The arbitration of trust disputes

Posted on 27 March 2019

The arbitration of trust disputes

International arbitration offers many advantages for the resolution of trusts disputes. The flexibility of arbitral procedure, the confidentiality of arbitration and the enforceability of arbitration awards under the New York Convention are all factors in its favour. Some obstacles to the use of arbitration in trust disputes remain, however. At the end of 2018 the ICC issued an update of its recommended arbitration clause for trust deeds that is intended to address some of those issues.

Trusts disputes and international arbitration

Disputes relating to a trust are often resolved in the courts of the country which has express jurisdiction over the trust, or in the courts of the country where the trust is administered – often the courts of the Bahamas, the Cayman Islands, the Channel Islands or Switzerland. However, international arbitration offers a number of advantages over national court litigation, including:

  • Enforceability: international arbitration benefits from a common scheme for the enforcement of awards throughout the world via the New York Convention, which has been signed by 159 countries.
  • Confidentiality: arbitration proceedings are private and are, for the most part, confidential. This contrasts with national court proceedings which are (save in certain circumstances) public as far as trust disputes are concerned.
  • Flexibility: the parties can select arbitrators with a particular expertise in trusts disputes; they can also choose where the dispute is to be heard. They can then apply to the tribunal to adapt the process to fit the requirements of the particular dispute. National court proceedings give the parties no such options.

Obstacles to the arbitration of trusts disputes

Where the dispute is between trustees and third parties, no issues arise: trustees normally have the power to enter into arbitration agreements just as with any other contract. Where the dispute is 'internal', however – i.e. a dispute between trustees, settlor and/or beneficiaries about the operation of the trust – there can be some obstacles. 

  • Parties to the arbitration agreement: an arbitral tribunal derives its jurisdiction from an agreement between the parties to refer their dispute to arbitration, and the New York Convention requires such an agreement to be in writing. Where an arbitration clause has been inserted into a trust deed, however, usually only the trustee(s) and the settlor have expressly agreed to it. This leaves open the question as to how the beneficiaries, who are not signatories to the trust deed, can rely on the arbitration clause or be bound by it.
  • Unascertained/incapable beneficiaries: depending on the terms of the trust, some of the beneficiaries may not be able to participate in an arbitration – either because they have not been identified yet or because they lack the capacity to take part (most obviously if the beneficiaries are minors or unborn children). The outcome of the dispute may affect them, however, and the tribunal may have to ensure that they are adequately represented.
  • Arbitrability: exceptionally, it might not be possible to refer a trust dispute to arbitration at all because a trust deed is not characterised as a contract under the applicable law. This was the view of the Supreme Court of India in Shri Vimal Kishor Shah & Others v Mr Jayesh Dinesh Shah & Others (2016). It appears that most jurisdictions would not go this far, however, and would instead rely on the separability of the arbitration clause (i.e. it is deemed to be a standalone agreement within the trust deed) to deal with any such objection.

Ways around the obstacles

Various solutions have been proposed to deal with these obstacles. In England (where the validity of arbitration of internal trust disputes remains unclear) it has been suggested that a beneficiary might be deemed to have acquiesced to an arbitration clause by accepting a benefit under the trust. In the USA, it has been said that accepting the arbitration clause might be a precondition to receiving any rights or benefits under the trust. The problem of unascertained, minor or unborn beneficiaries might also be dealt with by applying for the appointment of an independent representative by the court at the seat of the arbitration, if permitted under the local law, or by the tribunal.

Several jurisdictions have adopted laws to address these issues expressly. The Bahamas, for example, enacted the Trustee (Amendment) Act in 2011, which states that where there is an arbitration clause in a trust deed, that shall be treated as an arbitration agreement between all the parties (including the beneficiaries of the trust) for the purposes of the Arbitration Act in the Bahamas; and the tribunal has the same power to appoint an independent person to represent any beneficiaries who are unascertained or lack capacity as the Bahamian courts have in court proceedings. Guernsey has enacted a similar law, and there is another awaiting ratification in New Zealand. Other jurisdictions which are popular for the administration of trusts are likely to follow suit.

ICC arbitration clause

A number of arbitral institutions have also responded to these issues, by publishing standard clauses and rules which offer solutions. The American Arbitration Association (AAA), for example, has a set of rules for the arbitration of disputes arising out of wills and trusts.

In late 2018, the ICC issued a revised version of its recommended arbitration clause for trust deeds (it had issued its original clause in 2008). This clause contains two key provisions:

  1. It expressly confirms that the settlor, the trustees and any protector or other power-holder, have agreed to the provisions of the arbitration clause, and any beneficiary that claims or accepts any benefit, interest or right under the trust shall be deemed to have agreed to, and shall be bound by, the arbitration clause.
  2. It makes it clear that the arbitral proceedings and any award shall be confidential unless disclosure is required under any law or regulation or is needed for the administration of the trust or the implementation of the award. 

What the clause does not tackle is the representation of any beneficiaries who are unascertained or lack capacity – but the accompanying notes state that: "It is advisable to include in the terms of the trust a mechanism for the appointment of litigation friends and representatives to represent incapacitated or unascertained beneficiaries in the arbitration."

Conclusion

Trusts disputes have long been regarded as falling outside the boundaries of international arbitration, but the arbitration of trust disputes is likely to grow in popularity as more settlors appreciate its advantages and as more jurisdictions amend their laws to cater expressly for it. Both jurisdictions which are seen as popular centres for trust administration, and jurisdictions which are seen as popular seats of arbitration, are likely to focus on trusts arbitration in the future and make changes to their laws to promote it.

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