The Supreme Court of Texas recently considered whether beneficiaries of a trust may be bound by an arbitration provision in a trust instrument. Although the Court based its opinion on the Texas Arbitration Act, its reasoning provides some insight into how courts in other jurisdictions might resolve similar issues in the future.
The facts of the underlying dispute are straightforward: the settlor of the trust named his sons as sole beneficiaries, designating himself as trustee, with the attorney who prepared the trust designated as successor trustee upon the settlor’s death. Several years later, one of the beneficiaries filed a court action against the successor trustee, alleging that he had misappropriated trust assets and failed to provide the beneficiaries an accounting of such assets as required by law. The trustee denied the allegations and moved to compel arbitration pursuant to the Texas Arbitration Act (TAA) based upon the trust’s arbitration provision, which provided that arbitration “shall be the sole and exclusive remedy“. The trust agreement expressly bound the Grantor, Trustees, and beneficiaries, and each of their respective heirs and successors.
The lower court held that for an arbitration provision to be binding, it must be the product of an enforceable contract between the parties which did not exist between the trustee and the trust beneficiaries. As such, it denied the motion to compel arbitration.
The Texas Supreme Court reversed, holding that although the beneficiaries were not signatories to the trust instrument, the TAA does not require a formal contract – it merely requires an agreement to arbitrate – which was satisfied under the doctrine of direct benefits estoppel when the plaintiff beneficiary accepted the benefits of the trust and sued to enforce its terms. The Court noted it would be incongruous to allow a beneficiary to hold a trustee to the terms of the trust but not hold the beneficiary to those same terms. Because the beneficiary had accepted certain benefits of the trust and sought to enforce its provisions against the trustee, his conduct indicated his acknowledgement of the trust’s validity and his acceptance of its terms (including the arbitration provision). As such, the beneficiary was estopped from claiming that the trust’s arbitration provision was inapplicable and, as the dispute was also held to be within the scope of the arbitration agreement, the provision could be enforced against him. The Court noted that there exists a strong presumption in favor of arbitration and any doubts as to the scope of a valid arbitration provision favor arbitration.
A possible effect of this opinion will be the more frequent inclusion of arbitration provisions in trust agreements. Perhaps even more importantly, though, it is yet one more illustration of the creativity courts in the US will apply in support of the strong presumption in favor of arbitration.