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Arbitration of Trust Disputes
Date: 30/05/2024 Type: Articles Topic: Private Client | Trusts | Wills and Estates | Inheritance | Next Generation Wealth | Investment and HNWI’s | Tax |This article looks at a few of the main considerations in deciding whether to include an arbitration clause in a trust instrument.
Introduction
There has been a shift in recent years towards favouring open justice over court proceedings being held in private. Disputes in respect of trusts have not been immune to this trend and in the UK, as well as the Channel Islands, BVI, the Cayman Islands and Bahamas the Courts have been seen to scrutinise applications for proceedings to be held in private more carefully.
There is a general presumption that proceedings should be open and the public and the media should be able to attend and comment on Court proceedings. However, in disputes relating to trusts - which often involve private family matters – the Courts may decide that the proceedings should be held in private or that reporting restrictions should apply or that judgments should be anonymised.
In considering this point the courts will look to balance the need to protect the interests of the beneficiaries of the trust (who may include minors) and the general presumption that it is in the interests of justice for proceedings to be open to the public.
This can lead to family trust disputes falling into the public domain and sensitive private information relating to family wealth and assets becoming public. This poses an issue for those who need to settle a trust dispute but do not, for reasons often related to protecting family members, wish for their personal affairs or assets to become public.
In light of this issue, including arbitration clauses within trust deeds is an increasingly attractive idea as it ensures that proceedings are held in private. Arbitration of trust disputes has also become more popular as a number of jurisdictions including Bahamas, Guernsey and New Zealand have put in place a statutory framework for the arbitration of trust disputes.
Advantages of Arbitration
Privacy
One key advantage of arbitration in the context of trust disputes is the ability to keep the assets of the trust and details of the dispute private. High profile individuals may wish to keep sensitive information about their personal affairs confidential for business or social reasons, especially with the growth of social media making the spread of information a lot easier.
However, there can still be situations where information that comes to light in the course of an arbitration can fall into the public domain. In the recent case of Volpi v Volpi where an arbitral award was appealed to the domestic Court of Arbitration (the Bahamas Supreme Court) because no privacy order was obtained from the Bahamas court (which is not subject to the same privacy requirements as the arbitration) the judgment was made public without being anonymised.
Similarly, where a party to an arbitration becomes aware of information in the arbitration that leads to a separate claim outside those proceedings, in some limited circumstances, that information may be used in those proceedings which may be heard in public and without the same privacy constraints. The use of that information must be in line with the relevant statutory framework of that arbitration and must, in general terms, be required for justice to be done in those separate non-arbitral proceedings.
Flexibility
Arbitration is more flexible than court proceedings as the process can be more bespoke and can be outlined by the settlor in the trust deed. For example, the settlor can agree on the credentials, skillset or even characteristics they wish their arbitrators to have, the medium in which the arbitration takes place, and any specific procedural elements. This may allow for a more tailored process, bringing comfort to the parties that their disputes will be heard in the way they see as appropriate by an arbitrator that has expertise in the contested issues.
Enforcement
Arbitral awards are also generally easier to enforce in foreign jurisdictions than foreign court judgments, thanks to the New York Convention which governs the recognition and enforcement of foreign arbitral awards, and has 172 contracting states. Contracting states to the New York Convention generally agree to enforce foreign arbitral awards of other contracting states. The ease of enforcing foreign arbitral awards is advantageous in the context of trust disputes, given that many large trusts are established in offshore jurisdictions, and the assets held by the trusts may be spread across many different jurisdictions.
Disadvantages of Arbitration
Binding beneficiaries to the arbitration agreements
As beneficiaries are not parties to the trust instrument they have not agreed to be bound by the arbitration clause within the trust deed. Those same beneficiaries may not also have the same view on the importance of keeping matters private and they may wish to expose perceived wrongdoings in a public forum rather than the matter being resolved privately. This can lead to disgruntled beneficiaries issuing claims at Court rather than engaging with the arbitration process. This in turn can result in the defendant in those proceedings having to engage with the Court to contest the jurisdiction and push the matter back into arbitration.
There are a number of different approaches in drafting of the trust deed to address this issue and model clauses to address this issue have been published (amongst others) by the International Chamber of Commerce.
Uncertainty
Despite there being a statutory framework in a number of key trust jurisdictions, there remains uncertainty about the enforceability of some arbitration awards in the context of trust disputes. This is in part because trust arbitration is a relatively new concept and there isn't a large body of caselaw on their enforceability in each jurisdiction. In particular the issue of their enforcement in the UK against beneficiaries remains untested by the courts.
The issue of enforcement becomes more complicated where there are beneficiaries that are not named, or are not yet born, and may not be bound to any arbitration award. Some jurisdictions have legislated to solve this problem – for example in Guernsey, Bahamas, and Arizona there are statutes that assist in enforcement against minor or unknown beneficiaries. However, in many jurisdictions, the answer to this question remains unclear, and any outcome of trust arbitration may prove difficult to enforce.
Conclusion
Notwithstanding the potential issues with enforcement of arbitral awards we are seeing an increasing number of disputes where the parties wish to use arbitration and an increasing number of people wishing to include arbitration clauses in trust instruments. We expect this trend to continue.
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