Trusts and Alternative Dispute Resolution – The New Regime

By Maria Cole*

The creation of a statutory alternative to resolution of trust-related disputes is historic.

As many litigators know, prior to the Trust's Act 2019 (Act), it was often necessary to file proceedings in the High Court to achieve the binding resolution of disputes between trustees and beneficiaries, despite the parties wanting to resolve their disagreements privately. At the heart of the concern was whether the resolution of a trust dispute achieved privately would be enforceable.

In what has been described as a watershed event, the Act provides for private dispute resolution as a default mechanism for the resolution of “internal matters” (between trustees and/or beneficiaries) and “external matters” (between a trustee and a third party), where legal proceedings are foreshadowed in an express trust.

Surprisingly, this new dispute resolution regime has hardly featured in the articles and blogs that have been published about the new Act. Focus has been on the mandatory and default trustee duties, the exemption and indemnity clauses for trustees, and the requirements around disclosure of information to beneficiaries. The dispute resolution procedures have often merely been acknowledged but not remarked on. So, why are the changes significant and what is the relevance of this change for litigators and their clients?

Express provision for private dispute resolution Under the Act, private dispute resolution is referred to as an “ADR process” and defined as meaning “an alternative dispute resolution process (for example, mediation or arbitration) designed to facilitate resolution of a matter”. A “matter” is defined as a legal proceeding, or a dispute that could give rise to a legal proceeding, but excludes any legal proceeding or dispute about the validity of all or part of the trust (validity remains for determination by the High Court).

The default provision1 stipulates that if there is no provision for private dispute resolution in the terms of a trust, a matter may be referred by a trustee to an ADR process with the agreement of each party to the matter. This statutory acknowledgement of the suitability of ADR to resolve trust disputes is long overdue. As the Law Commission stated in its review of the law of trusts, when considering dispute resolution outside of the courts and the benefits of ADR, when compared with a court hearing, these include lower costs, quicker resolution, achieving finality, maintaining confidentiality and privacy, and being less adversarial.2

Prior to the passing of the Act, parties were often hamstrung when they wanted to implement clauses in trust deeds which explicitly provided for private dispute resolution. As a consequence, they invariably ended up in the High Court, often with a public spotlight on their affairs.

One issue was the inability to obtain the consent of all parties to agree to engaging in the dispute resolution process or to be bound by the terms of any settlement. This was due to many beneficiaries of trusts being discretionary, unascertained, or lacking capacity, which meant their interests could not be considered or safeguarded. There was a further issue arising from the duty of trustees to actively consider the decisions they take as trustee and not fetter the future exercise of their discretions. The concern was where the terms of any settlement would require trustees to commit to a future course of action which may breach those duties. The Act expressly addresses these issues and has removed them as impediments for eligible disputes to be subject to an ADR process.

Where an internal matter is subject to an ADR process and has “unascertained” beneficiaries, for example grandchildren not yet born, or beneficiaries who lack capacity, then the court must appoint representatives for them. The Act specially provides that representatives may agree to an ADR settlement, or agree to be bound by an arbitration agreement or any arbitral award under it, on behalf of the beneficiaries they represent3 .

The duty upon trustees not to bind or commit trustees to a future exercise of discretion remains, but there is a "carve-out"4. Now, for the purposes of an ADR settlement or arbitration agreement or any arbitral award under that agreement, a trustee may give binding undertakings in relation to their future actions as a trustee.

The starting point when looking at the issue of consent is the terms of the trust deed.

For internal matters, the court has a discretionary power to enforce provisions in a trust that require a matter to go to ADR. It may also submit a matter to an ADR process, unless that would be contrary to the terms of the trust. The court can do this at the request of a trustee or a beneficiary, or on its own motion5. This means the consent of all parties is not necessary for an ADR process to occur in relation to an internal matter, if the terms of the trust provide for private dispute resolution.

For external matters, if the terms of the trust require or empower a trustee to refer a matter to an ADR process, the trust’s terms hold sway. However, if the trust deed is silent on this issue, the default provision is that a trustee may refer a matter to an ADR process if all parties consent to it6 .

The Act goes beyond family and testamentary trusts. It also governs “specified commercial trusts”, which include qualifying commercial trusts, wholesale investment trusts and security trusts.

Commercial parties who set up a trust in New Zealand will have access to the ADR provisions under the Act and the New Zealand Arbitration Act 1996. This will enable disputes to be settled confidentially and promptly. This is a significant benefit, given the commercially sensitive nature of many business endeavours. If parties agree to arbitrate in the first instance, the threat of arbitration will often drive parties to negotiate a settlement. If the arbitration process is in train and a negotiated settlement is reached, it can be recorded as an arbitral award on agreed terms.

Where commercial trusts are contracting with third parties, consideration should be given to ensuring such contracts include ADR provisions, stipulating the applicable law is that of New Zealand. This country is recognised as a safe and neutral jurisdiction and is a signatory to the New York Convention. Accordingly, any arbitral award made in New Zealand can be enforced either domestically or in most international jurisdictions.7

At a time when it can be difficult to get parties to agree to anything, having a workable dispute resolution clause in a trust deed is essential. Inadequately drafted clauses often result in parties who are already at loggerheads, trying to agree on who the arbitrator or mediator will be, or procedural rules and timetabling. Where the clauses are too detailed or prescriptive, they can often become unenforceable. Multi-tiered clauses, which require mediation or negotiation as a pre-condition to arbitration, may also be problematic for achieving a binding and enforceable result. This is because under the Arbitration Act, for there to be an arbitral award, there must be a live dispute. If settlement has been reached before the matter has been referred to arbitration, any negotiated settlement cannot be recorded as an arbitral award or enforced as one.

The Trusts Act 2019 has addressed head-on the issues which were a road-block to the private resolution of trust disputes in New Zealand. It has confirmed unequivocally that ADR is an appropriate and viable option, enabling parties to air their often deeply personal grievances through a private forum of the parties’ choice.

Reiterating the Law Commission’s views, the benefits for all parties will be lower costs, a quicker resolution, achieving finality, maintaining confidentiality and privacy, and a less adversarial process.

The New Zealand Dispute Resolution Centre (NZDRC) has drafted a model clause for internal matters which could be included by those who are looking to establish or update trust deeds:

Any dispute or difference arising in relation to the trust between a trustee and one or more beneficiaries, or a trustee and one or more other trustees, but excluding any dispute about the validity of all or part of the trust, shall be referred to and finally resolved by arbitration in accordance with the Arbitration Rules of the

The NZDRC Arbitration Rules provide a framework and detailed provisions to ensure the efficient and cost-effective resolution of trust disputes and can be amended if required.

1At section 143 of the Act. 2Law Commission|Te Aka Matua O Te Ture, Review of the Law of Trusts, August 2013, Wellington, Report 130, Chapter 14, page 197 at [14.2]. 3Section 144 of the Act.

4Section 146 of the Act. 5Section 145 of the Act. 6Section 143 of the Act. 7The United National Convention on the Recognition and Enforcement of Foreign Arbitral Award (known as the New York Convention) currently has over 167 state party signatories.