Contents

Chapter 13
Resolving disputes outside of the courts

The use of alternative dispute resolution

Proposal
P53 New legislation should:
(a)give trustees 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), where none is given by a trust deed;
(b)give trustees a specific power to give future assurances of action that have been agreed to as a part of an ADR settlement;
(c)provide that trustees will not be liable to other parties to an ADR settlement for agreeing to the settlement if they acted honestly and in good faith while doing so;
(d)provide that a beneficiary can make a request to the court that mediation be used to resolve a dispute rather than continuing with court proceedings and that the court can require mediation to be used. It should be open to the court to allow the costs of the mediation to be paid from the trust assets;
(e)provide that the court can appoint representatives of unascertained and incapacitated beneficiaries, who may be other beneficiaries, who can agree to an ADR settlement on behalf of the unascertained and incapacitated beneficiaries, subject to the court’s approval of the settlement; and
(f)provide that parties to a dispute can request that the Public Trust appoint a mediator or arbitrator. The Public Trust would be able to charge a fee to cover reasonable costs for carrying out this service.
Please give us your views on this proposal.

Current law

13.18ADR techniques, such as mediation, conciliation and arbitration, are used in trust disputes. Some trust deeds, particularly more modern ones, explicitly allow the use of ADR. Where a trust deed does not provide for the use of ADR, 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 a mediation settlement. Where there are some 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.

13.19There is nothing in the Trustee Act that makes ADR generally available. However, section 20(g) does provide a trustee with the power to:

compromise, compound, abandon, submit to arbitration, or otherwise settle any debt, account, claim, or thing whatever relating to the trust or to the trust property …

and for any of those purposes [to] enter into, give, execute, and do such agreements, instruments of composition or arrangement, releases, and other things as to him seem expedient, without being responsible for any loss occasioned by any act or things so done by him in good faith.

13.20This power is limited to settling a debt, account or claim, and appears generally to apply to external disputes, rather than disputes between beneficiaries and other beneficiaries or beneficiaries and trustees, but in these circumstances could cover an agreed settlement by ADR.

Issues

13.21The benefits of using ADR to resolve disputes are well accepted and well documented. When compared with a court hearing, these include cheaper costs, quicker resolution, achieving finality, maintaining confidentiality and privacy, and being less adversarial. However, ADR may not be available in some trusts because trustees do not have the appropriate powers under the trust deed. Even where ADR 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. While it is likely that the courts do have considerable inherent powers to order or approve the use of ADR and to appoint representatives on behalf of unascertained and incapacitated beneficiaries, there is certainly room for legislation to make this clearer and to further facilitate the use of ADR.

Options for reform

13.22The options considered were:
(a)retaining the status quo of the limited default power to compromise and agree under section 20(g). The legislation could make it clear that this includes ADR.
(b)introducing a statutory power for trustees to use ADR to settle an internal or external dispute, where no power is given by a trust deed. This option would make ADR available even where not expressly allowed under a trust deed, and would make it available for all types of trust dispute, rather than just those currently covered by section 20(g). Parties would need to agree to use ADR and to agree to the settlement.
(c)introducing a provision based on the Hawaiian legislation allowing a beneficiary to request that the court require mediation to be used to resolve a dispute instead of court proceedings. Unlike the Hawaiian rules which require the parties to bear the cost of the mediation it would be open to the court to allow the costs of the mediation to be paid from the trust assets.
(d)providing that the court can appoint representatives of unascertained and incapacitated beneficiaries, who may be other beneficiaries, to agree to an ADR settlement on their behalf. Any agreed settlement would then have to be approved by the court. This would explicitly state in legislation the law as it currently stands.
(e)allowing trust deeds to provide for “virtual representatives” who could be appointed to represent the interests of unascertained and incapacitated beneficiaries and agree to binding settlements on their behalf, without need for the court’s involvement, either to appoint the representatives or to approve the settlement.

Discussion

Including provisions on ADR

13.23ADR is an effective and efficient way of resolving trust disputes. While ADR does not provide the independent supervision of trusts that the courts have, in many cases an agreed settlement will be an appropriate way of resolving a dispute. The use of ADR should be encouraged and facilitated where it is the best option. A legislative provision enabling the use of ADR in all trusts would help to achieve this. Although ADR may sometimes be an option under section 20(g) of the Trustee Act and is provided for in many trust deeds, providing trustees with a legislative power to settle disputes using ADR would make it clearer that these options are available in all trusts and would be particularly useful in the case of older trust deeds which are less likely to explicitly provide for the use of ADR. The proposed provision would apply to all trusts, including existing trusts. Submitters on the Fifth Issues Paper were fairly evenly divided on this question of whether a statutory provision facilitating the use of ADR should be introduced. Taylor Grant Tesiram’s view was that legislation should facilitate but not compel the use of ADR, and that the best option was extending section 20(g) to make it clear that it extends to all disputes involving trustees. Their view is that arbitration is not suitable for beneficiary-trustee disputes and its use should be prohibited under the legislation, but that it could be suitable for trustee-third party disputes. Susan Robson considered that ADR should be available even where it is not allowed under a trust deed.

13.24The NZLS, the Trustee Corporations Association and Perpetual agreed that ADR was useful in trust disputes, but considered that no legislative reforms were necessary because it is available under modern trust deeds or by consent of the parties. We recognise that there is no evidence of a large problem with access to ADR in trust disputes at present. However, we consider that the advantages of using ADR over going to court are such that legislation should make it clear that ADR can be used in all trust disputes where it is appropriate.

13.25The use of ADR may raise a few problems for trustees, however. If an ADR settlement requires trustees to commit to a future course of action, they are effectively fettering their decision-making, which may breach the duty to be active. Reaching an agreed settlement in a dispute is often going to be the best option for trustees. Legislation can alleviate this issue by providing trustees with a specific power to give future assurances of action 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. We favour the approach of providing in statute that trustees will not be liable for agreeing to an ADR settlement if they acted honestly and in good faith.

Beneficiaries requesting ADR to be used

13.26We see merit in the option of introducing a provision which allows a beneficiary to apply to the court for an order that mediation 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 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. The Hawaiian provision, upon which the proposal is based, requires the costs of the ADR to be borne by the parties to the dispute. We agree with Greg Kelly Law and the Trustee Corporations Association that the provision should allow for the court or parties to decide that dispute resolution costs should be paid out of the trust fund.

Unascertained and incapacitated beneficiaries

13.27We have considered the option of proposing legislation that allows the appointment of virtual representatives for unascertained and incapacitated beneficiaries who can bind those beneficiaries to a settlement without the court having to approve the settlement. However, we are concerned that this would not adequately protect the interest of beneficiaries who cannot represent themselves. Although it does add to costs, the court as an independent decision-maker is in the best position to decide how the interests of unascertained and incapacitated beneficiaries can best be safeguarded.

13.28Most submitters did not support introducing virtual representatives. Taylor Grant Tesiram stated that in no other circumstances could incapacitated or unascertained beneficiaries be bound without court appointed representation. Its view is that even with court appointed representatives, mediation settlements can be relatively low cost. Greg Kelly Law and the Trustee Corporations Association were concerned that it would be difficult to ensure virtual representatives acted fairly rather than doing the bidding of the party that appointed them. They considered that the protection and supervision of the court is beneficial. KPMG considered that the idea had some merit but that it would be difficult to make agreements with virtual representatives binding and that third parties would find non-binding compromises too uncertain.

13.29We propose instead that the legislation should provide that the court can appoint representatives of unascertained and incapacitated beneficiaries. This is for the purpose of clarifying that this option is available to the court, as the court does have the power to do this currently.

Appointment of an independent mediator or arbitrator

13.30Where parties are willing to settle a dispute by ADR but want an independently appointed mediator or arbitrator, we consider that there should be a way of having an independent appointment made without having to go to the court. We propose that this could be one of the new functions for the Public Trust in its expanded role under the new legislation.