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Grosskopf v Grosskopf: what next for the arbitration of trust disputes?

Insight

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Arbitration offers a number of potential advantages for settlors looking to ensure that "internal" trust litigation – that is to say litigation involving settlors, trustees, beneficiaries or others with an interest in the trust property as opposed to third parties – can be resolved effectively and in confidence. Advantages often cited in support of trust arbitration include, for example:

  • Confidentiality: in recent times, major trust litigation (such as Grand View v Wong) has often found itself in the public eye. Arbitration represents a means of resolving a trust dispute in a confidential setting;
  • Choice of forum: an arbitration agreement allows parties to choose the jurisdiction in which the dispute can be resolved (which may be different to the jurisdiction of the governing law of the trust);
  • Choice of representation: parties are free to choose their legal representatives, avoiding restrictive rights of audience rules in various offshore jurisdictions; and
  • Speed and finality: arbitration can offer a streamlined form of dispute resolution, giving the parties the ability to opt out of certain procedural steps (although the Volpi v Delanson litigation in the Bahamas shows this is far from guaranteed). The arbitral award itself is intended to be final and binding, with fewer available grounds on which to appeal.

Adoption of arbitration has been constrained, however, by a number of obstacles which have proven difficult to overcome. The recent decision of the English High Court in Grosskopf v Grosskopf ([2024] EWHC 291 (Ch)) highlights three such obstacles and provides insight into current judicial attitudes to trust arbitration.

The Grosskopf decision

Grosskopf involved a dispute between a claimant beneficiary and defendant trustees over the administration of a family trust. The claimant claimed that the defendants had committed breaches of trust and might have acted dishonestly. He sought the appointment of a judicial trustee in place of the defendants to allow the defendants’ conduct to be independently investigated.

The parties entered into an arbitration agreement for the dispute to be determined by the Beth Din of the Federation of Synagogues, but the claimant became dissatisfied with the arbitral proceedings and issued a claim in the High Court. The defendants applied to stay the claim pursuant to s.9 Arbitration Act 1996.

Opposing the stay application, the claimant argued:

  1. That the claim was incapable of arbitration because the Tribunal could not grant the relief sought (a Judicial Trustee can only be appointed by the Court) [56];
  2. That the class of beneficiaries of the Trust included minor and unborn beneficiaries who could not legally submit to arbitration and, as non-parties, were not bound by the agreement to arbitrate [58]; and
  3. That upholding the agreement to arbitrate in all cases would oust the Court’s supervisory jurisdiction over trusts [60].

Finding for the defendants on these points, Master Clark ruled:

  1. The fact an arbitrator cannot grant particular relief does not make the substance of a dispute incapable of arbitration [72]-[73]. Although there was no previous English authority on this point ([68]) the Master followed, inter alia:
    • The decision of the New South Wales Court of Appeal in Rhinehart v Welker ([2012] NSWCA 95) which expressed the view, obiter, that an agreement to submit a dispute about the removal of a trustee to arbitration was not contrary to public policy; and
    • The decision of the Privy Council in FamilyMart China Holding Co Ltd v Ting Chaun (Cayman Islands) Holding Corporation ([2023] UKPC 33) which held that the question of whether the relationship between shareholders had broken down was arbitrable even though the Tribunal had no power to make a winding up order.
  2. The claim was based on complaints about the defendants and the administration of the trust. There was no reason in principle why the questions of whether those complaints were made out and whether there were sufficient grounds for appointing a judicial trustee could not be resolved by arbitration ([61]). Trustees are frequently appointed and replaced outside court and the rights of beneficiaries are not affected by a change of trustee ([62]-[63]). The fact that other beneficiaries were not parties to the arbitration agreement did not therefore mean that the Tribunal could not decide whether the defendants should step down [66]. The Tribunal could also grant similar relief, for example by directing the defendants to step down, though an application to Court under s.41(1) Trustee Act 1925 might still be required if new trustees were not appointed ([65]).
  3. The Court’s jurisdiction would not be ousted. There is no statutory prohibition or policy rule against trust disputes being resolved out of court ([61]). The Court’s supervisory jurisdiction is not exercised at the Court’s own initiative and until it is invoked private trusts are left to operate outside court ([62]).

The Master accordingly found the arbitration agreement between the parties was operative and the claimant was not entitled to relitigate the issues before the High Court.

Analysis

So where does this decision leave arbitration of trust disputes? On the face of it, the decision appears an endorsement but caution is warranted. Grosskopf involved parties entering into an agreement to arbitrate but there will, of course, be many cases where there is no such agreement in place. It will also be appreciated that the logic of the High Court’s decision on limbs 2 and 3 above does not resolve the underlying problem (which is the same in each case) of binding non-parties to the arbitration agreement such that they cannot pursue separate legal proceedings.

It should be noted that other jurisdictions have sought to resolve this dilemma in different ways. To give a couple of examples:

  1. Trust provisions held to be binding on beneficiaries: as far back as 2013, the Supreme Court of Texas in Hal Rachal, Jr., v John W. Reitz (No. 11-0708) held that an arbitration clause in a trust instrument was binding on beneficiaries. It did so on the basis of the doctrine of “mutual assent” (a Texan cousin of the English concept of the doctrine of election), holding that a beneficiary who seeks to enforce the provisions of a trust instrument is taken to acquiesce to its other provisions, including any arbitration clause. This quasi-contractual view of trusts has not yet, however, been taken up in other common law jurisdictions and indeed it is worth noting that such a clause was held “null and void” by the High Court in New Zealand in the case of Ryan v Lobb [2020] NZHC 3085.
  2. Legislation: in the Bahamas, the Trustee Act 1998 (as amended by the Trustee (Amendment) Act 2011) provides, in ss.91A and 91B, for arbitral tribunals to exercise all the powers that would be exercised by a Court and for the tribunal to be able to appoint one or more persons to represent the interests of others, such as unborns and minors. This legislative route does appear to address the principal concerns raised in Grosskopf but is only binding in the Bahamas, leaving open the possibility of a beneficiary seeking redress in another jurisdiction. Although similar provisions do exist in other jurisdictions (eg s.63 of the Trusts (Guernsey) Law 2007) the somewhat patchy take-up of similar legislative solutions in other offshore jurisdictions arguably speaks to public policy considerations weighing against facilitation of arbitration (such as support for domestic trust industries).

In the absence of legislation, uncertainty remains as to the effectiveness of agreements to arbitrate and of unilateral steps such as the inclusion of arbitration clauses in trust instruments. This uncertainty arguably renders arbitration less attractive to trustees and potential settlors. The Grosskopf decision, however, taken together with the English Court’s general ‘pro-arbitration’ policy and legislative efforts in some offshore jurisdictions, might indicate a route forward. It will be interesting to see whether, after various false starts, a critical mass can be found to drive forward the changes necessary to make trust arbitration a more viable and attractive option.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2024

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About the authors

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Tom McPhail

Senior Associate

Tom advises individuals, businesses and institutions on commercial and trust disputes, both in England and offshore jurisdictions, including Bermuda, the BVI and Jersey.  

Tom advises individuals, businesses and institutions on commercial and trust disputes, both in England and offshore jurisdictions, including Bermuda, the BVI and Jersey.  

Email Tom +44 (0)20 3375 7605
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Oliver Blundell

Senior Associate

Oliver is a litigator who specialises in high-value and complex cases. Oliver has a particular focus on international civil fraud and asset recovery, regulatory investigations, and sanctions work. Oliver has represented clients before the City of London Police, the Financial Conduct Authority, and the Insolvency Service.

Oliver is a litigator who specialises in high-value and complex cases. Oliver has a particular focus on international civil fraud and asset recovery, regulatory investigations, and sanctions work. Oliver has represented clients before the City of London Police, the Financial Conduct Authority, and the Insolvency Service.

Email Oliver +44 (0)20 3375 7234
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Méabh Kirby

Associate

Méabh acts for a broad range of clients, including high-net worth individuals, trustees, beneficiaries, families and executors.

Méabh acts for a broad range of clients, including high-net worth individuals, trustees, beneficiaries, families and executors.

Email Méabh +44 (0)20 3375 7072
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