Jurisdictions around the world have recognised and continue to support arbitration as an appropriate forum for resolving trust disputes. In recent years, legislation has been enacted in numerous jurisdictions to provide for the arbitration of trust disputes, including perennial trust centres such as the offshore jurisdictions of Guernsey and the Bahamas, as well as common law countries like the United States (Arizona, Florida, Idaho, and Washington) and New Zealand, but also jurisdictions in new and emerging markets like the Dubai International Financial Centre ("DIFC") in the United Arab Emirates.
Why Arbitrate Trust Disputes?
Arbitration has many advantages as a dispute-resolution mechanism for those settling, administering, or benefitting from a trust instrument.
Private clients, families, and high-net-worth individuals generally wish to keep their disputes confidential, and arbitration allows a far higher degree of confidentiality than litigation in most court systems.
Arbitration also generally permits parties a greater amount of flexibility and control over the dispute-resolution process, from the choice of jurisdiction in which the dispute can be resolved, which may differ from the jurisdiction of the trust's governing law, to the selection of the arbitrator(s) and party representatives.
Specialists in equity, the laws of offshore jurisdictions that often govern trust instruments, family law, and cross-border disputes may be particularly in demand as arbitrators of trust-related disputes.
Unlike litigation, arbitration has a system for enforcement in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, commonly referred to as the New York Convention, usually making it simpler, faster, and cheaper in principle to enforce arbitral awards rendered in trust disputes.
Parties can access arbitration by including appropriate dispute-resolution clauses in their trust instructions, such as the deeds settling express trusts. To this end, the International Chamber of Commerce ("ICC") has issued the ICC Model Arbitration Clause for Trust Disputes ("ICC Model Clause") to assist parties in adding an arbitration agreement to trust instruments.
Trust settlors should in particular consider (1) the rules and procedures of various arbitration institutions, e.g., the American Arbitration Association has a bespoke set of Wills and Trusts Arbitration Rules and Mediation Procedures, (2) the costs of the arbitration institutions, as the sums in dispute may be comparatively less than in commercial arbitrations, (3) the qualifications of the arbitration tribunal, and (4) the attitude of the courts of the seat of arbitration to trusts (many civil jurisdictions do not recognise the split between legal and beneficial interests and will be less certain with equitable concepts).
Settlors can also consider whether a multi-tiered dispute-resolution clause is appropriate, which may compel negotiation and/or mediation prior to the commencement of arbitration in a bid to resolve disputes early and with minimal cost to the trust property.
Why not Arbitrate Trust Disputes?
There are of course disadvantages to the arbitration of trust disputes. Foremost, generally speaking, an arbitration agreement is limited to its signatories and does not generally bind third parties.
A preliminary issue thus may arise as to whether the beneficiaries are parties to the arbitration agreement. Indeed, perhaps the greatest challenge in trust arbitration is the absence of a contractual mechanism binding beneficiaries to an arbitration agreement, thereby requiring an express contractual mechanism or other legal mechanism to make arbitration agreements contained in trust instruments binding on the beneficiaries.
The ICC Model Clause has sought to address this issue by providing that "[a]ny beneficiary claiming or accepting any benefit, interest or right under the Trust, shall be bound by, and shall be deemed to have agreed to, the provisions of this arbitration clause." The ICC Model Clause also provides that "each successor trustee and [protector] [other power-holder], by acting or agreeing to act under the Trust, also agree, or shall be deemed to have agreed, to the provisions of this arbitration clause."
In terms of other legal mechanisms to tackle this issue, attitudes vary across jurisdictions. Jurisdictions such as the Bahamas,1 Guernsey,2 and Liechtenstein3 have legislated to confirm the binding effect of arbitration agreements on beneficiaries. Elsewhere, courts have stepped in to provide precedent on this issue. For example, the Texas Supreme Court has applied a doctrine of "direct benefits estoppel", i.e., a beneficiary is considered to have acquiesced to the provisions of a trust instrument, including its arbitration agreement, where the beneficiary seeks to enforce the instrument, to give effect to the intention of the settlor.4
In England, approaches vary. There is no Supreme Court authority on the issue but lower courts are willing to find beneficiaries are bound depending on the drafting of the trust instrument,5 e.g., a "carrot and stick" approach via the insertion of conditions precedent that require potential beneficial beneficiaries to submit any disputes to arbitration before benefitting under the trust and the use of forfeiture clauses that remove beneficial interests in the trust in cases of dispute resolution other than arbitration.
The Law Commission advised in 2017 that "a clause in a trust instrument requiring disputes to be arbitrated is not binding", but no express provision is made either in the English Arbitration Act 1996 or the Arbitration Bill currently before Parliament with the stated aim of updating and improving the 1996 Act.
Another challenge that frequently arises is that trust disputes often involve remedies that arise from statute or a court's inherent supervisory jurisdiction over trusts, and a party may argue that an arbitral tribunal lacks the necessary authority to grant this type of relief. However, the English High Court recently upheld an arbitration agreement between a beneficiary (as the claimant) and the trustees (as the defendant) where the beneficiary sought to have a judicial trustee appointed in place of the defendant trustees even though the appointment of a judicial trustee was a statutory remedy of the court.6
Certain disputes generally fall within the arbitration agreement, such as disputes between the settlor(s), trustee(s), and/or beneficiary or beneficiaries. These so-called "internal" disputes may concern the construction of the trust document, applications for the removal of trustees, applications by trustees for directions or to approve courses of action, actions for breaches of trust by trustees, and disputes between beneficiaries.
But external parties may "attack" the trust arrangement from the outside too, via challenges on the validity of the trust documents or the very creation of the trust, on grounds such as breaches of inheritance rights, lack of capacity, or undue influence. The claimants in these types of action are unlikely to be bound by the agreement to arbitrate and may instead bring their claim(s) via court litigation.
There may in certain jurisdictions be obstacles to the enforcement of arbitral awards rendered in trusts disputes. Some jurisdictions, like India, consider trust disputes to be non-arbitrable. There can also be public policy arguments against binding and enforcing awards against beneficiaries like children, the unborn, and the unascertained. Also, trust property may already have been paid out to beneficiaries and dissipated, making asset tracing and recovery difficult, expensive, and time-consuming.
Court Action in Support of Arbitration
Courts themselves often go far in upholding agreements to arbitrate.
One issue that may arise amid allegations of dishonesty is whether the arbitration agreement itself is valid even in documents otherwise procured by fraud, and generally the answer is that it is.
Challenges to trust arbitration proceedings including applications to set aside tribunal decisions, orders, and awards, have generally been unsuccessful in common-law jurisdictions and not granted on the basis of any trust-related attacks (as opposed more generally to attacks that could be made about arbitrations over other substantive disputes).
Trust Disputes and Arbitration Moving Forward
There is an undoubtedly warm attitude to trust arbitration around the world. Even civil-law countries are recognising trusts and establishing legal frameworks for the management of assets by trustees on behalf of beneficiaries. For example, Switzerland will enforce arbitral awards arising from trust arbitration through its conflict-of-laws provisions that effectively allow foreign trusts to be incorporated into Swiss law.
Several trends encourage this shift, including a desire for families to have a wider range of legal instruments to protect their property, the development of financial centres that want to attract financial services companies to manage and invest assets on behalf of others, and the adoption of common law in places like the DIFC in the Arabian Gulf in order to protect foreign investment.
Footnotes
1. Trustee (Amendment) Act 2011, § 91A.
2. Trusts (Guernsey) Law 2007, Art. 63. Notably, the other jurisdiction in the Channel Islands – Jersey – has not followed Guernsey's lead.
3. Liechtenstein Code of Civil Procedure, § 634(2).
4. Hal Rachal, Jr., v John W. Reitz, No. 11-0708 (Tex. 3 May 2013). A similar approach has been taken in Singapore. SeeJiang Haiying v Tan Lim Hui and another suit [2009] SGHC 42 and Cassa di Risparmio di Parma e Piacenza SpA v Rals International Pte Ltd [2015] SGHC 264.
5. Lewin on Trusts, 20th edition, chapter 49
6. Grosskopf v Grosskopf [2024] EWHC 291 (Ch).
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.
