Arbitration In Trust Disputes – A Cayman Islands Perspective

The use of arbitration to resolve trust disputes is gaining momentum in offshore jurisdictions and the Cayman Islands is poised to emerge as a progressive forum for trust arbitration. Following the enactment of the Arbitration Act in 2012, Cayman has seen a growing interest in incorporating arbitration clauses into trust deeds as settlors and trustees seek more private, flexible and efficient dispute resolution mechanisms. However, there still remains considerable scepticism as to whether trust disputes are capable of resolution by arbitration, with concerns raised by jurisdictions that are yet to introduce statutory framework governing the resolution of trust disputes by arbitration as well as jurisdictions that have enacted legislation and significant complexities and limitations have arisen in the course of arbitration.

So how do trustees, settlors, protectors, beneficiaries and their respective advisers navigate this conundrum and what is ultimately the most efficient means to achieve a resolution? Key considerations include:

• whether (all or part of) a trust dispute is appropriate for arbitration (including whether an arbitral tribunal is capable of granting the entirety of the remedies sought by the parties, and the subsequent enforceability of any award);
• whether an arbitration clause should be included when establishing a new trust or amending an existing deed, be classified as 'mandatory' or otherwise, or is a freestanding arbitration agreement more appropriate; and
• whether there are complexities which may preclude or impact on the parties' abilities to achieve a full resolution by arbitration (including changes of trustee issues, the interpretation of complex trust provisions, involvement of third parties and whether all parties can be bound to an arbitral resolution, so that any award will not result in independent claims by non-signatory beneficiaries).

Benefits of Arbitration in Trust Disputes

Arbitration remains a valuable tool to resolving trust disputes for reasons which include:

1. Privacy and confidentiality

A key advantage of arbitrating trust disputes is the preservation of confidentiality and privacy. The arbitration is dealt with privately and all confidential and sensitive information attributable to a trust and its beneficiaries is kept out of the public domain. Rules imposing confidentiality are placed on any award.

2. Flexibility, speed and expertise

Undoubtedly, arbitration allows bespoke procedures to be implemented and can be significantly faster than court litigation. The process can be shaped to accommodate specific requirements of the parties and procedures can be adapted (such as whether expert evidence can be dispensed with, or the degree of party involvement limited), to a greater extent than what is commonly allowed in court proceedings. The speed of determination by arbitration often results in a more cost-effective solution.

3. Expertise

Selection of a particular arbitrator with specialist expertise may also paramount and parties have greater flexibility in determining who should determine their dispute, without being confined to a judicial bench in a jurisdiction.

4. Finality

Arbitral awards are generally final, reducing protracted appeals.

Limitations of Arbitration in Trust Disputes

Notwithstanding the clear benefits of arbitration, there are still various challenges and concerns that must be considered which include:

1. Ousting of the jurisdiction of the Court

The Courts have traditionally maintained a unique supervisory role in trust administration and there remains a perception that arbitrating trust disputes is seeking to oust the jurisdiction of the Court.

2. Binding all parties

In circumstances where arbitration requires the consent of all parties, factions of the beneficial class, particularly minors and unborns, are often not signatories to a trust deed and may not have provided consent.

3. Third party relief / enforceability

The involvement of third parties can often complicate the binding nature of arbitration clauses, and the court still may need to enforce or supplement arbitral awards where remedies affect parties not directly involved in the arbitration. Certain remedies, such as appointment or removal of trustees, Beddoe relief, momentous decisions or orders affecting trust property remain matters within the exclusive jurisdiction of the Court, with Tribunals lacking the statutory powers conferred on courts.

4. Erosion of confidentiality / privacy

Although there are clearly confidentiality and privacy advantages associated with arbitration, there can also be an erosion of confidentiality if an arbitral award is challenged. Decisions such as Grosskopf v Grosskopf [2024] EWHC 291 (Ch) in England, Ryan v Lobb [2020] NZHC 3085 in New Zealand and Volpi v Delanson Services Limited in the Bahamas are examples of unresolved issues at arbitration which resulted in the erosion of confidentiality, particularly as it concerns the enforceability of arbitral awards against non-signatory beneficiaries and whether a Tribunal has the extent of powers that are otherwise conferred on our courts.

Jurisdictions legislating for Trust Arbitration

An increasing number of jurisdictions are legislating for the use of arbitration to resolve trust disputes. Legislative reform now introduced by Malta (in 1998), Guernsey (in 2007), certain U.S. States (since 2008) and the Bahamas (in 2009) are all seeking to deal with trust disputes by way of arbitration, some more successfully than others. Bahamas in particular has sought to further amend its legislation in 2023, to further advance its pro-arbitration stance by addressing representation mechanisms for minors and unborn beneficiaries and trustee removal and appointment matters, which would otherwise fall within the remit of the Court. Considering all of these lessons learnt by other jurisdictions, it is apparent that the Cayman Islands will be well placed to introduce amendments to its legislative framework that are effective from the outset soon.

Notwithstanding any legislative reform by the Cayman Islands, arbitration clauses in trust deeds (or freestanding arbitration agreements) will still need to be carefully worded, ensuring (at a minimum) that they make express provision to cover the breadth of the dispute (i.e. state "all disputes arising out of or in connection with the trust created hereunder"), the deemed agreement language (i.e. state "Any beneficiary claiming or accepting any benefit, interest, or right under the Trust shall be bound by, and shall be deemed to have agreed to, the provisions of this arbitration clause") and address confidentiality provisions (i.e. of both proceedings and awards). Ultimately, the effectiveness of such arbitration clauses depends on a number of factors which include compliance with formal requirements of applicable arbitration law, proper incorporation of deemed acquiescence mechanisms and clear provision for the representation of parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.