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Arbitration, Trusts Act

Arbitration on whose terms?

Ryan v Lobb relates, amongst other things) to a question of interpretation of a clause in a trust deed of the Lothbury Trust (the Trust) relating to the resettlement of trust assets in the event of separation.  While on the face of it a provision dealing with the settlors’ separation appears prudent; as was also the case in Potter v Duffy implementing such terms is not as straight-forward as the parties to such deeds might have thought in happier times.

By way of background in Ryan v Lobb the Trust Deed included the following provisions:

“2.5 Resettlement of Trust

(3) If the Settlors separate (or their marriage is legally dissolved), either Settlor may give the Trustees written notice requiring them to resettle (on new Trusts acceptable to the Settlor who has given notice) such part of the Trust assets as the Trustees consider fair and equitable having regard to the respective contributions of the Settlors (whether by gifting, inheritance or otherwise) to the total assets of the Trust.

(4) Once resettlement is effected under clause 2.5(3), the Settlor who gave notice shall cease for the purposes of this Deed to be a Discretionary Beneficiary and one of those acting as Protector. From that time, the other Settlor alone shall exercise all powers and discretions given to the Settlors by this Deed (including any powers the Settlors may have at that time as Protector).

(5) Any dispute or failure to agree relating to the provisions of this clause 2.5 is to be treated as a dispute to which clause 3.7 applies.

3.7 Dispute Resolution

(1)        The parties to this Deed wish to avoid family disagreements and any consequential family ill will. Any dispute arising out of this Deed must therefore be referred to arbitration (in the manner specified in this clause 3.7) unless resolved by mediation or similar agreement.

(2)        This clause 3.7 applies to all disputes arising out of this Deed or relating to the Trust Fund or any part of it. This includes disagreements of any kind and also includes any dispute as to the validity, breach or termination of this Deed or as to any claim in tort, in equity or under any Act. However, each of the parties to the dispute must be one of the following: \

(a) The Trustee or one of the Trustees, or

(b) One of the Discretionary Beneficiaries, or

(c) One of the Final Beneficiaries, or

(d) One of those who have become entitled to benefit under clause 2.8 following the Distribution Date.

(3)        None of the parties to any such dispute (the “Disputing Parties”) is to commence any court proceedings relating to that dispute unless that Disputing Party has complied with this clause 3.7.

(4)        Subject to any agreement between any of the Disputing Parties for the resolution of the dispute by mediation or in any similar manner, the dispute is to be referred to arbitration by one arbitrator appointed by agreement between all the Disputing Parties. If they cannot all agree, the Protector is to appoint the arbitrator. If the office of Protector is vacant at that time, or if there is more than one person acting as Protector and they cannot all agree, then Public Trust will make this appointment. This is to be treated as an arbitration agreement under the Arbitration Act 1996.

(5)        Any of the Disputing Parties who seeks urgent interim relief may, by written notice to all other Disputing Parties, elect not to comply with the provisions of this clause 3.7, but only to the extent of the relief sought and for the period required to dispose of the application for that interim relief. Except to that extent, on the disposal of the application the provisions of this clause 3.7 are once again to take effect.”

Ms Ryan was of the view that clause 2.5(3) required an enquiry as to the legal ownership of property transferred to the Trust.  Mr Lobb’s view was that the clause meant that the trustees are only required to have regard to who (as between Ms Ryan and Mr Lobb) contributed what to each item of property that has been transferred into the Trust

Ms Ryan sought a declaration that:

“That the inquiry that the trustees of the Trust (or the arbitrator if the trustees cannot agree) must make under cl 2.5(3) of the Trust Deed is what assets were owned by and contributed to the Trust by [Ms Ryan] and [Mr Lobb] respectively.”

Mr Lobb was of the view that the High Court had no jurisdiction to determine the matter.  As set out at [45] … as the procedures required by the Trust Deed had not been followed. He referred to cl 3.7 of the Trust Deed, and contended that the trustees should first have had a series of meetings to document and discuss any dispute they might have, and try to resolve the dispute. There was no meeting of trustees, because Ms Ryan refused to participate. He contended that Ms Ryan’s refusal to participate as a trustee should not be “rewarded” by the acceptance of premature proceedings filed in this Court. Any disputed matters should have been discussed at trustees’ meetings, and then proceeded to mediation if they could not be resolved. Only after all other reasonable avenues have been exhausted should the dispute proceed to an arbitration.”

The question for the High Court was whether the terms of the Trust created a binding arbitration agreement.  The decision traverses the authorities regarding arbitration of trust disputes and warrants careful consideration given the alternative dispute resolution (ADR) provisions introduced by the Trusts Act 2019, that will have application from 30 January 2021.

The difficulties with arbitration clauses for trust matters is summarised at [107] as follows:

Broadly speaking, the problems with including arbitration clauses in trust instruments can be summarised by reference to a paper by Toby Graham’s (The Problems with Compulsory Arbitration of Trust Disputes.”, as

  • The Court’s facilitative powers depend on the existence of a contractual agreement between the parties to the dispute that it shall be referred to arbitration. Trusts are not contracts for these purposes and in any event beneficiaries are not parties to the trust instrument containing the arbitration clause
  • An arbitration clause is repugnant to the terms of the trust (a beneficiary is automatically entitled to go to Court to vindicate his interests under the trust) or contrary to public policy (as ousting the Court’s jurisdiction), and
  • The arbitrator’s powers are confined in two important ways. First, he does not have power to bind incapables, unborns and unascertaineds. Secondly, he does not enjoy the same wide powers that enable the courts to vary the terms of a trust, appoint, change trustees, enhance their powers and so forth. This means that a trip to court is going to be necessary before the arbitral award becomes final and conclusive.

Associate Judge Smith concludes at [108] the that the arbitration clause is not binding because:

“In my view, parties such as the two children of Mr Lobb and Ms Ryan cannot be regarded as having “agreed” to arbitrate, and there is thus no arbitration agreement that could bind them. To the extent cl 3.7 purports to bind all discretionary beneficiaries (other than the settlors), and others who might become beneficiaries in the future, cl 3.7 must be invalid. As Mr Graham’s article points out, beneficiaries such as the children of Mr Lobb and Ms Ryan are not parties to the arbitration provisions.”

Importantly, s 143 of the Trusts Act, which will have application “if there is no provision in the terms of a trust that requires or empowers a trustee to refer a matter to an ADR process” differentiates between external matters involving the trustees and third parties; and internal matters between the trustees and beneficiaries.   For internal matters the court must appoint representation for unascertained and incapacitated beneficiaries and the any ADR settlement must be approved by the Court. 

Given that trustees have a duty not to fetter their discretion and for the reasons set out by Toby Graham, arbitration has not historically sat well in trust disputes (whether internal or external).  However, given the high cost of trust litigation, moving forward it is to be hoped that the ADR provisions of the Trusts Act will allow time and cost effective management of those trust disputes that are amendable to arbitration.

It is noted that s 146 of the Act addresses a trustee’s duty not to fetter the trustee’s discretion by providing that:

Despite section 33 (duty not to bind or commit trustees to future exercise of discretion), a trustee may, for the purposes of an ADR settlement or arbitration agreement and any arbitral award under that agreement, give binding undertakings in relation to the trustee’s future actions as trustee.

References:

  • Ryan v Lobb [2020] NZHC 3085
  • Potter v Duffy [2015] NZHC 544
  • Trusts Act 2019
  • Toby Graham “The Problems with Compulsory Arbitration of Trust Disputes” (2014) 20 Trusts and Trustees 20
  • David Brownbill QC “Arbitration of Trust Disputes” (2014) 20 Trusts and Trustees 30 at 30-31
  • Matthew Conaglen “The Enforceability of Arbitration Clauses in Trusts” (2015) 74(3) CLJ 450
  • Tony Molloy “Trust Arbitration in New Zealand” in SL Strong (ed) Arbitration of Trust Disputes: Issues in National and International Law (1st ed, Oxford University Press, London 2016)

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