Yearbook on International Arbitration Volume II edited by Marianne Roth Michael Geistlinger with the assistance of Marianne Stegner Antwerp · Copenhagen · Zurich · Vienna · Graz 2012 Christopher P. KOCH A tale of two cities! – arbitrating trust disputes and the ICC’s arbitration clause for trust disputes Table of Contents I Introduction .............................................................................................. 180 II What is a trust – who is involved? ........................................................... 182 A The actors ............................................................................................... 182 1 The settlor ...................................................................................... 183 2 The trustee ..................................................................................... 183 3 The beneficiary/ies ......................................................................... 183 4 The protector .................................................................................. 183 5 The courts of the trust jurisdiction ................................................... 184 III Nature and typology of trust disputes: Differences between contract and trust disputes ...................................................................... 184 A Trust disputes .......................................................................................... 186 B Beneficiary or internal disputes ............................................................... 186 C Third party disputes ................................................................................. 186 IV Questions of arbitrability .......................................................................... 187 V Is an arbitration clause in a trust deed enforceable? ............................... 188 A Judicial recognition of arbitration clauses in trust instruments ................. 190 B Problems under the New York Convention .............................................. 194 C Legislative support of arbitration in trust disputes .................................... 194 VI Minor, incapacitated and non-ascertained beneficiaries .......................... 198 VII The ICC arbitration clause for trust disputes ........................................... 199 A The agreement to arbitrate ...................................................................... 200 B Joinder provisions ................................................................................... 201 VIII Conclusions ............................................................................................. 204 Annex 1 ............................................................................................................ 206 Abstract This article examines whether arbitration clauses in trust deeds can be effective, in view of the fact that a trust is not a contractual undertaking but a unilateral act of a person disposing of some or all of his or her assets. Can the beneficiaries of a trust be compelled to arbitrate disputes which might arise under the deed of 179 Christopher P. KOCH trust even though they are not parties to the arbitration clause? After exploring the general principals involved and some relevant case law as well as certain legislative developments concerning the arbitration of trust disputes, the article will examine the ICC arbitration clause trust for trust disputes suggested by the ICC in the light of the foregoing discussion and also with a view to the new join- der provisions in the new ICC arbitration rules. Keywords Arbitration, arbitration clause, agreement to arbitrate, trust deeds, nature of trust, trust dispute and arbitration, ICC arbitration clause for trust disputes, joinder of parties under new 2012 ICC Rules of arbitration I Introduction OH, East is East, and West is West, and never the twain shall meet,1 The often quoted first line of Kipling’s Ballad of East and West tells of an un- bridgeable gap between East and West. There may be a similar dichotomy be- tween the world of contract law and that of trusts. While the former implies the pursuit of competing goals through a common effort regulated by contract, the latter evokes a world of solitary contemplation of a life beyond death or, in some cases, beyond the grasp of the national revenue service, as the settlor seeks to dispose of his/her assets in such a manner as he feels is best, ensuring that the affairs of the progeny are sometimes regulated well beyond the grave, for years if not generations to come. However different these two worlds are, they share the impact of globalization and, with it, the ever increasing complexity of problems arising between the par- ties involved. Trusts developed as estate planning tools when assets were held locally and a trust would be set up under the same law that governed the will and probate procedures. Settlors, trustees and beneficiaries were likely to be domi- ciled in the same jurisdiction as the courts that had jurisdiction over the estate. Today, fortunes tend to be international, with real and movable assets located in many jurisdictions. Trusts are increasingly used to achieve other than testamen- tary objectives and are set up in offshore trust jurisdictions such as the Baha- mas, the Cayman Islands, the British Virgin Islands, or, closer to home, the Channel Islands, while the trust assets may be held in a third country. Upon the death of a settlor in the U.S., his/her will may be probated there, while the trust might be subject to the supervision of the Bahamas courts and a trust company, say in Lichtenstein, will be administering the trust assets held in various coun- tries. The estate might end up before the courts of three or four jurisdictions. If one adds the public nature of these proceedings and the threat that internal family disputes might thus be exposed to the unkind eye of the international 1 Rudyard Kipling, The Ballad of East and West. A Victorian Anthology, 1837-1895, at http://www.bartleby.com/246/1129.html (16 September 2011). 180 A tale of two cities! – arbitrating trust disputes and the ICC’s arbitration clause for trust disputes press, it is not difficult to imagine a specter of international judicial entanglements and public exposure that is considerably more horrific than even Jarndyce v. Jarndyce.2 To deal with the complexities of resolving disputes in an era of increasingly globalized transactions, international commerce has privatized the adjudication of commercial disputes through arbitration. Arbitration provides a neutral private and confidential forum, where arbitral tribunals chosen by the parties apply tailor- made procedures to arrive at a final and internationally enforceable decision. The huge success of international commercial arbitration is largely due to the suc- cess of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards3 as well as to the fact that states throughout the world have enacted arbitration-friendly laws. It would therefore seem that arbitration might be the ideal means to resolve trust disputes. All disputes arising out of a deed of trust would be heard in the venue as foreseen by the deed. Proceedings would be confidential and hearings held behind the closed doors of conference rooms in first-class hotels, rather than the publicly accessible courtroom of the local court. The dispute would be decided by a panel of arbitrators, chosen by the parties for their experience and skill and any decision rendered by the tribunal at the end of the process would be enforceable throughout the world. Will an arbitration clause in the deed of trust live up to these promises? Arbi- tral institutions seem to think so. The American Arbitration Association promul- gated Wills and Trusts Arbitration Rules, the latest revision of which is dated June 1, 20094 and, in 2008, the ICC’s Commission on Arbitration published the ICC Arbitration Clause for Trust Disputes along with an Explanatory note.5 The purpose of this study is to examine to what extent an arbitration clause in a trust instrument can fulfil its promise as an efficient and discrete method for dealing with trust disputes. Having examined the challenges that arbitration faces in the world of trusts, we will take a closer look at the ICC’s suggested Arbitration Clause for Trust Disputes and see how it deals with those challenges. We will not concern ourselves with business trusts or trusts set up for a specific purpose (i.e. charitable trusts), but only trusts which are set up to manage all or a part of a settlor’s assets during his/her lifetime and/or after his/her death. 2 Charles Dickens’ account in “Bleak House” of a fictitious trial about a large estate that, after lasting for generations, ended up eating up the entire estate. Two exam- ples of such publicized family litigation that readily come to mind are the Thyssen and Weissfisch cases. While the former pitted father against son in trust litigation in Bermuda concerning control over the Thyssen industrial group generating legal fees in excess of 100 million pounds, the former concerned a dispute between two brothers about the control over the trust holding the assets of their metals trading company. 3 The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has been ratified or acceded to by 145 states. The full text of the Convention can be found at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/ NYConvention.html (16 September 2011). 4 AAA, AAA Wills and Trusts Arbitration Rules, American Arbitration Association (ed.), 2009. 5 Taskforce on Trusts and Arbitration, ICC Arbitration Clause for Trust Disputes, ICC International Court of Arbitration Bulletin, 19 (2008), 9; The Taskforce also published an Explanatory Note, which is reproduced in Annex 1 of this article. 181 Christopher P. KOCH II What is a trust – who is involved? There is no clear-cut legal definition of the concept of trust. Given the incredible variety of types of trusts one might be tempted to say, like Supreme Court Jus- tice Stevens did in 1964, defining pornography: “I know it when I see it.”6 Black’s Dictionary contains inter alia the following definition of a trust: “Any arrangement whereby property is transferred with the intention that it be administered by a trustee for another’s benefit.”7 Article 2 of the Hague Convention on the Law Applicable to Trusts and on their Recognition (Trust Convention), ratified by Switzerland in 2007, defines the trust as follows: “Article 2 For the purposes of this Convention, the term “trust” refers to the legal re- lationships created – inter vivos or on death – by a person, the settlor, when assets have been placed under the control of a trustee for the bene- fit of a beneficiary or for a specified purpose. A trust has the following characteristics: a) the assets constitute a separate fund and are not a part of the trustee’s own estate; b) title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; c) the trustee has the power and the duty, in respect of which he is accounta- ble, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law. The reservation by the settlor of certain rights and powers and the fact that the trustee may himself have rights as a beneficiary are not necessarily in- consistent with the existence of a trust.” Finally, the classic definition of a trust is that of Sir Arthur Underhill.8 “A trust is an equitable obligation, binding a person (called the trustee) to deal with property owned by him (called the trust property, being distin- guished from his private property) for the benefit of persons (called the beneficiaries) of whom he may himself be one, and any of them may en- force the obligation.” A The actors From the three definitions above, it becomes apparent that we are dealing with at least three actors, namely the settlor, the trustee and the beneficiary/ies. 6 “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [of hard core pornography]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the mo- tion picture involved in this case is not that.” USSC, Jacobellis v. Ohio, judgment of 22 June 1964, 378 U.S. 184. 7 Black’s Law Dictionary, 6th ed., St. Paul 1990, 1508. 8 Sir Arthur Underhill/David Hayton, Law of Trusts and Trustees, 16th ed., London 2002. 182 A tale of two cities! – arbitrating trust disputes and the ICC’s arbitration clause for trust disputes 1 The settlor The settlor is the person who creates the trust by transferring title to his/her property to the trustee and declaring a trust over that property. In the case of a testamentary trust, the settlor will also be the testator. In a living (inter vivos) trust, the Trust Convention expressly foresees that the settlor may also be a beneficiary and/or a trustee.9 2 The trustee The trustee is the person who receives the property in trust and becomes its legal but not its beneficial owner. Trust property is separate property. According to the Trust Convention, the recognition of a trust in a non-trust jurisdiction “shall imply as a minimum that the trust property constitutes a separate fund …”10 The trustee has the fiduciary duty and the power to manage or dispose of the assets in his name but in accordance with the deed of trust and the law. Trustees may be physical persons; however, nowadays, more often than not, trusts are admin- istered by professional trust companies acting as trustees. 3 The beneficiary/ies The beneficiaries are all those who have equitable property rights in the trust property as defined in the trust deed and to whom the trustee owes a fiduciary duty. They may include the settlor and any person designated by the deed of trust as a recipient of any right to or benefit from the trust. Beneficiaries can be designated by class (“my children”) and may not exist yet when the trust is set- tled (grandchildren) which makes them unascertained beneficiaries. 4 The protector Protectors are a relatively recent phenomenon in the world of trusts. Their use is linked with the increasing tendency to establish trusts in offshore jurisdictions such as Bermuda, the BVI, the Bahamas etc. While settlors want to transfer legal title over their assets to an offshore trust they may be apprehensive about turn- ing over unfettered control over sizeable portions of their wealth to distant trus- tees operating in those offshore jurisdictions. The protector was thus created as a mechanism to assert various degrees of control over the trustee. Protectors’ powers were initially set out in the trust deed but most offshore trust jurisdictions, perceiving a regulatory need, have adopted legislation to regulate protectors to a greater or lesser extent.11 Apart from extensive supervisory powers, protectors may also have the power to appoint or dismiss trustees or to approve or disap- prove beneficiaries or distributions to beneficiaries. 9 Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition which was enacted in Switzerland on June 1, 2007. 10 Ibid. at Art. 11. 11 Oliver Arter, Anwalt und Trust, The 6th Zurich Annual Conference on International Trust and Inheritance Law Practice, p. 124 at http://www.froriep.com/download/ Arter_Anwalt_und_Trust.pdf (16 September 2011). 183 Christopher P. KOCH 5 The courts of the trust jurisdiction Finally, we must not forget the important role that the courts play in connection with trusts. Underhill describes a trust as an “equitable” obligation, thereby indi- cating that the law of trusts was developed by the English chancery courts (equi- ty courts) rather than by the common law courts. Traditionally, the courts have retained considerable supervisory powers over trust matters. Thus, courts may not only decide internal and external trust disputes but also intervene in the ad- ministration of a trust or replace a trustee who is unfit for her office, or appoint one, when necessary. The courts’ supervisory power also includes the power to issue directions and/or instructions upon the trustee’s request. The possibility of petitioning the court for directions or instructions is a particularly useful way for trustees to pro- tect themselves from liability. Faced with an unclear or unworkable provision in the trust deed or with several alternative courses of action, the trustee may apply to the court for an interpretation of the unclear provision (constructive summons) or for directions on how to exercise her powers (directive summons).12 The pro- cedures for a trustee to obtain directions or instructions are usually simple, non- contentious ex parte proceedings, which do not involve the beneficiaries. However, with impending globalization, it appears to be more and more common, particularly in the case of offshore trusts, that trust companies are located where the trust assets are and not where the court having jurisdiction over the trust is situated. Thus, the trustee of a trust subject to Bahamas law may be a Swiss trust company with its seat in Geneva, administering trust assets located in Switzerland and/or various other jurisdictions. Here, the supervisory role of the Bahamas trust court will be less immediate than if the trustee is locat- ed in Nassau. III Nature and typology of trust disputes: Differences between contract and trust disputes To appreciate whether arbitration can be an effective tool for resolving trust dis- putes, it may be useful to take a look at some of the qualitative differences be- tween disputes arising in these different worlds. Looking at what kind of litigants are most likely to be involved in a dispute, we find that in international commercial disputes that are submitted to arbitration, the overwhelming majority of the parties are incorporated legal entities. While trust disputes may involve a corporation as trustee or protector, the settlor and the beneficiaries will always be physical persons. This has an impact on the tone and conduct of proceedings, which in a trust dispute is likely to become much more personal and emotional than one would find in a contract dispute. One observer remarked that the personal dynamics seen in trust litigation are often comparable to what one sees in divorce proceedings.13 Trust disputes among 12 Tina Wüstemann, Arbitration of Trust Disputes, in: Christoph Müller (ed.), New Developments in International Commercial Arbitration 2007, Zurich 2007. 13 Georg von Segesser, Arbitrability in Estate and Trust Litigation, in: Rosalind F. Atherton, Paper of The International Academy of Estate and Trust Law, The Hague 2000. 184 A tale of two cities! – arbitrating trust disputes and the ICC’s arbitration clause for trust disputes members of a family may have their psychological origins in the family history of each of the members, rather than in the actual wording of a trust deed. Thus, personal emotions may drive the process as much as the rational pursuit of a perceived economic right. Contractual disputes are limited to the persons who are parties to the con- tract. Privity of contract closely circumscribes the circle of potential parties to any arbitral proceedings arising out of a contractual dispute. The great majority of international commercial disputes involve two parties.14 Trust disputes, on the other hand, will usually involve more than two parties, without it being possible to determine in advance exactly who those parties will be. If the dispute is internal between the beneficiaries and the trustee, it may also involve a protector, if there is one, as well as rights of unascertained beneficiaries. If the dispute is between beneficiaries, it may involve the trustee because the dispute concerns the con- struction of the deed of trust. There is thus a much greater uncertainty about who is bound by the arbitration clause and who would be a party in arbitral proceed- ings than would be the case with a commercial arbitration agreement. Contractual relationships are ephemeral. They are based on an understand- ing which is usually entered into by the parties to achieve a specific commercial result. Once this has been done, the relationship ends and the parties can walk away and no longer have any obligations towards each other. While some long- term contracts may foresee a longer lasting cooperation between parties, the relationship will still come to an end when the purpose has been achieved or the parties give up trying to achieve it. Trusts, on the other hand, are usually set up in a family setting. The bonds between the members of the family are not ephemeral but permanent fixtures in the life of each member. When disputes arise, their resolution needs to take account of the fact that the parties might want to maintain their family ties.15 Trust instruments reflect the perennial nature of the family of which they seek to regu- late the devolution of assets from one generation to the next and sometimes even one or more generation after that. It may thus be possible that the trust assets do not revert to legal ownership of the settlor’s descendants for over a hundred years after the creation of the trust.16 This temporal element is reflected in the dispute resolution mechanisms pre- ferred by each of these legal worlds. Arbitral tribunals are as ephemeral as the disputes they decide. They are set up when a party decides to bring its claim to 14 According to the ICC’s statistics, slightly more than two thirds of the cases filed every year involve only two parties. ICC Court of Arbitration, 2009 Statistical Report, ICC International Court of Arbitration Bulletin, 21 (2010), 5. 15 Tina Wüstemann, Arbitration of Trust Disputes, in: Christoph Müller (ed.), New De- velopments in International Commercial Arbitration 2007, Zurich 2007, 35. 16 The common law rule against perpetuities requires that the remainder interest in trust property revert to the legal ownership of beneficiaries within a determined peri- od of time. According to the “Uniform Statutory Rule against Perpetuities” suggested by the U.S. Uniform Law Commission, an interest in trust property must vest within 90 years of the creation of the interest or else it lapses. Thus, if in a generation skip- ping trust the remainder interest reverts to the grandchildren when they are 40 years of age, the first grandchild must be born within 90 years of the settlor creating the trust. NCCUSL, Uniform Statutory Rule Against Perpetuities (National Conference of Commissioners on Uniform State Laws 1990). 185 Christopher P. KOCH arbitration and end their existence, becoming functus officio, once the dispute has been resolved, either by an award or following a settlement.17 Trust law has been created by the courts and it is the courts that have traditionally dealt with resolving trust disputes. As permanent institutions, the courts will outlast any trust. They can provide a sense of continuity and stability regarding the judicial oversight of the trust, which an arbitral tribunal cannot. This brings us to the types of disputes that one may find in a trust setting. The court in the English case of Alsop Wilkinson v Neary ([1995] 1 All ER 431, Ch D), gave a description of the typology of trust disputes in which trustees might be involved.18 It distinguished: A Trust disputes These are “disputes as to the trusts on which [the trustees] hold the subject mat- ter”, and include all disputes which directly affect the trust or its existence. They do not necessarily have to be adversarial, since they also include a trustee’s petition for the Court to interpret the deed of trust or to guide him/her in the exe- cution of his/her duties. This category also includes external disputes in which non-beneficiaries attack the validity of the trust. For example, a creditor’s action to set aside a trust, allegedly set up by a settlor to hide his/her assets from the creditors, would fall under this category, although, in that particular case, the court did not deal with them. B Beneficiary or internal disputes The second category defined by the Alsop court concerns “... a dispute with one or more of the beneficiaries as to the propriety of any action which the trustees have taken or omitted to take”, a dispute which can be between beneficiaries among each other or with the trustee. A typical example of an internal trust dis- pute may be a disagreement between trustees and beneficiaries on how the trust is to be administered or demands for an accounting by a beneficiary etc. What is at stake is not the existence of the trust but the individual beneficiaries’ rights to profit from the trust.19 C Third party disputes The last category identified in Alsop is the “third party dispute” which is “... a dispute with persons, otherwise than in the capacity of beneficiaries”. This in- cludes all disputes arising out of contracts which the trustee has entered into with third parties, to provide goods and services to the trust, i.e. bankers or invest- ment advisors. We will not be concerned with this type of dispute. 17 Nigel Blackaby, et al. (eds.), Redfern and Hunter on International Arbitration, 5th ed., Oxford 2009, 520, Nr. 9.18. 18 Alan Sprince, Trustees' duty to defend - Look before you leap, when to leap and how high, Web Journal of Current Legal Issues at http://webjcli.ncl.ac.uk/articles1/ sprince1.html (16 September 2011). 19 Tina Wüstemann, Arbitration of Trust Disputes, in: Christoph Müller (ed.), New De- velopments in International Commercial Arbitration 2007, Zurich 2007, 38. 186 A tale of two cities! – arbitrating trust disputes and the ICC’s arbitration clause for trust disputes IV Questions of arbitrability Arbitrability concerns the question whether a given type of dispute may legally be referred to arbitration or whether it must remain in the exclusive purview of the state courts or other institutions of the state. Generally, the law of the seat of the arbitration determines what type of dispute is arbitrable. However, the issue can also come up at the enforcement stage, since one of the grounds under the New York Convention permitting a court to refuse enforcement of a foreign arbitral award under Article V.2 (a) is that: “The subject matter of the difference is not capable of settlement by arbitration under the law of that country”. Questions of personal status, such as whether a person is married, competent, or a legal heir are usually not arbitrable. On the other hand, in commercial arbitration, there is very little that is not arbi- trable these days. Arbitration-friendly statutes have defined what is arbitrable in the broadest way. Thus, Switzerland, Germany and Austria consider that any dispute involving a financial or economic interest is arbitrable.20 Other jurisdic- tions have defined arbitrability in terms of the rights which the parties can freely dispose of.21 However, in the more personal world of trust disputes, issues of personal status i.e. marital status, filiation or mental capacity as well as the pro- tection of minors, incapacitated or unascertained beneficiaries are likely to come up, which are not monetary or economic in nature and may raise questions about whether such issues may be decided by private adjudication. In re Trust of Fell- man, a Pennsylvania court found that the question whether the settlor was com- petent to revoke the trust was not arbitrable.22 The Court’s rationale was that, since interdiction was so invasive of an individual’s human rights, it could only be pronounced after a full hearing guaranteeing all constitutional safeguards, which were not present in arbitration.23 While the court’s reasoning may not be utterly convincing, it does reflect that the bench looks at probate disputes differently than at contract disputes. As a consequence, the AAA’s model arbitration clause for Wills and Trusts expressly removes questions of competency from the scope of the clause.24 20 Art. 177 Swiss PILA; para. 1030 German ZPO; para. 582 Austrian ZPO. 21 This is the case in France: Art. 2059 CC; Italy: Art. 806 CPC and Art. 1966 CC; in the Netherlands: Art. 1020 para. 3 CPC; Sweden: Art. 1 Arbitration Act; Spain: Art. 2 Arbitration Act. 22 In re Revocation of Revocable Trust of Harold and Marie Fellman, dated December 13, 1989, 412 Pa. Super. 577, (Pa. Super. March 3, 1992). 23 Ibid. at p. 583. 24 AAA, Standard Arbitration Clause In order to save the cost of court proceedings and promote the prompt and final resolution of any dispute regarding the interpretation of my will (or my trust) or the administration of my estate or any trust under my will (or my trust), I direct that any such dispute shall be settled by arbitration administered by the American Arbitration Association under its Arbitration Rules for Wills and Trusts then in effect. Neverthe- less the following matters shall not be arbitrable questions regarding my competen- cy, attempts to remove a fiduciary, or questions concerning the amount of bond of a fiduciary. In addition, arbitration may be waived by all sui juris parties in interest. The arbitrator(s) shall be a practicing lawyer licensed to practice law in the state whose laws govern my will (or my trust) and whose practice has been devoted pri- marily to wills and trusts for at least ten years. The arbitrator(s) shall apply the sub- 187