Disputes over family trusts and succession are increasingly common for a number of reasons including family fragmentation, economic turmoil, and a more assertive group of next generation beneficiaries. But when fall-outs occur, how can families ensure that their personal affairs are not aired in a public court process? Despite the offshore world's reputation for secrecy, even the courts in jurisdictions with established trust industries do not guarantee that every family trust dispute will be heard in private.
For this reason, non-court dispute resolution processes, such as private arbitration, offer an attractive option for wealthy families and/or businesses that are owned by family trusts. There can be nothing more damaging or distracting than having a family rift over the ownership or control of a trading business play out in public. Ensuring that such disputes are dealt with confidentially and protecting details of the family trust and family relationships are usually a priority for any wealthy family or their advisers. But can such ‘non-commercial’ disputes be submitted to arbitration? How significant are the legal hurdles to this and how are some of the established trust jurisdictions seeking to address the challenge and make changes to their arbitration and trust law regimes to allow for the proper fusion of the worlds of arbitration and trusts?
Why Not Arbitrate?
Compared to court proceedings, the benefits of arbitration for dealing with trust disputes are quite clear:
However, in many cases, the risk of publicity is a useful weapon for a disgruntled beneficiary to wield. Whilst there has been a practice in a number of offshore trust jurisdictions to have some cases heard in private, with anonymised case reports being published which do not name the family or business involved, there is a perceived trend towards transparency and open justice. If cases are subject to appeal, often the appeal court's decision will be published and will not be anonymised. In the case of hearings before the Privy Council, which is the final court of appeal for many offshore trust jurisdictions, the court hearings will now be live-streamed for all to watch.
Up to now, the principal concern over the use of arbitration in trust disputes is how to ensure that all the beneficiaries are bound to submit to the arbitration process. When it comes to disputes in relation to the 'internal' administration of a trust, there is a key difference to a typical commercial arbitration. In the latter, the parties have consented to the use of arbitration. In contrast, the funding of a family trust represents a gift to the beneficiaries, who might not even have been aware of the fact, and certainly would not have been asked at the outset to sign up to the trust terms.
For a disgruntled beneficiary who wishes to wield the sword of publicity, it has been too easy for them to claim that they are not bound to submit their dispute to arbitration. A number of international arbitration organisations, the ICC and the American Arbitration Association, have sought to address this, and promulgated a form of model clause that can be used in trust instruments in order to require disputes to be submitted to arbitration rather than to a potentially public court system. What these clauses seek to do, in order to ensure that there is mandatory arbitration of trust disputes, is to provide for beneficiaries to be deemed to have accepted and agreed to the arbitration clause if they seek to claim any other rights under the trust document. A key feature is to use the language of agreement, for example the ICC Model Clause states: "Any 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."
This specific provision is crucial for the purposes of enforcing the arbitration award in the future, because the key point is that the beneficiary must be “deemed to have agreed” to submit the matter to arbitration. It can be argued that this is, in effect, no different to beneficiaries being made to accept the inclusion of other clauses in the trust document, for example a trustee charging clause.
Who Will Be Bound By The Outcome?
A further issue is ensuring that all beneficiaries will be bound by the outcome of an arbitration. In contrast to commercial arbitrations, some of the relevant or affected parties to a trust dispute may well be under-age children or incapacitated adults. Family trusts will often have a dynastic beneficial class, meaning that future born family members will become beneficiaries as and when they are born. How can it be ensured that those beneficiaries are bound by the outcome of the arbitration? It would not be desirable to just wait and see if those beneficiaries decide to make a complaint about (or potentially unwind) the outcome of the arbitration when they come of age.
In a court process, all beneficiaries (even the unborns) will typically have their interests represented by a person who is duly appointed in the court process – they will be called a 'litigation friend' or 'next friend' or 'guardian ad litem', depending on the terms used in the relevant jurisdiction. How can this be dealt with in the arbitration clause? There are two options:
First, you could apply to the court solely for the limited purpose of having representatives appointed for underage or unborn beneficiaries. The representative's role can be limited to just participating in the arbitration process.
Secondly, and this is the route the ICC are promoting in their guidance, the trust document itself could set out a mechanism for the appointment of a representative so that those beneficiaries' interests can be represented in the arbitration. Under this option, it would be advisable for the trust document to replicate as much as possible the provisions that are contained in the governing law of the trust for the appointment by the court of representatives for those interests. This should ensure that no challenge could be made to those provisions on the basis that they conflict with, or are inadequate next to, the requirements established under the court rules. However, an added advantage of including such provisions in the trust document itself is that particular conditions could then be set on whom should be entitled to act as a representative, or who should be prohibited from acting as a representative. For example, it might be stated that the representative must have a certain professional qualification, or seniority, or be based in a particular jurisdiction.
Supporting Legal Framework Is Essential
The key to the legal stability of a trust-arbitration clause is ensuring that the governing law of the trust recognises it as an appropriate forum, and also provides sufficient certainty as to how it will operate in practice. A number of jurisdictions have now recognised the attraction of such clauses to settlors, trustees and beneficiaries, and have enacted specific legislation to cater for trust-arbitrations. Bahamas did so as long ago as 2011 (clarified and updated in 2023), and New Zealand also has legislation which came into force in January 2021. In the US, a number of states have specifically legislated to allow for trusts disputes to be referred to mandatory arbitration, for example Arizona, Florida, Idaho and Washington.
Similar changes are now being considered in other jurisdictions, even England, where trust law revisions are far less frequent than in the offshore world. The legal viability of trust-arbitrations forms part of the English Law Commission's trust law review programme for 2023.
However, once legislation is in place, it is essential that it is clear and robustly enforced. In a decision handed down in 2018, title In the Matter of the W, S and SP Trusts (anonymised for confidentiality obviously!), the Bahamas Supreme Court upheld the validity of a trust arbitration clause and ordered that court proceedings be stayed whilst the matter proceeded to arbitration. Having a judiciary willing to uphold provisions for mandatory arbitration in whatever situations they arise is key to their success, and to the willingness of settlors and trustees to have confidence in choosing this method of resolving disputes.
Within the private wealth industry, the advantages of ensuring that family trust disputes are submitted to arbitration are well-recognised, yet for many years it has been an area beset with doubts over the legal position. As such, this form of dispute resolution has remained an under-utilised option for many family trusts. But there is undoubtedly an appetite for trust-arbitrations as a method for family trusts to resolve their internal disputes.
A number of arbitration organisations and established trust law jurisdictions are meeting the challenge head on. Families who may have been wavering over the decision to create, or even continue, a family trust because of the risk of court publicity, should now consider the possibility of private arbitration as a route to preventing future family schisms making the headlines. Trust jurisdictions that can successfully offer this as a viable option, combined with up-to-date trust legislation and a high-quality trust industry, are likely to find themselves moving ahead of the rest of the offshore pack.
Steven Kempster is a Partner at Withers LLP, London, where he specialises in international trust and succession disputes. He is a member of the Society of Trusts and Estates Practitioners and the Association of Contentious Trust and Probate Specialists, and was ranked in Chambers Global and High Net Worth Guides 2023 and previous years.