17.01  Trust litigation has increased substantially during the recent past and experience shows that the disputes are becoming more hostile and hard fought.¹ Settlors are leaving substantial fortunes in complex structures covering different jurisdictions. The greatest risk in multi-jurisdictional trust litigation comes from potential clash of laws and procedures of different countries, which can lead to lengthy parallel litigation in different jurisdictions eventually resulting in contradictory judgments. The boom of international trust litigation is also the result of the ‘second-generation problem’ whereby first-generation settlors are passing away and handing the baton (p. 384) over to next-generation beneficiaries and surviving spouses in circumstances where enormous familial pressures have been left unresolved. As settlors live longer, there is greater chance of incapacity, which can create uncertainty in the administration of trusts and lead to litigation. The increasing number of multiple marriages and the tensions that arise among successive spouses and the children of numerous marriages in patchwork families also often result in litigation.

17.02  Trusts have gained wide international recognition (in particular, since the ratification of the 1985 Hague Convention on the Law Applicable to Trusts and on Their Recognition (Hague Trust Convention))² and have grown beyond their traditional borders. With increasing mobility of individuals in a shrinking world, trusts are no longer confined to the Anglo-Saxon world but are also often imported into civil law jurisdictions in connection with a relocation of the settlor or beneficiary and his family. While some civil law jurisdictions such as Switzerland or Italy have ratified the Hague Trust Convention,³ others (such as Liechtenstein, which has also ratified the Hague Trust Convention) have developed their own trust-like institutions. Furthermore, some civil law states do not recognize the trust at all. Settlors and beneficiaries from civil law jurisdictions often do not fully understand common law trusts and can become frustrated by the rules trustees must follow. When used to avoid forced heirship laws or marital property claims in a settlor’s ‘home’ jurisdiction, trusts will likely be attacked by disadvantaged parties. Trusts have thus increasingly come under attack by ‘outsiders’ of the trust, such as former spouses, creditors of the settlor, or forced heirship heirs.

17.03  In the 1990s, representatives from the trust industry started discussing the idea of using mediation to resolve trust disputes.⁴ Proposals to use arbitration to settle (p. 385) trust issues have also been discussed.⁵ In practice, however, the idea of arbitration in this field has not taken root as quickly as mediation.⁶

17.04  Most arbitration practitioners have never been involved in a trust arbitration. This is not really surprising: until recently, trust litigation and arbitration rarely intersected. While trust disputes are primarily concerned with family wealth and involve individuals rather than corporations, arbitration had grown out of international commerce. Trusts thus did not traditionally provide for arbitration even though the advantages of arbitration—not divulging confidential or embarrassing information and choosing a qualified tribunal—would seem an appealing alternative to court litigation. But this has been changing during the last years.

17.05  Active debate about trust arbitration has been reopened.⁷ In 2008, the International Chamber of Commerce (ICC) set up a Task Force on Trusts and Arbitration which introduced a model ICC arbitration clause (and related explanatory notes) to be included in a trust deed.⁸ In 2015, the ICC Task Force was revived to look again into whether arbitration and trust disputes go together and whether such matters should be promoted given the 2012 ICC Rules of Arbitration⁹ and recent legislative (p. 386) developments in the field of trust arbitration.¹⁰ In addition, a number of offshore trust jurisdictions, such as Guernsey,¹¹ Malta,¹² and the Bahamas,¹³ as well as some US states (Arizona, Florida, Missouri, New Hampshire, and South Dakota)¹⁴ have recently implemented legislation for trust arbitration.

17.06  Switzerland’s importance as a centre for trust services and its long-standing tradition in international arbitration would make it a perfect venue for trust arbitration, particularly in light of the scarcely developed arbitration law and practice in several offshore trust jurisdictions. Against this background, this chapter will examine whether trust disputes can be arbitrated in Switzerland, with a particular focus on the recognition of arbitration clauses in trust deeds.¹⁵

17.07  Trust disputes are distinctively different from traditional commercial disputes in that trust disputes typically concern the affairs and fortunes of wealthy families and thus regularly involve individuals. While substantial amounts of money are often at stake, the parties usually wish to maintain an ongoing relationship (ie usually long-term in nature).

17.08  In the context of trust litigation, it is important to be aware of the role of the court of the state whose law governs the trust (often an offshore jurisdiction). Apart from its judicial function, the court also has a regulatory or supervisory role in relation to the administration of the trust, mainly to protect the beneficiaries. A trustee may make an application to the court and ask for assistance to ensure that it acts properly and does not commit a breach of trust. To exclude or limit potential liability (p. 387) vis-à-vis the settlor and/or the beneficiaries, a trustee may for example ask the court for directions as to (i) the interpretation of an unclear provision in the trust deed (constructive summonses) or (ii) in relation to the conduct of the trusteeship (directive summonses).

17.09  Trusts can be the subject of a variety of different disputes where other types of law—such as matrimonial property law, inheritance law, or bankruptcy law—may be relevant in addition to trust law. There are three broad categories of trust disputes:¹⁶

• •  Third party disputes concerning the trustee’s external relationship with third parties, such as contracts with investment advisors or insurance and risk managers.

• •  Trust disputes concerning (external) claims by creditors, disappointed heirs, or (ex)-spouses trying to attack or vary the trust. An example is the Thyssen case where it was argued before the Bermuda court that the trust violated Swiss inheritance and family law and should be set aside.¹⁷ Similar issues can arise in British divorce proceedings as a result of the British family law approach to offshore trusts on divorce.¹⁸ Switzerland initially did not have much experience when dealing with trusts in the context of divorce proceedings. However, on 26 April 2012, five years after the Hague Convention became effective in Switzerland, the Swiss Federal Tribunal gave its judgment in the matter Rybolovlev v Rybolovleva, dealing for the first time with trusts in the context of divorce proceedings.¹⁹

• •  Beneficiaries’ disputes or so-called internal disputes concerning either the internal relationship between the beneficiaries or between the trustee, protector, and/or beneficiaries. These kind of disputes are basically disputes about the terms of the trust, and the validity of the trust is not generally questioned. Such disputes may arise in relation to the beneficiaries’ interests under the trust, for example if it is not clear whether someone falls within a class of beneficiaries. These disputes may also concern the exercise of discretion by a (p. 388) trustee (eg whether a beneficiary received a large enough distribution from the trust), breach of trust claims (eg alleged mismanagement by the trustee of the trust assets), or requests for the replacement of a trustee who is unfit for the job. Attempts by beneficiaries to obtain information from the trustee concerning the trust’s affairs, applications for directions, or requests for the variation of the trust deed also fall within this category.

17.10  Most trust deeds contain a choice of law clause, but jurisdiction clauses in trust deeds are still not very common.²⁰ Many offshore trust locations can establish jurisdiction for trust disputes if the trust is governed by the local law of that country, even though the parties and the facts of the case have nothing to do with that jurisdiction.²¹ Switzerland does not provide for the institution of trusts in its substantive law. Switzerland has, however, ratified the Hague Trust Convention with effect from 1 July 2007²² and has enacted new conflict of law provisions, in particular Article 149a–149e of the Private International Law Statute (PILS), which operate so as to allow the full ‘implantation’ (or incorporation) of foreign trusts into Swiss law.²³

17.11  International jurisdiction in Switzerland is governed by the Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (LC),²⁴ which entered into force in Switzerland on 1 January 2011, and by the rules in the PILS.²⁵ However, Article 149b of the PILS applies to internal trust disputes only to the extent that the Lugano Convention is not applicable.²⁶ Therefore, provided that the LC is applicable, Articles 5(6) and 23(4) of the LC prevail over Chapter 9a of the PILS. The LC applies to proceedings brought against a settlor, trustee, or beneficiary (but not a protector) provided the defendant is domiciled in a contracting state.²⁷ More specifically, provided that the trust (p. 389) contains a Swiss choice of forum clause, internal trust disputes must be brought before a Swiss court according to Article 23(4) of the LC if one of the parties is domiciled in an LC state. Furthermore, under the LC and in the absence of a Swiss choice of forum clause, a defendant domiciled in a contracting state may be sued in his or her capacity as settlor, trustee, or beneficiary not only in the courts of the contracting state where the defendant is domiciled but also in the courts of the contracting state where the trust (as opposed to the trustee) is ‘domiciled’ or has its ‘seat’.²⁸ In order to determine whether a party is ‘domiciled’ in the state whose courts are seized of a matter, the court must apply its internal law.²⁹ Under Swiss law, the seat of a trust is the place of administration designated by the terms of the trust in writing or in another form that can be evidenced in writing. In the absence of such designation, the seat is the place where the trust is effectively administered.³⁰

17.12  In cases where the LC is not applicable, Article 149(b) of the PILS applies. This provision states that the choice of forum in the trust deed shall prevail and that such choice of forum is exclusive unless provided otherwise. Hence, a designated Swiss court shall not decline its jurisdiction if a party or trustee is domiciled or has his or her usual residence or establishment in the Swiss canton where the Swiss court is located; if the trust has its seat in that canton; or if a large part of the trust corpus is located in Switzerland.³¹ Furthermore, where there is no valid choice of forum, jurisdiction in Switzerland can be affirmed as a result of a sufficient connection to Switzerland under Article 149b(3) of the PILS, for example as the ‘domicile’ of the trust.³² Thus, a Swiss judge would be competent to adjudicate an internal trust dispute governed by foreign trust law provided the trust contains a Swiss jurisdiction clause or jurisdiction in Switzerland can be affirmed as a result of a sufficient connection to Switzerland.³³

17.13  Another question, however, is whether the foreign trust court would recognize the jurisdiction of the Swiss courts rather than assert its own jurisdiction, particularly in matters involving the supervisory function. There is also some doubt (p. 390) whether Swiss courts have sufficient expertise in trust law and whether they can adequately step into the shoes of a foreign supervisory authority.³⁴ For example, the Rybolovlev³⁵ case suggests that Swiss courts may be somewhat reluctant to apply foreign trust law. When the Swiss Federal Tribunal rendered its decision in 2012 in the framework of provisional measures in the context of divorce proceedings pending before the Geneva court, the Swiss Federal Tribunal concluded that the husband was still the sole beneficial owner or in a position of control of the Cyprus trust, which justified treating the trust assets as still belonging to the husband. In reaching this conclusion, the Swiss Federal Tribunal followed the Court of Justice of Geneva in applying Swiss law in relation to receivership and the principle of ‘piercing the corporate veil’ as applied under Swiss company law rather than Cyprus trust law.³⁶

17.14  There has so far been little case law in Switzerland under the Hague Trust Convention, but given the increasing number of Swiss trustees and trust companies, it is to be expected that Swiss courts will see an increasing number of trust disputes in the near future.

17.15  Increased use of arbitration in trust disputes will mainly depend on whether the idea is embraced by the trustee (corporate trustees) and the settlors in new trust deeds. There appears to be consensus among trust practitioners that the subject matter of trust disputes (the affairs of a family and its fortunes) make such matters predestined to be tried through the privacy³⁷ of arbitration to avoid potential humiliation and reputation risks associated with such disputes.³⁸ The last thing a (p. 391) settlor wants is for the size and whereabouts of his or her assets and the names of the beneficiaries of the trust to be made public and discussed in the media. Trust companies and protectors also seek to avoid publicity regarding their management of trusts. As a result, the parties, prior to a dispute, should agree on the level of confidentiality that all involved parties are to maintain. The settlor may also state in the arbitration clause contained in the trust instrument that any dispute in connection with a trust arbitration shall be confidential.³⁹

17.16  Regardless of whether a dispute relates to a breach of trust, third party rights, or the proper understanding of the beneficiaries’ rights or the trustee’s powers, such a dispute will generally involve very complex questions of law and fact that may be more suitable for a panel of experienced arbitrators than for a state court judge. Speed and cost considerations also speak in favour of arbitration, particularly given that extensive discovery appears to be one of the reasons why offshore trust litigation has become very expensive and time-consuming. The courts are sometimes also overburdened because in many (offshore) jurisdictions there are usually only a handful of (mostly part-time) judges available to adjudicate cases. In some cases, final appeals usually need to be lodged with the Privy Council in London. Furthermore, parties may have the impression that they are at a disadvantage when their dispute is heard by a court in another country. Arbitration overcomes these types of concerns as a result of its not being tied to a particular (legal) culture or set of proceedings.⁴⁰ Thus, the legal and cultural neutrality of arbitration can be a significant advantage, since it encourages parties to accept the legitimacy of the dispute resolution forum.⁴¹

17.17  Although some common law trust lawyers object to the concept of trust arbitration, the concern does not appear to be that trust disputes are not well suited for arbitration. Instead, those lawyers doubt whether an arbitration agreement (and thus the award) can be made as to bind all of the classes of beneficiaries.⁴²

17.18  Switzerland has a leading position in international arbitration and has been the seat of some trust arbitrations. In most of the cases, however, the parties agreed to (p. 392) submit an existing trust dispute to arbitration.⁴³ Arbitration clauses in trust deeds still appear to be rare. Nevertheless, the appetite for trust arbitration is definitely on the increase in Switzerland, as suggested by various conferences on trust arbitration, including a Society of Trust and Estate Practitioners (STEP) conference in Geneva in March 2011; a working group of Swiss trust companies and international arbitration practitioners in Geneva in March 2012; and a STEP conference in Lausanne in November 2015.⁴⁴

17.19  In Switzerland, international arbitration is governed by Chapter 12 of the PILS. Chapter 12 applies where the parties have selected (i) a city in Switzerland as the seat of arbitration and (ii) at least one of the parties did not have its domicile in Switzerland at the time of the conclusion of the arbitration agreement.⁴⁵ This means that either the settlor, trustee, protector, or a beneficiary—if parties to the arbitral proceedings—must have had their domicile outside of Switzerland when concluding the arbitration agreement for Chapter 12 of the PILS to apply. The fact that Chapter 9a of the PILS, which contains jurisdictional provisions in relation to the Hague Trust Convention, does not refer to arbitration does not mean that arbitration is excluded as no such reference to arbitration can be found in the other chapters of the PILS. Trust disputes can thus be arbitrated in Switzerland.

17.20  The Swiss lex arbitri must be distinguished from the substantive law applicable to the merits of the dispute, that is, the law governing the trust.⁴⁶ From the range of problems identified in the context of trust arbitration, the crucial question in the authors’ view is not the issue of arbitrability⁴⁷ or the proper representation of minor or unborn beneficiaries⁴⁸ but rather whether on the basis of Chapter 12 of the PILS a beneficiary can be bound to arbitration on the basis of an arbitration agreement in a trust deed.

(p. 393) 17.21  General conditions to allow arbitration of ‘international trust disputes’ on the basis of an arbitration agreement in a trust deed are in principle (i) the formal validity of the arbitration agreement,⁴⁹ (ii) the substantive validity of the arbitration agreement, binding all parties in dispute,⁵⁰ (iii) the representation of all interested parties (including unborn, minor and unascertained beneficiaries), and (iv) whether the subject matter of the dispute is arbitrable.⁵¹ These questions may be answered differently depending on the seat of arbitration.

17.22  Although a trust can be validly created verbally, for evidentiary purposes, a trust is usually set up in a deed form. In most offshore trust jurisdictions, the establishment of a trust is not considered as a contractual undertaking between the settlor and the trustee but rather a unilateral act by which the settlor commits property into the trust and confers rights and obligations on others (eg the trustee, beneficiary, protector, or trust advisors). There seems to be consensus among common law trust practitioners that, even if a trust deed is not a contract as such, it may contain an arbitration agreement provided such agreement is stipulated as an express agreement in the trust instrument.⁵² In light of the Swiss doctrine with regard to arbitration clauses in last wills and statutes of foundations,⁵³ an arbitration agreement may equally be contained in a trust deed.⁵⁴

17.23  The arbitration agreement should be contained in the initial trust instrument (after the choice of law provision, if any) and any subsequent amendments and not merely in a letter of wishes, as this is not a binding document.⁵⁵ The arbitration agreement must bind all parties to a trust dispute so that court proceedings can be stayed if a party ignores the arbitration clause. Often, however, certain potential and later actual parties to a trust dispute have not signed the trust deed containing the arbitration agreement, leaving only the settlor and the trustee as parties. This scenario raises the question of whether there is a mechanism by which the settlor can impose his or her will on the beneficiaries and any other person linked to the trust such as a protector or successor trustee that such future trust disputes must be arbitrated.

17.24  Agreements to arbitrate are governed by Article 178(1) of the PILS, which states that ‘(1) The arbitration agreement must be in writing and may take the form of (p. 394) a telegram, telex, telefax or communicated in any other manner which allows the text of the agreement to be established.’ Article 178(1) is a substantive rule of Swiss private international law and is one of the mandatory provisions of the Swiss lex arbitri.⁵⁶ As a result, parties may not submit their arbitration agreement to another law.⁵⁷ Swiss law is thus decisive on the question of whether trustees, protectors, and/or beneficiaries need to agree explicitly in writing to the arbitration clause.

17.25  Under Swiss law, an arbitration agreement providing for international arbitration in Switzerland must be made in writing or evidenced by text.⁵⁸ Such writing requirement is, according to the prevailing doctrine, a prerequisite for the validity of the arbitration agreement, even though there is uncertainty as to the scope of the term ‘made in writing’ as used in Article 178(1) of the PILS. However, the text of the arbitration clause need not necessarily bear a signature.⁵⁹

17.26  According to Swiss doctrine, it is debatable whether it is sufficient that an arbitration agreement is drafted by one party and simply accepted orally or tacitly by the other party.⁶⁰ According to the Swiss Federal Tribunal,⁶¹ however, acceptance of the arbitration agreement should (preferably) be contained in a document and notified to the other party. It is thus unclear whether a beneficiary could be compelled to arbitrate in Switzerland merely on the basis that he accepted and requested distributions from the trust or claimed beneficiary status.⁶²

17.27  Considering the jurisdictional aspects of Article 149b(1) of the PILS in relation to internal trust disputes under the Hague Trust Convention⁶³ according to which the settlor or a person empowered under the trust deed by the settlor (eg the trustee or the trustee with the consent of the protector) may unilaterally declare a Swiss or other court as the exclusive forum for trust disputes, binding trustees, protectors, and/or (p. 395) beneficiaries as the case may be,⁶⁴ there is sound argument that an arbitration clause in a trust deed providing for arbitration in Switzerland would be equally enforceable.

17.28  Moreover, as previously noted,⁶⁵ in many offshore trust jurisdictions courts are competent to deal with trust disputes if the trust in question has been established and is governed by the local law of the respective jurisdiction even though the parties and the facts of the case may be unrelated to that jurisdiction. Pursuant to Article 6 of the Hague Trust Convention, the settlor has the power to choose the applicable trust law and hence to also indirectly identify the court that is competent to deal with internal trust disputes. Accordingly, it could be argued that such power not only includes the power to choose a state court but also to provide for arbitration. Unfortunately, the Swiss legislature failed to address the issue of trust arbitration when implementing the Hague Trust Convention and related jurisdictional provisions in the PILS. In light of the stricter form requirements under Article II(2) of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention),⁶⁶ it is certainly preferable for now to have the arbitration clause signed by all parties concerned whenever possible.⁶⁷

17.29  Article 178(2) of the PILS is based on the principle of favor validitatis and states that the arbitration agreement is valid if it conforms either to (i) the law chosen by the parties, (ii) the law governing the subject matter of the dispute (eg the law governing the trust), or (iii) Swiss law. On the other hand, formal validity of an arbitration agreement providing for arbitration in Switzerland is determined in accordance with Swiss law only.⁶⁸

17.30  By designating three alternative laws or connecting factors, the legislature aimed at providing the users of international arbitration in Switzerland with the greatest possible degree of predictability.⁶⁹ As a result, challenges against the substantive validity of an arbitration agreement are extremely limited.⁷⁰

(p. 396) 17.31  It is debated whether Article 178(2) of the PILS is a mandatory rule from which the parties may not deviate, for example by agreeing that the arbitral tribunal must determine the validity of the arbitration agreement exclusively by reference to the law chosen by the parties.⁷¹ However, that issue is beyond the scope of the current chapter. Instead, the focus herein will be on the third alternative mentioned in Article 178(2) of the PILS—that is, Swiss law—which requires a detailed appreciation of the general rules on formation of contracts found in Articles 1–10 of the Swiss Code of Obligations (CO).⁷²

17.32  Settlor(s), trustee(s), and protector(s) usually execute and sign the trust deed containing the arbitration clause when accepting office. Trustees and protectors assume their responsibilities under the terms of the trust deed. Thus, the arbitration agreement could state that by accepting office, the trustees and protectors are deemed to have agreed to the arbitration agreement in the trust deed. Such an arbitration agreement would cover not only the original trustee and protector but also any trustee or protector succeeding in office. From a Swiss perspective, the original trustee and/or protector should preferably sign the trust deed, and any successor trustee and/or protector should accept office (and the arbitration agreement) in writing in the deed of appointment.⁷³ Hence, any deed of appointment should at least refer to the arbitration clause in the trust deed and should preferably contain the arbitration clause as such.

17.33  As we have seen, there is no particular hurdle to overcome with regard to the consent to the arbitration agreement contained in the trust deed as far as the settlor, trustee, and protector (or successor trustee and protector) are concerned. Beneficiaries, however, present a trickier problem, since they are usually not parties to the trust deed and often do not even know about the trust. Any beneficiary who is party to a trust dispute and refuses to arbitrate could frustrate the entire arbitration process. A mechanism is needed to bind such beneficiaries to the arbitration agreement.

17.34  Some English authors are of the view that under the English Arbitration Act 1996, a trust deed could be drafted in such a way that benefiting from the trust would be deemed an agreement to submit trust disputes to arbitration.⁷⁴ By accepting the gifts or invoking (p. 397) any rights under the trust deed, the beneficiaries would be deemed to agree to settle any dispute in accordance with the arbitration agreement contained in the trust deed under the theory of deemed acquiescence.

17.35  This is also the approach followed by the ICC Arbitration Clause for Trust Disputes, which was developed in 2008 and which is intended to be integrated into the trust instrument.⁷⁵ That clause states that:

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.

17.36  This concept is already known in international arbitration as several arbitration laws enable arbitral tribunals to assert jurisdiction over a range of non-signatory parties, provided those parties have demonstrated some recognition, whether explicit or implicit, of being bound by the arbitration agreement.⁷⁶ Moreover, in the context of sports arbitration there is often no express consent to arbitration from the athletes and teams involved in proceedings. Rather, their consent is assumed on the basis of their participation in leagues and tournaments whose organizing bodies in effect impose the applicable dispute resolution mechanism on the athlete.⁷⁷

17.38  In this case, the Swiss Federal Tribunal had to consider, inter alia, the enforceability of a waiver to bring setting aside proceedings against the award. The tribunal came to the conclusion that such waiver, which had been signed by the athlete, did not result from a freely expressed intent and therefore could not be binding on him. However, the Swiss Federal Tribunal limited the scope of its ruling to the waiver to bring set-aside proceedings, highlighting why the same conclusion does not necessarily apply to the validity of the arbitration agreement. Although the Swiss Federal Tribunal expressed concerns with regard to the ‘consent’ of the athlete, it did not deny the validity of the arbitration agreement as such. Hence, in the authors’ view the same considerations may apply by analogy to trust arbitration, and arbitration agreements in trust deeds should thus be binding upon beneficiaries.

17.39  Furthermore, a beneficiary (such as a donee or an heir) does not incur obligations under the trust deed but rather receives benefits from the trust by the bounty of the settlor. Submission to arbitration as offered by the settlor through an arbitration clause in the trust deed is considered a condition for benefiting under the trust. In the authors’ view, any person claiming to be a beneficiary will accordingly not be compelled to submit to that condition. As mentioned earlier, a beneficiary has often also no other choice than to resort to the court of the state whose law governs the trust in case of a trust dispute, which law and jurisdiction, however, the settlor has ‘unilaterally’ chosen.⁸⁰

17.40  A similar approach has been suggested by Swiss commentary⁸¹ for the validity of arbitration clauses in last wills or statutes of foundations,⁸² which suggests this (p. 399) method should also work in a trust context provided the beneficiary consents to arbitration in the form required under Swiss law.⁸³ This means that the beneficiary (or persons claiming beneficiary status under the trust deed), like an heir, must accept the benefits from a trust subject to certain conditions, such as agreeing to submit any future dispute to arbitration.

17.41  Under Swiss law, such clauses should not be characterized as immoral or vexatious and should be upheld.⁸⁴ One caveat must be made from a Swiss perspective: in accordance with prevailing doctrine, a beneficiary could not be bound to arbitration by the settlor to the extent a trust dispute concerns his or her forced heirship portion. A beneficiary claiming that a trust violates various Swiss forced heirship rights may thus be able to contest arbitration successfully and have his or her case heard by an ordinary court.⁸⁵ The testator/settlor may, however, provide for a provision in the trust deed and his/her last will which would restrict the non-cooperative heir/beneficiary to the minimum portion under Swiss forced heirship law, should he or she not respect the arbitration clause.⁸⁶

17.42  To summarize, the concept of deemed acquiescence in the context of trust arbitration is derived from the ‘unilateral’ and beneficial nature of the trust. A beneficiary, whether of a fixed interest or a discretionary trust, like a donee or an heir, does not incur obligations under the trust deed but rather receives by bounty of the settlor benefits from the trust. Submission to arbitration is considered as a condition for benefiting under the trust. This is in the authors’ view not considered as creating a sort of forced arbitration as trusts are not contracts and no one is obliged to agree to become the beneficiary of a trust. Arbitration is, by will of the settlor, one of the conditions set to draw benefits under the trust.

17.43  Another option for the settlor to compel a beneficiary to arbitration which has been discussed by trust practitioners in the last few years is to give the trustee the power to exclude a beneficiary (eg not make the distribution) if the beneficiary refuses to consent to arbitration through a so-called in terrorem clause. A forfeiture clause, (p. 400) according to which a beneficiary loses any entitlement if he resorts to the state courts instead of arbitration in case of a dispute, may have a similar effect. Care needs to be taken with such approach depending on the applicable law governing the trust.⁸⁷

17.44  While a trust provision indicating that agreeing to arbitration is a condition precedent to benefiting from the trust should be effective under Swiss law, the issue is really governed by the applicable trust law (lex causae) rather than the Swiss lex arbitri.⁸⁸ Similarly, an arbitrator would most likely look to trust law to assess the validity of a forfeiture clause. On the other hand, provided the arbitrator considers such clauses valid, the Swiss lex arbitri is relevant to whether the beneficiary needs explicitly to agree to arbitration in writing or whether claiming or accepting a gift from the trustee could be considered as validly agreeing to arbitrate.⁸⁹

17.45  As these theories have not yet been tested—either in common law jurisdictions or in Switzerland—there remains a risk that a beneficiary may successfully oppose arbitration and resort to state court litigation. The chance of compelling a beneficiary to arbitration in Switzerland may be enhanced if the arbitration clause—as regards substance—is substantively valid under the relevant trust law.⁹⁰

17.46  Third parties such as creditors, heirs, or (ex-)spouses of the settlor cannot be compelled to arbitration on the basis of an arbitration clause in a trust deed. Instead, they would have to agree to submit an existing dispute to arbitration, which in practice they may be reluctant to do. Provided all concerned parties agree to arbitrate an existing dispute, such a dispute should be arbitrated, as jurisdictional issues are less likely to arise and potential problems at the enforcement stage can be more easily assessed.⁹¹

17.47  One of the distinctive features of a trust is that the settlor may designate beneficiaries that are not yet born, ascertained, or of full age (such as a future grandchild of the settlor). As an award may have an impact upon the proprietary rights of such beneficiaries, the question arises (i) how such (classes of) beneficiaries can be bound by a trust arbitration agreement and (ii) how their interests can be properly (p. 401) represented in an ongoing arbitration.⁹² Both issues are closely related and conflict of law issues may need to be considered. In the United Kingdom and relevant offshore trust jurisdictions, it will usually be the trustee—in light of his or her fiduciary duties vis-à-vis the beneficiaries—who represents the interests of such (classes of) beneficiaries. Alternatively (eg in case of a conflict of interest), a protector may act as guardian or the court will appoint a representative or so-called litigation friend.⁹³ Any compromise on behalf of such beneficiaries requires the approval of the court. From a Swiss perspective, a distinction must be drawn between (i) minor beneficiaries and (ii) unborn or unascertained beneficiaries.

17.48  The question whether a minor beneficiary has the capacity to be a party to an arbitration in Switzerland is decided not in accordance with the law governing the subject matter of the dispute but rather the law applicable to that person’s personal status. Conversely, the rule in the United Kingdom and related offshore trust jurisdictions is to apply the trust law to all aspects of a trust dispute, irrespective of the nationalities and domicile of the parties involved.⁹⁴

17.49  In the case of a minor living in Switzerland, the parents are entitled to represent the child in civil law proceedings or any pending arbitration proceedings to the extent the parents have custody, which they usually have jointly. The consent of the parents is not needed where the minor child only benefits from a transaction. The consent of the parents would, however, be needed to bind minor beneficiaries living in Switzerland to a trust arbitration seated in Switzerland as the arbitration proceedings may have financial consequences for the minor beneficiaries.⁹⁵ Minor beneficiaries may otherwise be bound by a trust arbitration clause in the same way as adult beneficiaries.

17.50  As regards the representation of a minor beneficiary in an ongoing trust arbitration, the involvement of the Swiss child protection authority may be required if there is a potential conflict of interest (eg if a parent of a minor beneficiary is also a party to the arbitral proceedings because both parents and children are beneficiaries under the trust). A trustee, protector, or arbitrator could not represent the interests of such a minor beneficiary living in Switzerland. A trustee or arbitrator would also not be entitled to appoint a representative for the child living in Switzerland as this is a matter subject to the exclusive jurisdiction of the Swiss child protection authority. As regards minor beneficiaries domiciled outside Switzerland, an arbitrator in Switzerland—like a Swiss court—would have to look at the national law at the residence of each beneficiary in order to determine who can properly represent each (p. 402) minor beneficiary. Court involvement in the arbitration proceeding is certainly nothing new, since arbitration laws and procedural rules regularly allow for limited domestic court involvement in arbitral proceedings.⁹⁶

17.51  Notwithstanding the above, it is suggested that the settlor may appoint an independent representative (or entrust a third party such as a protector to make such appointment) in the trust deed to protect the interests of minor beneficiaries (including a power to compromise). Arbitrators must consider on a case-by-case basis whether such appointment can be made without violating national laws providing for mandatory protection of that minor’s interest by a court appointed guardian or other representative. In the latter case, the representative or guardian designated in the trust deed will need to apply for approval of the local child protection authority or court to ensure the enforceability of the award.⁹⁷

17.52  Notably, the proper representation of minor beneficiaries is in the view of the authors a rather exaggerated debate, at least from a Swiss perspective. Thus, one of the authors of this chapter has been involved in Swiss arbitration proceedings involving minor parties represented by a duly appointed guardian and the same procedural rules were applied in the Swiss arbitration as in traditional Swiss court proceedings.⁹⁸

17.53  In England and related offshore trust jurisdictions, a court will usually appoint a representative to represent unborn or unascertained beneficiaries in a pending trust litigation.⁹⁹ In the United States, it is possible to provide for such class of beneficiaries in the trust deed by ‘virtual representation’, either by (i) involving adult beneficiaries representing unborn or unascertained beneficiaries with the same interest or (ii) designating an individual representative or body to appoint such representative.¹⁰⁰

17.54  There is doubt whether a so-called ‘virtual representation clause’ as commonly used in the United States will stand up to scrutiny in the offshore trust jurisdictions.¹⁰¹ Such an approach, however, could, in the authors’ view, work in a trust arbitration in Switzerland.

(p. 403) 17.55  Guernsey has specifically addressed this point regarding minor and unborn beneficiaries by providing clear guidance in its trust legislation. Interestingly, the representation of unborn and unascertained beneficiaries in Swiss trust proceedings was not discussed in Switzerland in relation to the ratification of the Hague Trust Convention. In any event, this appears to be a question governed by the applicable trust law¹⁰² rather than the lex arbitri, and an arbitrator in Switzerland could thus proceed in the same way as the trust court would in the relevant jurisdiction.

17.56  Trust disputes have multiparty character. To avoid a challenge to an award and to enhance the enforceability of the award in relation to all parties concerned, it is important that all relevant persons be parties to the arbitral proceeding. In English judicial proceedings, the court—usually on the basis of a proposal of the trustee—notifies the interested parties about an ongoing trust litigation and invites them to join the proceedings.¹⁰³ It is therefore recommended that potential beneficiaries be notified of an arbitration—preferably prior to the constitution of the arbitral tribunal—and that the parties agree to the intervention of such interested persons during the arbitral proceedings. It should not be the duty of the arbitrators to include all interested parties but rather such burden should be upon the claimant, possibly with a related duty of the respondent to inform claimant of any known potential beneficiaries.¹⁰⁴ Most rules of the major arbitral institutions¹⁰⁵ contain provisions for multiparty arbitral proceedings, and the 2008 ICC Arbitration Clause for Trust Disputes specifically deals with the joinder of parties/beneficiaries after the arbitration has been initiated. The fourth and final paragraph of the ICC Arbitration Clause for Trust Disputes, which deals with joinder of parties/beneficiaries to the arbitration proceedings, will be reviewed by the members of the 2015 ICC Task Force on Trust Arbitration so as to conform to the language to the 2012 version of the ICC Rules of Arbitration.

17.57  Switzerland has adopted an independent substantive rule for the determination of arbitrability, which states that any dispute involving an economic or financial interest may be settled by arbitration without the need to consider any potentially (p. 404) stricter rules found in the law applicable to the merits of the dispute or the national law of one of the parties.¹⁰⁶ Arbitrability has been defined by the Swiss Federal Tribunal as ‘a dispute [that] can be resolved by arbitration with regard to its proper nature and/or the fact that no mandatory legal provision reserves the exclusive jurisdiction of the courts; the issue of arbitrability may therefore be described as a quality of the subject-matter in dispute’.¹⁰⁷

17.58  Apart from purely non-financial matters, arbitrability can only be denied in an international arbitration with its seat in Switzerland for claims which have exclusively been reserved for the state courts pursuant to mandatory provisions of foreign law which must be taken into account as a matter of public policy.¹⁰⁸ In the context of trust arbitration, the main aspect of the arbitrability question is whether trust arbitration would somehow interfere with domestic court jurisdiction in a manner that is contrary to public policy.¹⁰⁹

17.59  By choosing a liberal approach to arbitrability in Article 177 of the PILS, the Swiss legislature expressed its will to facilitate arbitration of a broad range of disputes. As nearly all types of trust disputes ultimately concern the distribution of private wealth, the majority of such disputes can thus be arbitrated, given the liberal definition of arbitrability under Swiss law.¹¹⁰

17.60  As some trust matters may not be arbitrable in some jurisdictions, the question arises whether such disputes should a priori be excluded in the arbitration clause to limit the risk of parallel proceedings or problems at the enforcement stage.¹¹¹ Similarly, one may come to the conclusion that some types of trust disputes may not be suitable for arbitration and should be better referred to state courts. Careful drafting will help avoid questions of interpretation and potential jurisdictional problems. The inclusion of a list of possible disputes in the arbitration clause is not recommended as this list could be interpreted as exhaustive even if not so intended.

17.61  The New York Convention assists in ensuring that an arbitral award can be enforced by domestic courts in a relatively straightforward manner throughout the world or at least in countries that are parties to the New York Convention. Currently, there are 156 signatories to the New York Convention. While most offshore jurisdictions like Bermuda, Bahamas, Cayman Islands, Guernsey, Jersey, and Liechtenstein are signatories of the New York Convention, either in their own capacity or as territories of a state party,¹¹² others countries have not (yet) adhered to the convention, meaning that the procedures set forth in the New York Convention will not apply in those jurisdictions. Nevertheless, many of these countries are parties to other multilateral conventions and bilateral treaties which have an effect similar to that of the New York Convention.¹¹³

17.62  Extending the reach of the arbitration agreement to beneficiaries is somehow worrisome in light of the New York Convention’s insistence that the arbitration agreement be contained in an agreement in writing; that is, that both parties must fulfil the formal requirements.¹¹⁴ Under Articles II(2) and V(1)(a) of the New York Convention, it is not considered sufficient that the arbitration clause is contained in a document drafted by one party (ie the settlor) and simply accepted orally or tacitly by the other party (ie the beneficiary).¹¹⁵ However, while the New York Convention does not explicitly recognize a unilateral arbitration clause,¹¹⁶ the convention can be used as grounds for the enforcement of an award if unilateral clauses are permitted under the law of the country where enforcement and recognition of the award is sought.¹¹⁷ Thus, the liberal definition of arbitrability under Swiss law (p. 406) may have consequences for the recognition of a Swiss award abroad.¹¹⁸ Experience shows, however, that the trust assets are normally not located in the trust jurisdiction, and it is to be expected that the enforcement of a Swiss arbitral award at the place where the trust assets are held will most likely not be problematic, at least in terms of arbitrability.

17.63  Another question is whether an award issued against a class of unborn or unascertained beneficiaries or beneficiaries who are minors and who were represented in the arbitral proceedings by the trustee or a guardian appointed by the settlor would, in light of Article V(1)(a) of the New York Convention, be enforceable in a place where the interests of such minor, unborn, and unascertained beneficiary would have mandatory protection by a court appointed representative or guardian (eg in Switzerland).

17.64  The arbitration of trust disputes has come a long way in the sense that most Swiss-based and other trustees would seem to prefer resolving trust disputes by way of arbitration. Settlors who are increasingly concerned about the prospects of court proceedings also find arbitration an appealing alternative. Switzerland’s importance as centre for trust services and its longstanding tradition in international arbitration would make it a reliable and neutral venue for trust arbitration.

17.65  The legislative developments in Arizona, Florida, Missouri, New Hampshire, South Dakota, Guernsey, Malta, and the Bahamas as well as the approach adopted by the ICC have brought some uniformity and certainty to the trust industry, and these initiatives reflect a tendency to reconcile trust law and arbitration practice. It is to be expected that other trust jurisdictions will follow this trend, which will limit the potential risk of parallel proceedings (and enforceability problems) if arbitration in Switzerland is chosen as the dispute resolution mechanism.

17.66  However, while arbitration agreements in a trust deed have a sound legal basis, the waters remain untested with respect to the English theory of deemed acquiescence and the Swiss doctrine in relation to arbitration clauses in last wills. From a Swiss perspective, it is debatable whether a beneficiary needs to explicitly agree to arbitration in writing or whether claiming or accepting a gift could be considered as valid (deemed) consent to arbitration. Considering Article 149b(1) of the PILS, according to which a settlor may unilaterally prorogate a Swiss or other court as exclusive forum for trust disputes, binding beneficiaries as the case may be, an arbitration clause in a trust deed providing for arbitration in Switzerland should in the authors’ view be equally enforceable upon a beneficiary without the need for the (p. 407) latter’s written consent. Similarly, under Article 6 of the Hague Trust Convention, the settlor has the power to choose the applicable trust law (which in turn leads in general to the jurisdiction of the state court whose law governs the trust). It could therefore be argued that the settlor’s power not only includes the power to prorogate a state court but also to provide for arbitration.

17.67  Unfortunately, the Swiss legislature failed to address the issue of trust arbitration when implementing the Hague Trust Convention and related jurisdictional provisions in the PILS. A slight revision of Article 178 or Article 149b of the PILS would help to clarify this uncertainty, as would a decision from the Swiss Federal Tribunal. For the time being, a degree of caution must be exercised by trust practitioners when inserting arbitration clauses with seat in Switzerland in trust deeds. In general, issues such as whether the arbitral tribunal has jurisdiction over beneficiaries, whether consent to the arbitration clause must be in writing, and the representation of minor, unborn, or unascertained beneficiaries as well as the issue of arbitrability require careful and country-specific attention to ensure the enforceability of the award. As a result, the choice of the seat of arbitration is of great importance.

17.68  It may enhance the chances of compelling a beneficiary to arbitration in Switzerland if the arbitration clause is substantively valid under the applicable trust law. A forfeiture clause, according to which a beneficiary loses any entitlement if he or she resorts to the state courts instead of arbitration, may have a similar effect. When inserting arbitration clauses providing for arbitration in Switzerland into newly created trusts, it is preferable for now to have the arbitration agreement signed by all concerned parties. As the beneficiary does usually not sign the trust deed, such written consent should preferably be obtained from the beneficiary (eg by the trustee) shortly after the creation of the trust, if feasible under the circumstances, but in any event prior to the first distribution.