Building trust(s) in arbitration

Trusts are frequently used in commercial transactions, including for bond issuances and certain types of security.  They are also commonly used as a means of managing private wealth, funds and high value assets.  Yet probably (there is a dearth of cases) English law does not currently recognise the validity of a clause in a trust deed that purports to refer ‘internal’ trust disputes between trustees and beneficiaries to arbitration.  This is for two reasons. 

First, the trust is a creature of the English courts (of equity), and the courts have an inherent supervisory jurisdiction to determine the rights of beneficiaries and trustees, alongside certain statutory and non-statutory powers to administer the trust.  

Second, the trust deed itself does not typically involve an agreement between trustees and beneficiaries, which in turn means there is no “arbitration agreement” between them, as that is defined in the Arbitration Act 1996 (the 1996 Act).  As a result, the prevailing view is that the English court would not give effect to an arbitration clause in a trust deed (absent the occasional instance of an express arbitration agreement between trustees and beneficiaries).  New legislation would be required to make this possible. 

The possibility of legislating to give effect to arbitration clauses in a trust context has some importance in practice because the familiar advantages of arbitration can often be attractive for trust disputes.  Arbitration provides confidentiality, flexibility, and a neutral forum.  Most of all, it often allows more easily for cross-border enforcement. Several jurisdictions, including the DIFC, Guernsey, and U.S. States such as Florida, do allow arbitration of trust disputes. The Law Commission’s proposal indicates that the Commission is keen to sustain the “leading role” of the law of England and Wales in this area.  Arbitral institutions have also signalled their willingness to administer trust-related arbitrations: the ICC has maintained a Model Clause for Trust Disputes since 2012 (although its enforceability in England is unclear). 

At first glance, arbitration is therefore well-suited to deal with contentious issues commonly arising between trustees and beneficiaries, such as disputes about investment strategy, adherence to fiduciary duties, distributions, termination, and trustee remuneration and indemnification.  Reform may also enhance the attractiveness of London-seated arbitration to foreign investors with assets in the UK.  

However, any legislation would still face challenges.  A key conceptual question arises in the enforcement context: Article II of the New York Convention requires an agreement in writing under which the parties undertake to submit their dispute to arbitration.  It is open to question whether other jurisdictions - particularly those less familiar with trusts - would recognise and enforce an award arising from an arbitration agreement in a trust instrument, even if that award was valid under English law. 

A further issue relates to the proposal’s compatibility with Article 6(1) of the European Convention on Human Rights, which guarantees the right to a fair, public hearing.  While Article 6 rights can be waived, any waiver must be clear and unequivocal, raising difficult questions about the representation of minors and unascertained beneficiaries (who are commonly trust beneficiaries).  

The proposal is not limited to particular types of trust, but it is likely to be most useful in the private wealth and family trust context.  By contrast, we think it is unlikely that arbitration would be attractive in the context of “bond trusts” or “security trusts” in a loan financing or capital markets context, given the distinctive role that bond trustees and security trustees play in debt financing transactions (typically involving a fluctuating and innominate pool of beneficiaries).