Mediation Resources
Mediating trust disputes
Practical guidance for trustees or personal representatives and
beneficiaries
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Disputes covered
This guidance is primarily concerned with disputes internal to
the trust or estate, for example:
- questions of construction;
- challenges to the exercise or proposed exercise of the powers
of trustees or personal representatives;
- disputes about the trusteeship or executorship; and
- claims for breach of trust
Disputes external to the trust or estate, for example a claim
against advisers or against a third party said to have damaged
property of the trust or estate, are not covered. (i)
This guidance is based on English law but similar principles may
apply in all the major trust jurisdictions.
In what follows, “trusts” includes estates and “trustees”
includes personal representatives.
Considering mediation
The family context of many trust disputes makes them especially
suited to mediation.
The court’s expectation that trustees will at least have
considered mediation (or some other form of A.D.R.) applies,
however, to external disputes, not internal disputes. (ii)
Power of trustees to enter mediation agreement
An agreement to mediate does not commit anyone to settle the
underlying dispute but it does involve contractual commitments,
typically(iii):
- to stay, or not to commence,
proceedings unless and until mediation has been attempted and has
proved unsuccessful(iv);
- to attempt to settle the dispute in good faith - probably
meaningless as a matter of law, although possibly relevant to the
question of costs;
- to warrant that each party has authority to settle, and to
disclose any limits on that authority
- to exonerate the mediator for liability in the absence of fraud
or wilful misconduct;
- to keep all negotiations confidential and not to use them in
litigation; and
- to pay the fees and costs of the mediation.
We deal with paying for the mediation below. Where the trustees’
involvement is only personal, as with a claim for breach of trust,
there seems nothing to stop trustees from agreeing the other terms.
Where questions of construction are concerned, or the validity of
the exercise of powers, their power to go to court should not be
constrained and any provision about their authority to settle must
make it clear that they cannot bind the trust.
Parties concerned
If the mediation is to end in a compromise of the dispute, all
concerned parties will need to be present or represented. The facts
of each case will determine who is a necessary party but trust
disputes are especially likely to affect a large class.
If the necessary parties are few in number and are all of full
age and capacity, they can all attend the mediation in the usual
way. But in other circumstances special arrangements will be
needed.
Numerous beneficiaries
There may be too many beneficiaries to make it practicable for
all to attend a typical one-day mediation. If they are all of full
age and capacity, they may appoint a spokesman (e.g. by power of
attorney) to negotiate on their behalf or, where there is more than
one class of beneficiaries, a spokesman for each class. The
mediator may even mediate separate class meetings, with someone
suitable being chosen to negotiate on behalf of each class. Where
the beneficiaries are unable to appoint someone with authority to
bind them, or where the class includes minors or unborns (see
below), the court’s approval will usually be needed. So those
initiating the mediation will have to choose someone suitable to
negotiate for the class, with a view to his being appointed a
representative party by the court afterwards. The court’s approval
is required to a compromise where there is a representative.
(v)
Note, however, that it is not essential for a representative
party to be a member of the class being represented.(vi) If no willing or appropriate beneficiary
is available, it may be possible to rely on (e.g.) a suitable
solicitor or local attorney.
Unborn or unascertained beneficiaries
The court’s approval will be needed if a compromise is to bind
unborn or unascertained beneficiaries. Traditionally the trustees
safeguard their interests in negotiation(vii) and where the trustees have no adverse
interest of their own, and all the others can speak for themselves,
there is no need for a representation order: the court can simply
approve the compromise on behalf of unborn or minor beneficiaries.
But a representation order will be wanted where the trustees are
disabled from looking after the unborn or unascertained
beneficiaries or where they are part of a class requiring such an
order in any event.
Minor or incapable beneficiaries
How will minor or incapable beneficiaries be bound by a
compromise? They may be covered by a representation order. Or it
may be possible to frame the compromise so that their interests are
unaffected. Otherwise the following applies.
No one can contract for a minor, and the court’s approval will
be needed, when the minor will have to have a litigation
friend.(viii) The simple course is to
line up a suitable person as a potential litigation friend, who can
take part in the mediation on behalf of the minor (without any
formal role) and who can take office when the court gives approval.
It will also be useful to have at the mediation the counsel who
will opine on any compromise to the court.
Incapable beneficiaries, by contrast, may have someone who can
bind them without the approval of the court, i.e. an attorney under
a lasting power of attorney or a deputy appointed under the Mental
Capacity Act 2005. Otherwise the court’s approval will be needed
and a litigation friend will have to be appointed.(ix)
Where a litigation friend is needed, and the court’s approval is
wanted quickly, it will usually be sensible to prepare a
certificate of suitability of the litigation friend before the
mediation, so that he can take office without court order.(x) If the court is to be asked to make the
appointment, evidence is necessary.(xi)
Personal representatives or trustees of another trust
Where personal representatives or trustees of another trust are
beneficiaries under the trust in dispute, they will have the powers
of compromise given by section 15(f) of the Trustee Act 1925. In a
difficult case, they may wish to have the protection of a court
order, the court either sanctioning the compromise under Public
Trustee v. Cooper(xii) or, possibly,
accepting a surrender of the trustees’ discretion.(xiii) In that case the compromise agreement
will have to be conditional upon the court’s approval.
Charities
Where a charity is a beneficiary, its trustees too will have the
powers of compromise given by section 15(f) of the Trustee Act
1925. In a difficult case, they may wish to have the protection of
guidance from the Charity Commission under section 29 of the
Charities Act 1993.(xiv) But if there
is to be an application to court in any event, it will be simpler
to ask for the sanction of the court. Again, the compromise
agreement will have to be conditional on the approval
contemplated.
Terms of compromise
Using trustees’ powers
If the claim is for breach of trust, it is not open to the
trustees to agree to exercise their powers in a given way as part
of the consideration for the compromise. To do so would be a fraud
on the power.(xv)
Otherwise it may well be one of the terms of a compromise that
the trustees will exercise discretionary powers in a given way.
There is nothing intrinsically improper in trustees’ exercising
their powers to give effect to a compromise.(xvi)
But practical points are:
- Trustees should beware of accepting too readily the demands of
unreasonable and vociferous beneficiaries at the expense of the
others. Given, however, the "reality testing" of all parties'
positions that is an inherent part of the mediation process, this
is less of a problem in mediation than, say, in simple all-party
negotiations;
- It may be undesirable for trustees to contract to exercise
their powers in a given way, because in the absence of an express
power to do so they are not entitled to fetter the future exercise
of their other powers. It may be preferable for the compromise to
be simply conditional on an exercise of the powers in the given
way. But there would be nothing wrong in agreeing to exercise the
powers in a given way conditional on the approval of the court.
Absent a power to fetter, if a proposed compromise envisages
binding the trustees to a particular exercise in the future (as
distinct from a present exercise which is part and parcel of the
compromise) they should not join in.
- The trustees may be well advised to consider obtaining the
sanction of the court to the proposed exercise even if they have
not contracted to exercise their powers in that way.
Conditions
The agreement may need to be conditional on one or more of the
following:
- the appointment of a particular person as a representative
party and the approval of the compromise on behalf of the class
represented;
- the appointment of a particular person as litigation friend for
a minor or patient and the approval of the compromise on behalf of
the minor or patient;
- the sanction of the court or the Charity Commission where the
beneficiaries include personal representatives or trustees of
another trust or charity trustees; and
- the sanction of the court where the compromise involves the
exercise of the trustees’ discretionary powers.
The compromise agreement should set out all the steps to be
taken to satisfy the conditions, by whom and when. It should also
provide for what happens if the conditions are not satisfied: have
the parties agreed a fall-back plan or does the compromise simply
become void?
Going to court
Evidence
When the court is being asked to approve a compromise on behalf
of a class, or to sanction the exercise of a power, it will require
evidence that the compromise is a beneficial one. It may be
difficult to provide that evidence without disclosing some part of
the negotiations. What may be disclosed will have to be set out in
some detail in the compromise agreement, the confidentiality terms
of which generally supersede those in the agreement to mediate.
Listing
Approval of a compromise may be urgent. It is likely to be
simpler to arrange a short hearing before a judge than before a
Master. The matter can be listed informally by counsels’ clerks
through the Clerk of the Lists or else there can be an attendance
in the Applications Court in the Chancery Division. (All parties
would waive short notice.) There is no system for arranging urgent
hearings before a Master through the Masters’ Secretaries and it is
necessary instead to attend on a Master dealing with ex parte
applications at 2.15 p.m. merely to fix a hearing.
When no proceedings are already on foot, it will usually be
possible to issue a claim form before the hearing and if not an
undertaking to issue can be given. The costs of such steps should
be provided for in the compromise agreement.
Paying for mediation
Can the trustees use the trust fund to pay their own costs of a
mediation or the costs of anyone else? The question is a difficult
one and advice should be taken early on.
Trustees’ own costs
If the claim to be compromised is one for breach of trust, the
trustees cannot pay their own costs of a mediation out of the trust
fund (except as part of the compromise itself). That must follow
from the rule that they cannot use the trust fund to pay their
costs of defending litigation for breach of trust until, at the
earliest, the claim has been dismissed or discontinued.(xvii) The same presumably applies if the
claim is a hostile claim to remove them, even if no breach of trust
is alleged.
Where the trustees are neutral and the dispute is between
beneficiaries, their costs of representation at a mediation should
be recoverable from the trust fund, in the same way as their costs
of legal advice and representation is ordinarily recoverable. It is
not clear that that extends to contributing to the mediator’s fees,
since their entitlement to use lawyers is a branch of the exception
to the rule that they have to do everything personally; and the
mediator will not be doing anything which the trustees would
otherwise have to do.(xviii)
Other parties’ costs
There seems no basis for saying that the trustees have any power
to fund the whole mediation out of the trust fund, whether by
meeting the costs of the other parties or by paying the
mediator.
That creates a serious difficulty where it is necessary to find
someone to act on behalf of a minor or a patient and then to become
his litigation friend. That person, if not a lawyer, will need to
instruct a lawyer and there is no fund for the purpose. The same
applies to a potential representative of a class of
beneficiaries.
A solution available in some cases will be for the trustee to
exercise a discretionary power (of appointment or advancement) to
apply trust property for the benefit of one or more beneficiaries
by paying for all or part of the mediation out of it. Some care
will be needed: if there is only one person in whose favour the
power can be exercised (e.g. under section 32 of the Trustee Act
1925), it may not be reasonable to expect him to pick up the whole
bill. But where the warring beneficiaries are all objects of the
power, it may well be easy to justify paying for a mediation out of
the trust fund. Where the objects of the power are adults, the
trustees will have the protection of their consent, since if they
disapprove of using the trust fund they can withdraw from the
proposed mediation altogether. The payment of costs from trust
funds could have tax consequences, but this is outside the scope of
this guidance.
When that solution is not available, asking the court to confer
a suitable power under section 57 of the Trustee Act 1925 may be
worth while in a heavy case – especially if litigation has already
begun.
Otherwise, it seems that the parties to the proposed mediation
who are sui juris will have to pay or guarantee the costs of a
proposed litigation friend or representative before the mediation
can take place. It is not clear that the court, when later asked to
approve a compromise, can direct payment of those costs out of the
trust fund: they are not costs of the only application before it,
which will be ones for approval.
Express power
The following is proposed as a suitable express power:
“If any dispute relating to the Trust arises the Trustee may
[with the written consent of the Protector]:
- enter into an agreement for a mediation of the dispute or any
other process of dispute resolution (together “A.D.R.”) to avoid
contested proceedings or to avoid their being tried on such terms
as it thinks fit (including a term that the Trustee will not take
proceedings unless and until the A.D.R. has proved
unsuccessful);
- on such terms as it thinks fit pay out of the Trust Fund or
reimburse itself from the Trust Fund part or all of the costs of
the A.D.R. of any party thereto including its own costs thereof
save (as to its own costs) to the extent that the dispute concerns
an allegation of breach of trust on the part of the Trustee”.
Some thought needs to be given before making a protector’s
consent necessary: if the protector is a beneficiary, or someone
close to a particular party to the dispute, the requirement for his
consent is likely to cause the other parties to view the whole
mediation process with suspicion, and so may prove
counterproductive.
Endnotes
(i) Practical points arising where trustees consider bringing or
defending external proceedings:
- They have a power of compromise under section 15(f) of the
Trustee Act 1925.
- They may wish to protect themselves by issuing a Beddoe
application.
- If they do, they will be expected at least to have considered
mediation or some other form of A.D.R. (see next endnote).
- Their power to spend trust money on A.D.R. is not beyond
question and they may wish to seek a power to do so under section
57 of the Trustee Act 1925 in their Beddoe application.
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(ii) Practice Direction – Applications to the Court for
Directions by Trustees in Relation to the Administration of the
Trust (supplementing C.P.R. Part 64), para. 7.5, as to the evidence
on a Beddoe application. See too The Chancery Guide (2005 ed.),
para. 26.13.
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(iii) See the form of agreement on the resources page.
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(iv) See the form of stay agreement on the resources page
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(v) C.P.R. r. 19.7(5).
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(vi) Chessels v. British Telecommunications plc [2002] P.L.R.
141 at [22].
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(vii) Re Druce’s Settlement Trusts [1962] 1 W.L.R. 363 at 370
(“watchdog for … unborn interests”).
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(viii) C.P.R. r. 21.10(2).
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(ix) Ibid.
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(x) See C.P.R. r. 21.5.
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(xi) C.P.R. r. 21.6(4).
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(xii) [2001] W.T.L.R. 901.
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(xiii) As was done in Re Ezekiel’s Settlement Trusts [1942] Ch.
230 (C.A.); Re Strafford [1980] Ch. 28 (C.A.).
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(xiv) As substituted by section 24 of the Charities Act
2006.
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(xv) Askham v. Barker (1850 12 Beav. 499.
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(xvi) Re Q Trusts [2001] C.I.L.R. 481 (Cayman G.C.).
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(xvii) Armitage v. Nurse [1998] Ch. 241 (C.A.) at 263.
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(xviii) Although the trustees’ power of compromise under section
15(f) of the Trustee Act 1925 necessarily carries with it the power
to incur reasonable costs in compromising, the power appears to be
confined to external disputes: that is implied in Re Strafford
[1980] Ch. 28 (C.A.).
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