Arbitration in Trusts

Because arbitration is often faster, cheaper, private and more convenient than litigating disputes in court, mandatory arbitration clauses have long been a mainstay in a variety of commercial contracts.  Additionally, the parties’ ability to choose an arbitrator with expertise in the particular area of law at issue often adds significant benefit. In the context of commercial contracts, however, there have been concerns over potential bias in favor of “repeat customers”—that arbitrators might find for the company perceived as likely to arbitrate more cases down the road or regularly come out against individual consumers who are unlikely to litigate additional arbitration cases in the future.  Despite these concerns, the widespread use of arbitration provisions in commercial contracts at this point is firmly established. 

Like commercial litigation generally, the unfortunate reality is that despite a grantor’s best intentions, litigation arising between beneficiaries and trustees is often long, drawn out, and extremely expensive.  In fact, such litigation is often intertwined with highly emotional inter-family disputes, making settlement and early resolution less likely.  And although the same time, expense, convenience, privacy and need for decision makers with specialized knowledge is just as great in the world of trust litigation, mandatory arbitration clauses have never gained the same popularity in trust agreements as in commercial contracts.  This is somewhat surprising, especially given that the concerns over potential bias in favor of regular customers wouldn’t arise nearly as often in the trust litigation context.

In recent years, however, arbitration clauses have finally started making their way into trust agreements.  The big question that remains unanswered, however, is whether they’ll be enforced.  In fact, there are very few precedential decisions or statutory provisions on the subject out of any jurisdiction nationwide.

Additionally, practitioners, litigants, judges and arbitrators will need to consider the many procedural actions that arise in trust litigation that are rarely, if ever, employed in traditional commercial litigation and decide whether those actions are capable of resolution through arbitration.  For example, a trustee or beneficiary may petition the court for instructions construing the effect of certain trust provisions or may ask the court to construe the rights of parties who are unknown at the time of the proceeding, such as yet unborn beneficiaries.  It’s unclear whether an arbitrator could decide these types of proceedings even if mandatory arbitration clauses in trust agreements are deemed enforceable.