Arbitration of trust disputes: two bodies of law collide.

• Author: Strong, S.I.
• Position: I. Introduction through II. An Introduction to Trusts and Trust Law Theory, p.1157-1181

Once considered nothing more than "mere" estate-planning devices, trusts play a large and growing role in the international economy, holding trillions of dollars of assets and generating billions of dollars of income each year. However, the rising popularity of both commercial and noncommercial trusts has led to an explosion in hostile trust litigation, leading settlors and trustees to search for new and less expensive ways to resolve trust-related disputes.

One possible solution involves use of a mandatory arbitration provision in the trust itself. However, the unique, multiparty nature of trust disputes often makes this sort of arbitration highly controversial.

This Article considers the various issues that arise when two separate bodies of law--trust law and arbitration law--collide, using recent developments in the field of international commercial arbitration to address some of the more intransigent problems facing trust arbitration. In so doing, this Article introduces a number of new judicial decisions not previously considered in the scholarly literature and brings a uniquely comparative and international perspective to the debate regarding the jurisprudential propriety of mandatory trust arbitration.

TABLE OF CONTENTS I. INTRODUCTION II. AN INTRODUCTION TO TRUSTS AND TRUST LAW THEORY A. What Is a Trust? B. Types of Trusts, Including Commercial Trusts C. The Theoretical Basis of Trusts 1. The Donative Theory of Trusts 2. The Contract Theory of Trusts 3. Other Theories of Trusts III. ARBITRATION OF TRUST DISPUTES A. Benefits of Arbitration B. Trustees' Powers to Arbitrate C. Settlors' Powers to Compel Mandatory Trust Arbitration 1. Legislation in Favor of Mandatory Trust Arbitration . 2. Elements Required for Mandatory Trust Arbitration Under Common Law Principles a. No Impermissible Ouster of the Court's Jurisdiction . i. Arbitration as a Litigation Substitute ii. Special Issues Regarding Judicial Accounting and Instruction. b. An Arbitration Clause That is Operable, Effective, and Capable of Performance. i. Solutions Suggested Under National Law. ii. Solutions Suggested Under International Law. c. An Arbitral Clause That is Binding on the Party Seeking to Avoid Arbitration i. Settlor Consent ii. Consent of Parties Other Than the Settlor d. Proper Representation e. Subject Matter Arbitrable IV. CONCLUSION I. INTRODUCTION

Trusts and their civil law equivalents, often known as foundations or associations, (1) play a large and growing role in the international economy. Not only do trust vehicles hold assets valued in the trillions of dollars and generate billions of dollars each year in income, but administrators and trustees accumulate similarly massive amounts in annual fees. (2) With a rising number of trusts moving into the international realm so as to take advantage of favorable tax laws in various offshore jurisdictions, trusts have become an issue of global importance) Furthermore, trusts are becoming increasingly commercial in nature, leaving behind their reputation as mere estate-planning devices. (4)

The combination of international and commercial characteristics might suggest that arbitration would be an appropriate means of resolving trust disputes, since arbitration is very much the preferred means of resolving other types of international commercial controversies. (5) Indeed, such an approach might already appear to be standard procedure, given the number of trusts that currently appear in arbitrations in the United States and elsewhere. (6) However, the vast majority of these arbitrations cannot really be considered "trust disputes" per se, since they arise out of contractual relationships between the trust and unrelated third parties and typically involve matters that are entirely external to the trust itself. (7)

However, these kinds of external, third-party disputes are not the only type of trust-related conflicts that exist, nor indeed are they the most common. Instead, "[m]ost trust disputes are internal disputes" (8) that address matters relating to the inner workings of the trust and involving controversies between some or all of the various parties to a trust, including trustees, protectors, and beneficiaries. (9)

These types of matters are quite different from external trust disputes, not only in terms of their subject matter (which can involve specialized questions of trust law), but also in terms of the manner in which arbitration arises. Arbitration with external third parties is typically based on an arbitration clause found in an individual contract made between the trust and the third party. Arbitration of internal trust disputes, on the other hand, usually arises as a result of a mandatory arbitration provision found in the trust itself. (10)

This latter type of arrangement is much more controversial than arbitration with an external third party pursuant to a contract existing outside the trust. (11) Indeed, some courts have concluded that mandatory arbitration provisions contained in a trust are unenforceable. (12) However, the potential difficulties associated with mandatory trust arbitration have not diminished the appeal of this particular procedure. Hostile trust litigation is reaching "near epidemic" levels, and many settlors and trustees view arbitration as an excellent means of limiting spiraling litigation costs. (13)

Anecdotal evidence suggests that relatively few trusts currently contain arbitration provisions. (14) However, it is unclear why this is so, given the significant amount of national and international interest in mandatory arbitration of internal trust disputes. (15)

One reason might be that some residual prejudice against arbitration still exists among some members of the trust bench and bar. (16) For example, questions have been raised about the adequacy of due process protections in arbitration as well as the ability of arbitrators to handle the kind of complex, multiparty disputes that often arise in trust law, (17) even though every other area of law has overcome these kinds of worries about the legitimacy of the arbitral process/s However, the root of the problem may simply be that "[m]any trust practitioners have never encountered arbitration." (19) While trust lawyers are often proud of the specialized nature of their practice, this may be one instance where the traditional isolation of the trust bench and bar has resulted in trust specialists' not being exposed to some of the more positive advances that have been made recently in arbitration law. (20)

Alternatively, the minimal use of mandatory arbitration provisions in trusts may be due to concerns about the enforceability of such clauses. This hesitancy is often said to be the result of the relatively small number of judicial opinions in this area of law (21) and the wide publicity given to the few negative decisions that exist. (22) No lawyer wants his or her client to be the precedent-setting test case in a developing area of law, even if the outcome is ultimately in the client's favor.

However, the situation may not be as problematic as is commonly believed. Indeed, there are a number of signs that mandatory trust arbitration is gaining momentum in the United States and elsewhere. For example, a growing number of jurisdictions are addressing issues relating to mandatory trust arbitration through legislative means. (23) Furthermore, several older cases, including In re Estate of Jacobovitz, (24) In re Meredith's Estate, (25) and Schoneberger v. Oelze, (26) that have been frequently cited for the proposition that arbitration...