Contents

Chapter 14
Resolving disputes outside of the courts

The use of alternative dispute resolution

RECOMMENDATION

R42 The new Trusts Act should:
(1) Clarify that trustees have a power to use alternative dispute resolution (ADR) to settle an internal dispute (between trustees and beneficiaries) or an external dispute (between trustees and third parties), other than a dispute as to the validity of all or part of a trust. This should be a default power that applies unless explicitly excluded or modified by the terms of the trust.
(2) Make any provision in the terms of a trust that requires the settlement of a dispute by ADR enforceable, other than a dispute as to the validity of all or part of a trust.
(3) Give trustees a specific power to give future assurances of actions that have been agreed to as a part of an ADR settlement.
(4) Provide that trustees will not be liable to other parties for agreeing to the settlement if they acted honestly and in good faith while doing so.
(5) Provide that by virtue of this provision, an ADR settlement cannot override creditor priority rules as they affect creditors that are not party to the settlement.
(6) Provide that a beneficiary or trustee can make a request to the court that ADR be used to resolve a dispute rather than court proceedings and that the court can require ADR to be used. It should be open to the court to allow the costs of the mediation to be paid from the trust.
(7) Provide that the court can appoint representatives of unascertained and incapacitated beneficiaries, who may be other beneficiaries, who can agree to a binding ADR settlement on behalf of the unascertained and incapacitated beneficiaries, subject to the court’s approval of the settlement.

Facilitating the use of alternative dispute resolution

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.

14.3While some trust deeds, particularly modern ones, explicitly allow the use of ADR, others do not. There is nothing in the Trustee Act 1956 that makes ADR generally available,294 although it may be possible to vary the trust deed to provide this power or for parties to agree to the use of ADR. Where all parties, including beneficiaries, are capable of consenting, parties can agree to an ADR settlement. Where there are unascertained or incapacitated beneficiaries, the court can appoint a person to represent the interests of these beneficiaries. In this case, any settlement must be consented to by the court.

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.

14.9 David Williams QC submitted that we should give consideration to the work of the United Kingdom’s Trust Law Committee on the arbitration of trust disputes.295 This work has been informative and we have aligned our proposals with several of the Committee’s suggestions, including a provision giving legal validity to ADR clauses in a trust deed and a provision for a default ADR clause. The Committee’s paper advocates for a legislative approach that would bind creditors and unascertained and incapacitated beneficiaries through the use of litigation friends.296 Other submitters have made it clear that they think that such an approach should not be taken in New Zealand as the court should have oversight in order to protect potentially vulnerable parties and we agree with this view. We are not aware of a need to give arbitration greater preference than other forms of dispute resolution in relation to trusts in New Zealand, as a submitter advocated, but consider that the current law and our recommendations leave open and facilitate the use of a variety of forms of ADR in trust disputes.
14.10We have chosen not to pursue the proposal that the Public Trust should be empowered to appoint an independent mediator or arbitrator where parties to a dispute desire it.297 We no longer consider it necessary to have a body in this role. We also consider that it is not the type of role usually filled by the Public Trust.

Application to existing trustsTop

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.

294ADR may sometimes be an option under section 20(g) of the Trustee Act 1956.
295Trust Law Committee “Arbitration of Trust Disputes” (2012) 18 T&T 296.
296At 306.
297Preferred Approach Paper, above n 293, at P53(f).