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Arbitration Clauses in Trusts

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Arbitration Clauses in Trusts InDret REVISTA PARA EL WWW. INDRET.COM ANÁLISIS DEL DERECHO Arbitration Clauses in Trusts The U.S. developments and a Comparative Perspective Gerardo J. Bosques-Hernández School of Law Inter American University of Puerto Rico BARCELONA, JULIO 2008 InDret 3/2008 Gerardo J. Bosques-Hernández Abstract∗ This paper aims to present a comparative law study about the enforceability of arbitration clauses in a trust, with particular emphasis on the U.S. and Latin American developments and a notion of the issue in the international context. Part 1 is an introduction of the topic. Part 2 will discuss arbitration in estate planning by providing a brief description of its advantages in comparison to litigation, by commenting on different ways to implement enforceable arbitration in estate planning devices and then by suggesting mediation as a way to commence the forthcoming process prior to binding arbitration. Part 3 will discuss the developments in the United States with binding arbitration clauses in trusts and wills, looking at case law, states’ projects and institutional initiatives. Part 4 will address the international experience, reviewing international movements toward the recognition of mandatory arbitration clauses in estate planning devices and some legislation that officially recognizes the clauses in wills and trusts. Finally, Part 5 will present a conclusion and my recommendation, regarding the need of legislation. Título: Cláusulas arbitrales en los trusts. Desarrollos en los derechos estadounidenses y una perspectiva de derecho comparado Keywords: Arbitration Clauses; Trusts Palabras clave: Cláusula de arbitraje; fideicomisos Summary 1. Introduction 2. Arbitration in Estate Planning 2.1 Arbitration Clauses 2.2. Advantages 2.3. How to Use Them 2.4. The Theories 2.5. Mediation as an Alternative 3. The Enforcement of the Clause in the U.S.A. 3.1. The Federal and State Governments Moves Toward Arbitration 3.2. The Case Law 3.3. State’s Initiatives: The Cases of Hawaii and Florida 3.4. An Institutional Approach 4. The International Experience 4.1. The International Trust 4.2. The International Experience with Trust and Arbitration 4.3. An Institutional Approach ∗ JD, Pontifical Catholic University of Puerto Rico; LLM in International & Comparative Law, Tulane University; Adjunct Professor; Inter American University of Puerto Rico, School of Law. This article was prepared while doing graduate work at Tulane University school of Law. The author wishes to express his sincere thanks and appreciation to César A. Alvarado-Torres, Taína Moscoso-Arabía, Gerardo Picó del Rosario and Professor Cynthia Ann Samuel. GJBH© email: [email protected]. 2 InDret 3/2008 Gerardo J. Bosques-Hernández 4.4. Some International Concerns 5. Conclusion: The need of legislation 6. References 3 InDret 3/2008 Gerardo J. Bosques-Hernández 1. Introduction The devastating effects that litigation causes to parties in almost any type of controversy are well known. Those effects could range from emotional distress, economic losses or deterioration of future family relations. In probate litigation all those controversies are always present and we frequently see them in the news, in our communities and even in our families. Estate planning is defined as the preparation for the distribution and management of a person’s estate at death through the use of wills, trusts, insurance policies, and other arrangements so that he and his beneficiaries will derive the maximum benefit during his lifetime and after his death.1 During this process it is common and logical for a testator or settlor to include an arbitration clause in his will or trust or even for a lawyer to suggest its use. It is a method to avoid litigation, and it could be considered a legacy to the heirs. That is precisely the purpose of the Alternative Dispute Resolution (ADR) devices: they are means to avoid trials and everything that trials involve and represent. Unfortunately, as we will discuss later in this paper, the enforcement by the United States courts of an arbitration clause provided in a trust or a will is not clear. But, besides the national response to this premise, it is important to take into careful consideration the international developments not only as a possible model for progressive legislation, but also as a possible eventual conflict with an international trust or an international succession. In the era of globalization and with the mobility of these days, it is quite common to see multijurisdictional estate planning.2 This takes me to the main point of this paper: the enforceability of an arbitration clause in a foreign trust or in a will executed perhaps in a civil law country with property, movable or immovable, situated in the United States. This paper will not address difficulties related to trust instrument clauses conferring jurisdiction to decide disputes arising out of the trusts upon the courts of a particular territory. The question is: On account of the experiences in the United States and in the international arena, can a trust instrument contain an effective arbitration clause in relation to future disputes? Moreover, in such case, would it be recommended or necessary to adopt legislation governing this particular subject? 1 Black’s Law Dictionary (8th ed. 2004), estate planning. 2 Jeffrey A. SCHOENBLUM (2006), Multistate and Multinational Estate Planning, 3a Ed., Wolters Kluwer Business; See also Jeffrey A. SCHOENBLUM (1992), “Multijurisdictional Estates and Article II of the Uniform Probate Code”, 55 Alb. L. Rev. 1291. 4 InDret 3/2008 Gerardo J. Bosques-Hernández 2. Arbitration in Estate Planning 2.1. Arbitration Clauses The use of arbitration clauses in estate planning devices is not an innovation. In the United States, George Washington’s will had an arbitration clause.3 He is frequently cited as the father of will arbitration clauses.4 Even Supreme Court Chief Justice Marshall, back in 1828, upheld a clause that empowered a majority of the executors to decide all disputes arising under a will, later called “Quasi-Arbitration Provisions.”5 In other jurisdictions these provisions are also known. Just to mention one of them, the Spanish Arbitration Act of 2003, based in the Act of 1988, which includes an interesting disposition about Testamentary Arbitration.6 Talking about its origins VALLET DE GOYTISOLO, quoting DE LA PLAZA, pointed out as the precedent of Spain’s testamentary arbitration that the German Civil Procedure Law, Z.P.D., in §1.048, required the application of arbitration rules when the arbitration was ordered in a disposition of last will.7 Big steps have been taken favoring arbitration as a public policy, but besides its long history, the use of arbitration clauses have not yet been ultimately transformed into a preferred method to avoid courts. As Arnold M. ZACK pointed out in 1956 “the historical hostility of the judiciary toward the concept of arbitration has been mirrored in the field of decedents’ estates with like results as were found in the early cases on commercial arbitration.”8 On the other hand, there are examples of arbitration clauses for trusts or wills available, and settlors and testators are using them.9 Therefore, we can anticipate that controversies are going to arise especially in the international arena. 3 The Arbitration Clause in George Washington will, established “... that all disputes (if unhappily they should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chosen by the disputants each having the choice of one, and the third by those two--which three men thus chose shall, unfettered by law or legal constructions, declare their sense of the Testator’s intention; and such decision is, to all intents and purposes, to be as binding on the parties as if it had been given in the Supreme Court of the United States.” Will of George Washington, Transcription, (http://gwpapers.virginia.edu) (last visited Oct. 6, 2007). 4 John R. PHILLIPS, et al. (2006), “Analyzing the potencial for ADR in estate Planning instrument”, 24 Alternatives to High Cost Litig. 1, 10 [hereinafter PHILLIPS (2006), Analyzing the potencial for ADR]. 5 Pray v. Belt, 26 U.S. 670, 679-80 (1828). 6 Ley 60/2003 de 23 de diciembre, de Arbitraje (BOE nº 309, de 26.12.2003). 7 VALLET DE GOYTISOLO (1989), “Comentarios al art. 1059 CC” en ALBALADEJO (Director), Comentarios al Código Civil y Compilaciones Forales, Tomo XIV Vol. 2, Edersa, Madrid, 2nd ed., p. 366; See also COGLIOLO (1940), “La clausula arbitrale nei testamenti, en scritti varii di privato”, 7th ed 1940, p. 483 quoted by ALBALADEJO (1990), “Comentarios al art. 907 CC” en ALBALADEJO (Director), Comentarios al Código Civil y Compilaciones Forales, Tomo XII, Vol. 2, 2nd ed., p. 227. 8 Arnold ZACK (1956), “Arbitration: Step-Child of the Wills and Estates”, 11 Arb .J. 179 [hereinafter ZACK (1956), Arbitration: Step-Child]. 9 See AAA Standard Arbitration Clause; See also Bruce M. STONE & Robert W. GOLDMAN (2005), “Resolving Disputes with Ease and Grace”, 31 ACTE J. 235 (Providing four sample arbitration clauses). 5 InDret 3/2008 Gerardo J. Bosques-Hernández 2.2. Advantages In comparison to litigation, arbitration in estate planning devices presents a variety of advantages. First, most of the people consider the ordinary judicial system to be extremely formal. Arbitration provides the parties a less formal atmosphere than the traditional adversarial processes. It allows the testator or the settlor to select the arbitrator
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