Enforceability of arbitration provision in a trust

The Texas Supreme Court held that the arbitration provision contained in a trust deed was enforceable against the trust beneficiaries. The case - Rachal v. Reitz - is available HERE

The “direct benefits estoppel” seems an interesting way to bind beneficiaries. Does anybody know how other jurisdictions have dealt with this issue?

Yes. In Florida binding arbitration clauses in wills and trusts are enforceable by statute. See here. By the way, if anyone would like to see a copy of the Texas decision, I have a link to it here.

In the Privy Council’s decision in Crociani v Crociani [2014] UKPC 40, they disagreed with an equivalent argument that an exclusive jurisdiction clause ought to be binding on beneficiaries:

33 In the context of contractual exclusive jurisdiction clauses, the approach of the court to a claim brought in another jurisdiction was authoritatively described by Lord Bingham of Cornhill in Donohue v Armco Ltd [2001] UKHL 64, [2002] 1 All ER 749 , para 24 in these terms:

“If contracting parties agree to give a particular court exclusive jurisdiction to rule on claims between those parties, and a claim falling within the scope of the agreement is made in proceedings in a forum other than that which the parties have agreed, the English court will ordinarily exercise its discretion … to secure compliance with the contractual bargain, unless the party suing in the noncontractual forum (the burden being on him) can show strong reasons for suing in that forum. I use the word ‘ordinarily’ to recognise that where an exercise of discretion is called for there can be no absolute or inflexible rule governing that exercise, and also that a party may lose his claim to equitable relief by dilatoriness or other unconscionable conduct. But the general rule is clear: where parties have bound themselves by an exclusive jurisdiction clause effect should ordinarily be given to that obligation in the absence of strong reasons for departing from it. Whether a party can show strong reasons, sufficient to displace the other party’s prima facie entitlement to enforce the contractual bargain, will depend on all the facts and circumstances of the particular case.”

34 As Lord Hobhouse of Woodborough explained in para 45 of that case, the defendant to such a claim “has a contractual right to have the contract enforced” and his “right specifically to enforce his contract can only be displaced by strong reasons being shown by the opposite party why an injunction should not be granted”. Thus, where a claim has been brought in a court in breach of a contractual exclusive jurisdiction clause, the onus is on the claimant to justify that claim continuing, and to discharge the onus, the claimant must normally establish “strong reasons” for doing so. Counsel referred to other cases where judges have expressed themselves somewhat differently, but the Board considers that the position is accurately stated by Lord Bingham and Lord Hobhouse, and that any statement which is said to involve a different approach should not be followed.

35 The question of principle which arises in this case is whether the same test applies to an exclusive jurisdiction clause in a deed of trust. Contrary to the appellants’ argument, the Board is of the opinion that it should be less difficult for a beneficiary to resist the enforcement of an exclusive jurisdiction clause in a trust deed than for a contracting party to resist the enforcement of such a clause in a contract. The Board is of the opinion that in the case of a trust deed, the weight to be given to an exclusive jurisdiction clause is less than the weight to be given to such a clause in a contract. Given that a balancing exercise is involved, this could also be expressed by saying that the strength of the case that needs to be made out to avoid the enforcement of such a clause is less great where the clause is in a trust deed.

36 In the case of a clause in a trust, the court is not faced with the argument that it should hold a contracting party to her contractual bargain. It is, of course, true that a beneficiary, who wishes to take advantage of a trust can be expected to accept that she is bound by the terms of the trust, but it is not a commitment of the same order as a contracting party being bound by the terms of a commercial contract. Where, as here (and as presumably would usually be the case), it is a beneficiary who wishes to avoid the clause and the trustees who wish to enforce it, one would normally expect the trustees to come up with a good reason for adhering to the clause, albeit that their failure to do so would not prevent them from invoking the presumption that the clause should be enforced. In the case of a trust, unlike a contract, the court has an inherent jurisdiction to supervise the administration of the trust – see eg Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709 para 51, where Lord Walker of Gestingthorpe referred to “the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts”. This is not to suggest that a court has some freewheeling unfettered discretion to do whatever seems fair when it comes to trusts. However, what is clear is that the court does have a power to supervise the administration of trusts, primarily to protect the interests of beneficiaries, which represents a clear and, for present purposes, significant distinction between trusts and contracts.

37 Accordingly, the Board considers that, while it is right to confirm that a trustee is prima facie entitled to insist on and enforce an exclusive jurisdiction clause in a trust deed, the weight to be given to the existence of the clause is less (or the strength of the arguments needed to outweigh the effect of the clause is less) than where one contracting party is seeking to enforce a contractual exclusive jurisdiction clause against another contracting party…

In Panama, as a civil law jurisdiction, the trust law clearly states : Article 41
Any kind of controversy or dispute in regard to which there is no special procedure stated in this Law shall be resolved by means of a summary judgment.
The Trust Deed may establish that any controversy arising from the Trust shall be resolved by arbitration, and also the procedure the arbitrators shall be subject to.