Chapter 5 - Alternative dispute resolution

Obtaining consent to using alternative dispute resolution

The nature of ADR is that parties need to agree to be bound by the resulting settlement. A difficulty with trusts is that unascertained and incapacitated beneficiaries cannot enter into an agreement. Trusts are generally not considered to be a contractual relationship,157 but a unilateral transfer of assets to a person prepared to accept the office of trustee for the benefit and on behalf of beneficiaries.158 It can be argued that living, capable beneficiaries can be considered to have agreed to provision for ADR in trust instruments. One theory is that all beneficiaries of a trust settlement claim under or through the settlor, who is a party to the agreement with the trustee for ADR, and there is a deemed acquiescence from beneficiaries to the use of ADR as a condition precedent to benefitting from the trust.159 Another view is that the equitable doctrine of election, which provides that no one shall claim both under and in opposition to the same instrument, means that beneficiaries who accept a benefit under a trust instrument must adopt the whole of it, including an ADR clause.160

When it comes to unascertained and incapacitated beneficiaries, however, these theories do not apply. Under the current law there will need to be an application to the court to have a representative appointed who can consent to be bound by an ADR settlement on their behalf. If the interests of incapacitated or unascertained beneficiaries are to be affected by a dispute settlement, these beneficiaries need to be represented during the ADR process.161


Achieving a binding settlement

Under current law, it is likely that the court will have to approve a settlement reached through ADR in order for it to be binding on unascertained and incapacitated beneficiaries. The rule in Saunders v Vautier,162 under which beneficiaries who are together absolutely entitled to trust property may bring the trust to an end, or vary the trust under the extended version of the rule, may be used to approve a settlement reached by ADR. Under section 64A of the Act, the court may approve a variation on behalf of certain classes of beneficiaries including minors, incapacitated, unborn and unascertained, provided it is not to their detriment. The court’s powers to approve variations enable the court to approve an agreement to submit a dispute to ADR and to approve any settlement agreement resulting from ADR. It may be possible for the court to use these powers to introduce mandatory ADR provisions into a trust and possible to include provision for virtual representation of incapacitated and unascertained beneficiaries.163 

Law reform

There are several approaches which could be taken to facilitate the use of ADR if it is considered that more emphasis should be placed on ADR as a method of trust dispute resolution.

An English Trust Law Committee Working Party and the Association of Contentious Trust and Probate Specialists has recently drafted a code for trust issues designed to encourage the use of mediation at any stage of a dispute, and particularly at an early stage.164 They proposed that a representative of incapacitated or unascertained beneficiaries would be appointed by the court before the commencement of legal proceedings.165 The Working Party considered that mediated agreements should continue to require the court’s approval in order to protect the beneficiaries from lack of skill and experience in their advisers, to ensure that the lawyers receive only their proper costs and fees and to enable the other parties to obtain a valid discharge from the beneficiaries’ claims.166 Though originally expected to take effect as a pre-action protocol, the code has now been issued as part of a non-binding practice guide.167

A more cost-effective and quicker approach is to empower the representative to enter into a compromise and discharge the claims of the beneficiaries he or she represents, without requiring that the court approve any such arrangements. The risk in this approach is that the incapacitated and unascertained beneficiaries may be poorly represented and the settlement may not adequately uphold their interests.

Is it possible to avoid recourse to the court? It would certainly be more cost-effective and faster if trust disputes could be resolved through ADR without the involvement of the court either to appoint representatives of incapacitated and unascertained beneficiaries or to approve the settlement. This could be achieved by a provision in the trust deed that appoints “virtual representatives” to make decisions that bind the incapacitated and unascertained beneficiaries. However, this does not appear to be that easy under current legislation. Hayton argues that a strong case can be made that arbitration does not amount to court proceedings, so that a trust deed allowing virtual representatives being involved in an arbitration does not oust the court’s jurisdiction if the arbitration occurs before legal proceedings have been commenced.168 However, a compromise agreement, such as that resulting from a mediation, either before or after legal proceedings would oust the court’s jurisdiction to approve arrangements in order for them to bind incapacitated and unascertained beneficiaries. A mediated settlement would, therefore, only be binding after the representatives had been appointed by the court and the court had approved the arrangement.169

In the United States virtual representatives can be used to reach binding settlements without court involvement. Legislation in a number of states enables virtual representation clauses in trust deeds to bind the interests of incapacitated and unascertained beneficiaries without the need for court approval.170 These provisions generally provide that beneficiaries with largely coincident economic interests to those that would be held by unascertained or incapacitated beneficiaries can act as their virtual representatives. Another way they can work is to provide for the appointment of an independent special representative for these beneficiaries, which can be a better option as it reduces the risk of a court overturning a settlement due to a conflict of interest of a beneficiary who approved it on behalf of unascertained or incapacitated beneficiaries as well as him or herself.171 In order to protect against later claims by disgruntled beneficiaries, trust deeds need to state that the representatives are not liable to the persons they represented unless they acted dishonestly.

Statutory intervention can facilitate the use of ADR in trust disputes. Hayton has said:172

Clearly, legislation is needed to deal with the difficulties, with some procedure for independent non-conflicted representatives to be appointed at an early stage to look after the interests of minor, unborn and unascertained beneficiaries and to have full authority to agree to a mediated solution of the dispute. Provision also has to be made for financing and protecting from liability whomever are appointed as such representatives, it being necessary for reasons of time and cost to oust the need for the approval of the court to any agreed solution.

In Guernsey there has been statutory intervention to ensure that where an ADR settlement is authorised by a trust deed or the court and is signed by or on behalf of all parties, “the settlement is binding on all beneficiaries of the trust, whether or not yet ascertained or in existence, and whether or not minors or persons under legal disability”.173

The majority of states in the United States give trustees the power to use mediation and arbitration to resolve trust disputes in a way that is similar to section 20 of the Act. A few states have gone further than this. Washington has adopted provisions as part of the Trust and Estate Dispute Resolution Act (TEDRA) that grants “any party the right to proceed first with mediation and then arbitration before formal judicial procedures may be utilized”.174 TEDRA contains detailed directions for arranging mediations and arbitrations. ADR decisions and settlements may be appealed to the court. TEDRA allows parties to come to an agreement that may differ completely from what the settlor intended.175 Because of this, TEDRA has been criticised in the United States as being too radical,176 although permitting parties to override a settlor’s intention is not seen as surprising or undesirable in jurisdictions like New Zealand that apply the rule in Saunders v Vautier.177

The Hawaiian legislation provides another example. In Hawaii, a beneficiary can make a request to the court that mediation be used to resolve the dispute. The court can also require mediation to be used. A criticism of Hawaii’s mediation system is that it requires that parties bear the cost of mediation, which make ADR a less attractive option178

See Law Commission Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2010) at 29−31.

Peacocke, above n 150, at 3.

Lawrence Cohen “The Arbitration of Trust Disputes” (1999) Journal of International Trust and Corporate Planning ITCP 7 at 203.

Peacocke, above n 150, at 4, citing Re Macartney [1918] 1 Ch 300 and Cooper v Cooper (1874) LR 7 JL 53 at 70.

Hayton “Problems in attaining binding determinations”, above n 144, at 2.

Saunders v Vautier (1841) Cr & Ph 240; 41 ER 482. See Law Commission Perpetuities and the Revocation and Variation of Trusts: Review of the Law of Trusts – Third Issues Paper (NZLC IP22, 2011) at 50−52.

Peacocke, above n 150, at 11.

“The ACTAPS Practice Guidance for the Resolution of Probate and Trust Disputes” < >.



Ibid, preliminary note.

Hayton “Problems in attaining binding determinations”, above n 144, at 2.

Ibid, at 4−5.

Ibid, at 5.

Ibid, at 7.

David Hayton “Major trends in the trust world: Part 2” (2007) 2 PCB 122, at 126.

Trusts (Guernsey) Law 2007 (Guernsey), s 63.

Trust and Estate Dispute Resolution Act, RCW §11.96A.270 (USA).

Peacocke, above n 150, at 14.

For instance KM Elliott “ADR Gone Wild!: One State’s Experience with a Radical Trust and Estate Dispute Resolution Act” (2007) < >.

Peacocke, above n 150, at 14.

Ibid, at 15, referring to the Supreme Court of Hawai’i, Hawai’i Probate Rules.