14.2The benefits of using ADR to resolve disputes are well accepted. When compared with a court hearing, these include lower costs, quicker resolution, achieving finality, maintaining confidentiality and privacy, and being less adversarial. ADR techniques, such as mediation, conciliation and arbitration, are used in some trust disputes. However, ADR is not available in all trusts and where it is available, the nature of trusts can prevent the use of ADR because there can be unascertained and incapacitated beneficiaries who are not able to give consent to the use of ADR or to any agreement reached under ADR.
14.4In our recommendations, we seek to clarify that trustees have the power to use ADR to settle trust disputes by including a default power to settle a dispute by ADR for both existing and new trusts.
14.5If an ADR settlement requires trustees to commit to a future course of action, they are effectively fettering their decision-making, which may breach the default duties to consider the exercise of their discretions and not to fetter the future exercise of their discretions. We propose the legislation resolve this issue by providing trustees with a specific power to give future assurances of actions that have been agreed to as a part of an ADR settlement. Trustees may also be hampered in a decision to settle a dispute using ADR by the risk of liability if other parties to the settlement are unhappy with the settlement later on. The statute should provide that trustees will not be liable for agreeing to an ADR settlement if they acted honestly and in good faith.
14.6We see merit in the option of introducing a provision which allows beneficiaries and trustees to apply to the court for an order that ADR be used to resolve a dispute rather than court proceedings. This would give beneficiaries increased power to select how disputes are settled, something that seems appropriate given that they are likely to be most affected by the outcome of a dispute. The court will exercise judgement as to whether ADR is appropriate in the circumstances of the dispute.
14.7The legislation should provide that the court can appoint representatives of unascertained and incapacitated beneficiaries who can agree to a settlement on behalf of these beneficiaries, although any settlement involving unascertained and incapacitated beneficiaries would continue to require the approval of the court. This recommendation is for the purpose of clarifying that this option is available to the court, as the court currently has this power. We did consider whether “virtual representatives” of unascertained and incapacitated beneficiaries should be able to bind those beneficiaries to a settlement, but we do not think that this adequately protects the interests of beneficiaries who cannot represent themselves.
14.8No submitter objected to the ADR proposals. Submitters to the issues papers have made it clear that they are generally satisfied with the state of the law in this area of trusts and do not want legislative change to be substantial. The comment was made that ADR should be voluntary for the parties. Inland Revenue requested that the recommendation make it clear that a purportedly binding settlement cannot override existing creditor priority rules so as to defeat creditors that are not party to the settlement. We understand that the Commissioner of Inland Revenue wishes to be protected in situations where a settlement between a trustee and third party creditor is to the detriment of other creditors, and considers that the legislation should protect against this. We do not consider it necessary for this to be stated in legislation.
14.11The new provisions recommended in this chapter should apply to all trusts from the date of enactment of the new Act. These provisions are helpful for the management of trusts, particularly for those that do not have terms of trust regarding the use of ADR, and existing trusts should be able to benefit from them.