Trust arbitrations could be the "next big thing" in dispute resolution.

Trust arbitrations are still relatively rare as a result of the perceived difficulties considered to be inherent in arbitrating such disputes. Arbitration should, however, appeal to those involved in certain types of trust disputes and there are, increasingly, solutions available for the perceived difficulties.

ADVANTAGES OF ARBITRATION FOR TRUST DISPUTES

There are many reasons why arbitration is better suited to certain types of trust disputes than court litigation.

Trust disputes generally involve intimate issues for families, who would often welcome increased privacy and confidentiality. Arbitration is a private process and, while arbitration is not—contrary to accepted wisdom—automatically covered by confidentiality in all jurisdictions, arbitration clauses can be drafted in such a way as to ensure confidentiality.

Arbitral awards are typically easier than court judgements to enforce internationally, given the adoption of the New York Convention by a large number of countries including, since 2014, the British Virgin Islands. Even those jurisdictions that have made the "commerciality" reservation, i.e., have only agreed to recognise and enforce commercial arbitration awards, are likely to consider trust disputes to be commercial and therefore to enforce awards resulting from trust arbitrations.

Arbitral awards are final and binding. With very limited exceptions, there is no right of appeal against an arbitral tribunal's award in an arbitration. The result is final, subject only to a request to set aside the award due to procedural irregularities, such as an unfair procedure or lack of independence, or because the award is contrary to public policy.

Unlike Court proceedings, which do not allow the parties to select a judge with expertise in the area of dispute, arbitration allows the parties to choose the arbitrator based on his or her particular technical skills and experience in a particular area or industry. In the context of trust disputes, this can be particularly important, given the very specialised nature of the disputes in question.

Finally, arbitration allows for a flexibility that is unknown in court litigation. It allows the parties and/or the arbitral tribunal to devise procedures that best suit the parties and the dispute. For example, the parties can agree, or the arbitral tribunal can order

  • A "bifurcation" of issues
  • The filing of evidence, such as witness statements and documents, together with or subsequent to the submission of written submissions
  • Lesser or greater discovery.

DIFFICULTIES WITH ARBITRATING TRUST DISPUTES

Despite all these advantages, trust arbitrations have been slow to catch on.

One explanation for this is that the initial exploration of trust arbitration did not find favourable treatment in the United States, where the courts rejected the notion that the trust deed constituted a written agreement to arbitrate. Similarly, England and offshore jurisdictions have embraced the donative theory of trusts, i.e., that the trust sets out the terms of a gift rather than those of a contract, which obviously causes difficulties for trust arbitration, given its essentially consensual nature.

Even if the trust deed can be conceived of as a contract, an agreement to arbitrate can only bind those who are parties to it. It has therefore long been thought that an arbitration provision in a trust deed cannot bind beneficiaries. Whilst parties to an arbitration agreement agree to refer any dispute to arbitration, there is no such agreement or consent required of beneficiaries. Commentators question whether or not beneficiaries can therefore be bound by arbitration provisions in a trust deed or even refer a dispute to arbitration.

Further, there is a question mark over whether or not an arbitrator can make an order binding on minor and unborn beneficiaries who cannot give consent or be parties to an agreement.

In addition, from an enforcement perspective, Article V(1) (a) of the New York Convention provides that an arbitral award may not be recognised or enforced where the parties to it were, according to the law applicable to them, under some incapacity such as being a minor.

One solution is to treat the arbitration as a reference from the court, bookending the arbitration with the appointment of a litigation guardian for minors and unborns and the reduction of any arbitral award to a Tomlin Order issued by the court. This will, however, reduce some of the advantages of arbitration, including privacy/confidentiality and enforceability.

Another solution is the "deemed acceptance theory". This attempts to resolve the difficulty of enforcing awards by proposing that beneficiaries can be bound by the arbitration provisions in a trust deed on the basis they claim "under or through" a settlor, who is a party to the trust deed. The beneficiaries therefore fall within Section 82(2) of the English Arbitration Act 1996, which provides that parties to an arbitration agreement include a "person claiming under or through a party to the agreement".

RECENT LEGISLATION TO ENCOURAGE TRUST ARBITRATIONS

None of these solutions is entirely satisfactory, and certain jurisdictions have introduced legislation to deal specifically with these issues.

In Arizona, the Bahamas, Florida, Guernsey, Jersey, Liechtenstein and some other jurisdictions, legislation has been enacted to confirm the binding effect of arbitration agreements on beneficiaries.

The recent Bahamas legislation goes further than any other legislation in this respect. In 2011, the Bahamas introduced the Trustee (Amendment) Act 2011. Section 91A of the Act enables a dispute or administration question relating to a trust to be resolved by arbitration if the trust instrument so allows. As a consequence, an arbitration provision in a trust instrument will bind all parties, including beneficiaries, regardless of whether or not they have been ascertained, or are in existence at the time, as if they were parties to an arbitration agreement.

In addition, Section 91B(2) of the Act vests an arbitration tribunal with the jurisdiction of an equity judge to exercise all powers conferred by statute or under the court's inherent jurisdiction. The tribunal is also vested with the power to appoint a representative of a class of persons or interests within the trust dispute, providing viable solutions to protect the interests of unascertainable beneficiaries within trust disputes. Without this provision, it would be necessary for the parties to apply to the court for the appointment of a suitable representative.

THE FUTURE

Arbitration of trust disputes is becoming increasingly viable, particularly in some of the offshore jurisdictions that have traditionally been the major venues for their resolution. Given the significant advantages of arbitration for resolving trust disputes, an increase in the number of arbitrations should be anticipated.

They are reported to be very popular with settlors, but they are likely to remain on the fringes of dispute resolution until trusts draftsmen embrace them.

Arbitration Of Trust Disputes

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