In our previous article, Managing Trust Disputes, we outlined common disputes which can arise in relation to trusts, and how to navigate such disputes. Ideally, such navigation would keep the dispute out of court and get it resolved by agreement between the parties. The Trusts Act 2019 (Act) now allows trustees to require that a dispute be resolved outside of Court.  

The Act introduced a new purpose of the legislation, being to provide out-of-court mechanisms for resolving trust disputes. These mechanisms, referred to as alternative dispute resolution (ADR), include processes like mediation and arbitration, where parties seek to resolve conflicts without going to court. ADR can be particularly useful for trustees and beneficiaries seeking to resolve issues more efficiently and privately.

Referring a dispute to mediation or arbitration

Under the Act, trustees are now empowered to refer disputes between themselves, beneficiaries, or third parties to mediation or arbitration. The trustees can either refer the dispute to ADR if the other parties agree, or if it is a dispute between trustee and beneficiary, they can ask the Court to order that the matter be referred to ADR. This is a generally welcome change, as trust disputes are often complex and sensitive, with personal and financial matters at stake. ADR provides an opportunity for parties to resolve such disputes in a private forum, with more flexibility for resolution, and often with a faster result.

An arbitration is run in a similar process to a Court hearing, with arguments presented by either side and a decision made by an independent third party.  However, the arbitration process is often faster and cheaper than the Court process. Mediation is a less adversarial environment where the parties work together, with the assistance of a mediator, to find a solution that each can agree to.

Forcing a party to mediate?

Given the provision of ADR options is now an express purpose of the Act, if asked the Court is likely to order the parties to mediate.  Some might say forcing a party to mediate may not be conducive to an ultimate agreed settlement. The common saying "You can take a horse to water, but you cannot make it drink" arises here. But, in the words of Lord Phillips, the Lord Chief Justice of England and Wales, "yes, but if you take a horse to water it usually does drink". It is difficult to deny the attraction of a quick, mediated settlement over a protracted, costly Court process.  

Mediation also provides options to resolve matters beyond what the Court can order in a legal proceeding. Through mediation, parties can address non-monetary interests and seek relief such as letters of apology, and they are not constrained by strict legal rights.

The Court's approach to ADR orders

The Court retains a discretion to decide whether to order ADR. Some relevant factors will be cost, confidentiality, speed, the suitability of the proposed mediator or arbitrator, the wishes of the settlor, the wishes of the parties, finality and enforceability. If a party is vehemently against mediation, the Court may consider this to a significant factor to refuse to make an order. On the other hand, the Court recognises the skill of mediators in assisting even reluctant parties to get to a resolution, and for this reason the Court does encourage the use of ADR.

Also important, the Court can order that the costs of ADR be paid from the trust property, perhaps a controversial point but a relief for some trustees and beneficiaries, knowing they do not have to front up with the cost themselves.  

Trustees can be bound by settlement

The Act also addresses a longstanding concern for trustees: the general duty not to bind themselves to the future exercise of discretion. Traditionally, this meant that trustees were reluctant to enter into settlement agreements because they were unable to bind their "future selves". The Act creates an exception to this rule, allowing trustees to enter settlement agreements and give undertakings during ADR. This change has opened up more possibilities for trustees to resolve disputes in a way that gives beneficiaries comfort as to the future running of the trust.

Any concern about enforceability of a mediated settlement can be allayed by the parties obtaining a Tomlin Order (a type of Court approval) or other approval from the Court.

Arbitration clause in the Trust Deed?

Trust deeds sometimes contain a clause which says if a dispute arises, either party to the dispute may refer the dispute to arbitration. If it does not contain an arbitration clause, the former position was that a trustee could not force the other party to go to arbitration. The Act now allows a trustee to refer a dispute between a trustee and a third party to arbitration when there is no arbitration clause in the trust deed, irrespective of beneficiary consent. The Act does not deal with a situation where there is an arbitration clause in the trust deed, and the trustee refers a third party dispute to arbitration absent beneficiary consent. Until the Court deals with the issue, it is unknown whether an arbitral award in this circumstance would be enforceable.

Conclusion

The Act empowers trustees and beneficiaries by promoting ADR as a practical solution to trust disputes. Mediation and arbitration offer a faster, less adversarial way to resolve issues while protecting the interests of the trust and its beneficiaries. Trustees can now enter settlements without fear of breaching their duties, and the Court has the power to ensure that ADR is used effectively, including appointing mediators and allocating costs fairly. For trustees and beneficiaries alike, ADR is becoming an essential tool in trust management.

If you are involved in a trust dispute, it is worth considering how mediation or arbitration might help you achieve a resolution that preserves relationships and protects trust assets. To discuss any of this further, reach out to our team of specialists.

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