Arbitrating trust disputes

  • Author : Andrew Vergunst
  • Author : Lawrence Grabau
  • Date : January 2011
ABOUT THE AUTHORS: Andrew Vergunst TEP is a Partner and Lawrence Grabau is an Associate at McDermott Will & Emery UK LLP

High-value funds are administered by executors and trustees, and periodically disputes arise over their administration. In recent years there has been a surge in the number of trust disputes. Typically these concern the affairs and fortunes of wealthy families. The disputes often relate to the trustees’ external relationships (specifically, contracts with investment advisors or insurance managers), the relationships between trustees and beneficiaries with regard to their respective capacities and dealings (such as trustee breach of duty), and the relationships between the beneficiaries themselves (questions usually occur when it is unclear whether someone falls within the beneficiary class).

Avoiding airing one’s dirty laundry in public

Few would argue that traditional means of resolving trust disputes via formal court litigation are the best way to resolve them. In general, court proceedings are very costly, financially and emotionally.

Perhaps for trust disputes, the biggest worry to the parties involved in a court trial is that litigation is rarely private. Resolving trust disputes often involves discussion of very private and sensitive matters coupled with myriad complex personal and emotional issues. Public knowledge of such private issues may result in public embarrassment for the parties concerned as well as adding to the emotional distress of a court trial.

Trusting arbitration

The trust industry has considered using arbitration as a binding method to resolve trust disputes in order to alleviate the negative effects of court litigation. The arbitration process maintains privacy and confidentiality of process. Neutrality of venue, procedural flexibility and the ability for the parties to appoint an arbitrator well-versed in the subject matter of the dispute are also attractive hallmarks of arbitration.

Parties may agree the specific terms of a written arbitration agreement or refer to a document containing an arbitration clause. In the case of a trust, an arbitration clause will usually be inserted into the trust deed. To render an enforceable award against all parties to a trust dispute, it is important that the arbitration clause in the deed binds all such parties to the dispute. Often the only parties that have signed the trust deed are the settlor and the trustees – it is uncommon for beneficiaries to sign a trust deed. It is unclear whether there is any uniform mechanism in law to compel such beneficiaries to the arbitration. Presumably, recognition of such mechanisms will depend entirely on the laws of that jurisdiction in which the award is to be enforced.

Global trust disputes and international arbitration

Besides the advantages mentioned above, ease of enforcement is probably the most important factor in favour of using arbitration in trust disputes, especially considering that an increasing number of disputes concern trusts which have an international dimension spanning across multiple jurisdictions. Most trust disputes of an international nature are often heard in the local courts of offshore jurisdictions. Some of these jurisdictions may not be adept at dealing with the complex nature of trust disputes efficiently and fairly. There might also be the risk of parallel proceedings in different national courts where one party’s claims are heard in one country and the other party’s claims are heard in another. This could give rise to a very costly judgement race. Arbitration offers parties the opportunity to centralise their disputes to one forum that will result in a binding decision that enjoys global enforceability.

Recognising the potential benefits of using arbitration to resolve trust disputes, international arbitration centres have recently started to offer institutional support to the trust industry in assisting it to deploy arbitration as a credible method to resolving trust disputes. For example, the American Arbitration Association (AAA) has now published a set of rules specific to trust and wills disputes alongside a model arbitration clause to insert into a trust deed.

Enforcing international arbitration awards

The global enforcement of international arbitration awards is mainly governed by the New York Convention1 (the Convention). The Convention provides an extensive enforcement regime for arbitration awards by requiring courts of contracting countries to recognise and enforce awards made in other countries, subject to specific limited exceptions. There is no real equivalent for enforcement of court judgments.

Article 5 of the Convention provides for limited grounds on which the enforcement of a Convention award can be refused. The grounds that are likely to cause difficulties to the enforceability of awards in trust disputes include: if the parties were under some incapacity or were not properly represented pursuant to the laws of the country where the award is to be made; if the party against whom the award is invoked was not given proper notice of the arbitration proceedings; and/or if the award is contrary to the public policy of the law in that country.

Currently, there are 144 signatories to the Convention. Offshore trust jurisdictions, such as the British Virgin Islands and Cayman Islands, are non-signatories to the Convention meaning that Convention awards will not be enforceable in these jurisdictions. Nevertheless, these countries are party to other conventions and bilateral treaties which have a similar effect to that of the Convention. Unlike the Convention, however, many of these enforceability instruments2 fail to provide for situations where parties to a dispute are under some incapacity or are not properly represented. Instead, there are only vague mentions to the general concept of public policy as being a factor that may prevent the recognition or enforcement of an award. Parties hoping to enforce their awards in such jurisdictions against an offshore trustee or minor, unborn or unascertained beneficiaries, need to be alert to this as the enforceability of such awards will often depend on that particular jurisdiction’s public policy.

Binding minor or unascertained beneficiaries

Pursuant to the Convention, if the interests of minor beneficiaries or unborn and unascertained beneficiaries are not properly represented according to the national law of the ‘seat’ (the judicial base of the arbitration), it is extremely unlikely that an arbitration decision will be enforceable against such parties. Most jurisdictions request that a representative or guardian acting on behalf of a minor or persons who are incapacitated must apply for court approval. Any appointments of representatives made without the approval of the court may violate national laws. Accordingly, the arbitral tribunal might not have jurisdiction to determine the dispute. Any award rendered by the tribunal could therefore be unenforceable through being contrary to the public policy of the country where the award is to be made. To that end, the AAA rules recommend to parties that if it is necessary to represent any minor, incapacitated or unborn beneficiaries, they should review state law to determine whether a court-appointed representative or guardian is required.

Very few jurisdictions have clear or specific legislation or guidance that allows national courts to appoint a special representative or guardian in the event that minor or unascertained beneficiaries are not properly represented in arbitration proceedings. Most jurisdictions do, however, have well established procedural rules in place for traditional court proceedings. These procedures are often quite complex and it is unclear whether they can extend to arbitration proceedings. Guernsey has specifically addressed this point regarding minors or unborn or unascertained beneficiaries by providing clear guidance in its trust legislation.

The Guernsey solution

Guernsey trust law3 states that an arbitration award will be binding on beneficiaries provided such beneficiaries were represented at arbitration whether personally or by his/her guardian, as the member of a class or otherwise. If the beneficiary was not so represented, he/she should have had notice of the arbitration and a reasonable opportunity of being heard, and only if, in the case of a beneficiary who is not yet ascertained or in existence, or who is a minor or person under legal disability, the arbitrator certifies that such person was ‘independently represented’ by a person appointed for the purpose by a court of law.

Tread very carefully…

There appear to be two critical issues for the trust and arbitration community to consider when deciding whether to use arbitration to adjudicate trust disputes: (i) whether a beneficiary who is initiating proceedings as the applicant to a dispute can be compelled to follow an arbitration clause in the trust deed that the beneficiary is not a signatory to; and (ii) the extent to which any award will be enforceable against an offshore trustee or minor, unborn or unascertained beneficiaries who are in a jurisdiction that is not party to the Convention.

The first issue may be dealt with by including a forfeiture clause in the trust deed. Under such a clause, if the beneficiary resorts to the courts instead of submitting to arbitration he/she will be not be entitled to benefit from the trust. The validity of such a clause will depend on its ‘certainty’ and whether it shuts out such a challenge on probable cause or good faith.4 As we have seen, the second issue is very much dependent on the interaction of the various treaties and conventions and the significance of any state-specific public policy argument. The suitability of such treaties and conventions to deal with the nature of trust disputes is questionable considering that such enforcement instruments are originally intended for breaches of international commercial contracts between large multi-national companies.

It is clear, even in Guernsey, that in most jurisdictions the involvement of the courts is necessary when dealing with minor, unborn or unascertained beneficiaries. Potentially, such reliance on the courts is a direct challenge to one of the most fundamental advantages to using arbitration to resolve trust disputes: ‘privacy of proceedings’. Essentially, involving the courts in such circumstances undermines the very nature of arbitration and, as such, risks exposing the parties’ affairs to public scrutiny.

Until jurisdictions provide adequate legislation to resolve the challenges highlighted in this article, a degree of caution must be exercised by trust practitioners when inserting arbitration clauses into trust deeds in an attempt to bind certain classes of beneficiaries to international arbitration proceedings. Perhaps an interim solution, in the absence of any specific and clear legislation on this issue, may be for the terms of the trust to give the power to appoint a representative, subject to court approval, to a recognised industry body such as STEP.

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958
The Geneva Convention on the Execution of Foreign Arbitral Awards, 1927
Part II, Section 63 to The Trusts (Guernsey) law, 2007
AN v Barclays Private Bank & Trust (Cayman) Ltd [2007] W.T.L.R. 565

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