Jersey: The Mediation Of Trust Disputes

Last Updated: 11 June 2008
Article by Appleby  

The traditional way of resolving trust disputes has been through litigation: trustees, beneficiaries and third parties in combination have "tooled up" with lawyers of various hues to battle through the dispute. Mediation now provides a possible alternative to litigation, but how suitable is it as a means of settling trust disputes?

There is much in the general nature of mediation that makes it suitable: mediation is a flexible process. Unlike the traditional litigation process which is bound by rules of court and conventions, mediation allows the parties choice: choice of the mediator, the venue, the date and timing and, to some extent, the detailed mechanism of the process. Each party can decide who should attend in their team and what issues they want to discuss.

By its nature mediation is conducted on a confidential basis, without prejudice and in private. It allows the parties an opportunity, therefore, to say things to one another which ordinary litigation might not afford. It allows also the exploration by the parties of hypotheticals without fear of commitment. It allows the possibility of non-legal remedies.

Some of this can of course be achieved by simple negotiation, but what mediation gives to the process is the mediator - the neutral facilitator - a role central to the process. The mediator assists the parties in their negotiations as an independent. Experience has shown that the best mediators have two qualities: (a) a specialism in the area of dispute; and (b) a willingness to test the parties' positions.

The important quality of mediation is that the parties are in ultimate control of the process, the decision to settle and the terms of resolution. Litigation is about an imposed resolution of a judge determining the rights of the parties from a limited range of outcomes. Mediation leaves the parties as the ultimate decision makers.

Looking more particularly at trust disputes, it is perhaps useful, to compare the disadvantages of traditional litigation as a means of highlighting the advantages of mediating a dispute rather than litigating it. Litigation is time consuming, expensive and ultimately the end result is more often imposed than agreed. The key advantages of mediation are that it is likely to cost less (though it should not be regarded as a cheap option); it is much quicker to arrange and the parties have that greater degree of control over the whole process.

The significant advantage though in relation to trust disputes is that many of these have a family element to them. The nature of disputes involving families is that they are often distinguished by personal animosity and bitterness, by family in-fighting and recrimination. The unfortunate direct correlation of these things is usually expense. Where dealing with family trust disputes, correspondence and witness statements recount long and often involved justifications and explanations of past family conduct, often in circumstances where it is only of peripheral relevance to the matters which a court would ultimately have to decide. Also in disputes of this nature, the courts struggle to provide an effective remedy for matters where the ultimate complaint is based more in family rivalry than in legal concept.

Mediation provides a forum in which the causes of a dispute – as much as the legal issues within it – can be discussed in an open and controlled way. It provides the parties with their 'day in court' but in a manner which is less confrontational. Hopefully, it would be a forum in which the parties could constructively explain their respective positions, rather than give evidence and be cross-examined.

Litigation can be ruinous not only to family relationships but also to the family businesses, which often form part of the underlying assets of a trust. Litigation can have a paralysing effect on such businesses and often perhaps because one is washing the trusts' dirty laundry in public, the effect of diminishing the value of that about which there is argument.

No Panacea

Of course that is not to say that mediation is a panacea. It does have disadvantages. There is no guarantee that the process will resolve the dispute, in which case a trial is inevitable in any event. Further it is a voluntary process and so a party may withdraw at any stage. One cannot force an outcome.

Further some disputes are simply not suited to the mediation process – particularly when the dispute centres on a point of law which cannot be resolved without a judicial decision or in the case where an emergency injunction is required. Difficulties will arise in mediation where a declaration from the court is, for example, required as to the true construction of a trust instrument.

Many disputes give rise to issues as to the effectiveness of mediation where the dispute involves the interest of minors and unascertained beneficiaries. Disputes will lend themselves more obviously to the mediation process, where all of the beneficiaries are ascertained and capable themselves of entering into a compromise in their own right. In such cases the beneficiaries can readily agree with a trustee who they claim to be in breach of trust on whether and the extent to which the trust fund should be compensated. They can reach agreement between themselves as to the effect of the terms or validity of a trust instrument or the purported exercise of any power under it.

Fundamental Impediments

There are of course fundamental impediments to negotiated settlements where there is a need to secure the approval to a settlement on behalf of beneficiaries who are minors, mentally incompetent or unascertained. However, the court has the power to appoint persons to represent the interests of those classes of beneficiaries and it can approve a settlement.

Further it does not follow that because there are minor and unascertained beneficiaries that this approval or agreement is necessarily required. Careful analysis is required of the problem to determine that. For instance the complaint may be by an income beneficiary concerning loss of income in circumstances where the capital interest remains untouched and the minor is only interested in capital. Alternatively, the parties may agree a compromise in which any possible interest of the minors or unascertained beneficiaries is protected.

One example of the difficulty is the requirement to determine a question of construction affecting the future conduct of the administration of the trust or the rights of beneficiaries. Often the impediment to compromise will be the requirement to satisfy the tax authorities. If past liability is to be avoided or new liability not generated the true rights and interests of beneficiaries may need to be determined by the court and an order made to satisfy the tax authorities.

Whilst, therefore, mediation is not the panacea and will not work in all disputes involving trusts, it should be seen as a useful tool and one which may afford a more ready settlement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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