In a recent landmark judgment the Supreme Court had to decide whether a so-called fidéicommis de famille (family foundation) based in Vaduz, Liechtenstein, could be considered as a valid legal entity from a Swiss law perspective for the purposes of filing a claim before a Swiss court, despite the fact that the foundation's purpose was solely to provide an income to family members. This type of foundation is prohibited under Swiss mandatory law by Article 335(2) of the Civil Code.

To determine the law applicable to foreign legal entities, Article 154 of the Private International Law Act applies the so-called 'theory of incorporation'. This means that all matters relating to a foreign legal entity are governed by the law under which that entity was established, in particular with regard to its legal nature and validity. However, based on the 'reserve of public order' principle applicable in private international law, certain legal rules considered as a matter of public order in Swiss public policy may apply to foreign legal entities regardless of the governing law of their place of incorporation (Article 18 of the act), provided that the relevant legal entity has a certain connection with Switzerland.

In Case ATF/BGE 135 III 614, as the family foundation was established and based in Liechtenstein, it was also governed by Liechtenstein law and therefore in principle was not limited by the prohibition of Article 335(2) of the code. However, in its ruling of November 17 2009 the Supreme Court had to decide whether this legal rule must be considered as belonging to Swiss public order, so that its scope of application was to be extended to a legal entity governed by foreign law. To settle this point, the Supreme Court analysed the history of the rule and observed that at the time it was adopted, it prohibited only the creation of new family foundations and did not make existing ones illegal. Based on this reasoning, the court concluded that Article 335(2) of the code was not part of Swiss public policy and hence could not be used to deny the legal personality of the Liechtenstein foundation in the case at hand. The family foundation was therefore considered to be valid and entitled to file a claim before a Swiss court.

This decision gave rise to discussions and criticism among legal scholars. By expressly recognising the validity of a type of foreign legal entity that would be considered as unlawful in Switzerland, the Supreme Court settled a long-debated question and made room for discussion about a possible abrogation of Article 335(2) of the code in the future.

Furthermore, the reasoning followed by the court can be directly applied to a trust, whose recognition will no longer be denied in Switzerland, provided that it is duly incorporated according to its applicable foreign law, even if such trust qualifies as a prohibited family foundation.

This liberal approach has strengthened Switzerland's openness to trusts, a legal institution that the Swiss legal order has always had difficulties in integrating.

For more information please contact Vincent Pfammatter at Lenz & Staehelin by telephone (+41 58 450 7000), fax (+41 58 450 7016) or email ([email protected] ).