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

(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.

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.

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

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.

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

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?

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.

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

16.26  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

16.28  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. 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

16.32  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.

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

16.35  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.

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

16.41  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.

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

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