Tina Wuestemann unravels the problematic relationship between trust litigation and arbitration.
Trusts have gained wide international recognition (in particular, since the ratification of the Hague Trust Conventioni) and have grown beyond their traditional borders. With increasing mobility of individuals in a shrinking world, trusts are no longer confined to the Anglo-Saxon world but are also often used in civil law jurisdictions.
Trust litigation has increased substantially during the last years. Courts in offshore jurisdictions where trust litigation usually takes place have been criticised for not always being the ideal venues to resolve disputes involving family trusts. Already in the 1990s, representatives mainly from the trust industry started discussing the idea of using mediation to resolve trust disputes. Proposals to use arbitration to settle trust issues have also been discussed. In practice, however, the idea of arbitration in this field has not taken root as quickly as mediation. During the last years, active debate about trust arbitration has been re-openedii.
In 2008, the ICC introduced a model ICC arbitration clause (and related explanatory notes) to be included in a trust deediii. In addition, a number of offshore trust jurisdictions, such as Guernseyiv, have become active in implementing legislation for trust arbitration.
This article will examine whether trust disputes are fit for arbitration (particularly in Switzerland which is traditionally an arbitration- and trust-friendly jurisdiction) and will discuss some of the concerns that trust and arbitration practitioners have identified as the major hurdles to the arbitration of ‘internal trust disputes’v.
II Trust Disputes
Trust disputes are distinctively different from traditional commercial disputes: they usually arise within a family and involve individuals rather than corporations. While substantial amounts of money are often at stake, the parties usually wish to maintain an ongoing relationship (considering that a trust is a long-term arrangement). Apart from the potential complexity of trust disputes and their multi-party character, the personal dynamics of such cases can be compared to those in divorce disputes.
In the context of trust litigation, it is important to be aware of the role of the court of the state whose law governs the trust (often an offshore jurisdiction). Apart from its judicial function, the court also has a regulatory or supervisory role in relation to the administration of the trust, mainly to protect the beneficiaries.
Most trust deeds contain a choice of law clause but usually no jurisdiction clause. In many offshore trust jurisdictions, there is jurisdiction for trust disputes if the trust is governed by the local law of that jurisdiction even though the parties and the facts of the case have nothing to do with that jurisdiction.
III Trust Arbitration in Switzerland
1 A Good Idea?
There appears to be consensus among trust practitioners that the subject matter of trust disputes (the affairs of a family and its fortunes) make them predestined to be tried through the privacy of arbitrationvi to avoid potential humiliation and reputation risks associated with such disputes. The last thing a settlor wants is that the size and whereabouts of his assets and the names of the beneficiaries of the trust are made public and eventually discussed in the media. Trust companies and protectors certainly also seek to avoid publicity of their management of trusts.
The general objection by some common law trust lawyers to the concept of trust arbitration does not appear to be that trust disputes are not well suited for arbitration, but rather that there is doubt as to whether an arbitration agreement (and thus, the award) can be made as to bind all of the classes of beneficiaries. Nevertheless, the appetite for arbitration - in particular, among settlors - appears definitely to be on the increase. It seems settlors, beneficiaries and/or trust companies outside the traditional (offshore) trust jurisdictions, who are not familiar with the dispute resolution process in the jurisdiction whose law governs the trust, would prefer to arbitrate trust matters in an arbitration-friendly jurisdiction.
2 Does It Work?
General conditions to allow arbitration of ‘internal trust disputes’ on the basis of an arbitration agreement in a trust deed are in principle (i) a valid arbitration agreement, binding all the parties in dispute; (ii) the representation of all interested parties (including unborn, minor and unascertained beneficiaries); and that (iii) the subject matter of the dispute is arbitrable. Questions such as whether a beneficiary of a trust can be compelled to arbitration or whether a trust dispute is arbitrable may be answered differently depending on the seat of the arbitrationvii.
From the range of problems identified in the context of trust arbitration, the crucial question in the author's view is not the issue of arbitrability or the proper representation of minor and unborn beneficiaries but rather the critical issue is whether a beneficiary can be compelled to arbitration on the basis of a (unilateral) arbitration agreement in a trust deed, which will be addressed in more detail hereafter.
According to the prevailing English doctrine, even if a trust deed is not a contract as such, it may contain an arbitration agreement provided such agreement is stipulated as an express agreement in the trust instrument. In light of the Swiss doctrine, which recognises (unilateral) arbitration clauses in last wills and statutes of foundations, an arbitration agreement may equally be contained in a trust deed.
The arbitration agreement must bind all parties to a trust dispute so that court proceedings can be stayed if a party ignores the arbitration clause. Often, however, certain (potential and later actual) parties to a trust dispute have not signed the trust deed (containing the arbitration agreement), to which only the settlor and the trustee are parties. Is there a possible mechanism for the settlor to impose his will on the beneficiaries and any other person linked to the trust, such as a protector or successor trustee, that such future trust disputes be arbitrated?
Trustees and protectors assume their responsibilities under the terms of the trust deed. Hence, the arbitration agreement could state that by accepting office, they (are deemed to) have agreed to the arbitration agreement in the trust deedviii. From a Swiss perspective, the original trustee and/or protector should preferably sign the trust deed, and any successor trustee and/or protector should accept office (and the arbitration agreement) in writing.
Beneficiaries are usually not parties to the trust deed and often do not even know about the trust. Any beneficiary who is party to a trust dispute and refuses to arbitrate could frustrate the entire arbitration process. A mechanism is needed to bind such beneficiaries to the arbitration agreement.
Some English authors are of the view that under the English Arbitration Act 1996, a trust deed could be drafted in such a way that benefiting from the trust would be deemed an agreement to submit trust disputes to arbitration. By accepting the gifts or invoking any rights under the trust deed, the beneficiaries would be deemed to agree to settle any dispute in accordance with the arbitration agreement contained in the trust deed (theory of deemed acquiescence)ix.
A similar approach has been suggested by Swiss doctrine for the validity of unilateral arbitration clauses in last wills or statutes of foundations which should also work in a trust context provided the beneficiary consents to arbitration in the form required under Swiss law. This means, the beneficiary (or persons claiming beneficiary status under the trust deed) must accept the benefits from a trust subject to certain conditions, such as agreeing to submit any future dispute to arbitrationx.
Another option for the settlor to compel a beneficiary to arbitration which has been discussed in the last years by trust practitioners is to give the trustee the power to exclude a beneficiary (i.e. not make the distribution) if the beneficiary refuses to consent to arbitration (so-called in terrorem clause). A forfeiture clause, according to which a beneficiary loses any entitlement if he resorts to the state courts instead of arbitration in case of a dispute, may have a similar effect. However, as the validity of such clauses appears to be highly debated under trust law, care needs to be taken with such an approach.
While a trust provision, according to which agreeing to arbitration is a condition precedent to benefiting from the trust, should be effective under Swiss law, the issue is really governed by the applicable trust law. Similarly, an arbitrator would most likely look to the trust law to assess the validity of a forfeiture clause. On the other hand, provided the arbitrator considers such clauses as valid, the Swiss lex arbitri is relevant to whether the beneficiary needs to explicitly agree to arbitration in writing or whether claiming or accepting a gift from the trustee could be considered as agreeing to arbitrate.
As these theories have not yet been tested – either in common law jurisdictions or in Switzerland – there remains a risk that a beneficiary may successfully oppose arbitration and resort to state court litigation. Only if the (offshore) state courts follow the approach expounded by these theories and refer such parties to arbitration can lengthy and costly parallel court proceedings be avoided.
Obviously, third parties such as creditors, heirs or (ex-)spouses of the settlor cannot be compelled to arbitration on the basis of an arbitration clause in a trust deed. Provided, however, all concerned parties agree to arbitrate an existing dispute, such a dispute should be arbitrated, as jurisdictional issues are less likely to arise and potential problems at the enforcement stage can be better assessed.
Under Swiss law, an arbitration agreement providing for international arbitration in Switzerland must be made in writing or evidenced by textxi. Such writing requirement is, according to the prevailing doctrine, a prerequisite for the validity of the arbitration agreement. The text of the arbitration clause need not necessarily bear a signature, however.
According to Swiss doctrine, it is debatable whether it is sufficient that an arbitration agreement is drafted by one party and simply accepted orally or tacitly by the other partyxii. It is, therefore, questionable whether a beneficiary could be compelled to arbitration in Switzerland merely on the basis that he accepted and requested distributions from the trust or claimed beneficiary status. When inserting arbitration agreements into newly created trusts, it is certainly preferable for now to have the arbitration agreement signed by all parties concernedxiii. Where the beneficiary did not sign the trust deed, such written consent should preferably be obtained from the beneficiary (e.g. by the trustee) after the signing of the trust deed.
One of the distinctive features of family trusts is that the settlor may designate beneficiaries that are not yet born, ascertained or of full age (such as a future grandchild of the settlor). As an award may have an impact upon the proprietary rights of such beneficiaries, the question arises (i) how such (classes of) beneficiaries can be bound by a trust arbitration agreement; and (ii) how their interests can be properly represented in an ongoing arbitration. Both issues are closely related and conflict of law issues may need to be considered. From a Swiss perspective, a distinction must be drawn between (i) minor beneficiaries; and (ii) unborn or unascertained beneficiaries.
As regards the representation of a minor beneficiary in an ongoing trust arbitration, the involvement of the Swiss guardianship authorities may be required if there is a potential conflict of interest (e.g. if a parent of a minor beneficiary is also a party to the arbitral proceedings because they are all beneficiaries under the trust). As regards minor beneficiaries domiciled outside Switzerland, an arbitrator in Switzerland would have to look at the national law at the respective residence of that beneficiary in order to determine who can properly represent such minors.
Notwithstanding the above, it is suggested that the settlor may appoint an in-dependent representative (or entrust a third party such as a protector to make such appointment) in the trust deed to protect the interests of minor beneficiaries (including a power to compromise). It then needs to be ensured on a case-by-case basis whether such appointment can be made without violating national laws providing for mandatory protection of that minor's interest by a court-appointed guardian or other representative.
Interestingly, the representation of minor, unborn and unascertained beneficiaries in Swiss trust proceedings was not discussed in Switzerland in relation to the ratification of the Hague Trust Convention. In any event, this appears to be more a question governed by the applicable trust law than the lex arbitri, and an arbitrator in Switzerland could proceed in the same way as the trust court would in the relevant jurisdiction.
The New York Conventionxiv assists in ensuring that an arbitral award can generally be enforced by domestic courts in a relatively straightforward way throughout the world (certainly in countries that are parties to the New York Convention).
Extending the reach of the arbitration agreement to non-signatories, such as beneficiaries, is worrisome in view of the New York Convention's insistence that the arbitration agreement be contained in an agreement in writingxv. Another question is whether an award issued against a class of unborn or unascertained beneficiaries or against beneficiaries who are minors and who were represented in the arbitral proceedings by the trustee or a guardian appointed by the settlor would, in light of the New York Conventionxvi, be enforceable in a place where the interests of such minor, unborn or unascertained beneficiary would have mandatory protection by a court-appointed representative or guardian (e.g. in Switzerland).
Arbitration is an ideal method for resolving trust disputes, in particular, due to its private and (relative) confidential nature. There remains, however, a risk of parallel proceedings (and enforceability problems) if arbitration is chosen as the dispute resolution mechanism, as some foreign (trust) jurisdictions take an unfriendly approach as regards trust arbitration and not all of them are members of the New York Convention.
From the range of problems identified in the context of trust arbitration, the critical issue is whether a beneficiary can be compelled to arbitration on the basis of a (unilateral) arbitration agreement in a trust deed. While there is sound legal basis for such arbitration agreements in a trust deed to be effective, following the English theory of deemed acquiescence and the Swiss doctrine in relation to unilateral arbitration clauses in last wills, the waters remain untested. Unfortunately, the Swiss legislator failed to address the issue of trust arbitration when implementing the Hague Trust Convention and consequently lost the opportunity to clarify the uncertainty.
While a number of offshore trust jurisdictions have become active in implementing legislation for trust arbitration, it remains to be seen whether they will succeed. Switzerland's increasing importance as a centre for trust services and its longstanding tradition in international arbitration makes it a reliable neutral venue for trust arbitration. Given that the use of arbitration to resolve trust disputes is still in its infancy, parties are, however, encouraged to exercise care when using trust arbitration clauses as to ensure the validity of the award.
i The Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985.
ii cf. e.g. David Brownbill, Trust Arbitration: What might be possible? (with a little help from statute), ACTAPS Newsletter June 2009, Vol. 116, page 19; Ian Meakin, Trust arbitration in Switzerland: On a roll or heading for a fall?, XXIV Old Buildings, 17 September 2008, Geneva; Tina Wüstemann, Arbitration of Trust Disputes, in: Christoph Müller (ed.), New Developments in International Commercial Arbitration 2007, Zurich 2007, p. 33 ff..
iii ICC Bulletin Volume 19 No. 2-2008, p. 9-11. The author of this article was a member of the ICC Task Force on Trusts and Arbitration, which produced under the auspices of the ICC Commission on Arbitration both the model clause and explanatory notes.
iv Part II Section 63, Trusts (Guernsey) Law 2008.
v This article is not intended to be a comprehensive analysis of all the complex questions which arise in the context of trust arbitration and many of the issues covered are necessarily summary in nature. The focus will be on non-commercial (family) trusts but in the author's view similar considerations would apply in relation to business trusts.
vi The private nature of arbitration does not per se ensure confidentiality. The standard of confidentiality which applies depends on the parties' agreement, the choice of (institutional) arbitration rules and the law applicable at the seat of the arbitration.
vii See also Explanatory Note to ICC Arbitration Clause for Trust Disputes (FN 3).
viii This is the approach adopted in the ICC Arbitration Clause for Trust Disputes.
ix David Hayton, Problems in Attaining binding Determination of Trust Issues by Alternative Dispute Resolution, Papers of the International Academy of Estate and Trust Law, 2001, p. 18; Lawrence Cohen/Marcus Staff, The Arbitration of Trust Disputes, Journal of Trust and Corporate Planning, Vol. 7 No. 4 1999, p. 221.
x This is the approach adopted in the ICC Arbitration Clause for Trust Disputes (para. 3, see. FN 3).
xi Article 178 (i) Swiss Private International Law Statute (PIL).
xii While the Swiss Federal Tribunal has not yet given an express ruling on the necessity of both parties' adhering to the formal prerequisites in direct application of Article 178(i) PIL, it did take it for granted in DTF 121 III 38, a case concerning the formal requirements of the New York Convention (which the court held to be incidental with those of the PIL), that both parties must fulfill the formal requirements.
xiii See para. 10 of Explanatory Note to ICC Arbitration Clause for Trust Disputes.
xiv New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.
xv Articles V(1)(a) and II(2) New York Convention; but see Article VII (I) New York Convention.
xvi Article V(1)(a) New York Convention.
Tina Wüstemann, LL.M., Partner Bär & Karrer AG, Switzerland