Arbitration of trust disputes: two bodies of law collide.

• Author: Strong, S.I.
• Position: III. Arbitration of Trust Disputes to C. Settlors' Powers to Compel Mandatory Trust Arbitration, 2. Elements Required for Mandatory Trust Arbitration Under Common Law Principles, a. No Impermissible Ouster of the Court's Jurisdiction, p.1181-1208

3. ARBITRATION OF TRUST DISPUTES

1. Benefits of Arbitration

   Arbitration is well-known as offering many benefits to parties. However, it is important to consider whether and to what extent these positive attributes also extend to trust disputes, since it would be unwise to adopt a procedure that is ill-suited to the types of claims that are expected to arise. (117) Indeed, specialists in arbitration agree that although arbitration offers significant advantages over litigation, arbitration may not be appropriate in every dispute. (118)

   First, parties are said to favor arbitration because it is faster and more cost-effective than litigation. (119) This is an equally important issue for settlors and trustees who are increasingly troubled by the amount of time and money that is spent on hostile trust litigation. (120) Controversies involving international trusts may be particularly at risk for increased litigation costs, since many offshore trusts are located in jurisdictions that give rise to extensive discovery disputes and lengthy appeals, including appeals to the Privy Council in London. (121) Since arbitration limits the availability of both discovery and judicial appeals, arbitration seems well-suited to the needs of parties to trust disputes. (122)

   Second, parties often prefer arbitration because it offers a private and confidential means of resolving legal controversies. (123) Interestingly, settlors and trustees may have an even higher desire for these protections than actors in other fields do. For example, settlors in both the testamentary and commercial contexts often adopt the trust form precisely because a trust provides more privacy than any of the other alternatives. (124) One would naturally expect settlors to want the same degree of confidentiality in their dispute resolution processes. Professional trustees have also been said to prefer the privacy of arbitration because public forms of dispute resolution can damage not only the trustees' own personal reputations but also the reputation of the trust industry as a whole. (125)

   Although arbitral concepts of privacy and confidentiality may be attractive to parties to trust disputes, there are some potential problems in this regard. Trust controversies are considered to proceed in rem, which means that a broad range of actual and potential parties may seek to join or be joined to the action. (126) The possibility of multiparty proceedings could create potential difficulties with respect to both the provision of notice and the opportunity to participate in the arbitration. While there are ways of addressing both these issues, (127) parties to trust disputes need to be aware of possible deviations from the common expectation of arbitral privacy, confidentiality, and bilateral proceedings. (128)

   Third, parties in other fields often choose arbitration because of its procedural flexibility. (129) Party autonomy is equally valued in trust cases, since many settlors choose the trust form precisely because of its structural flexibility. Given that many settlors are already predisposed toward autonomy, it would be unlikely for them not to want to exercise a similar amount of control over the procedures used to resolve any disputes associated with the trusts they have created. (130) Parties to international disputes may be particularly attracted to this aspect of arbitration, since settlors and beneficiaries are often ill at ease with judicial procedures used in the countries where offshore trusts are located and would appreciate a dispute resolution process that provides procedural predictability and familiarity. (131)

   Again, however, potential problems exist. For example, some courts and commentators have suggested that the lack of procedural formality that is said to typify arbitration (132) could lead to violations of the substantive or procedural rights of the parties to a trust dispute. (133) Special concerns arise with respect to unborn, unascertained, or legally incompetent beneficiaries. (134) However, these concerns appear largely misplaced given the wide range of procedural protections that exist under contemporary rules of arbitration. (135) Furthermore, it is always possible to modify existing arbitral processes to meet the unique needs of parties to trust disputes. (136)

   Fourth, commercial actors often use arbitration so that they can choose a decision maker who holds particular expertise in the subject matter at issue. (137) Given that trust law can be quite specialized as a matter of both procedural and substantive law, settlors would be expected to value this particular attribute of arbitration at least as much as parties to other types of disputes do. (138)

   Interestingly, this may be one area where certain members of the trust bench and bar are unaware of precisely how beneficial arbitration can be. For example, concerns have occasionally been raised about the competence of arbitrators vis-a-vis trust disputes, particularly with respect to whether arbitrators are able to handle the kind of complex, multiparty claims commonly associated with trusts. (139) As it turns out, these criticisms are remarkably similar to those made in the early days of arbitration, when hostility to anything other than judicial resolution of disputes was rife. (140) Over the years, the arbitral community has created numerous methods of addressing these types of concerns, which means that it is unlikely that trust arbitration will run into any difficulties with respect to the competence of arbitrators. (141) Instead, parties to trust arbitration are much more apt to reap the benefits associated with an arbitral regime that has had decades to grow and mature.

   The preceding four points apply equally to both national and international disputes. However, parties to international disputes have a fifth and final reason to prefer arbitration over litigation. Enforcement of foreign judgments is a difficult and notoriously unpredictable undertaking, since it is based primarily on principles of comity. (142) Parties to arbitration have a much easier time enforcing foreign arbitral awards because the process is almost exclusively governed by various multilateral treaties, the most prominent of which is the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). (143) These international conventions reflect a strong bias in favor of enforcement of arbitration agreements and awards, which allows parties to an international trust arbitration to obtain final resolution of their disputes much more quickly, efficiently, predictably, and cost effectively than parties to an international trust litigation can. (144) Both the United States and England are parties to the New York Convention, as are many of the more popular jurisdictions for offshore trusts (including Jersey, Guernsey, Bermuda, the Bahamas, and the Cayman Islands), either as independent contracting states or as territories of a contracting state. (145)

   However, some potential problems again arise. Parties hoping to benefit from the New York Convention's pro-enforcement regime must first ensure that the dispute in question is covered by the Convention. (146) Claims regarding the internal operations of a trust might experience some difficulties in this regard if a particular jurisdiction does not consider trust disputes to be (1) commercial in nature or (2) capable of settlement by arbitration. (147)

   The first issue, commerciality, is disposed of relatively easily, since most, if not all, trusts can be considered "commercial" as a matter of arbitration law. (148) Commercial trusts obviously pass muster, since they are expressly created for business purposes. (149) However, most noncommercial trusts would likely fall within the prescribed definitions as well, since many jurisdictions' definitions of commercial activity are so broad as to cover almost any transaction involving money. (150) Therefore, parties should be aware of this requirement but should not be unduly concerned by it.

   The second concern--namely, whether a trust dispute is capable of settlement by arbitration--is much more complicated. The issue here relates to the concept of arbitrability, which considers which disputes can be heard in arbitration and which are reserved to the exclusive purview of the courts. (151) This concept is central to the debate about mandatory trust arbitration and is discussed in detail below. (152)

   Despite several areas of potential concern, arbitration appears to be as attractive to parties to trust disputes as to parties in other areas of law. As a result, it is not surprising that many settlors favor mandatory arbitration of internal trust disputes. (153) However, several problems arise in this regard. First among these is the fact that trustees appear to have more power to initiate arbitration than settlors do under existing law. This issue is discussed in the next subpart.

2. Trustees' Powers to Arbitrate

   Although the contemporary debate about mandatory arbitration of trust disputes sometimes makes the process sound as if it is a recent innovation, arbitration of trust disputes has long been permitted in both England and the United States, frequently as a result of statutes that either implicitly or explicitly permit the trustee to enter into arbitration agreements with respect to matters external to the trust. (154) While arbitration agreements with external third parties have sometimes led to the arbitration of internal trust disputes, (155) at this point the paradigm for trust-related arbitration involves a matter arising out of a bilateral commercial relationship between the trust and some external third party, such as an agent or...