The enactment of the Federal Arbitration Act in 1925, along with similar statutes in the various states, codified the rights of parties to a contract to resolve disputes that arise between them through a private proceeding presided over by an arbitrator (or panel of arbitrators) instead of resorting to the use of the court system. Proponents of the arbitral forum often claim that arbitration results in a more efficient, confidential and cost-effective resolution of a matter than litigating in court. Testators and settlors have included arbitration provisions in testamentary documents (i.e., wills and trusts that take effect at the death of the settlor) on occasion for centuries. However, no uniform body of law exists regarding the enforceability of arbitration provisions in testamentary documents.
In 2006, a task force created by the American College of Trust and Estate Counsel (“ACTEC”) authored a report addressing the enforceability of arbitration provisions in testamentary documents. The task force concluded that arbitration provisions generally should be enforceable, and drafted model legislation for states that would define the circumstances of such enforceability. While some states, including Florida and Arizona, have enacted legislation based on the task force’s recommendations, the vast majority of states have not. Instead, courts continue to address questions regarding the enforceability of arbitration provisions in wills and trust documents on a case-by-case basis.
While there is still a paucity of case law on the subject, one principle that may be emerging is that a court should not enforce an arbitration provision in a testamentary document where there is a challenge to the validity of the document itself. A recent decision issued by the Arkansas Court of Appeals highlights this trend.
In Gibbons v. Anderson, 2019 Ark. App. 193 (2019), the settlor created a trust that provided that the trust would pay certain expenses of the settlor’s grandchildren, including college tuition expenses. The settlor later executed an amendment to the trust document that instead gave the trustees discretion to determine whether to make these distributions to beneficiaries. The amendment also contained an arbitration provision that provided, in relevant part, that:
Any claim or dispute . . . concerning questions of fact or law arising out of or relating to this Trust, or its breach, or the actions or status of any Trustee or Trust beneficiary . . . or any dispute relating in any way to this Trust Agreement or its functioning and performance, will be resolved by binding arbitration as described in this paragraph, rather than in Court.
The beneficiaries filed a complaint in circuit court alleging that the amendment was invalid because the settlor lacked capacity when he executed the amendment and because the amendment was procured through the undue influence of the co-trustees. The co-trustees moved to compel arbitration. The circuit court denied the motion to compel arbitration, and the Arkansas Court of Appeals affirmed the circuit court’s decision.
The Gibbons court reached two important conclusions. First, it drew a distinction between an arbitration agreement set forth in a trust document and one included in a contract. The court stated that a “trust agreement is not a contract [because a] trust contains the testamentary desires or instructions of the settlor/grantor. There is no requirement of a meeting of the minds.” Therefore, the court concluded that it could not “carte blanche apply contract/arbitration principles, statutes, or precedent to this dispute.” While the court did not enunciate this principle specifically, the court appears to have concluded that the existence of a trust cannot create a bilateral agreement between the settlor and/or the trustee and the beneficiary to arbitrate a dispute. Rather, an arbitration provision in a trust agreement is potentially enforceable only if a beneficiary assents to arbitration in some other manner.
Other courts that have considered the question typically have found that a trustee can establish a beneficiary’s assent to an arbitration provision in a trust agreement through application of the doctrine of equitable estoppel. Specifically, these courts have found that a beneficiary who attempts to enforce rights that would not exist without the trust manifests his or her assent to the trust’s arbitration clause. See, e.g., Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013). In other words, beneficiaries cannot seek to enforce the provisions in a trust document to take their share while simultaneously claiming that they have not assented to an arbitration provision set forth in the exact same document.
In drawing its second important conclusion, however, the Gibbons court held that a beneficiary cannot assent to an arbitration provision where the beneficiary challenges the actual validity of the trust document itself. In particular, the Gibbons court held “that an arbitration provision within a trust agreement cannot compel arbitration to determine the validity of the trust.” In reaching this conclusion, the Court reviewed the model rule proposed by the ACTEC task force, the arbitration statutes enacted by Florida and Arizona, and decisions issued by the Texas Supreme Court and the California Court of Appeals. Guided by these authorities, the Gibbons court effectively concluded that when a beneficiary challenges the validity of a testamentary document itself, the doctrine of equitable estoppel does not apply to compel arbitration because the beneficiary does not seek to enforce certain terms in the document while simultaneously disavowing the arbitration provision. Rather, the beneficiary seeks to invalidate the document in its entirety. As a result, there is no basis to find that the beneficiary has assented to the arbitration provision.
While the question is far from settled, the Gibbons decision demonstrates that courts may be unwilling to enforce arbitration provisions set forth in wills and testamentary trust documents where a beneficiary challenges the validity of the document itself.