12.01  In 2008, Guernsey adopted the Trusts (Guernsey) Law 2007, which provides in section 63(1) for a binding alternative dispute resolution (ADR) process for claims ‘founded on breach of trust’.¹ According to this statute (referred to herein as the 2007 Law or section 63), ADR includes ‘conciliation, mediation, early neutral evaluation, adjudication, expert determination and arbitration’, which is somewhat broader than some of the other provisions discussed in this book.²

12.02  Whilst this legislation is in many ways positive, it has been rarely if ever used. The reason seems to be that the legislation is still not regarded as a workable way of achieving finality due to perceived difficulties in securing proper representation of minor and unborn beneficiaries³ and achieving a binding resolution of trust (p. 290) disputes.⁴ Indeed, there appears to be a fundamental incompatibility between trusts and commercial arbitration that has not yet been overcome.⁵ This chapter considers why and what more might be done to improve on what is still surely a very promising legislative start.

12.03  Like most jurisdictions, Guernsey encourages the settlement of disputes as a matter of public policy,⁶ and the court here actively encourages resolution of disputes out of court, whether by mediation, arbitration, or otherwise. Matters involving trusts are treated no differently,⁷ and the obvious advantages of ADR, including time and cost savings, finality, confidentiality, and procedural flexibility, apply to trust disputes to the same extent as to any other type of dispute. Parties to trust arbitration may also enjoy worldwide enforcement of arbitral awards relating to trust disputes under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) to which Guernsey subscribes.⁸ Enforcement of awards under the New York Convention is thought easier than enforcement of court judgments under reciprocal enforcement legislation, as the latter frequently refers only to money judgments in language which does not easily accommodate the range of remedies available in trust disputes.

12.04  As a means of encouraging settlement of trust disputes, the 2007 Law introduced an overriding power for a trustee ‘without the sanction of the Royal Court [to] compromise or settle any action or claim brought by or against the trustee or in any way relating to the trust or the trust property’.⁹ Whilst not as wide-ranging as (p. 291) section 15(f) of the Trustee Act 1925 (which includes an express power to submit to arbitration or otherwise settle any matter relating to the trust), the 2007 Law is still a positive step, since it may minimize the likelihood of a prolonged trust dispute that can hamper or prevent the ongoing administration of the trust itself.

12.05  The 2007 Law accords other benefits. For example, many trust disputes are familial in nature and intensely personal, and are therefore prone to being pursued on issues of pure principle rather than commercial motivations. Because ADR presents parties with the opportunity to air their true feelings in a private forum, out of court resolution of trust cases may be particularly attractive.

12.06  There is another reason why settlement of trust disputes is desirable in Guernsey. Because the Island has a substantial trust industry, the Guernsey Financial Services Commission, whose job it is to supervise the conduct of those undertaking fiduciary activities by way of business,¹⁰ keeps a watchful eye over trust disputes both in and out of court. That means the commencement of proceedings or the making of a significant complaint, and any complaints which remain unresolved for three months or more, must be notified to the Commission,¹¹ as must notifications to and payments by insurers.¹² The Commission also expects periodic updates on the progress being made, including details of any attempts at settlement.¹³ The reason for this is not simply that significant and lengthy trust disputes played out in open court may damage Guernsey’s reputation as a high-quality trust jurisdiction. It is also that by their nature, such disputes tend to stretch the resources of even the larger trust companies, and the Commission is quite properly concerned to ensure that the attention of directors is not being drawn to dealing with a dispute at the expense of the business and that the amounts in issue, including any exposure to costs, are not adversely affecting the trust’s solvency or capitalization. As a result, the Commission welcomes settlement as part of its regulatory responsibility and as a means of upholding Guernsey’s reputation as an internationally reputable trust jurisdiction.

12.07  Settlement itself has commercial attractions. Like much of the 2007 Law, section 63 was aimed at encouraging businesses to come to Guernsey and thereby establishing Guernsey as a centre for international trust arbitration. Other jurisdictions have done likewise,¹⁴ but the Guernsey model is one of the more comprehensive. (p. 292) That said, some experts (most notably those comprising the English Trust Law Committee, whose review is the most comprehensive to date in England and Wales), do not much like the Guernsey statute, instead preferring legislation passed in Florida and the Bahamas.¹⁵ The approach there was to make modifications to existing arbitration legislation and then to introduce procedural rules to bind non-parties, which were compatible with Article 6(1) of the European Convention on Human Rights, which is binding on Guernsey.¹⁶ The Trust Law Committee therefore suggested a similar approach for England and Wales and made a number of recommendations for amendment of the 1996 Arbitration Act which have yet to be implemented.

12.08  A recent development provides an opportunity to revisit the Trust Law Committee’s views on section 63 and consider whether their recommendations for the United Kingdom remain the best way to achieve certainty in this area. The change in analysis is the result of a consultation paper published on 24 July 2015 by the Commerce and Employment Department of the Guernsey States on proposed new legislation intended to update Guernsey’s current arbitration laws.¹⁷ Guernsey’s existing laws are modelled on English law prior to England’s adoption of the Arbitration Act 1996. By contrast, the new draft Arbitration (Guernsey) Law 2015 is modelled on the 1996 Act, but with modifications to update it and reflect elements of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration.

12.09  By the time this chapter goes to press, the draft 2015 Law may be in force. Neither the consultation paper nor the draft legislation refer to the arbitration of trust disputes, but the opportunity now exists to consider whether amendments to the 2015 Law might improve on or even replace the model currently reflected in section 63. Aside from the familiar questions relating to representation and the contractual nature of trusts, the new legislation triggers some additional inquiries, which are anticipated in the consultation paper, at least to some extent. These include:

• •  Is it feasible, as in section 63, to create a single procedural model covering all types of AD and not simply arbitration?¹⁸

• (p. 293) •  Are rules for binding arbitration of trust disputes substantive or procedural in nature (or both) and where should such rules appear?

• •  Can and should trusts ADR apply to all types of trust disputes?

• •  Is it possible or desirable to exclude the role of the court altogether?

• •  Is it desirable to have all arbitrations dealt with under legislation?

12.10  Some of these questions have received less attention from commentators than one might expect, particularly given that such matters are at least as important as the more familiar issues such as how to bind all beneficiaries. Hopefully, what follows will provide some answers. The analysis begins with a discussion of Guernsey’s current arbitration legislation and how (if at all) the draft 2015 Law changes the existing regime.

12.11  Guernsey’s primary legislation on arbitration is the Arbitration (Guernsey) Law 1982 as amended by the Arbitration (Amendment) (Guernsey) Law 1986. The 1982 Act replaced the earlier ‘Loi donnant effet a un Protocole sur L’Arbitrage’ and the ‘Loi donnant effet a une Convention sur L’Execution des Jugements Arbitraux et portant amendememt a la Loi donnant effet a un Protocole sur l’Arbitrage du 20 juillet 1925’.¹⁹ The structure of the 1982 Law is, broadly, that the court (1) may, on application, stay proceedings brought in breach of an ‘arbitration agreement’ where there is no sufficient reason why the matter should not be referred to arbitration and where the applicant is prepared to support the arbitration²⁰ and (2) shall stay proceedings brought in breach of an operable arbitration agreement which is not a ‘domestic arbitration agreement’, as long as there is a disputed fact between the parties.²¹ The 1982 Law was modelled on England’s Arbitration Act 1950 and 1975, which have been largely replaced by the 1996 Act, and as such may be regarded as somewhat outdated.

12.12  Section 42 of the 1982 Law defines an ‘arbitration agreement’ as ‘a written agreement to submit present or future differences to arbitration, whether an arbitrator is mentioned therein or not’, which is the same as the definition which appeared in section 32 of the 1950 Act. Subject to limited exceptions, the 1982 Law also says that every arbitration agreement is treated as containing a provision to the effect that an award made by the arbitrator is ‘final and binding on the parties and the persons claiming under them respectively’.²²

(p. 294) 12.13  These provisions give rise to the familiar questions about whether a clause in a trust instrument can be an ‘arbitration agreement’, and, if so, who can rely upon or be bound by it. Similar concerns exist as to how to ensure any award is final and binding upon all interested parties, including beneficiaries who may include minors, unborn, or unascertained persons and others connected with the trust, such as protectors. This type of language can also give rise to suggestions that an arbitration clause is repugnant or contrary to public policy because it denies a beneficiary recourse to a court or that an arbitrator lacks the ability to award the full range of remedies available in a trust matter being decided by a court of equity.

12.14  Some authorities, including the Trust Law Committee, see these difficulties as serious.²³ Other commentators take a different view and offer compelling legal arguments to overcome the supposed problems.²⁴ The difficulty is that those engaging in trust arbitration are entitled to expect absolute confidence in the legitimacy of the process, which makes the current state of uncertainty untenable. Furthermore, if the arguments were upheld, the idea of a judicial process which relies in part on common law for its legitimacy is not very attractive. As a result, many commentators have suggested legislation as the inevitable starting point.

12.15  That being said, the contractual nature of arbitration suggests that there is nothing to stop people from agreeing amongst themselves to refer something to arbitration, even without legislation. Commentators have proposed ingenious wording to be inserted in trust instruments or in extraneous arbitration agreements drawn up only when the dispute occurs,²⁵ and there is no doubt such measures could work in a suitable case. But such efforts still require the cooperation of all the existing beneficiaries and a mechanism to bring in unborn or unascertained persons. It is also self-evidently not a sound basis for any trust arbitration centre to operate. And finally, it sometimes creates more problems than it solves.²⁶ As a result, this chapter assumes that Guernsey, which presumably still wishes to establish itself as a leading offshore centre for the resolution of trust disputes by ADR, should adopt legislation as the best way to solve the existing legal uncertainties.

12.16  The first issue to be considered involves the idea that an arbitration agreement must be in writing. Guernsey law says only unit trusts must be created by a written document,²⁷ so any trusts not evidenced in writing will fall immediately outside section 42 of the 1982 Law. That said, the vast majority of Guernsey trusts are nevertheless in written form,²⁸ in which case the question becomes whether or not an arbitration provision contained therein can be treated as an arbitration agreement. On the fair assumption that an ‘agreement’ requires at least two parties, unilateral written declarations of trust seem to fall outside the 1982 Law. Other written trust documents to which the settlor and the trustee(s) are both parties may qualify, provided those documents contain something that amounts to an agreement to submit present or future differences to arbitration. Many Guernsey trust instruments do contain wording of a sort that would on an ordinary construction amount to such an agreement.

12.17  But, even if some written trust instruments can be arbitration agreements, who can rely on or be bound by them? Even a bilateral settlement agreement surely binds only the actual parties to it, that is, the settlor and the trustees. Ingenious ideas are put forward to get round this problem. For instance, in section 82(2) of the 1996 Act, it is said that the extended definition of parties to the agreement referring to ‘any person claiming under or through a party to the agreement’ might ‘cover principals and beneficiaries whose agents and trustees, respectively, have entered into arbitration agreements on their behalves. It would also cover personal representatives, trustees in bankruptcy and assignees (whether legal or equitable)’.²⁹ There is surely something in this, as the claim that beneficiaries derive their rights from the (p. 296) court rather than the settlor seems to confuse the source of a right with its place of enforcement. No-one could seriously suggest that a contract party’s rights stem only from the court which is called upon to give effect to them and not from the contract itself. So why should it be any different for a trust? Just because beneficiaries are not parties to the trust deed does not mean their rights are not attributable to the person who intended and created them.

12.18  However, this observation is of no assistance in Guernsey as the 1982 Law was modelled not on the 1996 Law but on earlier English statutes with no equivalent to section 82(2). Furthermore, the views expressed earlier are not universally accepted,³⁰ and case law from other jurisdictions is split as to whether beneficiaries can rely upon an arbitration agreement within a trust instrument unless they sign the instrument,³¹ and only then if they sign as beneficiary and not as trustee.³² In practice, most beneficiaries do not, and some may not even know of the existence of the trust. As a result, rules of privity are found to prevail in circumstances where they surely ought not to apply at all.

12.19  So, neither the 1982 Law nor the common law provides much guidance on the question of who is bound by the arbitration agreement. That said, when one comes to ask who is bound by the award, the position might appear more positive, at least initially. This is because section 14 of the 1982 Law adopts the wording of section 16 of the 1950 Act, which is also largely reproduced in section 58 of the 1996 Act,³³ indicating that an arbitrator’s award is ‘final and binding on the parties and the persons claiming under them respectively’. However, no further definitions explain the words ‘persons claiming under them respectively’, so even under the 1996 Act, section 82(2) has no bearing on the question of who is bound by the award. Instead, all depends upon what is meant by the ‘parties’ and ‘claiming under’.

12.21  In the trust context, who would qualify as such persons? The relationship of trustee to beneficiary is after all, not one of agent to principal.³⁶ Where a trustee is sued for breach and the matter is arbitrated, it seems a stretch to suggest that all beneficiaries, especially if they are unborn, unascertained, or minors, could be bound to the award simply by virtue of section 16, if they were not otherwise represented at the arbitration.³⁷ And even in an action against a third party, it can only rarely be said that any beneficiaries’ claims are purely derivative of the trustees’ rights and vice versa.³⁸ Again then, section 16 of the 1950 Act and hence section 14 of the 1982 Law provide no obvious means of binding to the award all who need to be bound.

12.22  So is there another way, aside from legislation, to bind such parties to the arbitration agreement or the award? And what of arbitration agreements which fall outside the scope of the legislation altogether? Once again, ingenious solutions are put forward.

12.23  One is the equitable doctrine of ‘election’,³⁹ which states that a person who takes a benefit under an instrument must accept its terms in full.⁴⁰ Another is the idea of ‘deemed acquiescence’,⁴¹ which states that beneficiaries, as objects of the settlor’s bounty, take subject to the terms of the trust, including any provisions for the arbitration of disputes. Why, it is suggested, should an arbitration clause be any different from provisions limiting the liability of the trustees for breach of trust or permitting trustee remuneration? In those instances, surely the beneficiaries, being (p. 298) mere volunteers and objects of the settlor’s bounty, take as they find, albeit with the right to seek the court’s assistance when necessary.

12.24  The critics of these theories point out that if (and it is a big if) minors and the like can elect or acquiesce at all, the doctrines of election and deemed acquiescence form no part of the 1996 Act. But that is rather to miss the point, which is surely whether it is ever possible to force upon a person a provision which limits that person’s right to petition the court. It seems clear that an arbitration clause in a trust instrument is not an ouster of jurisdiction,⁴² especially where there is a right of appeal,⁴³ which supports the argument that beneficiaries must take what they are given.⁴⁴ There is also nothing objectionable in a binding choice of law or forum clause, so why should a binding arbitration clause be dealt with any differently?⁴⁵ However, a settlor cannot completely bar a beneficiary’s right to take matters to court,⁴⁶ as that would offend public policy.⁴⁷ In any event, in Guernsey, there is simply no law on the doctrines of election or deemed acquiescence, so their existence here is unconfirmed, and they form no firm basis upon which to establish a binding ADR regime for trusts. Nor is there any authority confirming that the Guernsey court has an inherent jurisdiction to stay proceedings brought in breach of an arbitration clause,⁴⁸ although it is likely that the Channel Tunnel case,⁴⁹ which confirmed such a jurisdiction did exist, would be followed here in practice.

12.25  As this suggests, the Guernsey legislation and common law provides little basis on which to construct any binding arbitration procedure. Unfortunately, the draft 2015 Law changes little. Broadly, the draft law applies when there is an ‘arbitration agreement’, which arises when two or more persons have agreed in writing to arbitrate any or all disputes.⁵⁰

12.26  One useful provision is section 1(2)(c), which, like section 6(2) of the 1996 Act, says that an agreement is considered to be in writing if it is ‘made by reference to a document containing a written arbitration clause, if the reference (expressly or impliedly) incorporates that clause into the agreement between the parties’. In many ways, this language appears helpful to trust disputes, since there seems nothing to prevent settlors, trustees, beneficiaries, or protectors from agreeing in clear words (p. 299) to have a dispute determined in accordance with an arbitration clause in the trust instrument.⁵¹

12.27  Although the draft law has no equivalent to section 82(2) of the 1996 Act, section 52 concerning the effect of the award uses the same terms as section 58 of the 1996 Act. Another instance of borrowing is seen in section 42 of the draft law, which resembles section 48 of the 1996 Act and which gives the arbitrator a wide range of potential remedies, including declarations, monetary orders, and orders for rectification or cancellation of documents. In addition, the parties may agree on the remedial powers exercisable by the arbitrator.⁵² Section 42 is thus very useful, since the range of remedies seems wide enough to encompass what would be needed in many trust disputes, even without the ability to agree upon additional remedies.⁵³

12.28  If one is looking at whether it is possible to introduce a comprehensive binding arbitration process for trust disputes, changes will surely be needed to both the new draft Arbitration Law and the 2007 Law. It is in this context that the question arises whether trust arbitration rules are procedural or substantive, as it would be more natural for substantive rules of trust law to appear in a piece of trust legislation. The answer is surely that they are largely substantive, as they have the capacity to vary rights and interests and to confer powers to make orders affecting the trust. It is for that reason that section 63 appears in the 2007 Law, and that in the Bahamas, for instance, the basis for trust arbitrations is found in sections 91A to 91C of the Trustee Act 1998 (Bahamas).⁵⁴ But those latter rules still link trust arbitration to the Bahamian Arbitration Act 2009, doubtless as a means of ensuring that all the advantages of the statutory procedure are acquired in a trust case.

12.29  It is suggested that the same approach should be followed in Guernsey, which would require changes to the draft 2015 Law as well as the 2007 Law. Those changes should probably focus around two main areas, which are (1) whether a clause in a trust instrument ever can be an arbitration agreement and who may be treated as party to it, and (2) who can be bound by the award.

12.31  This type of provision would also seem to address the issue of who may be bound by the award, since the problems associated with section 82(2) of the 1996 Act would be addressed by the last few words of the proposed second paragraph. The mention of persons ‘connected with the trust’ provides a sufficient basis for bringing in protectors and other persons who can be bound by wording that they accept the clause as a condition of their office.

12.32  But there remain three main difficulties with a clause of this type. The first is that it does not explain with precision what kinds of trust dispute may be referred to arbitration. The conventional view is that ‘external disputes’ with third parties cannot be subject to binding ADR, at least under the terms of the trust, so some modification or limitation is needed. The second problem is that the proposed clause is confined to arbitration and says nothing about other types of ADR. This suggests that we need to think about whether and to what extent it is both desirable and possible to extend the scope of the clause to mediation, which cannot be forced on an unwilling party. The third problem is that the proposed clause contains no mechanism for binding certain types of person, such as minor or unborn beneficiaries, who cannot be bound simply by virtue of being ‘beneficiaries’. Section 63 of the 2007 Law does contain such a mechanism, but that procedure is limited to claims founded on breach of trust, although the language does extend the mechanism to all types of ADR, including mediation. This suggests a need to think whether section 63 can be extended to other types of trust disputes.

12.33  Concerns relating to the scope of the trust disputes and how to bring in other types of ADR will be addressed later in this chapter. However, it is possible to deal with how to bind all beneficiaries relatively easily. When section 63 of the 2007 Law was introduced, there was already a practice in Guernsey whereby mediated settlements were referred to the court for approval to bind all interested parties.⁵⁵ Some think such a practice inefficient⁵⁶ and an expense which could be saved through provisions similar to section 63 or the Bahamian legislation which seeks to ‘obviate (p. 301) any need to involve the court for any purpose’.⁵⁷ It is therefore necessary to establish whether the court procedure is preferable to section 63, since section 63 would otherwise appear unnecessary.

12.34  Even now, most Guernsey trust disputes which are compromised by whatever means have the compromise approved by the court at a hearing at which all the beneficiaries are represented, with special representation for any minors, unborns, or unascertaineds. Usually the compromise is approved by the court as a ‘momentous decision’ taken by the trustee on behalf of the trust under Category 2 of the familiar Public Trustee v Cooper jurisdiction.⁵⁸ Where a trustee bringing the application is personally interested in the outcome, the court will give its approval following a surrender of the trustee’s discretion under Category 3 of Public Trustee v Cooper.⁵⁹ These cases trigger the court’s inherent supervisory jurisdiction, and it seems accepted that the court’s approval will prevent minors, unborns, and unascertaineds from taking future action.⁶⁰

12.35  A similar outcome could be achieved under the court’s inherent jurisdiction under Chapman v Chapman to approve variations of trust on behalf of those who cannot do so themselves.⁶¹ That jurisdiction (which has been acknowledged in Jersey)⁶² includes the approval of variations which are designed to resolve a genuine dispute about beneficial interests which would otherwise be triable by a court,⁶³ provided the variation is in the interests of those on whose behalf approval is sought. However, Chapman had its limitations and is therefore supplemented by the Variation of (p. 302) Trusts Act 1958 (England). The relationship between section 63 and the Guernsey equivalent of the 1958 Act is discussed further later in this chapter.⁶⁴

12.36  Perhaps the clearest instance of the Guernsey court’s role in cases of this type is the recent decision of McMahon DB in A Trust Company v F, M and Cs (together with any unborn issue).⁶⁵ In that case, the court relied upon the Public Trustee v Cooper jurisdiction to approve a mediated settlement of what it described as potentially significant litigation involving claims for breach of trust and other relief. The settlement agreement required the applicant trustee to pay into the trust a sum compromising the claim for breach against it. As the claim for breach was made against the trustee personally, the trustee could not approve the payment on behalf of the trust. The court accepted the trustee’s surrender of discretion and appointed a representative to act for the minor and unborn beneficiaries, to whose views the court paid particular attention.⁶⁶

12.37  In his decision, McMahon DB enunciated a number of key principles. For example:

• •  In cases where expedience demands, a judge may decide under section 79 of the 2007 Law to sit without Jurats present, although that will not usually be the case.⁶⁷

• •  Applications of this nature will ordinarily be heard privately in chambers and any judgment will be anonymized to respect the settlement agreement’s confidentiality, although the reasons for approval may be made public.⁶⁸

• •  Where a trustee has compromised a claim which is brought against it personally on terms that all claims are compromised, then the court’s supervisory jurisdiction is not engaged. However, the court’s approval is needed on behalf of any minors and unborns as the trustee would have a clear conflict in approving the settlement on their behalves.⁶⁹

• •  In deciding whether or not to approve the settlement, the court had to decide whether it was for the benefit of the minors and unborns. ‘Benefit’ here was given a wide meaning similar to that used in cases where the court approves variations under the Variation of Trusts Act.⁷⁰ The term therefore need not be limited to purely financial considerations⁷¹ but can be defined much more broadly.⁷² Finally, when deciding such issues, the court is entitled to take risks (p. 303) on behalf of minors and unborns similar to those which an adult might take on his or her own behalf.⁷³

• •  It may be relevant that the settlement has been concluded before an experienced mediator and with all parties represented by experienced counsel, and it may be inferred that when settling a dispute parents act in their children’s’ best interests as well as their own. Furthermore, bringing the dispute to an end can be considered a positive outcome when balanced against the alternative of sending the parties to litigation.⁷⁴

• •  The court’s approval of the settlement can bind minors and unborns.⁷⁵

12.38  The court process gives certainty that others may not, and it is clear that courts can even approve a trustee’s exercise of a power or discretion even against the wishes of one or more beneficiaries. But court proceedings are potentially expensive if there are numerous classes needing representation.

12.39  Another point to consider is that a process founded on the Public Trustee v Cooper jurisdiction would achieve nothing if an arbitral award cannot be effected other than by a variation of the trust or would require a separate court application of its own. Furthermore, in some cases, some parties may not know of the substantive proceedings until they or their representatives see the terms of settlement for which their approval is sought. That scenario, which raises the (perhaps remote) possibility that a beneficiary or class of beneficiaries could object to the settlement terms, is especially likely in cases where no ‘Beddoe relief’ has been sought by the trustee, that is, where the trustee has not applied to the court for litigation costs to be paid out of the trust property.⁷⁶ The question then becomes whether there is a better and more cost-effective means of achieving a binding settlement and whether that mechanism could form the basis for further rules in either the draft 2015 or 2007 Laws. One possible answer might be found in the English Civil Procedure Rules (CPR).

12.40  For some time now, the English court has enjoyed powers to ensure that minor, unborn, and unascertainable beneficiaries can be bound by orders and judgments in proceedings affecting a trust. These powers, which appear in the English CPR, are reflected, with some amendments, in Guernsey’s Royal Court Civil Rules 2007, as amended (Royal Court Rules). The connection between the Royal Court Rules and trust arbitration is often overlooked, although there are three good reasons why that should not be the case. First, even though rules of court are not applicable in arbitration,⁷⁷ they can (p. 304) provide a good model for ensuring finality in ADR. Secondly, and as shall be seen, the language of section 63 of the 2007 Law quite clearly borrows from certain procedural rules.⁷⁸ Thirdly, this approach has already been adopted in the Bahamas, to the extent that section 91B of the Trustee Act 1998 expressly incorporates ‘Order 15 rule 14 of the Rules of the Supreme Court in relation to proceedings before the court’.

12.41  The first rule to consider derives from CPR Part 19, rule 19.7, which states that, in cases involving a claim involving the property subject to a trust, a court may grant a representation order whereby a person is appointed to represent persons who are unborn, cannot be found or easily ascertained, or are members of a class with a similar interest in the claim. When such an order is granted, the court has the sole discretion of approving any settlement of the claim, which the court will do when that is for the benefit of all persons identified in a representation order. In those cases, the approval is binding on those persons unless the court otherwise directs. This mechanism is also found in the Bahamas, where section 91B of the Trustee Act gives the court the power to make a representation order.

12.42  The second rule to consider is CPR Part 19, rule 19.7A, which says first that a claim may be brought by or against trustees in that capacity without adding beneficiaries and second that any judgment or order given or made in the claim is binding on the beneficiaries unless the court orders otherwise in the same or other proceedings. There is no similar rule in section 91 in the Bahamas.

12.43  Rule 19.7 of the CPR is duplicated in Rule 34 of the Royal Court Rules, while rule 19.7A is reflected in Rule 35 of the Royal Court Rules. In Toor v Butterfield Trust (Guernsey) Limited, a case in which a deed of exclusion was alleged to be invalid because the protector’s consent had been procured by undue influence, McMahon DB, said that it was ‘clear that rule 35 provides a means by which beneficiaries of a trust will be bound by the outcome of litigation, even when they are not parties to it’.⁷⁹ A similar conclusion was reached at an interlocutory stage in Arun Estate Agencies Ltd v Kleinwort Benson (Guernsey) Ltd.⁸⁰ The issue there was whether a representation order should be made appointing one or more beneficiaries to represent the interests of a class on an application to set aside an English law employee benefit trust for mistake. Collas DB (as he then was) decided that such an order was inappropriate for a number of reasons, amongst which was that ‘by reason of Rule 35, the decision of the court would be binding on all the beneficiaries even if no representation order was made’.⁸¹ Although neither Toor nor Arun were breach of trust cases, the decisions nevertheless appear instructive.

12.44  There is one way in which Guernsey’s Royal Court Rules are lacking. At this point, the Royal Court Rules do not have an equivalent to CPR Part 19, rule 19.8A. This (p. 305) rule gives the court power to make judgments binding on non-parties in claims relating to property subject to a trust, among other things.

12.45  The most important aspect of Toon and Arun is that it is clear that Royal Court Rule 35 can be used to bind beneficiaries to judgments in cases where an action is brought by or against trustees. However, it is possible to extract from Toor and Arun the following additional principles:

• •  A representation order under Rule 34 is unlikely to be granted where the class of beneficiaries is too numerous to be contacted individually, and any person appointed to represent the class is unlikely to present any fresh arguments, which those who are already before the court have not already adduced.⁸²

• •  The cost of applying for a representation order is a factor to be taken into account and weighed against the benefit of the order being granted.⁸³

• •  Rule 35 is no reason to remove beneficiaries who were joined as parties to trust proceedings which in reality concern a dispute between the plaintiff and the beneficiaries, especially if that means costs might be awarded against them.⁸⁴

• •  A trustee may properly represent the beneficiaries’ interests if the trustee takes sufficient steps and receives sufficient advice in its own right.⁸⁵

12.46  Guernsey therefore has rules which could, as in the Bahamas, provide a means of binding all beneficiaries to awards made in different types of disputes. On analysis, however, the scope of the Guernsey rules is not as wide as those found in England, so to be effective, the Royal Court Rules need amendment. For example, although all beneficiaries must usually be convened to an action concerning a trust, that rule is subject to numerous exceptions, as English procedural rules and associated case law demonstrate.⁸⁶ For instance, the old English Rules of the Supreme Court (RSC), Order 85, rule 3, said that in an action for the administration of the trust, not all beneficiaries needed to be convened, although they could be if the plaintiff so wished. And under the forerunner to CPR rule 19.7A (RSC Order 15(14)(1)),⁸⁷ any judgment or order in proceedings brought by or against trustees was binding on the beneficiaries, even if they were not parties. However, that rule was expressly made without prejudice to the court’s power to order any person to be joined to the proceedings or to make a representation order under RSC Order 15(13), which is the forerunner to CPR rule 19.7.⁸⁸ An administration action generally was commenced (p. 306) by originating summons and affidavit,⁸⁹ but some cases involving a substantial dispute of fact or an allegation of fraud or breach of trust were commenced by writ to ensure the trustee could fully discover and answer the allegations made.⁹⁰ However, as was clear from RSC Order 85, rule 3(2), which referred expressly to Order 15(14), the same rules applied equally to any type of trust proceedings, be they hostile or administrative in nature.

12.47  The same cannot be said of Rules 34 and 35, which apply only to ‘actions’, which by Rule 10(1) must be commenced by tabling a ‘cause’, which for present purposes is similar to a writ. In Toor, McMahon DB said that had the case ‘been no more than a straightforward application in proceedings dealing with trust, then I accept that the more usual way of commencing them would have been by way of application, with affidavit evidence in support’.⁹¹ The means of making an application are described in sections 68 and 69 of the 2007 Law, which contain the Guernsey court’s supervisory jurisdiction over trusts. In some cases, such as for removal of a trustee, the court may require a formal pleading.⁹² In some situations, such as when the matter is hostile ‘Buckton 3’ type litigation⁹³ or a claim for breach of trust, the matter must be pleaded in full. But many cases under sections 68 or 69 still proceed by application and affidavit, and therefore exist outside Rules 34 and 35.⁹⁴

12.48  The preceding suggests that Rules 34 and 35 need changing if ADR is to extend to all trust proceedings and rules based on Rules 34 and 35 are to be used to bind all beneficiaries. However, the Guernsey legislature does not appear to have incorporated the Royal Court Rules into its ADR procedure as of yet. This issue will be discussed in more detail later in this chapter.⁹⁵

12.50  Although there is no clear interpretation of this provision, section 62 appears intended to prevent beneficiaries from suing a trustee on the same grounds as were raised in proceedings to which they were not party and reflected in any judgment to which they were not bound. This approach initially seems odd, as Rule 35 would surely avoid such an outcome in an action against a trustee. However, Rule 35 is presumably taken in Guernsey not to apply to breach of trust claims because it refers to cases where actions are brought by or against trustees ‘in that capacity’, that is, as trustees of the trust, not personally.⁹⁶ As a result, Rule 35 only applies to cases where the trustee is involved in a representative capacity.⁹⁷

12.51  Section 62 would therefore appear intended to fill the gap associated with breach of trust cases. However, that approach is not without its difficulties, since a ‘beneficiary’ is defined in the 2007 Law as ‘a person entitled to benefit under a trust or in whose favour a power to distribute trust property may be exercised’.⁹⁸ As a matter of construction, the distinction being made appears to be between entitlement as of right and as of discretion. However, the definition cannot apply to anyone who is, at the relevant time, unable to receive a benefit under the trust. As a result, unborn and unascertainable beneficiaries are not covered under section 62, nor is anyone who is initially excluded as a beneficiary, but who is later reinstated and sues for breach.⁹⁹ It is presumably with that in mind that the effect of Rule 34 is preserved in section 62(3).¹⁰⁰

12.52  Section 62 is also clearly designed to fill the gap in Guernsey procedure caused by the absence of any equivalent to CPR, Part 19, rule 19.8A.¹⁰¹ Thus, section 62 incorporates the fourteen-day notice rule reflected in CPR rule 19.8A.¹⁰² But (p. 308) notice to whom exactly? For minor beneficiaries,¹⁰³ one would assume notice to their guardian, their ‘tuteur’ (which includes a natural parent),¹⁰⁴ or their ‘curateur’, through whom they would participate in the proceedings.¹⁰⁵ But how is notice given to someone who does not yet exist? Again one is tempted to think Rule 34 should be applied here.

12.56  From this, one can extract the following:

• •  Section 63 is a binding dispute resolution process limited to actions brought against a trustee for breach of trust, although the provision was initially to cover any type of trust dispute.

• •  Section 63 applies where the action is referred to ‘ADR’ which, whilst initially limited to arbitration and mediation, now extends to arbitration, mediation, and other types of processes.

• •  Section 63 applies where the action is referred to ADR either under the terms of the trust or because the court so orders and in cases where settlement is achieved and ‘recorded in a document signed by or on behalf of all parties’.

• •  Where section 63 applies, the settlement is binding on all ‘beneficiaries’ so long as (1) the beneficiary was represented in the dispute resolution process or else was given fourteen days’ notice (or a longer period if required by the person conducting the ADR process) and a reasonable opportunity of being heard and (2) if the beneficiary was legally incapacitated, was ‘independently represented by a person appointed for the purpose by a court of law’, as certified by the person conducting the ADR.

• •  Section 63 applies to trusts subject to Guernsey law as well as trusts governed by the law of another jurisdiction.¹⁰⁷ Section 63 also applies to ADR which takes place both inside and outside of Guernsey and regardless of whether the process is subject to Guernsey rules of procedure.

12.57  Section 63 triggers other observations. For instance, the use of the term ‘beneficiaries’ cannot be comprehensive for the reasons already explained, even though the phrase is strangely (or perhaps deliberately) enlarged by the words ‘whether or not yet ascertained or in existence’.¹⁰⁸ It is also unclear why section 63 would be needed to confirm the binding nature of a settlement of a claim for breach of trust in cases involving a trust created under anything other than Guernsey law, if the proper law of that trust confirmed the binding nature of the settlement through legislation or common law of its own. However, the most interesting points under section 63 concern questions of scope.

12.58  In some respects, section 63 is quite ambitious, as it seeks to create a trust ADR process covering all types of ADR, not simply arbitration. However, the wide meaning of ADR gives rise to a number of difficulties. An arbitration, for example, would not usually lead to a written record of the settlement signed by all parties but would instead result in an award. Similarly, allowing Guernsey courts to adopt the Bahamian approach of giving the arbitrator the power to make representation (p. 311) orders will not provide a universal solution in cases involving section 63 because a mediator, for instance, could not be granted such powers. As a result, the court becomes the only entity capable of appointing independent representatives wherever there are minors and unborns, thereby necessitating a hearing even where the claim is referred to ADR is pursuant to the terms of the trust.

12.59  Another question is whether an ADR clause not limited to arbitration will be considered binding.¹⁰⁹ This is not something that can be fixed by reference to legislation elsewhere, as Guernsey has no legislation on mediation. As a result, any debate about whether a mediation provision can be considered binding must be decided through hostile litigation. This is problematic, since a court ought not lightly order the matter be referred.

12.60  Finally, a mediated settlement involving the exercise of a trust power or discretion, or the waiver of a right or a variation of the trust,¹¹⁰ only could be effected by the court. So whilst it may be possible for the parties to confer a wide range of powers on an arbitrator, particularly under section 42 of the draft 2015 Law, mediated settlements (other than those that are purely monetary in nature) will always need court approval.¹¹¹

12.61  The preceding suggests the legislature’s attempt to create a single process for all types of ADR was probably overly ambitious, although the limitation of the substantive scope of the provision to breach of trust claims is perhaps overly cautious. This latter decision may have been due to a perception that third parties could not be bound under section 63. That is clearly true, since no one can seriously suggest a third party asserting a proprietary claim to the trust property can be bound by an arbitration agreement in the trust deed.¹¹² (Of course, a trustee and third party can always include an arbitration provision in an external contract.)¹¹³ But to limit the arbitrability of trust disputes to breach of trust claims seems a mistake, as there are numerous ‘trust disputes’, friendly or hostile, that involve no one who could not be brought within the ambit of a suitable arbitration agreement within the trust instrument itself.¹¹⁴ To take an example, as section 63 stands, it would not even apply to a construction summons resolved by ADR, which seems odd.

12.62  In the final analysis, section 63 appears on balance to be a well-intended provision which is both too ambitious and yet too restrictive in its scope. The section is too ambitious because it has attempted to deal with all types of ADR, although in so doing, it has lost some of the advantages of the Bahamian model, which arise from passing to the arbitrator the powers that must under section 63 be assumed by the court. However, section 63 is also too cautious in its limitation to breach of trust claims, which appears to arise from a misunderstanding of what are true third party claims. However, what section 63 does not and probably was never intended to do is oust the court’s role. A court hearing will virtually always be necessary to confirm the compromise, because in the rare cases where there is a closed class of adult beneficiaries sui iuris, those persons may deal with their interests as they will by varying the trust.¹¹⁵ In this respect, section 63 is fundamentally different from the Bahamian model, which seeks to obviate the need for a jurisdictional hearing.

12.63  However, the virtual surety of a pre-ADR hearing may also be an advantage, as that is an ideal opportunity to have the court frame or approve the ADR process and ensure that the process will achieve the intended outcome. On the reasonable assumption that the costs of those submitting to such a procedure will be met from the trust fund to the extent they are not otherwise recoverable, the pre-ADR hearing takes on some of the character of a Beddoe hearing, but one in which not only the merits of any claim and the likely incidence of costs but also the legitimacy of the ADR process itself, is subject to scrutiny.¹¹⁶ The cost rules in trust proceedings are sufficiently flexible that beneficiaries,¹¹⁷ and occasionally even trustees,¹¹⁸ can obtain pre-emptive cost orders in breach of trust claims, and the trustee’s supposed duty of neutrality in trust proceedings is no longer the mantra it once was. As a result, the court should be able to fashion a pre-ADR section 63 hearing to deal fully with an ADR process and make sure that the procedure binds all necessary persons.

12.64  All this suggests that section 63 may yet have a valuable role to play in trust arbitration in Guernsey. Although the 2007 Law could benefit from an amendment of the type suggested earlier and a broadening of the class of disputes to which the sections apply, not much revision is needed to make the process highly advantageous if the intention is, as I believe it is, to maintain a wide definition of ADR and not to remove the court from the process altogether.