Consideration of Mediation and Arbitration Provisions in Wills and Trusts
| Jurisdiction | Kansas,United States |
| Pages | 26 |
| Citation | Vol. 92 No. 2 Pg. 26 |
| Publication year | 2023 |
March, 2023
arbitration provisions
Consideration of Mediation and Arbitration Provisions in Wills and Trusts
By Tim O'Sullivan and Wyatt Hoch
"An ounce of mediation is worth a pound of arbitration and a ton of litigation." — Joseph Grynbaum
"Conflict is inevitable. But combat is optional." — Max Lucado
Introduction
George Washington made a will shortly before he died, bequeathing property to various relatives. Sociological historians have taken much interest in the disposition of his slaves, including decreeing freedom for many of them to occur upon the death of the survivor of Martha and him. Legal scholars have found an intriguing arbitration provision in his will mandating that all disputes be decided by "three impartial and intelligent men" known for their "probity and good understanding," whose decision would be binding as if given by the Supreme Court of the United States. There were no established procedures for arbitration in Washington's time, although it was frequently used in commercial disputes. Since then, the search for extrajudicial means of resolving legal disputes has evolved, mostly in a commercial context and as a means of judicial preferences in avoiding trials of pending litigation matters.
As a part of this evolutionary process, over the past several decades in the United States there has been a clear trend to more proactively advocate alternative dispute resolution (ADR), such as mediation and arbitration, to resolve a full range of disputes outside of judicial systems for a variety of reasons, not the least of which has been to reduce the caseload and attendant burgeoning costs and administrative burdens on the country's court systems. The increasing use of ADR includes contracts mandating their usage, courts so mandating under statutory authority, and courts or litigating attorneys requesting that parties mediate pending matters, either prior to, at the commencement thereof, or in the throes of, the litigation of disputes. Estate and trust disputes have certainly not stood apart from this trend. State courts have been called upon with some frequency to address the question of whether mandatory ADR provisions in a will or trust are enforceable against non-signatories of the instrument in the event of a dispute. In the absence of legislation, as more fully addressed below, courts largely have been quite reticent to enforce mandatory arbitration or mediation provisions against non-signatories to the estate planning instrument. Implementing statutes addressing their enforceability are of relatively recent origin.
This article will analyze this trend, its importance to the Kansas estate planning practitioner, and put it in its proper perspective as a tool in the devolution of property under wills and trusts, most particularly its impact on family members of the decedent. Toward that end, the initial section is a compendium of the common law decisions addressing this issue. The next section outlines model acts and state statutes, including those in Kansas, that have addressed the enforceability of will and trust provisions mandating ADR of disputes and their limitations. The third section is an analysis of the relative benefits and potential detriments of ADR procedures to clients in resolving disputes. The fourth section will discuss the results of a recent 2021 survey of members of the KBA Real Estate, Property and Trust section — the second-largest section of the Kansas Bar Association — on aspects of ADR, including their efficacy, cost effectiveness, effect on family harmony, and the frequency of the inclusion of provisions that mandate them in wills and trusts. The final section will discuss considerations in the inclusion of mediation and arbitration provisions in revocable trusts, the current predominant estate planning instrument in the devolution of property at death, and an attachment containing a sample mediation and arbitration provision for consideration of its inclusion in Kansas trust instruments.
I. Common Law Decisions
There have been two principal legal theories espoused for the enforceability of mandatory mediation and arbitration provisions in wills and trusts even in the absence of their statutory sanctioning: the "benefit theory," which argues that a beneficiary who is accepting a gift should be estopped from objecting to satisfying the condition precedent for its acceptance required by the donor; and the "donor intent theory" which argues that the intent of the donor/settlor/ testator in incorporating such a requirement should be carried out absent any affront to public policy, as children normally have no legal right to inherit property from a parent. Another theory, the "contract theory" has been employed in differing contexts either to deny or grant their acceptance. In one context it can be employed to deny such provisions as not meeting requisite contractual requirements. In another context, it can be utilized with the "benefit theory" to find in essence an implied contract that is enforceable. One would thus expect a mixed judicial acceptance, which to date has only marginally been its fate. The Texas Supreme Court in Rachal v. Reitz is the singular state appellate court to date that has held ADR provisions in a trust instrument are enforceable. The case involved a suit by a beneficiary of an irrevocable trust against the trustee, alleging misappropriation of trust assets and failure to provide an accounting.[1] In response, the trustee moved to compel arbitration under the mandatory arbitration provision of the trust.[2] The Texas Supreme Court held that the arbitration provision in the irrevocable trust was enforceable against the beneficiary.[3]
The cynosure of the court's decision was whether the arbitration provision was valid under the Texas Arbitration Act, which provides that "agreements] to arbitrate" are generally enforceable.[4] The court concluded that language was broader than "contracts to arbitrate," and therefore the arbitration provision need not meet all elements of a valid contract.[5] Rather, it need only have mutual consent to be a valid agreement under the Texas Arbitration Act.[6] The court concluded that the beneficiaries and trustee mutually assented to the arbitration provision, even though the beneficiary did not sign it, because the doctrine of "direct benefits estoppel" states that a non-signatory assents to an agreement, constituting an implied acceptance, if he has received or is seeking benefits under that agreement.[7] Because the beneficiary was seeking benefits under the irrevocable trust, he was deemed to have assented to the arbitration provision contained therein.[8] Accordingly, under the "benefit theory," such implied assent fulfilled the contractual statutory requirement and the arbitration provision was valid and enforceable.[9] The Texas Supreme Court adopted the "direct benefits estoppel" concept from the Federal Arbitration Act even though there is no counterpart under the Texas Arbitration Act, sans any discussion as to whether the federal act preempted state law in that respect. At its essence, the court's rationale paralleled that of implied-at-law contracts, finding an implied assent to arbitrate disputes in the acceptance of benefits under the provisions of the instrument. This avoids vitiating the decedent's intent in reposing such arbitration requirement in the settlor's trust by finding an implied, albeit not expressly overt, condition for a beneficiary's acceptance of benefits under the instrument, thereby honoring the intent of the settlor as a separate basis for its decision.
Other cases have demurred from accepting the reasoning of Rachal v. Reitz, finding ADR provisions in trusts and wills to be unenforceable. In Schoneberger v. Oelze, the Arizona Court of Appeals held that a trust was not a contract within the meaning of the Arizona Arbitration Act, and therefore was not enforceable under that act.[10] The Arizona Arbitration Act differed from the Texas Arbitration Act in that it required the arbitration provision be in a "written contract" rather than just a "written agreement."[11] In employing the contract theory against the validity of the arbitration provision, the court found that a trust was not a contract due to it lacking the fundamental mutual assent on which an enforceable arbitration provision rests.[12] The court did not consider the trustee's arguments, a la Rachal, that the beneficiary was estopped from denying the arbitration provision after accepting the benefits under the trust; rather, it concluded the lack of a written contract was determinative.[13]
Similarly, in In Re Calomiris, the District of Columbia Court of Appeals held that an arbitration provision in a will establishing a marital trust was not a written contract to submit to arbitration under the District of Columbia Arbitration Act.[14] The court followed Schoneberger in concluding that an arbitration provision in a will did not exhibit the requisite mutual assent to be a valid arbitration agreement.[15]
Several California cases make unclear the state of the law in that jurisdiction. In Diaz v. Bukey, the California Court of Appeals held that a trust was not a contract, as required to be enforceable under the California Arbitration Act.[16] In so doing, the court concluded that the beneficiary was not equitably estopped from challenging the arbitration provision even though he had received benefits under the trust.[17] This case, however, was vacated and remanded by the California Supreme Court with instructions to reconsider in light of a different decision.[18] Instead, the case was dismissed pursuant to stipulation by the parties.[19]
The California Court of Appeals did not consider the question again until McArthur v. McArthur...
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