust law acknowledges the right of a beneficiary to trace trust property which was disposed of in breach of trust,⁵⁵ whilst beneficiaries of a fiduciary mandate agreement have no such right.

• •  A trustee’s liability may in certain circumstances be limited to the trust property,⁵⁶ whilst the fiduciary’s liability is generally unlimited.

• •  The interests of discretionary beneficiaries of a trust may be beyond reach of their creditors if the trust deed so provides and thus not subject to execution,⁵⁷ whilst there is no such privilege for beneficiaries of a fiduciary mandate agreement.

• •  Trustees hold the trust property as a ‘special purpose’ and ‘third parties’ property’ whilst fiduciaries regularly acquire legal title over the fiduciary property.⁵⁸

• •  Trustees may apply to the court for binding instructions which have discharging effect, whilst there is no such remedy for fiduciaries, since courts do not retain any sort of supervisory power in matters relating to fiduciary mandate agreements.

18.34  Another instrument that is highly adaptable and therefore suitable for asset protection and succession planning is the Liechtenstein foundation. In addition, foundations are broadly used as holding vehicles or as instruments for the preservation of family enterprises.

18.35  Foundation law has a long tradition in Liechtenstein, beginning in 1926. In 2009, the legislature revised the foundation law completely and created a modern legal framework that is well prepared to face the challenges of today’s foundations.⁵⁹

18.36  A Liechtenstein foundation is a legal entity to which the founder has provided assets to achieve a particular purpose.⁶⁰ The fund is held, administered, managed, used, etc, by the foundation board⁶¹ for the purpose set out by the founder. The foundation has no members or shareholders but becomes autonomous after incorporation.

18.37  The assets of the foundation are legally separated from the founder’s personal assets, which means that the foundation is the bearer of rights and obligations. (p. 418) It can hold bank accounts, grant proxies, and sue or be sued. The liability of the foundation is limited to the value of the assets of the foundation fund. There is no personal liability of the founder.

18.38  The founder is free to define the objectives of the foundation provided they are legal, moral, and ‘outward directed’.⁶² Therefore, a Liechtenstein foundation may have private-benefit or common-benefit purposes.⁶³ The founder may establish a foundation to support certain family members (eg to defray expenses for their upbringing and education, outfitting, and support, and similar objects) or to serve the ‘common good in a charitable, religious, humanitarian, scientific, cultural, moral, sporting or ecological sense’.⁶⁴ It is even possible to establish a mixed foundation that serves private as well as charitable purposes, either simultaneously or successively.

18.39  Foundations may engage in commercial activities (although they are generally excluded) and establish facilities of commercial business if the type and scope of interests held require it. In other words, an enterprise foundation holding participations is admissible in Liechtenstein.⁶⁵

18.40  A Liechtenstein foundation is established by a founder’s unilateral declaration of will (via a foundation deed or statutes), which has to be in written form.⁶⁶ In particular, the foundation deed must contain (i) the wish of the founder to form the foundation, (ii) the asset endowment, and (iii) the purpose of the foundation, including the appointment of beneficiaries. The founder can also issue by-laws. In practice, these by-laws often contain the provisions regarding the beneficiaries.⁶⁷ The signature of the founder under the foundation deed and by-laws must be authenticated.

18.41  In addition, common-benefit foundations must be registered in the public register.⁶⁸ Only after registration do they acquire their legal personality. In contrast, private-benefit foundations are not obligated to be entered in the public register. They acquire their legal personality through formation. This may be one of the advantages of foundations over trusts. As will be discussed further below, many disputes involving Liechtenstein trusts deal with their validity or whether they are a sham. There is more legal certainty with a foundation since, as a general principle, such organizations (p. 419) are difficult to create on a false basis and, once created, may fail only in the rarest circumstances. However, the formation of a private foundation has to be notified to the authority.⁶⁹ In both cases, neither the name of the founder nor the identity of the beneficiaries must be disclosed.⁷⁰

18.42  As mentioned above, the foundation fund is autonomous and is therefore no longer subject to (direct) control of the founder. However, Liechtenstein foundation law enables the founder to adapt the foundation to the individual needs of his or her family or business.

18.43  It is therefore possible for the founder to maintain a certain influence on the foundation either indirectly through the foundation’s administrative bodies (eg establishment of a foundation board closely related to the founder),⁷¹ or directly by providing the founder with certain reserved powers (such as the right to amend the foundation deed (the statutes) and the supplementary formation deed (by-laws), or the right to revoke the foundation).⁷² The reservation of such revocation and amendment rights serves to ensure a certain level of influence to the founder, but it may also cause adverse consequences. When the founder contributes assets to the foundation, the legal title to those assets is vested in the foundation, requiring the founder to irrevocably give up control over these assets. The Liechtenstein Supreme Court recently held that whenever revocation and amendment rights are reserved, the founder has not yet made any ‘pecuniary sacrifices’⁷³ with regard to the establishment of the foundation and thus has not irrevocably transferred any of the assets to the foundation until he either waives such reserved powers or dies, thereby irretrievably giving up any control over the foundation and its assets.⁷⁴ Of course, this might adversely affect any asset protection strategies pursued by the founder. For instance, the statute of limitations for claw-back or forced heirship claims is tolled and will start running only when an irrevocable transfer of assets to the foundation can finally be assumed.⁷⁵ However, it is possible to design and construe such reserved powers without putting all or a substantial part of the foundation’s assets at risk of creditor claw-backs and attacks by forced heirs.⁷⁶

(p. 420) 18.44  With regard to the foundation governance, two different systems must be distinguished: while the common-purpose foundation is subject to supervision by the supervisory authority (Stiftungsaufsichtsbehörde or STIFA), private-purpose foundations are basically monitored by the beneficiaries through their right to information.⁷⁷ In other words, private-purpose foundations can exist completely independent of state supervision.⁷⁸ Also, the courts exercise their supervisory role only upon application by an interested party.⁷⁹ These interested parties (ie the beneficiaries) are entitled to initiate non-contentious proceedings in order to safeguard their rights in private foundations by asking for the removal of the foundation board, the appointment of special auditors, or the rescission of resolutions passed by the foundation board.⁸⁰ However, the founder may restrict the rights to information of the beneficiaries. According to Article 552 section 10 of the PGR, the beneficiaries do not have any right to information if the founder has reserved for himself the right to revoke the foundation. In this case, the founder monitors the activities of the foundation until his death. Only afterwards are the beneficiaries allowed access to the information. Alternatively, the founder may establish a so-called controlling body, which controls the activities of the foundation. In these cases, the beneficiaries may only request reports on the controlling body. Furthermore, according to Article 552 section 11 of the PGR, the founder may appoint an auditor, with the founder himself or persons who have knowledge of the fields of law and business being the controlling body.⁸¹

18.45  Taxation of Liechtenstein foundations is also very favourable. Foundations that qualify as private asset structures (ie have no commercial activities) are taxed at a flat rate of CHF 1,200 per year. Other foundations are subject of annual income tax of 12.5 per cent of the taxable income. The transfer of assets to the Liechtenstein foundation is practically tax-free in Liechtenstein.⁸² The same applies to distributions from a Liechtenstein foundation to the beneficiaries.

18.46  As indicated earlier, Austria does not recognize trusts. Furthermore, Austria has not signed the Hague Convention on the Law Applicable to Trusts and on Their Recognition,⁸³ nor has it enacted any laws governing the treatment of foreign (p. 421) trusts from an Austrian perspective. However, there are two types of foundations in Austria: those based on the Federal Foundation and Funds Act (Bundes-Stiftungs- und Fondsgesetz or BSFG) and those based on the Private Foundation Act (Privatstiftungsgesetz or PSG), which came into force on 1 September 1993.⁸⁴

18.47  When developing the PSG, the Austrian legislature drew inspiration from the legal framework established in Liechtenstein. Therefore, Austrian private foundation law and Liechtenstein foundation law are broadly similar. In particular, as under Liechtenstein law, Austrian private foundations may reflect common-benefit as well as private-benefit purposes.⁸⁵

18.48  However, there are significant distinctions between Austrian private foundations and the Liechtenstein foundations.⁸⁶ For example:

• •  Beneficiaries and their eligible relatives are not allowed to be members of the foundation board in Austria. This also applies to persons who have been instructed by the beneficiaries (or their eligible relatives) to represent the beneficiaries’ interest in the foundation board and—in case the beneficiary is a legal entity—the natural persons that control the legal entity.⁸⁷

• •  It is not possible to establish a private foundation through a so-called fiduciary in Austria. In Austria, the fiduciary, not the principal, is deemed to be the founder.⁸⁸ In contrast, in Liechtenstein, the principal is regarded as the founder.⁸⁹

• •  In Austria, the founder cannot define an enforcement privilege, while Liechtenstein foundation law allows such an action.⁹⁰ In Liechtenstein, if the founder provides for an enforcement privilege in the foundation’s deed, creditors of the beneficiaries cannot, either through bankruptcy proceedings or through execution of judgments, seize the rights and benefits of beneficiaries.

• •  The beneficiaries’ rights to information cannot be restricted in Austria.⁹¹

• •  The foundation deed must be certified by a notary public and filed with the company register of the commercial court. The foundation deed (including the name of the founder) is publicly available.⁹² Notably, the addenda (which together with the statutes forms the foundation declaration and in practice (p. 422) contains the provisions regarding the beneficiaries) must not be filed to the company register.

• •  The minimum capital needed to form an Austrian foundation is €70,000.⁹³

• •  There are a number of taxes that apply to an Austrian private foundation such as: (i) private foundation transfer tax in the amount of 2.5 per cent; (ii) continuous corporate taxation in the amount of amounts to 25 per cent; and (iii) withholding tax on payments to beneficiaries in the amount of 25 per cent.

18.49  The Liechtenstein system of litigation as laid down in the Liechtenstein Code of Civil Procedure (Zivilprozessordnung or ZPO) dating back to 1912 has not changed much over the years. Although the system is capable of handling even large-scale commercial disputes, one drawback is that all major litigation may be brought before courts of three or even four instances, requiring a great deal of time. Also, the judges, who enjoy a strong reputation internationally, claim to be overburdened with work and are therefore not always able to settle disputes as promptly as the parties would wish. Although the panels of higher instances are composed of professional judges and laymen, in the Supreme Court the laymen are experienced lawyers. Nevertheless, proceedings in all three instances (District Court, Superior Court, and Supreme Court) in civil or criminal matters do not usually take more than two years.

18.50  The various instances guarantee a maximum of judicial security. However, so-called Willkürbeschwerden (appeals of arbitrariness) may be brought to the Liechtenstein Constitutional Court (Staatsgerichtshof or StGH) and may prolong the average duration of a proceeding for another year. Although this prolongation can be all but irrelevant, this ‘last frontline in defending the law’ avoids severe procedural errors or gross negligence regarding the principles of law.⁹⁴ The Constitutional Court puts such emphasis on the verdict that it is not to be considered a fourth instance.⁹⁵

18.51  However, three instances in addition to possible proceedings before the Constitutional Court may be a long way to go from the point of view of the parties involved. International cases often result in particularly complex and time-consuming fact-finding procedures. In addition, the public are excluded from hearings before the courts of law only in exceptional cases.

18.52  Because Liechtenstein is not a party to any multilateral agreements on the international recognition and enforcement of court decisions, the country does (p. 423) not appear to be an attractive venue for civil proceedings.⁹⁶ Proceedings before the Liechtenstein Courts of law are therefore only sensible if the opposing party is domiciled and/or its assets are located in Liechtenstein or, to a lesser extent, Austria or Switzerland, since those are the countries in which the judgments are enforceable.

18.53  This phenomenon, which applies to the thousands of trusts and foundations set up and administrated in Liechtenstein in equal measure, led Liechtenstein to join the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention, in 2011.⁹⁷ This move has allowed parties to solve their civil disputes quickly, discretely, and considerably more economically before a private arbitral panel. Furthermore, the award may be enforced both in Liechtenstein and abroad.

18.54  In 2010, in anticipation of its joining the New York Convention, Liechtenstein totally revised its law on arbitration.⁹⁸ The reform was based on the Austrian model, which was itself based on the original 1985 version of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. However, Liechtenstein arbitration law departs in certain aspects from the UNCITRAL model, which ‘make[s] it more attractive and effective’.⁹⁹ Some of the main characteristics of Liechtenstein arbitration law, including (i) the requirements for mandatory binding arbitration, (ii) the interim injunctions, (iii) the procedure for setting aside an arbitration award, and (iv) the possibility of enforcing an arbitration award, will be introduced in the following paragraphs.

18.55  Liechtenstein law contemplates two mandatory requirements to exist before arbitration is considered appropriate. First, there must be a valid arbitration agreement, and second, the dispute must be objectively arbitrable.

18.56  In Liechtenstein the arbitration agreement must be in writing and can be contained either in a series of documents signed by both parties, such as letters, e-mails, or other forms of correspondence exchanged between the parties, or in a standard contract (such as standard terms of business) that provide a record of the agreement.¹⁰⁰ The requirement that there must be a record ensures that there (p. 424) is some evidence of the arbitration agreement that is equivalent to a document in writing.¹⁰¹ This does not mean, however, that the arbitration agreement needs to be written on paper. Storage on a data carrier, such as CD-ROM or hard disk, is sufficient. Where an agreement is formed by such means, the identification of the sender of the relevant item of communication is deemed equivalent to a personal signature. For instance, where an arbitration agreement is concluded by exchange of e-mails, the electronic signature of the parties is sufficient.¹⁰² In this context, the form requirement serves an evidentiary purpose, although such matters become irrelevant if not objected to in time.¹⁰³

18.57  With regard to consumers, there are additional formal requirements. According to section 634 of the ZPO, arbitration agreements between a business and a consumer may validly be concluded only on a post-dispute basis. In addition, the arbitration agreement must be a separate agreement, personally signed by the consumer, and must not contain any other agreement. Before the conclusion of the arbitration agreement, the consumer must receive written legal advice on the differences between the arbitration proceedings and the proceedings before state courts. Finally, the place of arbitration must be stipulated and may only be the consumer’s domicile or usual place of residence.

18.58  As to the content, the arbitration agreement must contain the definition of the legal relationship which is subject to arbitration. Apart from that, the parties are generally free to determine the rules of procedure, which include the composition of the arbitral tribunal, the appointment of the arbitrators, the seat of the court, the language of the arbitration proceedings, etc.¹⁰⁴ The parties may incorporate other rules of procedure by reference.

18.59  With regard to the rules of procedure, it is recommended to agree on the Liechtenstein arbitration rules issued by the Liechtenstein Chamber of Commerce in cooperation with the Liechtenstein Arbitration Association.¹⁰⁵ Though this is not a formal, permanent arbitration institution, the Liechtenstein Arbitration Association provides a semi-institutionalized platform for Liechtenstein arbitration. The Liechtenstein rules apply to both international and domestic proceedings and to arbitral tribunals sitting in both Liechtenstein and abroad.

18.60  The Liechtenstein rules attach special importance to simplicity. For example, Article 18 of the Liechtenstein rules impose only a minimal duty to produce documents. In addition, the Liechtenstein rules provide clear rules as to the allocation of costs, but allow some discretion on the part of the arbitrators.¹⁰⁶ Furthermore, (p. 425) the rules clearly describe the costs of the procedure as well as the fees of the arbitrators, which normally depend on the complexity of the case as well the value of the dispute.¹⁰⁷

18.61  The rules also govern confidentiality, which is still greatly valued by clients harbouring wealth offshore. According to Article 29 of the Liechtenstein rules, parties may only appoint arbitrators that are subject to professional secrecy obligations (lawyers, auditors, trustees, etc), unless the parties agree otherwise. Furthermore, the rules explain explicitly that the parties and their representatives, the experts, the arbitrators, any commissioner, the secretariat, and any auxiliary persons must keep confidential all awards and orders, as well as all materials submitted and facts made available by other participants in the framework of the arbitral proceeding. This provision also introduces penalties for violations of this rule. According to Article 29 paragraph 7 of the Liechtenstein rules, persons that breach the confidentiality obligation must pay a contractual penalty of CHF 50,000 to the injured parties.

18.62  The new Liechtenstein law on arbitration has clarified and extended the scope of arbitration so that every proprietary claim subject to a decision of a court of law may be the object of an arbitration agreement.¹⁰⁸ In addition, the parties to an arbitration agreement may also subject non-proprietary claims to arbitration insofar as the parties are entitled to conclude a settlement concerning the subject matter of the dispute. In essence, this also applies to the legal situation in Switzerland and Germany.¹⁰⁹ Only claims in matters of family law, certain company-related disputes, and claims based on articles of apprenticeship may not be made subject to arbitral proceedings.¹¹⁰

(p. 426) 18.64  Therefore, it seems correct to consider that a number of trust-related disputes, including the removal of the foundation board (which is an increasingly important subject in Liechtenstein trust litigation with a significant number of cases), the rescission of resolutions of foundation boards or trustees, as well as the appointment of extraordinary auditors, to be arbitrable in Liechtenstein. This conclusion applies to foundations as well as to trusts,¹¹² based on a statement in the official underlying documents indicating that ‘in disputes between a foundation or its organs and private beneficiaries … the Foundation Supervisory Authority will know to reluctantly exercise its discretion to step in, in order to avoid circumventing the settlor’s will and this statutory provisions foreseeing arbitration’.¹¹³ However, as seen in section IV, the Supreme Court took a different view and stated that not all disputes in connection with a foundation may be decided by arbitration.

18.65  Liechtenstein arbitration law indicates that, unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order any party to take such interim or protective measures as the arbitral tribunal may consider necessary with respect to the subject matter of the dispute in order to avoid the enforcement of the claim being frustrated or considerably impeded or to avert a danger of irreparable harm.¹¹⁴ However, this provision states that ex parte decisions are not permitted in arbitration. Therefore, the opposing party must be heard before such interim or protective measure is ordered.

18.66  The absence of ex parte measures means that the element of surprise is lost in arbitration. Thus, the question arises whether it makes more sense to apply for an interim measure with the court of law rather than an arbitral tribunal.¹¹⁵ However, measures rendered by a tribunal might be more advantageous because they cannot be separately appealed.¹¹⁶ As a result, the right to appeal is limited to severe violations of the fundamental procedural rights of the parties or of the ordre public. Incorrect considerations of the evidence, plain procedural errors, and errors of judgment are insufficient reasons for denying the enforcement of measures rendered by the (p. 427) tribunal.¹¹⁷ This approach differs from that used in litigation, since interim measures of the Liechtenstein District Court imposed according to the Execution Act can be appealed on plain procedural errors or errors of judgment with recourse to the Supreme Court. In cases of incorrect findings, an appeal to the District Court is permitted.

18.67  In Liechtenstein, the parties to arbitration may exercise their right to file an action for setting aside the award within four weeks of the award being declared.¹¹⁸ This applies to arbitral awards, including awards on jurisdiction.¹¹⁹

18.68  The Superior Court is the only competent court for actions determining the (non-) existence of an award or setting aside an award.¹²⁰ The decisions of the Superior Court are final except for actions brought in the Constitutional Court.

18.69  The decision of an arbitral tribunal may be set aside on grounds of invalidity of the agreement,¹²¹ excess of authority,¹²² violation of the right to be heard,¹²³ or violation of ordre public.¹²⁴ In addition, awards have to be set aside if the subject matter of the dispute is not capable of settlement by arbitration in Liechtenstein¹²⁵ and may be reopened for reasons relating to crime.¹²⁶

18.70  The New York Convention entered into force in Liechtenstein on 5 November 2011. Foreign arbitration awards are therefore easily enforceable in Liechtenstein, and Liechtenstein arbitration awards are enforceable in the courts of other states parties to the New York Convention.

18.71  When ratifying the convention, Liechtenstein made a reservation on the grounds of reciprocity, which means that recognition and enforcement only apply to arbitral awards rendered within the territory of other countries that are signatories of the convention. Liechtenstein thus recognizes and enforces awards rendered by arbitral tribunals seated in one of the signatory states of the New York Convention.

18.72  In contrast to some other signatories to the convention (such as China, India, and the United States), Liechtenstein has not submitted a reservation on commercial (p. 428) trade. Thus, foreign arbitral awards can be enforced in Liechtenstein even if they concern civil but not commercial matters.

18.73  However, other countries restrict application of the New York Convention to commercial matters only. Therefore, before embarking on Liechtenstein arbitration involving a complex trust dispute, parties from those jurisdictions should consider whether their home courts would consider the underlying trust dispute ‘commercial’ and thus enforceable under the New York Convention.

18.74  With regard to the proceedings, a distinction must be drawn between an arbitral tribunal situated in Liechtenstein and an arbitral tribunal situated abroad. In the first case, the arbitral award constitutes a domestic title for execution and can therefore be enforced under the provisions of the Liechtenstein Execution Act. In the latter case, one must first apply to the Court of Justice to declare the arbitral award enforceable. The Court of Justice will enforce the award if the requirements of the New York Convention are met.¹²⁷

18.75  Sections II and III of this chapter described the basic requirements of trusts, foundations, and arbitration in Liechtenstein. This section will now deal with the various problems that can arise when parties attempt to incorporate arbitration provisions in trust or foundation deeds.

18.76  First of all, it must be stated that the vast majority of the trust disputes in Liechtenstein are internal disputes that involve controversies between the settlor (founder), the trustees (foundation board), the protectors, and the beneficiaries. Indeed, there are only a few reported cases of disputes in which non-beneficiaries attack the validity of trusts.¹²⁸

18.77  These internal disputes frequently encounter mandatory arbitration provisions found in the trust deed. Thus, some problems arise. The first critical issue is whether internal trust disputes are capable of settlement by arbitration. This issue relates to the concept of arbitrability. The second concern relates to the arbitration provision itself and the question of whether the arbitration agreement binds all parties of a potential trust dispute.

18.78  Given the liberal definition of arbitrability in the arbitration law of Liechtenstein, the literature in Liechtenstein posits that all disputes in connection with a trust or a foundation may be decided by arbitration. In particular, Wenaweser claims that:

the new law permits the submission of practically all types of disputes in relation to trusts, foundations or companies to arbitration, including in particular:

1. (a)  the removal of the trustees (or foundation council members);

2. (b)  the challenging of resolutions adopted by trustees (or the foundation council);

3. (c)  the appointment of extraordinary auditors.¹²⁹

18.79  It is also true that according to the interpretation of the exact wording as well as to the historical interpretation of section 599 paragraph 3 of the ZPO, all company related matters (including trusts and foundations) can be exclusively reserved for arbitration. The only exceptions are where proceedings are instigated by specific public officers acting ex officio (ie the courts, the Supervisory Authority, or the criminal prosecutor). According to the Liechtenstein Government, in these cases ‘proceedings may be normally conducted irrespective of possible arbitration clauses’.¹³⁰

18.80  The courts seemed initially to share this understanding of the statutory law. Indeed, the Supreme Court has stated that the dismissal of organs of Liechtenstein entities may be reserved to an external person and may therefore be submitted to arbitration.¹³¹

18.81  This principle was contradicted in a 2011 case where the Supreme Court ruled that arbitration clauses in a foundation deed of a Liechtenstein foundation never preclude beneficiaries of a foundation from (also) applying for the judicial supervision of non-contentious court proceedings.¹³² The Supreme Court held that in non-contentious court proceedings relating to the supervision of foundations, the beneficiaries’ claim resulting from the breaches of duty of the foundation’s board do not comprise a proprietary claim. Thus, proceedings regarding the dismissal of the board members may not be subject to a settlement. For reasons of public interest regarding the system of control and functioning of foundations, the arbitration clause was held to be inconsistent with the legal provisions of the supervision of foundations which were to be exclusively exercised by Liechtenstein courts. Consequently, the claim of a beneficiary for dismissal of a foundation’s board was to be handled in proceedings before a court.

(p. 430) 18.82  This reasoning is not convincing considering the wording of section 599 of the ZPO and the clear intent of the legislature.¹³³ For charitable foundations, as well as in blatant cases where breaches of duty and conflicts of interests of private foundations suggest such a dismissal, the court, the prosecutor, or the Foundation Supervisory Board steps in ex officio. In all other cases, where involved persons, beneficiaries included, file applications for dismissal—often with trumped-up reasoning—a public ‘interest in protecting control and functioning’ does not apply. Without a doubt, arbitral tribunals are capable of coping with this task.

18.83  In another case,¹³⁴ the Superior Court seemed to weaken the Supreme Court’s strict interpretation of the above and stated that beneficiaries’ rights of information can be settled and are thus arbitrable according to section 599 paragraph 1 of the ZPO, as the pertaining proceedings cannot be instigated ex officio in the sense of section 599 paragraph 3 of the ZPO. The situation, however, seems to be different for trusts. Indeed, as mentioned above, Article 931 paragraph 2 of the PGR requires arbitration of all disputes (including internal disputes) if the trust is created under foreign law.¹³⁵ And if the Liechtenstein legislature considers arbitral tribunals capable of coping with supervisory issues in cases where the trust is created under foreign law, this must be true of trusts created under Liechtenstein law as well.¹³⁶ However, the provision of Article 931 paragraph 2 of the PGR has not yet been reviewed by the Liechtenstein courts, therefore we do not know if this interpretation (ie the arbitrability of all trust disputes regardless of whether the trust is created under Liechtenstein law or foreign law) will be persuasive to the courts. As a result, some uncertainty remains.

18.84  To sum up, the present situation is unsatisfactory. Hopefully, the legislature will amend the law soon to make it clear that internal disputes calling for supervision are arbitrable. However, there are also important caveats. One major concern is the possible duplication of proceedings. Indeed, as indicated earlier, non-contentious court proceedings relating to the supervision of foundations or trusts may be instigated by specific public officers acting ex officio. These proceedings would then be conducted irrespective of and in addition to possible arbitration proceedings in place. One solution to this problem would be to limit the power of the public officers to initiate proceedings ex officio. However, it still remains unclear whether the Liechtenstein legislature is willing to amend the law at all. Most recently, the (p. 431) Liechtenstein Government has appointed a panel of judges and experts to consider and suggest appropriate amendments to that effect.

18.85  The second issue to consider involves the arbitration provision itself. As already noted, section 598 of the ZPO provides that arbitration clauses must be in writing. This also requires the beneficiary to acknowledge the clause in writing. Typically, the trust deed is signed only by the settlor and the trustee. The foundation deed is signed only by the founder. The beneficiaries do not sign the trust instrument.

18.86  In order to avoid potential problems, section 598 of the ZPO provides that it is sufficient for arbitration to be stipulated under a testamentary disposition via other legal transactions that are not based on agreements between parties or under statutes. This means that arbitration clauses are binding upon beneficiaries by operation of law even if the beneficiary has not approved such a clause in writing.

18.87  However, as mentioned earlier, the new Liechtenstein arbitration law sets tough standards for arbitration agreements in consumer contracts to be considered valid. Businesses and consumers may conclude arbitration agreements only for disputes that already exist and not for future disputes. The term ‘consumer’ includes any person who is carrying out the concerned transaction not as part of their business. In most cases, beneficiaries of trusts and foundations, especially family foundations, are regarded as consumers rather than businesses.

18.88  In contrast, the law confers merchant status to foundations, which means that they are categorized as businesses. As a result, arbitration clauses in foundation deeds would normally be ineffective as they do not meet the specific requirements that apply in a consumer protection context, particularly with respect to future disputes. An arbitration clause in a foundation deed would therefore apply only if the foundation were in a dispute with a beneficiary who also qualifies as a business and could therefore not be categorized as a consumer. If this were not the case, it would again be necessary to enter into a separate arbitration agreement.

18.89  Two possible solutions for this issue exist. The first solution arises from the fact that foundations are usually not allowed to engage in commercial business.¹³⁷ Therefore, the foundations should also be treated as consumers.¹³⁸

18.90  The second approach is provided in the Government’s comment on the new arbitration law.¹³⁹ According to that document, the whole internal foundation–beneficiary relationship does not equal the entrepreneur–consumer relationship (p. 432) subject to the Consumer Protection Act (KschG). According to Article 1 paragraph 1 of the KschG, consumer protection law covers contractual relationships between businesses and consumers and this precondition is not fulfilled with respect to foundations. Additionally, Liechtenstein foundations are usually set up and administered via fiduciary relationships by professional trustees. Therefore, it was concluded that foundations do not need classic consumer protection, with the same approach being applicable to trusts.¹⁴⁰ In other words, the Liechtenstein legislature has specially opted to preclude the application of consumer protection law in relation to the trust/foundation–beneficiary relationship.

18.91  Although there are good arguments for precluding the application of consumer protection law in relation to the trust/foundation–beneficiary relationship, there still remains uncertainty.¹⁴¹ However, the Liechtenstein legislature has recognized the problem and is likely to remove this uncertainty by way of amendment of the law in the near future.

18.92  The Liechtenstein legal system contains not only a modern trust and foundation law but also a very attractive and effective arbitration law; indeed, a pro-arbitration approach exists in Liechtenstein.¹⁴² Nevertheless, this chapter has identified two major problems for the mandatory arbitration of trust (and foundation) disputes in Liechtenstein: the Supreme Court’s ruling that internal foundation disputes are not capable of settlement by arbitration and the application of consumer protection law in relation to the trust/foundation–beneficiary relationship.

18.93  As problematic as the current situation is, this chapter has concluded that there are viable solutions to these problems. In particular, the Liechtenstein legislature should take steps to further develop trust arbitration to help Liechtenstein remain one of the most welcoming offshore jurisdictions.