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III Trust Arbitration as a Matter of National Law, 16 Trust Arbitration in New Zealand

Tony Molloy

From: Arbitration of Trust Disputes: Issues in National and International Law

Edited By: SI Strong, Tony Molloy (Consultant Editor)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Arbitrability — Arbitral agreements — Arbitral tribunals — Arbitrators

(p. 364) 16  Trust Arbitration in New Zealand

I.  Introduction

16.01  Components of the web of legislation pertaining to trusts in New Zealand include the Trustee Act 1956,1 the Family Proceedings Act 1980, the Charities Act 2005, Part 1 of the Superannuation Schemes Act 1989, Part 12 of the Maori Land Act 1993, and Part 3 of the Energy Companies Act 1992. The first two are enactments capable of application to all express trusts. Each of the last four applies to public trusts or to a special segment of them. There is also supplementary legislation in the form of the Trustee Companies Act 1967 and the Trustee Companies Management Act 1975.

16.02  A substantial body of New Zealand case law supplements these statutes. That body is informed by case law from Australia, the United Kingdom, Canada, and the United States.

(p. 365) 16.03  The legal and accounting professions grievously oversell trusts. New Zealand has fewer than 4.7 million inhabitants. The New Zealand Law Commission found that ‘in 2010 there was at least one trust for every 17 people in New Zealand’.2 By 2013, the Law Commission estimated that there were ‘between 300,000 and 500,000’ trusts in New Zealand.3

16.04  Nearly five decades of experience suggests that many of these trusts own little other than the equity in a modest and mortgaged house; that such trusts in this category that are professionally managed are a useless drain on limited family resources; and that the trustees of a large percentage of the remaining trusts in this category are lamentably ignorant of the obligations of trusteeship.4 On the latter ground alone, internal trust disputes are as inevitable as they are frequent.5

16.05  The New Zealand Law Commission perceives little scope for arbitration of trust disputes, stating:

Arbitration is a more formal process [than mediation]. It is regulated by the Arbitration Act 1996. Arbitrators make a final and binding decision, which is capable of enforcement. Arbitrations have over time been used more frequently to deal with complex commercial disputes. This has resulted in a degree of procedural complexity. The Arbitration Act 1996 appears to be targeted at relatively high cost commercial dispute resolution. This means that it is of limited use in most disputes relating to trusts.6

This appears to be the common view, and it is surely accurate in respect of the small trusts just mentioned, the main beneficiaries of which are the professional advisers who failed to warn their clients that a trust was not really suitable for the circumstances in question.

(p. 366) 16.06  On the other hand, when it is considered that as much as 55 per cent of New Zealanders’ aggregate net worth is held by, or for, the top 10 per cent of the population,7 there are also many high-end trusts that fully earn their expensive keep. Confidential arbitration could be an excellent option for the trust disputes of this often intensely publicity-shy group.

II.  Prospects for Change

16.07  If the Law Commission’s view of trust arbitration is intended to apply to these high-end trusts, then it is a view that will have to change for reasons similar to those that drove the mercantile community of the City of London to create a facility for the arbitration of commercial disputes. Indeed, when Britain was desperately trying to trade its way out of the ‘long depression’ that followed the collapse of the Vienna Stock Exchange in 1873, there was an urgent need for a climate favourable to commerce. That was not going to happen without a bench of specialist judges, of acknowledged capacity, being available to resolve mercantile disputes quickly and expertly.

16.08  The judges of the Queen’s Bench Division—the general trial division of England’s High Court of Justice—wanted to help. They voted twenty to five in favour of organizing their division so that commercial cases would be allocated to judges acknowledged to have the necessary expertise.

16.09  The one obstacle was the Chief Justice, Lord Coleridge. In his view, all judges could do everything and the court was to operate on the basis that the next available judge would take the next case. This was about as acceptable to the merchants trading in and with England as a hospital system that required a gynaecologist to do brain surgery if s/he happened to be the next available surgeon. Indeed, one member of the bench wrote anonymously to The Times, pointing out that the Chief Justice was leaving merchants no option but to forsake the court and take on ‘the hazardous and mysterious chances of arbitration’.8

16.10  The campaign for a separate commercial list to be tried by judges with specific experience of commercial cases was given considerable impetus by the notorious (p. 367) case of Rose v Bank of Australasia.9 The case concerned a claim by shipowners for a ‘general average’ contribution from cargo owners (ie proportional sharing of certain losses experienced while a ship is at sea). The matter came before Lawrance J, who had no experience of commercial law and who, in the words of MacKinnon LJ, ‘was a very stupid man, a very ill-equipped lawyer and a bad judge [who] knew as much about the principles of general average as a Hindoo about figure-skating’.10

16.11  The trial went on for twenty-two days in May 1891. The judge reserved judgment and only gave it, after much prompting, some nine months later. It was clear he had understood nothing of the issues involved.11

16.12  That was the last straw. Fed up with the cost, chaos, and delay that such ill-matched judges were inflicting on commerce and the economy, the City did not even wait for the case to go to appeal. It created the London Court of Arbitration.

III.  The Obstacle to Change

16.13  As it was in Victorian England, so it remains in contemporary New Zealand. The public view of leaders of the Bar as well as the private view of many judges is that we continue to sacrifice justice and the good of the economy in order to maintain the fantasy12 that every judge is fit to try every kind of case. If it were possible for any New Zealand judge to have exhibited competence across all fields of the law, that judge would have been Sir Robin Cooke, later Lord Cooke, yet this giant of the common law had blind spots in equity and fiduciary law—particularly, perhaps, in cases argued by non-specialist counsel. Indeed, the preface to the distinguished Australian textbook, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies included this passage:

In New Zealand the prospect of any principled development of equitable principle seems remote short of a revolution on the Court of Appeal. The blame is largely attributable to Lord Cooke’s misguided endeavours. That one man could, in a few years, cause such destruction exposes the fragility of contemporary legal systems (p. 368) and the need for vigilant exposure and rooting out of error. A sounder approach is indicated by Deane J:

Long before Lord [sic] Seldon’s [sic] anachronism [sic] identifying the Chancellor’s foot as the measure of Chancery relief, undefined notions of ‘justice’ and what was ‘fair’ had given way in the law of equity to the rule of ordered principle which is of the essence of any coherent system of rational law: Muschinski v Dodds (1985) 160 CLR 583 at 616.

Leaving aside the jurisdictions [ie, such as New Zealand] which must be counted for the present as lost ….13

The learned authors go on to catalogue numerous New Zealand cases affected by Sir Robin’s misconceptions of equity.14

16.14  Criticism of New Zealand law has come from other quarters as well. Indeed, many of New Zealand’s equity and trust decisions have been wondered at15 and attacked16 by leading trust academics in Canada and Australia. More recently, in his much-cited treatise on Fiduciary Loyalty, Matthew Conaglen, then Reader in Equity at Cambridge University Law School and now Professor of Equity and Trusts at Sydney University Law School, described New Zealand’s case law on fiduciary matters, under the influence of Lord Cooke, as ‘without clear guiding principles’.17

16.15  If, of all judges, this legendary master of the common law, constitutional law, and administrative law could not master equity and trusts, then the assumption of the New Zealand High Court that every judge can do every type of case competently is misconceived. Indeed, it is madness to hope that any other—let alone many other, let alone all other—New Zealand judges will be able to do better than Lord Cooke. In equity, in particular, this is a grave situation. Section 99 of the Judicature Act 1908 enacts the principle established since 1615 that if, in any matter before the court, there is a conflict between the rules of the common law and of equity, the (p. 369) latter shall prevail.18 If judges do not comprehend the principles of equity, how can they apply that critical provision?

16.16  If the bulk of the judges are no better at equity and trust law than Lord Cooke (and few of them would claim to be), the problem of their non-specialization is steadily compounding. When, as in England or in New South Wales, judges specialize, they lift the skills of the barristers who practice in their court, just as specialist barristers hone the skills of the judges before whom they appear. The specialist bar and the specialist bench are constantly pooling, testing, and extending their skill and knowledge to the great advantage of the only people that matter, that is, the litigants.

16.17  Proper allocation of judicial work is critical to the fair and efficient administration of justice. New Zealand litigants who hope that the costs they are paying are funding competent adjudication in equity and trust matters can only wonder at the worth of a High Court that can place them in the hands of judges not acknowledged to be competent in the areas of law central to the case at hand.

IV.  A System that is Inherently Unfair to New Zealand Litigants

16.18  The current system results in a paradox: although it is professional misconduct for a barrister to undertake a case in an area of law in which he or she is not competent, every barrister who becomes a judge in New Zealand is expected to engage in such misconduct every day he or she sits on the bench.19 Journalists writing in the business press do their best to expose the damage this regime inflicts. They are ignored, just as the Queen’s Bench Division judges of 125 years ago were ignored. Indeed, nothing has happened in the seven years since a leading forensic journalist reported excoriating comments from some of New Zealand’s recently resigned judges, including a statement that the ‘bulk of society … will have little, if any, respect for the legal system as a whole. Nor should we expect them to’.20 Similar sentiments (p. 370) were expressed by the senior New Zealand Bar, as reflected by statements that commercial litigants are being ‘shafted’ by the official system.21

16.19  These concerns are identical to those expressed in the late nineteenth century by the English Bar and, with the almost sole exception of the Chief Justice, its judiciary. In New Zealand now, as in England then, commercial litigants are:

[o]pting for arbitration rather than litigation [, which] allows them to resolve disputes in secret, more cheaply and with less delay. [Litigants] can choose their adjudicator, rather than accepting a court-assigned judge who may or may not have a commercial bone in their body—and control their own ‘court-room’ procedures.

Faced with ever-dwindling civil litigation lists in the High Court, judges and senior barristers have finally woken to the problem. The court has lost its central function of resolving commercial disputes. And resolving them by arbitration and mediation means confidential outcomes, with no body of legal precedent being built up.

Barristers such as Robert Fisher, QC, a former High Court judge, say they believe it is important for the rule of law that courts resume their role at the heart of dispute resolution.

David Williams QC, the only High Court judge to quit the bench and return to private practice, says the commercial community is bailing out of civil litigation for two main reasons: ‘continuing, long-running unhappiness’ with the chief justice’s refusal to let judges specialise in either commercial or criminal matters, and the ‘vast amounts of money being spent on needless discovery of documents’.

Overseas, major commercial centres such as Sydney, London and Singapore have opted for specialisation, ‘so the quality of judging in commercial matters is higher instead of the lottery you get here, where you can end up with a judge who has never done any commercial work’, he says.

‘The general feeling is one of resigned and disappointed acceptance that nothing will change until the chief justice changes. People will continue to move to arbitration and mediation because of that fact.’22

When stubbornly myopic chief justices ignore the lessons taught by the disasters of history, including those such as Lawrance J (and his New Zealand counterparts) (p. 371) sitting in trials on which they are ill equipped to adjudicate, the people for whom the courts exist are doomed to be abused by them.

V.  The Potential for Trust Arbitration in New Zealand

16.20  This background makes it all the more disappointing that the New Zealand Law Commission sees little scope for arbitration of trust disputes under the law as it stands.23 Given the mess that the doggedly generalist New Zealand High Court is widely thought to have been making of equity and trust cases—and therefore of litigants’ lives—trustees and beneficiaries are likely to be interested in any viable alternative to subjection to the ‘tyranny of the List’ in the High Court.

16.21  So is arbitration a viable alternative? If so, to what extent?

Limited Express Right to ‘Review’ by an Arbitrator

16.22  To begin with, there are certain New Zealand trusts the beneficiaries of which have a right to ‘review’, by an arbitrator, of inadequate trustee responses to requests for information. However, this right is confined to beneficiaries of the thirty-odd ‘community’ and ‘customer’ trusts created under Part 3 of the Energy Companies Act 1992, which reformed local government electricity suppliers in New Zealand in the 1990s. Clifford J expertly describes these reforms in Bulley v Attorney-General,24 as does the judgment of the Court of Appeal upholding his Honour’s decision.25

16.23  The Minister of Energy and Energy Trusts of New Zealand Inc have created guidelines pursuant to which allegedly information-starved ‘beneficiaries’ of these trusts can appeal to ‘reviewers appointed by the Arbitrators and Mediators Institute of New Zealand Inc. Even if conducted by an arbitrator, however, this is not much more than a political sop. In any event, this process covers only around 0.01 per cent of the trusts thought to exist in New Zealand. Unsurprisingly, it appears to excite negligible interest, although advocates of trust arbitration could point to the mechanism as an initial stepping stone toward more wide-ranging measures.

No Principle Militating against Arbitrability of Trust Issues that Each Beneficiary and Each Trustee Has Agreed to Arbitrate

16.24  Of considerable general interest, however, is a decision of the Court of Appeal of New South Wales (Australia), which is the leading equity jurisdiction that is (p. 372) closest to New Zealand. In a trustee removal case under a statute not materially differing from the New Zealand Trustee Act 1956, that court, by a two to one majority, upheld the view of the trial judge in the Equity Division of the Supreme Court of New South Wales that:

a proceeding in the court’s equitable or statutory jurisdiction for removal of a trustee was susceptible to ‘private justice’ by reference to arbitration. The primary judge held that there was no reason in his view why such a dispute could not be referred to arbitration and, ‘a fortiori, mediation’. He held that this would not exclude the jurisdiction of the court and that if anything public policy encourages the private resolution of disputes concerning family matters.26

16.25  In the Court of Appeal, Bathurst CJ stated:

173  It … falls to be determined whether a claim to remove a trustee is capable of settlement by arbitration. None of the parties were able to point to any authority on the question. It is correct, as the respondents submitted, that a trust is a creature of equity and the courts maintain an inherent supervisory jurisdiction over the administration of trusts: McLean v Burns Philp Trustee Co Limited (1985) 2 NSWLR 623 at 633, 637. This Court in Rinehart v Welker [2011] NSWCA 403 at [52] expressed the view that the proper conduct of trustees was a matter which required close public scrutiny. Further, the approach of a court in evaluating all relevant circumstances in considering whether it is in the interests of the beneficiaries to remove a trustee (Miller v Cameron supra) is a matter which tends against such disputes being arbitrable.

175  Notwithstanding these matters, it is my opinion that at least in circumstances where the trustee and each beneficiary have expressly agreed to their disputes being referred to arbitration, a court should give effect to that agreement. The supervisory jurisdiction of the court is not ousted. It continues to have the supervisory role conferred upon it by the relevant legislation, in this case the Commercial Arbitration Act. There may be powerful commercial or domestic reasons for parties to have disputes between a trustee and beneficiary settled privately. It does not seem to me that the matters to which I have referred above should preclude a court from giving effect to such an agreement provided the jurisdiction of the court is not ousted entirely.

176  The fact that an arbitrator may not have power to remove a trustee or make a vesting order does not alter this position. An arbitrator could give effect to a claim for removal by ordering the trustee to resign, to appoint a new trustee and to convey the trust property to that person.27 Such an award could be enforced as a judgment under, in this case, the Commercial Arbitration Act s 33.

177  In these circumstances it does not seem to me to be contrary to public policy28 for the beneficiaries under the Trust and the trustee to agree to resolve their disputes by arbitration, provided the supervisory jurisdiction of the court contained (p. 373) in the relevant legislation is maintained. It is not necessary in the present case to deal with a more difficult question which would arise if the arbitration clause was contained in the Trust Deed and purported to bind all persons beneficially entitled under the Trust, including infants and unborn beneficiaries.

178  … The fact that it is not a commercial dispute and involves breaches of fiduciary duty does not mean that it is incapable of arbitration. I have already dealt with the public policy argument and the fact that it is not a commercial dispute seems irrelevant, particularly as there may be sound reasons for the parties desiring that a family or domestic dispute be resolved privately.

179  So far as the suggestion that third party rights are affected, the only third party identified was HPPL [a company in which the appellant trustee, whose removal was sought, owned 75% of the shares] which supports the reference to arbitration. Its position could be readily accommodated by making a stay conditional upon it submitting to the arbitration and agreeing to be bound by the result.

180  Nor does it matter in my view that the claim involves an allegation of serious misconduct. The fact that serious misconduct found by the court is a ground for the removal of a trustee does not, in my opinion, lead to the conclusion that a claim for serious misconduct is not capable of settlement by arbitration…. [W]here the allegations of serious misconduct are made against the party seeking the stay the fact that the allegations involve serious misconduct is relevant in the exercise of the discretion, but does not mean that a court as a matter of course would refuse a stay.

181  Further, the fact that the claim involves the status of the GHR [the appellant trustee] as trustee does not seem to me to affect the position. The removal and replacement of a trustee does not destroy the substratum of the Trust…. In a case of removal of a trustee neither the trust property nor the rights of beneficiaries are affected. In these circumstances the fact that the claim involves the so-called status of the trustee does not alter the position.

182  GHFR [one of the appellant’s children] relied on the provisions of s 42(f)29 of the Trustee Act which conferred upon the trustee the power to refer to arbitration ‘any debt, account, claim or thing whatever relating to the trust or to the trust property’, in support of the submission that the dispute was capable of settlement by arbitration. Having regard to the conclusions which I have reached it is not necessary to reach a final view on the scope of that section. However, it does seem to me that the section is dealing with claims made by or against third parties of the Trust as distinct from claims between the trustee and beneficiaries. See Royal Bank of Scotland Ltd v Byng supra; Dowling v St Vincent De Paul Society of Victoria Inc supra at [21]; c/f Perpetual Trustees Australia Ltd v Wallace [2007] FCA 527 at [40].

(p. 374) 183  It follows, in my view, that if the parties had in fact agreed that the claim for the removal of GHR as trustee should be submitted to arbitration such a dispute would be arbitrable.30

The Flaw in the Contrary View

16.26  Of the four judges who tried the case and heard the appeal, only Young JA had doubts as to whether a claim for the removal of a trustee was arbitrable, even by agreement of the parties. Although the learned judge conceded that ‘a court could make orders authorising a Registrar to sign transfers on behalf of the former trustee and direct the Registrar-General to register them’, his Honour’s concern was that:

removal and replacement of trustees usually involves the taking of accounts and an in personam order against the former trustee which if he or she disobeys it leads to imprisonment. It is stretching things to contemplate that an order for imprisonment would be an appropriate enforcement procedure to perfect an arbitrator’s award.31

16.27  While cases conceivably might arise in which such considerations could justify a court ruling against arbitration as a matter of discretion, the sounder view of general principle is that expressed by McColl JA, who stated:

I accept the force of Young JA’s observations about the potential difficulties of enforcing an arbitrator’s award. However, compelling as they are, they do not militate against conclusion that the respondent’s claims, if within [the arbitration clause], would be arbitrable. As Patten LJ said in Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855; [2012] 1 All ER 414 (at [84]):

‘… [A]s explained earlier in this judgment, these jurisdictional limitations on what an arbitration can achieve are not decisive of the question whether the subject-matter of the dispute is arbitrable. They are no more than the practical consequences of choosing that method of dispute resolution: see Societe Commerciale de Reassurance v ERAS (International) Ltd [1992] 1 Lloyd’s Rep 570; Wealands v CLC Contractors Ltd [1999] 2 Lloyd’s Rep 739.’32

Rinehart v Welker is Consistent with the New Zealand Arbitration Act

16.28  Apart from Young JA’s unconvincing dissent, the approach of the New South Wales judges in Rinehart v Welker appears sound.33 Furthermore, that approach should be attractive to high-end New Zealand trust disputants who are able to agree that they wish their problem to be resolved by arbitrators in whom they can have confidence, rather than take the risk of placing the matter before the High Court and then discovering that they have drawn a judge with no acknowledged competence in trust law.

(p. 375) 16.29  An analysis of the New Zealand Arbitration Act 1996 suggests that such an outcome would be possible, based on a few key provisions. Those sections read:

Purposes of Act

The purposes of this Act are—

  1. (a)  to encourage the use of arbitration as an agreed method of resolving commercial and other disputes; and

  2. (d)  to redefine and clarify the limits of judicial review of the arbitral process and of arbitral awards …

Arbitration under other Acts

  1. (1)  Where a provision of this Act is inconsistent with a provision of any other enactment, that other enactment shall, to the extent of the inconsistency, prevail.

  2. (2)  Subject to subsection (1), where a provision of this Act applies to arbitration under any other enactment, the provisions of that other enactment shall be read as if it were an arbitration agreement.

10  Arbitrability of disputes

(2)  The fact that an enactment confers jurisdiction in respect of any matter on the High Court or a District Court but does not refer to the determination of that matter by arbitration does not, of itself, indicate that a dispute about that matter is not capable of determination by arbitration.

12  Powers of arbitral tribunal in deciding disputes

  1. (1)  An arbitration agreement, unless otherwise agreed by the parties, is deemed to provide that an arbitral tribunal—

    1. (a)  may award any remedy or relief that could have been ordered by the High Court if the dispute had been the subject of civil proceedings in that court:

    2. (b)  may award interest on the whole or any part of any sum which—

      1. (i)  is awarded to any party, for the whole or any part of the period up to the date of the award; or

      2. (ii)  is in issue in the arbitral proceedings but is paid before the date of the award, for the whole or any part of the period up to the date of payment.

14A  Arbitral proceedings must be private

An arbitral tribunal must conduct the arbitral proceedings in private.

14B  Arbitration agreements deemed to prohibit disclosure of confidential information

  1. (1)  Every arbitration agreement to which this section applies is deemed to provide that the parties and the arbitral tribunal must not disclose confidential information.

(p. 376) 16.30  There is also provision for resort to the High Court on questions of law arising in the course of an arbitration if such a process would be in the interests of substantial cost saving.34 Appeal may be made to the High Court on questions of law.35

16.31  In addition to these features, the availability of arbitration gives trustees and beneficiaries the best of both worlds, in that the parties can ignore the arbitration agreement and proceed to court anyway when it suits them. Notably,

[t]he existence of a clause such as cl 18.1 does not, of course, preclude the issue of proceedings. If there is no genuinely arguable issue associated with those proceedings then they may be taken to judgment notwithstanding the submission to arbitration. As well, if both parties to any legal proceedings are content for the matter to proceed by way of litigation, rather than through the arbitral process provided for, then those proceedings may continue to be prosecuted through the Court.36

16.32  Thus, the structure of the arbitration legislation and its express intention to ‘encourage the use of arbitration’ and ‘redefine and clarify the limits of judicial review of the arbitral process and of arbitral awards’ makes it seem tailor-made for resolving disputes connected with high-end New Zealand trusts. This conclusion is particularly apt given the unfairness and injustice of the ‘cab rank’ rule that governs the allocation of High Court judges to cases tried in that court.

The Prerequisite: An Arbitration Agreement

16.33  There is, however, a vital prerequisite. The Act applies only to a ‘dispute which the parties have agreed to submit to arbitration under an arbitration agreement’.37 For this purpose, ‘arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’.38

16.34  Rinehart v Welker was an unsuccessful application to stay legal proceedings. The basis of the application had been that the trustees and the beneficiaries had settled a previous dispute by a confidential settlement deed which included a provision that required any dispute ‘under this deed’ to be mediated, or, failing agreement by that route, ‘automatically referred to arbitration’.39 Had the dispute unfolded in New Zealand, this clearly would have been an ‘arbitration agreement’ for the purposes of the New Zealand Arbitration Act 1996 had mediation failed. However, the scope of that arbitration provision was confined to any dispute under the confidential (p. 377) settlement deed, and the New South Wales Court of Appeal was unanimous that none of the claims pleaded in the current dispute,

viewed in isolation from the defences, involve invoking or enforcing any rights created by the Settlement Deed nor is their outcome generated or controlled by the Settlement Deed. As GHR submitted …, a court does not remove a trustee without looking at the whole of the circumstances; that would include the Settlement Deed but it would not lead to the conclusion that the outcome was governed or controlled by the Settlement Deed. Similarly, whilst it may be that it would be open to GHR to argue that what was done was reasonable in the context of the regime established by the Settlement Deed, this would not of itself lead to the conclusion that the outcome was governed or controlled by the Settlement Deed as distinct from the proper application of the statutory and inherent jurisdiction of the court.40

16.35  The claim that the action should be stayed to enable arbitration to proceed therefore failed.41 Although the remarks in the judgments about the arbitrability of trust disputes are therefore obiter, the case ran for two days in the Equity Division of the Supreme Court, a further day in the Court of Appeal, and was argued in each court by several leading Senior Counsel. The judgments in each court were carefully expressed, particularly that of Bathurst CJ in the Court of Appeal. His Honour’s views on trust arbitration would carry great weight in the New Zealand courts.

Ways Forward

16.36  With a superannuation trust or some other form of contract-based commercial trust, it is easy to incorporate an ‘arbitration agreement’ into the trust deed when it is being prepared.42 Private trust deeds are more challenging, since they are not contracts. Rinehart v Welker does indicate that in cases where all the affected beneficiaries are sui juris, they and the trustees may enter into an ad hoc arbitration agreement that the court will tend to support.43 But there will be many a settlor who wants to ensure that disputes over his or her trust must be arbitrated even though the usual class of potential beneficiaries will include infant and unborn persons who lack contractual capacity.

16.37  In those cases, agreement of all affected persons will of course be impossible. When the trust deed is being drafted, is it possible to outflank that difficulty by including an arbitration agreement between the settlor, the original trustees, and, possibly, for good measure, the original protector of the trust? Bathurst CJ sat on the fence about this in Rinehart v Welker, stating that ‘[i]t is not necessary in the present case (p. 378) to deal with a more difficult question which would arise if the arbitration clause was contained in the Trust Deed and purported to bind all persons beneficially entitled under the Trust, including infants and unborn beneficiaries.’44

16.38  Aligning itself with the view that such a clause can be validly incorporated into the nascent trust deed, the International Chamber of Commerce has settled a comprehensive and adaptable model arbitration clause for trust disputes, with a detailed accompanying explanatory note. The clause reads, in part:

All disputes arising out of or in connection with the trust created hereunder shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed by the ICC International Court of Arbitration … in accordance with the said Rules.

The settlor hereby agrees to the provisions of this arbitration clause and the trustees, any protector and their successors in office, by accepting to act under the trust, also agree or shall be deemed to have agreed to the provisions of this arbitration clause. Accordingly, they all agree to settle all disputes arising out of or in connection with the trust in accordance with this arbitration clause.

As a condition for claiming, being entitled to or receiving any benefit, interest or right under the trust, any person shall be bound by the provisions of this arbitration clause and shall be deemed to have agreed to settle all disputes arising out of or in connection with the trust in accordance with this arbitration clause.45

16.39  The experts are divided on whether this could work. The most thorough analysis of direct relevance to the New Zealand situation is that of Professor Matthew Conaglen, himself a New Zealander.46 He would like the trust deed provision to work. Without at all disagreeing with Bathurst CJ’s view that it is a difficult call, he considers that caution is needed before relying on authorities dating from a time when stricter judicial views on public policy were the order of the day.47 He suggests, convincingly, that the English Trust Law Committee’s position paper on arbitration of trust disputes pitches argument for the impossibility of trust arbitrations too high.48

16.40  While accepting that the definition of ‘arbitration agreement’ in section 2 of the Arbitration Act 1996 includes agreements to submit to arbitration whether they are ‘contractual or not’, Dr Conaglen points out the oddity of even calling an:

(p. 379) arbitration clause in a trust an ‘agreement’ between the settlor and trustee: an agreement which can be enforced neither by nor against one of the two parties is an unusual agreement. The issue is, ultimately, one of statutory construction as to what the Arbitration Act means when it refers to an agreement, and there is real reason to doubt [the] view that a trust falls within that meaning.49

16.41  To which, citing authority, he rightly adds that:

[a] beneficiary’s rights are not derived from the trustee’s rights. They arise because of equity’s willingness to hold the trustee to his undertaking to act as such, and are ‘engrafted onto, not carved out of, the legal estate’. Where a beneficiary brings claims based on those rights, he does so in his own right, not ‘through or under’ either the trustee or the settlor.50

16.42  For all that, Professor Conaglen has no doubt that ‘trust disputes can potentially be the subject of arbitration’.51 He sees this potential in combining equity’s theme, ‘she who seeks equity must do equity’, with the inherent power of the court, which, in appropriate cases, could be exercised to stay proceedings brought in the face of an arbitration provision in the trust deed. In the end, he finds that:

[t]he strongest justification for enforcing arbitration clauses in trusts seems, as with the other terms of the trust, to lie in giving effect to the settlor’s intention. Commonwealth courts have placed somewhat less weight on the settlor’s intention than have courts in the US, as the differing approaches to the rule in Saunders v Vautier indicate. However, as Evershed MR said, with the approval of Lord Morton on appeal:

The general rule … is that the court will give effect, as it requires the trustees themselves to do, to the intentions of a settlor as expressed in the trust instrument, and has not arrogated to itself any overriding power to disregard or re-write the trusts.

If arbitration of trust disputes is not considered repugnant to the gifts, which have been made in a trust and is not contrary to public policy as it does not illegitimately oust the jurisdiction of the court, then a stay of proceedings granted under the inherent jurisdiction of the court may be an effective means of giving effect to the settlor’s intention as to how the trust would operate.52

16.43  As each court in Rinehart v Welker emphasized, powers under the inherent jurisdiction are discretionary.53 Relevant considerations might include whether the arbitration clause in the trust deed was apt to cover, say, beneficiary allegations of trustee misconduct and whether it would be a proper exercise of discretion, in the circumstances, for a judge to deny a beneficiary the right to eschew arbitration and approach the court directly.

(p. 380) The Law Commission’s Recommendations

16.44  On trust law itself, the Law Commission’s Report, if implemented, could create numerous problems by introducing doubt where there was previously none and thereby increasing cost.54 As Lord Neuberger has said of reform in other contexts,

34.  First point: where the present law is tolerably clear, well understood, and workable, particularly in a slightly technical field where there is no perfect answer, leave the law alone….

39.  My fifth point … invokes the only truly reliable piece of legislation, which causes problems to us all, and it is one which I do not think that even the Commission can do anything about—the law of unintended consequences…. The problem for reformers is that one can see the problems with the present system, one can even sometimes the way to solve them, but what is far, far more difficult to see is the problems which any reformed system will throw up. I do not agree with Astbury J that this justifies inaction, but what it most certainly does justify is caution and carefulness both before and when making changes….

40.  The moral of the tale is this: law reform often brings with it unintended consequences. Those consequences arose in this case despite the fact that the 1989 Act was intended to implement proposals put forward by the Law Commission.55

16.45  Despite these sorts of admonitions, the New Zealand Law Commission has nevertheless recommended that its proposed new Trusts Act should:

  1. (1)  Clarify that trustees have 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), other than a dispute as to the validity of all or part of a trust. This should be a default power that applies unless explicitly excluded or modified by the terms of the trust.

  2. (2)  Make any provision in the terms of a trust that requires the settlement of a dispute by ADR enforceable, other than a dispute as to the validity of all or part of a trust.

  3. (3)  Give trustees a specific power to give future assurances of actions that have been agreed to as a part of an ADR settlement.

  4. (4)  Provide that trustees will not be liable to other parties for agreeing to the settlement if they acted honestly and in good faith while doing so.

  5. (5)  Provide that by virtue of this provision, an ADR settlement cannot override creditor priority rules as they affect creditors that are not party to the settlement.

  6. (6)  Provide that a beneficiary or trustee can make a request to the court that ADR be used to resolve a dispute rather than court proceedings and that the court (p. 381) can require ADR to be used. It should be open to the court to allow the costs of the mediation to be paid from the trust.

  7. (7)  Provide that the court can appoint representatives of unascertained and incapacitated beneficiaries, who may be other beneficiaries, who can agree to a binding ADR settlement on behalf of the unascertained and incapacitated beneficiaries, subject to the court’s approval of the settlement.56

16.46  The Law Commission’s final remarks on the subject indicate that:

14.5 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 default duties to consider the exercise of their discretions and not to fetter the future exercise of their discretions. We propose the legislation resolve this issue by providing trustees with a specific power to give future assurances of actions 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. The statute should provide that trustees will not be liable for agreeing to an ADR settlement if they acted honestly and in good faith.

14.6 We see merit in the option of introducing a provision which allows beneficiaries and trustees to apply to the court for an order that ADR 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 likely 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.

14.7 The legislation should provide that the court can appoint representatives of unascertained and incapacitated beneficiaries who can agree to a settlement on behalf of these beneficiaries, although any settlement involving unascertained and incapacitated beneficiaries would continue to require the approval of the court. This recommendation is for the purpose of clarifying that this option is available to the court, as the court currently has this power. We did consider whether ‘virtual representatives’ of unascertained and incapacitated beneficiaries should be able to bind those beneficiaries to a settlement, but we do not think that this adequately protects the interests of beneficiaries who cannot represent themselves.

14.8 No submitter objected to the ADR proposals. Submitters to the issues papers have made it clear that they are generally satisfied with the state of the law in this area of trusts and do not want legislative change to be substantial. The comment was made that ADR should be voluntary for the parties….

14.11 The new provisions recommended in this chapter should apply to all trusts from the date of enactment of the new Act. These provisions are helpful for the management of trusts, particularly for those that do not have terms of trust regarding the use of ADR, and existing trusts should be able to benefit from them.57

(p. 382) Given the problems the High Court is having in allocating work only to those judges who are of acknowledged competence, provisions to facilitate arbitration of internal trust disputes by competent arbitrators may enable an urgent need to be satisfied.

VI.  Conclusion

16.47  The judicial misallocation described in this chapter is the only real problem with New Zealand trust law. This issue is a particular worry for offshore settlors of New Zealand trusts, since they have every reason to be thinking of exporting those trusts to trustees in more enlightened jurisdictions. Hopefully the voices calling for the end of the current misguided regime will be heard before too many more years shall have elapsed and before too much more offshore business shall have been lost.

16.48  In the meantime, settlors and their advisers must consider the inclusion, into all future New Zealand offshore and domestic trust deeds, of arbitration provisions based on the International Chamber of Commerce model arbitration clause for trust disputes and on the well-crafted Law Commission recommendations that have just been discussed. Until, if ever, those recommendations are implemented, inclusion of individual provisions at least may give settlors, trustees, and beneficiaries a fighting chance of ensuring the expertise of the tribunal that will be their first resort for solving, in private, the crises that human nature and trust estates have been encountering since an anonymous genius created the first trust for the Franciscan friars on their arrival in England in the second quarter of the thirteenth century.58


1  The only mention of arbitration in the Trustee Act 1956 is in section 20(d), which empowers any trustee 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’. This provision is of use in dealing with external claims against the trust estate but is of no use in respect of internal problems of trust administration.

2  Law Commission, Review of the Law of Trusts: Preferred Approach, Issues Paper 31 (November 2012) para 1.3, n 8.

3  Law Commission, Review of the Law of Trusts: A Trusts Act for New Zealand, Report 130 (August 2013) para 5.

4  Former Chief Justice of Ireland Ronan Keane writes:

Professor Frances Moran, the formidable lady who for many years lectured on equity to the students of King’s Inns, used to tell her (in those days) nearly all male classes: ‘There are three roads to ruin in life, wine, women and becoming a trustee. The first two are at least enjoyable.’ This was not merely cynicism. The office of trustee is one which generally offers few advantages, material or otherwise. It can be time consuming, tedious and, where the beneficiaries are difficult, importunate or quarrelsome, as they frequently are, positively distasteful. And, on top of all this, it may involve the holder in legal liability and that in circumstances where he or she has done nothing remotely dishonourable.

Ronan Keane, Equity and the Law of Trusts in the Republic of Ireland (2nd edn, Bloomsbury Professional 2011) para 9.01.

5  Internal trust disputes relate to the inner workings of a trust and involve the settlor(s), trustee(s), protector(s), and/or beneficiary(ies).

6  Law Commission, Review of the Law of Trusts: Fifth Issues Paper: Court Jurisdiction, Trading Trusts, and Other Issues, Issues Paper 28 (December 2011) para 5.3.

7  Max Rashbrooke, Wealth and New Zealand (Bridget Williams Books 2015) 62.

8  Richard Aikens, ‘“With a View to Dispatch and the Saving of Expense”: How the Commercial Court Has Attempted to Meet the Demands of the Business Community for Efficient and Cost-Effective Litigation Procedures’ in Mads Andenas and Duncan Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford University Press 2009) 563, 568–69. Even today there are great judges who deprecate the ‘unwisdom of consenting to arbitration’. Michael Wilson & Partners Limited v Nicholls [2011] HCA 48 [119] (Heydon J) (High Court of Australia).

9  Unreported, Queen’s Bench Division of the England and Wales High Court, Lawrance J, 12 November 1891, reproduced in VV Veeder ‘Mr Justice Lawrance: The “True Begetter” of the English Commercial Court’ (1994) 110 Law Quarterly Review 292, 299, affirmed in Rose v The Bank of Australasia [1894] AC 687.

10  Aikens (n 8) 569.

11  ibid. See also Veeder (n 9) 292.

12  Fantasy is the only word for it. Consider, for example, the far-out-of-his-depth judgment of the judge in the New Zealand trust case discussed in Tony Molloy, ‘Still More on Settlor Control: The 18 September 2008 Reserved Decision of the New Zealand High Court in Harrison v Harrison CIV 2008-404-001270’ (2010) 16 Trusts and Trustees 73. See also Donovan Waters, ‘Settlor Control—What Kind of a Problem Is It?’ (2009) 15 Trusts and Trustees 12. As in so many similar cases, this appalling judgment was the inevitable outcome of a fine judge being required to operate well outside his comfort zone.

13  RP Meagher, JD Heydon, and MJ Leeming, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (4th edn, LexisNexis Butterworths 2002) xi.

14  ibid [2310].

15  Waters (n 12) 15 (writing that the New Zealand judge ‘took what can only be described as a most unorthodox line in reaching the conclusion that, if necessary, it could invade the trust ….’).

16  Charles Rickett, ‘Cry “Equity”—It Works!’ [2013] New Zealand Law Journal 25, 28 (discussing two New Zealand trust judgments that displayed ‘overweening self assurance and readiness to pronounce on matters of law and justice with little deeper reflection’ and writing that ‘Abracadbra law does us all a disservice. A little more scholarship in answering legal problems would do us all a lot of good’).

17  Matthew Conaglen, Fiduciary Loyalty (Hart Publishing 2010) 25–26. Others have expressed similar views about New Zealand trust judgments. See eg Jessica Palmer, ‘Attempting Clarification of Constructive Trusts’ (2010) 24 New Zealand University Law Review 113; Jessica Palmer, ‘Controlling the Trust’ (2011) 12 Otago Law Review 473; Jessica Palmer, ‘Equity and Trusts’ [2012] New Zealand Law Review 141; Nicola Peart, Mark Henaghan, and Greg Kelly, ‘Trusts and Relationship Property in New Zealand’ (2011) 17 Trusts and Trustees 866; Charles Rickett and Jessica Palmer, ‘Trusts Jurisprudence in the High Court’ [2010] New Zealand Law Journal 353.

18  Earl of Oxford’s Case (1615) 21 ER 485. See also Senior Courts Act 1981 (UK) s 49(1).

19  That can, of course, also happen when courts do specialize, but not enough. In an interview a year after he resigned in protest from the Chancery Division, Sir Hugh Laddie deprecated having been required to sit on cases outside areas of practice in which he was acknowledged to be skilled and experienced. A newspaper reported that he believed that:

[h]ad he taken a case outside his field at the Bar, he’d have left himself open to a negligence action…. But the moment he was a judge he was expected to do just that. ‘It was challenging—like high-wire walking—but I didn’t think it fair for clients to be learning at their expense.’ Most worrying were the cases involving unrepresented litigants, with applications ‘in an area of law that I knew nothing about’.

Frances Gibbs, ‘Definitely No Regrets: There is Life Beyond the High Court’ The Times (16 May 2006) (quoting Sir Hugh Laddie).

20  Jenni McManus, ‘Litigants Turn Their Backs on Courts’ The Independent (26 June 2008) 6.

21  ibid. See also The Chambers Dictionary (10th edn, Chambers Harrap 2006) 1408 (defining ‘to shaft’ as a slang expression meaning ‘[t]o dupe, swindle, treat unfairly’).

22  McManus (n 20) 6. Concerns about the lack of precedent are particularly pressing, since development of the law relies on public and reported decisions by competent judges who shall have formed their ideas with:

the aid of the purifying ordeal of skilled argument on the specific facts of a contested case. Argued law is tough law. This is as true today as it was in 1409 when Hankford J said: ‘Home ne scaveroit de quel metal un campane fuit, si ceo ne fuit bien batu, quasi diceret, le ley per bon disputacion serra bien conus’ (YB 11 Hen 4, Mich, fo 37)…. Today, as of old, by good disputing shall the law be well known.

Cordell v Second Clanfield Properties Ltd [1969] 2 Ch 9, 16–17 (Megarry J).

23  Law Commission, Review of the Law of Trusts: Fifth Issues Paper: Court Jurisdiction, Trading Trusts, and Other Issues, Issues Paper 28 (December 2011) para 5.3.

24  [2012] NZHC 615.

25  [2013] NZCA 559.

26  Rinehart v Welker [2012] NSWCA 95 [35] (Bathurst CJ) (describing the effect of the decision of the court below, Welker v Rinehart (No 2) [2011] NSWSC 1238 (Brereton J)).

27  See also ibid [214] (McColl JA).

28  See also ibid [211] (McColl JA).

29  Section 42(f) of the Trustee Act is the New South Wales counterpart of section 20(g) of the New Zealand Trustee Act 1956, which empowers a trustee 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 may 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.

30  Rinehart, [2012] NSWCA at 95.

31  ibid [226].

32  ibid [216].

33  ibid. For more on Rinehart, see Daniel Clarry, ‘The Removal of Trustees by Arbitration in England and Australia’ in SI Strong (ed), Arbitration of Trust Disputes: Issues in National and International Law (Oxford University Press 2016) paras 11.01–11.80.

34  Arbitration Act 1996 s 4.

35  ibid s 5.

36  Raukura Moana Fisheries Ltd v The Ship ‘Irina Zharkikh’ [2001] 2 NZLR 801 [38] (Young J).

37  Arbitration Act 1996 s 10(1).

38  ibid s 2 (emphasis omitted). See also ibid Schedule 1, art 7(1) (‘An arbitration agreement may be made orally or in writing.’).

39  Rinehart, [2012] NSWCA 95 at [19].

40  ibid [127] (Bathurst CJ).

41  ibid [185]–[86] (Bathurst CJ).

42  For more on commercial trusts, see Mark Kantor, ‘The Use of Trusts in Financing Transactions: Special Issues Relating to Arbitration of Commercial Trusts’ in SI Strong (ed), Arbitration of Trust Disputes: Issues in National and International Law (Oxford University Press 2016) paras 2.01–2.101.

43  Rinehart, [2012] NSWCA 95 at [173]–[83].

44  ibid [177].

45  Bruno Boesch, ‘The ICC Initiative’ (2012) 18 Trusts and Trustees 316, 322; SI Strong, ‘Institutional Approaches to Trust Arbitration: Comparing the AAA, ACTEC, ICC, and DIS Trust Arbitration Regimes’ in SI Strong (ed), Arbitration of Trust Disputes: Issues in National and International Law (Oxford University Press 2016) paras 5.01–5.135.

46  Matthew Conaglen, ‘The Enforceability of Arbitration Clauses in Trusts’ (2015) 74 Cambridge Law Journal 450–79. Cf Mark Herbert, ‘Trust Arbitration in England and Wales: The Trust Law Committee’ in SI Strong (ed), Arbitration of Trust Disputes: Issues in National and International Law (Oxford University Press 2016) paras 10.01–10.103.

47  Conaglen (n 46) 466.

48  ibid 469.

49  ibid 470.

50  ibid 471.

51  ibid 465 (emphasis added).

52  ibid 476. See also Nicholas Le Poidevin, ‘Arbitration and Trusts: Can It Be Done?’ (2012) 18 Trusts and Trustees 307, 309.

53  Welker & Ors v Rinehart & Anor (No 2) [2011] NSWSC 1238 [8]–[11], [50]; Rinehart v Welker [2012] NSWCA 95 [184]–[94]. See also Conaglen (n 46) 476, 479.

54  Helen Dervan, ‘Trusts Law Reform: Do We Need A Statutory Straightjacket?’ (2014) 20 Trusts and Trustees 673–91.

55  Lord Neuberger of Abbotsbury MR, ‘Law Reform—Where Will It All End?’ Address to Law Commission Seminar (2 December 2010) 14–17, <http://webarchive.nationalarchives.gov.uk/20131202164909/http://judiciary.gov.uk/media/speeches/2010/mr-speech-law-commission-02122010>.

56  Law Commission, Review of the Law of Trusts: A Trusts Act for New Zealand, Report 130 (August 2013) 43–44 (Recommendation 42) 197–99 (ch 14).

57  ibid 198–99.

58  Frederick William Maitland, Equity, Also the Forms of Action at Common Law (Cambridge University Press 1909) 25.