Bringing Beneficiaries to the Mediation Table: Drafting Enforceable Trust Provisions Requiring Mediation of Disputes During Post-death Trust Administration

• Publication year: 2014
• Author: By Christopher D. Carico, Esq.* and Golnaz Yazdchi, Esq.*

BRINGING BENEFICIARIES TO THE MEDIATION TABLE: DRAFTING ENFORCEABLE TRUST PROVISIONS REQUIRING MEDIATION OF DISPUTES DURING POST-DEATH TRUST ADMINISTRATION

By Christopher D. Carico, Esq.* and Golnaz Yazdchi, Esq.*¹

I. INTRODUCTION

Mediation, when available, continues to be an effective, cost-efficient tool for resolving contested probate matters. Until 2007, the local probate rules of some of the larger California counties gave the probate court the explicit power to compel mediation in contested probate matters.² This power vanished in California with the holding in Jeld-Wen, Inc. v. Superior Court.³ Estate planning clients often prefer the concept of mediation in the place of protracted litigation to resolve potential future disputes among family members concerning administration of their estate plans. Carefully-drafted trust provisions utilizing conditional gifts can serve to give an incentive to the beneficiaries and trustees to enter into a binding agreement at the outset of the administration to mediate future disputes. This agreement to mediate in turn can empower the court to compel mediation when disputes later arise, without violating the public policy concerns addressed in Jeld-Wen.

This article begins by reviewing current California law relating to the enforcement of settlor-imposed conditions on the receipt of gifts, including a requirement in the trust instrument that the parties agree to mediate any future disputes as a condition precedent to receiving the gift. It then discusses the public policy considerations that could restrict the enforcement of a mandatory mediation provision, namely, voluntariness, access-to-justice, unconscionability, and avoidance of forfeitures. The article continues with the authors' recommendations on how to draft mediation provisions into the trust instrument to avoid public policy pitfalls. The article concludes with suggested trust language that conditions gifts on signing an agreement to mediate future disputes, followed by a sample agreement to mediate.

II. SETTLOR'S RIGHT TO IMPOSE REASONABLE DISPUTE RESOLUTION CONDITIONS

The settlor "may dispose of his property on whatever condition he wishes to impose," as long as the condition is not illegal or against public policy.⁴ California generally has a strong public policy in favor of deterring litigation, including the use of mediation to resolve disputes.⁵ Fundamentally, permitting the settlor to condition gifts under the trust instrument on the beneficiary's written agreement to participate in mediation to resolve any future disputes appears consistent with California public policy.⁶

The paramount rule in the construction and administration of testamentary instruments is to carry out the settlor's expressed intent as far as possible.⁷ Following this rule, if the trust instrument clearly expresses the settlor's intent that the parties be required to participate in mediation in order to receive certain benefits, public policy would ordinarily support enforcement of the mediation requirement.

The oft-cited benefits of mediation are the following:

1. "[T]rial is costly, time consuming, and stressful for the parties involved."⁸
2. Many disputes can be resolved less formally.
3. Mediation, as a means of dispute resolution, has a proven record in California and elsewhere "for reducing the cost, time, and stress of dispute resolution . . . ."⁹
4. Mediation can provide parties with a "simplified and economical procedure for obtaining prompt and equitable resolution of their disputes . . . ."¹⁰
5. Mediation provides a "greater opportunity to participate directly in resolving these disputes."¹¹
6. "Mediation may also assist to reduce the backlog of cases burdening the judicial system."¹²
7. Mediation can "have the greatest benefit for the parties in a civil action when used early, before substantial discovery and other litigation costs have been incurred."¹³

[Page 5]

III. PUBLIC POLICY CONCERNS WITH IMPOSING MEDIATION

The public policy considerations that limit the probate court's ability to unilaterally impose mediation on the parties are generally considered to be (1) voluntariness of mediation, (2) access to justice, (3) unconscionability claims, and (4) the avoidance of forfeitures.¹⁴

A. Voluntariness Issue Raised by Jeld-Wen

Prior to 2007, the local probate rules for some counties in California permitted bench officers to order the parties in long-cause contested matters to participate in mediation.¹⁵ The probate court's ability to compel mediation remains the rule of law in many other states.¹⁶ In California, the court's power to compel mediation changed in 2007 with the decision in Jeld-Wen.¹⁷ There, the trial court ordered the parties involved in a construction defect case into private mediation and appointed the neutral to mediate and conduct settlement conferences for a maximum of 100 hours at the hourly rate of $500 per hour. The parties were also ordered to share the costs of the mediator.¹⁸ The maximum liability exposure for one of the tangential defendants, Jeld-Wen, Inc., could have been less than the costs it would incur in participating in the mediation (i.e., attorneys' fees and pro rata share of mediator fees).¹⁹ Jeld-Wen therefore refused to mediate. The trial court issued sanctions against Jeld-Wen and ordered Jeld-Wen to attend the next mediation conference.²⁰ The Court of Appeals reversed, finding that forcing a party to attend and pay for mediation over objection was "antithetical to the entire concept of mediation" being voluntary.²¹ The decision in Jeld-Wen effectively ended the Superior Court's ability to force contestants in probate proceedings into mediation. As a result, in 2008, the local probate rules for some counties were modified to eliminate the rules giving the court the ability to impose mediation.

B. Overcoming the Voluntariness Hurdle

While courts are currently prohibited from forcing parties into mediation, they may generally enforce private contractual provisions that require parties to mediate a dispute first as a condition precedent to obtaining certain benefits under a contract.²² In Lange v. Schilling,²³ the Court of Appeals upheld contract provisions requiring mediation as a condition precedent to receiving an award of attorneys' fees.²⁴ "[T]he public policy of promoting mediation as a preferable alternative to judicial proceedings is served by requiring the party commencing litigation to seek mediation as a condition precedent to the recovery of attorney fees . . . . [H]ad the parties resorted to mediation, their dispute may have been resolved in a much less expensive and time-consuming manner."²⁵

If the trust instrument requires that the beneficiaries execute an agreement to mediate future disputes as a condition to receiving a specific benefit under the trust instrument, and the beneficiary signs the agreement in order to obtain the benefit, the beneficiary has voluntarily consented to mediate future disputes. The trust document can require the trustee to agree to mediation as a condition of accepting office. The court can then enforce the agreement to mediate in the event of a future dispute, even over objection of the party, without violating the public policy of voluntary participation in mediations.

C. Constitutional Guarantees of Access to Justice

The United States and California Constitutions guarantee citizens access to justice—the right to petition the court to resolve grievances.²⁶ All persons must be assured access to the courts without regard to their economic means.²⁷ Public policy prohibits creating unreasonable financial hurdles to access justice. Trial courts are empowered to waive filing fees and surety requirements and even reduce attorneys' fees payable by contract to a prevailing party to ensure that all parties can access justice.²⁸ Any alternative dispute resolution, including mediation, which adds or shifts costs to a party otherwise unable to afford it may be unenforceable as a denial of access to justice or due process.

Before distribution of the trust estate, some beneficiaries may lack the economic means to contribute to the costs of the mediator or hire counsel to represent them in the mediation. To avoid potential claims of denial of access to justice and due process, the authors recommend that the trust instrument authorize the trustee to pay from the trust estate all reasonable costs relating to the beneficiaries' participation in the mediation.²⁹ Given the strong public policy favoring mediation and the proven cost savings from resolving disputes earlier, the payment of the mediation-related costs by the trustee would generally be consistent with the exercise of the trustee's fiduciary duty to act in the best interest of the trust estate and its beneficiaries, including being cost-conscious.³⁰

D. Protecting against Claims Alleging Unconscionability

A contract requiring mediation, like any other contract, may be unenforceable where enforcement would be unconscionable.³¹ For an agreement to be deemed unconscionable, it must be both procedurally and substantively unconscionable.³² Since the agreement to mediate included within a trust instrument will necessarily have an element of "take it or leave it" without the opportunity to negotiate its terms (i.e., the settlor is deceased), the agreement is likely to be considered an adhesion contract and procedurally unfair. Substantive unconscionability requires a showing that the contract is overly harsh or one-sided.³³ As long as the agreement to mediate applies equally to all parties and does not unfairly shift costs or burdens to a particular party, then the contract should be deemed substantively fair and therefore enforceable.

[Page 6]

E. Weakening the Forfeiture Argument

California public policy disfavors forfeitures, but the policy is by no means absolute. A trust provision that denies a specific gift to a beneficiary who refuses to sign the agreement to mediate could be characterized as forfeiture but remain enforceable nonetheless.³⁴...