Readers of this blog know I’m a big fan of mandatory arbitration clauses in wills and trusts, which are expressly authorized by statute in Florida (see here). Mandatory arbitration is often good for everyone involved in an estate dispute. Grantors are assured that their private lives remain out of the courts and therefore free from public exposure. Fiduciaries can protect estate and trust assets, while limiting their liability, thus reducing the overall cost of administration. Beneficiaries can avoid the emotional damage and cost of protracted litigation. And the public doesn’t have to fund a legal process in which the wealthy battle over their inheritances.
Which is why an article recently published by John T. Brooks and Jena L. Levin of Foley & Lardner in Chicago caught my eye. Entitled Enforceability of Mandatory Arbitration Provisions in Trust Agreements, the article does a good job of summarizing Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013), a recent Texas Supreme Court decision upholding a mandatory arbitration clause in a trust. What’s most interesting about this case is that the court upheld the arbitration clause on testamentary-intent grounds — in the absence of a specific authorizing statute.
Even though we have a specific authorizing statute in Florida (F.S. 731.401), the Texas opinion is helpful for Florida lawyers because it points the way towards universal enforceability of arbitration clauses — even if challenged in a jurisdiction (like Texas) that has NOT adopted specifically authorizing legislation. The key here is to think “conditional” gift. By accepting a share of the estate, the beneficiaries also accept the strings attached to that gift, including the mandatory arbitration clause. Here’s an excerpt from Enforceability of Mandatory Arbitration Provisions in Trust Agreements:
In a unanimous opinion, the Texas Supreme Court reversed the appellate court and concluded that the arbitration clause was enforceable against John for two reasons. First, as the settlor, John’s father determined the conditions attached to his gifts, and the father’s intent in this case was to arbitrate any disputes over the trust. Second, the Texas Arbitration Act requires enforcement of written agreements to arbitrate. Although such an agreement requires mutual assent and a party typically manifests his assent by signing an agreement, the Rachal court recognized that assent may be proven by the beneficiary’s acceptance of the benefits of the trust and/or his suit to enforce the terms of the trust. Applying the doctrine of direct benefits estoppel, the court held that John was bound by the arbitration clause. While John could have disclaimed his interest in the trust or challenged the validity of the trust entirely, because he attempted to enforce rights that wouldn’t have existed without the trust, he was estopped from challenging the arbitration provision therein.
While there’s sudden newfound clarity in Texas with respect to this particular question, the state of the law remains wide open in the vast majority of states, as there are very few statutes governing enforcement of an arbitration clause in a trust agreement and virtually no published decisions analyzing whether such a clause is enforceable against trust beneficiaries. Depending on the language of the particular state’s Arbitration Act and on the courts in that state apply doctrines of equitable estoppel, the Rachal opinion may prove to be very instructive for courts around the country if and when they’re faced with this issue of first impression in their jurisdiction.
For those of you looking for sample arbitration clauses specifically tailored for wills and trusts, there are two good resources to start with: the sample clause published by the American Arbitration Association or “AAA” (click here) and the sample clauses provided in a 2005 ACTEC article entitled Resolving Disputes with Ease and Grace. The ACTEC article contains a sample clause incorporating the type of conditional-gift language that seems to have won the day in the Rachal case.