University of Missouri School of Law Scholarship Repository Faculty Publications 2012 Arbitration of Trust Disputes: Two Bodies of Law Collide S. I. Strong University of Missouri School of Law, [email protected] Follow this and additional works at:http://scholarship.law.missouri.edu/facpubs Part of theDispute Resolution and Arbitration Commons, and theProperty Law and Real Estate Commons Recommended Citation S.I. Strong, Arbitration of Trust Disputes: Two Bodies of Law Collide, 45 Vand. J. Transnat'l L. 1157 (2012) This Article is brought to you for free and open access by University of Missouri School of Law Scholarship Repository. It has been accepted for inclusion in Faculty Publications by an authorized administrator of University of Missouri School of Law Scholarship Repository. Legal Studies Research Paper Series Research Paper No. 2012-08 Arbitration of Trust Disputes: Two Bodies of Law Collide S.I. Strong 45 VANDERBILT JOURNAL OF TRANSNATIONAL LAW __ (forthcoming 2012) This paper can be downloaded without charge from the Social Sciences Research Network Electronic Paper Collection at: http://ssrn.com/abstract=2035560 Electronic copy available at: http://ssrn.com/abstract=2035560 Arbitration of Trust Disputes: Two Bodies of Law Collide S.I. Strong* 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 non-commercial 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. Several U.S. states have taken diametrically opposed positions on mandatory trust arbitration, although the vast majority of jurisdictions have not yet addressed this matter. 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. The Article focuses on five areas of concern: the potential for impermissible ouster of the courts, the operability and effectiveness of the arbitration provision, the extent to which the arbitration provision is binding on the party against whom arbitration is asserted, proper representation of parties and arbitrability. In so doing, this Article introduces a number of new judicial decisions not previously considered in the scholarly literature and brings using a uniquely comparative and international perspective to the debate regarding the jurisprudential propriety of mandatory trust arbitration. TABLE OF CONTENTS I. Introduction 2 II. An Introduction to Trusts and Trust Law Theory 11 A. What is a Trust 12 B. Types of Trusts, Including Commercial Trusts 14 C. The Theoretical Basis of Trusts 17 1. The donative theory of trusts 17 2. The contract theory of trusts 20 3. Other theories of trusts 23 III. Arbitration of Trust Disputes 25 A. Benefits of Arbitration 25 B. Trustees’ Powers to Arbitrate 30 C. Settlors’ Powers to Compel Mandatory Trust Arbitration 36 1. Legislation in Favor of Mandatory Trust Arbitration 36 2. Elements Required for Mandatory Trust Arbitration 39 Under Common Law Principles 1 Electronic copy available at: http://ssrn.com/abstract=2035560 a. No impermissible ouster of the court’s jurisdiction 40 i. Arbitration as a litigation substitute 41 ii. Special issues regarding judicial 48 accounting and instruction b. An arbitration clause that is operable, effective 53 and capable of performance i. Solutions suggested under national law 54 ii. Solutions suggested under international law 57 c. An arbitral clause that is binding on the party 64 seeking to avoid arbitration i. Issues involving settlor consent 64 ii. Issues involving consent of parties other 74 than the settlor d. Proper representation 77 e. Subject matter arbitrable 83 IV. Conclusion 91 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 * D.Phil., University of Oxford (U.K.); Ph.D., University of Cambridge (U.K.); J.D., Duke University; M.P.W., University of Southern California; B.A., University of California, Davis. The author, who is admitted to practice as an attorney in New York and Illinois and as a solicitor in England and Wales, is the Henry G. Schermers Fellow at the Hague Institute for the Internationalisation of Law as well as Associate Professor of Law at the University of Missouri. The author is also a member of the American Law Institute (ALI) Consultative Groups for both the Restatement (Third) of Trusts and the Restatement (Third) of the U.S. Law of International Commercial Arbitration. Many thanks are due David M. English, David Horton and John H. Langbein for comments and insights provided on earlier drafts of this Article. All errors of course remain the author’s own. 1 Although trusts developed historically as a common law device, civil law jurisdictions are becoming increasingly involved in this field, either through the development of their own domestic forms of trusts or the recognition of trusts formed in common law countries. See Henry Christensen III, Foreign Trusts and Alternative Vehicles, 1902 PLI/CORP. 323, §4 (Aug. 18-19, 2011); Adair Dyer, International Recognition and Adoption of Trusts: The Influence of the Hague Convention, 32 VAND. J. TRANSNAT’L L. 989 (1999); Dante Figueroa, Civil Law Trusts in Latin America: Is the Lack of Trusts an Impediment for Expanding Business Opportunities in Latin America? 24 ARIZ. J. INT’L & COMP. L. 701, 703-07, 721-51 (2007); Frances H. Foster, American Trust Law in a Chinese Mirror, 94 MINN. L. REV. 602, 637-50 (2010); Henry Hansmann & Ugo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis, 73 N.Y.U. L. REV. 434, 437-45 (1998); Michael Hwang, Arbitration of Trust Disputes, in GUIDE TO THE WORLD’S LEADING EXPERTS IN COMMERCIAL ARBITRATION 83, 84 (Legal Media Group ed., 2009); John H. Langbein, The Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 YALE L.J. 165, 186 (1997) [hereinafter Langbein, Commercial Trusts]; John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L.J. 625, 629, 632-43, 669-71 (1995) [hereinafter Langbein, Contractarian]; 2 Electronic copy available at: http://ssrn.com/abstract=2035560 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.3 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 Maurizio Luponi, The Civil Law Trust, 32 VAND. J. TRANSNAT’L L. 967, 970-73 (1999); Julien Perrin, The Recognition of Trusts and Their Use in Estate Planning Under Continental Laws, 10 Y.B. PRIV. INT’L L. 629, 630 (2008); Steven L. Schwarcz, Commercial Trusts as Business Organizations: An Invitation to Comparativists, 13 DUKE J. COMP. & INT’L L. 321, 322 (2003); Tina Wüstemann, Arbitration of Trust Disputes, in NEW DEVELOPMENTS IN INTERNATIONAL COMMERCIAL ARBITRATION 2007, 33, 33-35 (Christoph Müller ed., 2007). For ease of discussion, the term “trust” will be used to refer to both civil law and common law devices, unless otherwise indicated. 2 See David Horton, The Federal Arbitration Act and Testamentary Instruments, 90 N.C. L. REV. __, *22 (forthcoming 2012) (noting irrevocable trusts in the United States “generated $188 billion in income and $4.7 billion in trustees’ fees” in 2008 alone); Langbein, Commercial Trusts, supra note 1, at 177-78 (estimating in 1997 that commercial trusts held assets in the range of $11.6 trillion, with non-commercial trusts holding an additional $672 billion). 3 See Wüstemann, supra note 1, at 33-34. The expanded use of international trusts has been facilitated by the enactment of the Hague Convention on the Law Applicable to Trusts and on Their Recognition (Hague Convention on Trusts). See Convention on the Law Applicable to Trusts and on Their Recognition, 1 July 1985, 23 I.L.M. 1389, 1389-92 (1984) [hereinafter Hague Convention on Trusts]. The Hague Convention on Trusts has been ratified or acceded to by Australia, Canada, Italy, Liechtenstein, Luxembourg, Malta, Monaco, The Netherlands, San Marino, Switzerland and the United Kingdom. See Hague Convention on Trusts, Status, available at http://www.hcch.net/index_en.php?act=conventions.status&cid=59. It has been signed but not ratified by Cyprus, France and the United States. See id. 4 See Langbein, Commercial Trusts, supra note 1, at 166. 5 See GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 68-71 (2009). 6 Evidence of trust-related arbitration can be found in various judicial opinions. See Dallah Real Estate & Tourism Holding Co. v. Pakistan, [2010] UKSC 46, ¶¶1-2, 7 (Lord Mance); Fili Shipping Co. Ltd. Premium Nafta Products Ltd, [2007] UKHL 40 ¶¶3-5 (Lord Hoffman), on appeal from Fiona Trust & Holding Corp. v. Privalov [2007] 1 All E.R. (Comm.) 891; The Trustees of the Edmond Stern Settlement v. Levy, [2009] EWHC 14 (TCC), ¶¶1-2; Laughton v. CGI Tech. & Sol’ns, Inc., 602 F. Supp. 2d 262, 263-64 (D. Mass. 2009); Delaney Elec. Co., Inc. v. 3 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/or 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 Schiessle, 601 N.E. 2d 978, 980 (Ill. App. Ct. 1992); United States Trust Co., N.A. v. Cavalieri, No. HHDCV070513653S, 2008 WL 1822721, at *1 (Conn. Super. Apr. 1, 2008). 7 Such proceedings are largely uncontroversial, particularly in jurisdictions with legislation giving trustees the explicit power to enter into nonjudical means of dispute resolution. This type of legislation has long been available, but is becoming increasingly popular. See infra notes 154-77 and accompanying text. 8 Hwang, supra note 1, at 83. Different commentators define internal and external trust disputes differently. See Paul Buckle & Carey Olsen, Trust Disputes and ADR, 14 TR. & TRUSTEES 649, 651 (2008); Wüstemann, supra note 1, at 38. 9 See Hague Convention on Trusts, supra note 3, art. 2; DAVID HAYTON ET AL., UNDERHILL AND HAYTON LAW RELATING TO TRUSTS AND TRUSTEES ¶¶8.157-8.167 (18th ed. 2010); Langbein, Contractarian, supra note 1, at 664; Wüstemann, supra note 1, at 36. 10 Parties to an internal trust dispute could also enter into an arbitration agreement after the dispute has arisen (i.e., a submission agreement or compromis), but it is usually easier to obtain an arbitration agreement before legal controversies arise rather than afterward, regardless of whether the matter is related to a trust or not. See GARY B. BORN, INTERNATIONAL ARBITRATION AND FORUM SELECTION AGREEMENTS: DRAFTING AND ENFORCING 37 (2010) [hereinafter BORN, DRAFTING]. 4 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 11 Although the current interest in mandatory arbitration of trust disputes makes it seem as if the procedure is relatively new, these issues have been discussed at various times in the past. See Arnold M. Zack, Arbitration: Step-child of Wills and Estates, 11 ARB. J. 179 (1956); Blaine Covington Janin, Comment, The Validity of Arbitration Provisions in Trust Instruments, 55 CAL. L. REV. 521 (1967). 12 See Diaz v. Bukey, 125 Cal. Rptr. 3d 610, 614-15 (Cal. Ct. App. 2011), petition for review granted, 257 P. 3d 1129 (2011); Rachal v. Reitz, 347 S.W.3d 305, 310 (Tex. Ct. App. 2011), petition for review filed Sept. 8, 2011. 13 Lawrence Cohen & Marcus Staff, The Arbitration of Trust Disputes, 7 J. INT’L TR. & CORP. PLAN. 203, 203 (1999); see also American College of Trust and Estate Counsel (ACTEC), Arbitration Task Force Report 22 (Sept. 2006), available at http://www.mnbar.org/sections/probate- trust/ACTEC%20Arbitration%20Task%20Force%20Report-2006.pdf; Georg von Segesser, Arbitrability in Estate and Trust Litigation, in PAPERS OF THE INTERNATIONAL ACADEMY OF ESTATE AND TRUST LAW – 2000 21, 21 (Rosalind F. Atherton ed. 2001); Wüstemann, supra note 1, at 33-34. 14 See Wüstemann, supra note 1, at 41; see also Erin Katzen, Arbitration Clauses in Wills and Trusts: Defining the Parameters for Mandatory Arbitration of Wills and Trusts, 24 QUINNIPIAC PROB. L. J. 118, 119 (2011). 15 See Michael P. Bruyere & Meghan D. Marino, Mandatory Arbitration Provisions: A Powerful Tool to Prevent Contentious and Costly Trust Litigation, But Are They Enforceable? 42 REAL PROP. PROB. & TR. J. 351, 352-53 (2007); Horton, supra note 2, at *3; Katzen, supra note 14, at 118-19; Wüstemann, supra note 1, at 41. 16 See ACTEC, supra note 13, at 5 (discussing the “blinding prejudice” to arbitration in contemporary trust and estates practice). 17 See Gerardo J. Bosques-Hernández, Arbitration Clauses in Trusts: The U.S. Developments and a Comparative Perspective, 3 REVISTA PARA EL ANALISIS DEL DERECHO (INDRET) 1, 5, 15 (2008), available at 5 area of law has overcome these kinds of worries about the legitimacy of the arbitral process.18 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 http://www.indret.com/pdf/559_en.pdf; E. Gary Spitko, Gone But Not Conforming: Protecting the Abhorrent Testator From Majoritarian Cultural Norms Through Minority-Culture Arbitration, 49 CASE W. RES. L. REV. 275, 307-14 (1999); Wüstemann, supra note 1, at 40-41. 18 See BORN, supra note 5, at 775; Horton, supra note 2, at *14, *16-20. 19 Cohen & Staff, supra note 13, at 206. 20 This isolation arises as a result of the specialized nature of trust law and procedure. See James W. Martin, Ten Tips for Handling Complex Probate, 84 FLA. B.J. 45-52 (Feb. 2010). Some jurisdictions even require trust disputes to be brought in specialized probate or chancery courts. See WILLIAM M. MCGOVERN ET AL., WILLS, TRUSTS AND ESTATES: INCLUDING TAXATION AND FUTURE INTERESTS 626 (2010). 21 See Katzen, supra note 14, at 118-19; Wüstemann, supra note 1, at 34, 49. 22 See Diaz v. Bukey, 125 Cal. Rptr. 3d 610, 614-15 (Cal. Ct. App. 2011), petition for review granted, 257 P. 3d 1129 (2011); Rachal v. Reitz, 347 S.W.3d 305, 310 (Tex. Ct. App. 2011), petition for review filed Sept. 8, 2011. 23 See infra notes 154-77 and accompanying text. 6 cases, including In re Jacobovitz’ Will,24 Meredith’s Estate,25 and Schoneberger v. Oelze,26 that have been frequently cited for the proposition that arbitration of trust disputes is impermissible have all been abrogated legislatively or judicially, even though those subsequent decisions have not received the same kind of attention that negative precedents have. Finally, the amount of law concerning arbitration of trust dispute is not perhaps as “thin and underdeveloped” as it is said to be, since a number of relevant judicial decisions appear to have been largely overlooked by legal commentators.27 Indeed, the perceived scarcity of what might be considered “clear” authority in this field appears to have led some judges and practitioners to adopt a view that is “more conservative towards ADR than the law actually is today,” even though the lack of subject-specific precedent would normally seem to suggest “that the general principles of arbitration law . . . should apply equally to trust cases.”28 This observation leads to another reason why mandatory trust arbitration may appear to be a somewhat questionable proposition: very little analysis of the issues relating to the arbitration of internal trust disputes has been conducted by experts in arbitration.29 Instead, most of the commentary in this field has come from the trust community. While it is true that trust arbitration gives rise to a number of challenges not seen in other areas of law, many modern trusts do not reflect any “necessary element of the probate court, or 24 Compare In re Jacobovitz’ Will, 295 N.Y.S.2d 527, 529 (Sur. Ct. Nassau Co. 1968), with In re Blumenkrantz, 824 N.Y.S.2d 884, 887 (Sur. Ct. Nassau Co. 2006). 25 Compare Meredith’s Estate, 266 N.W. 351 (Mich. 1936), with In re Nestorovski Estate, 769 N.W. 2d 720, 732 (Mich. Ct. App. 2009). 26 See Schoneberger v. Oelze, 96 P.3d 1078, 1082-83 (Ariz. Ct. App. 2004), superseded by statute, Ariz. Rev. Stat. Ann. §14-10205 (2011), as recognized in Jones v. Fink, No. CA-SA 10-0262, 2011 WL 601598 (Ariz. Ct. App. Feb. 22, 2011). 27 Katzen, supra note 14, at 118-19. These newly discovered decisions are introduced and discussed throughout this Article. 28 Cohen & Staff, supra note 13, at 211. 29 For example, the leading database on international arbitration, kluwerarbitration.com, does not appear to include any articles focusing on the arbitration of trust disputes. See kluwerarbitration.com (searching for the word “trust” as a title of any piece of commentary). 7 family wealth transfer, or even of donative transfer”30 that would make the participation of commercial and arbitration lawyers in this discussion inappropriate. Indeed, the large number of commercial trusts currently in use31 and the significant degree of overlap between commercial trusts, corporations and other business associations suggests that commercial lawyers should be integrally involved in the debate about mandatory arbitration of internal trust disputes.32 This is not to say that the arbitral community has been actively excluded from the discussion in any way. Instead, the problem seems to be that experts in arbitration appear somewhat unaware of the unique issues associated with mandatory trust arbitration.33 In many ways, the arbitration community appears to be as isolated from other areas of practice as the trust community is. This type of practical and jurisprudential segregation cannot continue. Instead, it is high time that these two areas of specialization, trust law and arbitration law, came together to address questions relating to the arbitration of internal trust disputes through inclusion of an arbitral provision in the trust instrument. Indeed, as discussed below, several recent developments in 30 Christensen, supra note 1, §2. 31 See Robert Flannigan, Business Applications of the Express Trust, 36 ALBERTA L. REV. 630, 630 (1998). 32 Numerous similarities exist between commercial trusts and other types of business associations. See Christensen, supra note 1, §2; Hansmann & Mattei, supra note 1, at 434; Langbein, Contractarian, supra note 1, at 631; Paul B. Miller, The Future for Business Trusts: A Comparative Analysis of Canadian and American Uniform Legislation, 36 QUEEN’S L.J. 443, 452-55, 474-78, 482, 499 (2011). 33 Although two leading arbitral institutions – the International Chamber of Commerce (ICC) and the American Arbitration Association (AAA) – have both taken steps to address the special needs of parties involved in the arbitration of trust disputes, these efforts appear to be isolated events. See AAA Wills and Trusts Arbitration Rules, effective 1 June 2009, available at http://www.adr.org/sp.asp?id=22005; ICC Arbitration Clause for Trust Disputes, 19 ICC International Court of Arbitration Bulletin 9 (2008) [hereinafter ICC Model Trust Clause], available on http://www.iccdrl.com/CODE/LevelThree.asp?page=Commission%20Reports&tocxml=ltoc_CommReportsAll.xml &tocxsl=DoubleToc.xsl&contentxml=CR_0035.xml&contentxsl=arbSingle.xsl&L1=Commission%20Reports&L2= &Locator=9&AUTH=&nb=10. Indeed, neither the AAA Wills and Trusts Arbitration Rules nor the ICC Model Trust Clause have yet been mentioned in any judicial opinion. Furthermore, these initiatives have been largely ignored in commentary generated by the trust bar, with the AAA and ICC’s recent efforts only being discussed in passing. See Horton, supra note 2, at *7; Katzen, supra note 14, at 130-32. However, the author analyzes the AAA and ICC initiatives in detail in two forthcoming articles. See S.I. Strong, Empowering Settlors: How Proper Language Can Increase the Enforceability of a Mandatory Arbitration Provision in a Trust (forthcoming 2012) [hereinafter Strong, Enforceability]; S.I. Strong, Arbitration Arising Out of a Provision Found in a Commercial or Other Trust: Why Special Procedures Are Necessary and What Those Procedures Must Include, under consideration by ARB. INT’L (forthcoming 2012) [hereinafter Strong, Procedures]. 8