Sunday, March 17, 2013

Arbitration Clauses in Trust Deeds

A learned Single Judge of the Bombay High Court in Jayesh Shah v. Kaydee Family Trust (Arbitration Application 278 of 2012, decided on March 6, 2013) has decided an interesting point of law in connection with arbitration of disputes arising out of trusts. An arbitration clause in a Trust Deed provided for arbitration of all disputes “regarding the interpretation of any of the clauses of provisions or the contents of this Trust deed or between the trustees, or the trustees and beneficiaries, or the beneficiary inter­se regarding the rights, titles or interest flowing or arising from this Trust deed or consequential thereto…” The trust was a private trust for the benefit of six minors. Three of the beneficiaries (now having attained majority) filed an application u/s 11 in respect of disputes with the other beneficiaries (who also had attained the age of majority). Principally, the application was resisted on two grounds: (a) that the beneficiaries were not ‘party’ to the arbitration agreement; and (b) in any event, the arbitration agreement being entered into while the beneficiaries were minor, was void. It was also argued that “parties claiming through a party to arbitration agreement can apply for referring the dispute to arbitration under s. 45”, but this provision applied only with respect to Part II and no such provision was found in Part I of the Act. Reliance was placed on a judgment of the Delhi High Court in the case of Chhaya Shriram v. Deepak Shriram, for the proposition that beneficiaries are not a ‘party’ to an arbitration agreement in a trust deed.

The nature of a beneficiary's interest is a matter of some complexity (readers may refer to an excellent article by Edelman J., in a recent 2013 issue of the Law Quarterly Review in this regard). Jurisdictions where beneficiaries have been held bound by an arbitration clause in a trust deed often proceed on the premise that the beneficiary claims through a trustee and thus claims through a party to the agreement. Whether the language of s 7 of the Indian Act allows for such an interpretation is an open question. The learned Single Judge of the Bombay High Court however took a different approach - one which was premised not on the beneficiary claiming through a party, but on the beneficiary itself being a party. The learned Judge held, “In my view, the definition of 'party' under s 2(h) of the Act has to be interpreted harmoniously and the beneficiaries, who were referred to in the said Trust Deed as beneficiaries which provides for referring all disputes to arbitration between the beneficiaries and Trustees and also beneficiaries inter-se, has to be construed as if the beneficiaries were also party to the arbitration agreement... In my view, beneficiaries under the said Trust deed are not only claiming through the Trustees when they were minor, but are claiming independently under the Trust deed after attaining the age of majority...” With respect, this reasoning appears to beg the question: it is not clear what is meant by saying that the word 'party' has to be construed 'harmoniously'. Further, the impact which the general proposition (that a beneficiary is in a contractual relationship with the settlor, trustees and other beneficiaries) will have on other areas of law is not quite clear. If the proposition is to be regarded as being confined to the Arbitration Act, it is not clear where the basis for such restriction is to be derived from. This is not to say that there is no scope whatsoever, under any circumstances, to hold beneficiaries bound by an arbitration clause: however, the basis on which the learned Single Judge proceeded appears to require further consideration. For instance, one theory has been on the basis of estoppel and 'deemed acceptance' - by accepting the benefits under a trust, a beneficiary accepts to be bound by all obligations, including the obligation to arbitrate: two potential issues arise - (a) is such a theory a basis to enforce arbitration of inter-se disputes between beneficiaries (as opposed to disputes between a beneficiary and a trustee); (b) is such a theory compatible with s. 7 of the Indian Act: with respect, the answer cannot be found in simply saying that s 2(h) must be construed 'harmoniously'.

The approach of the learned Single Judge may be contrasted with the observations made by the Delhi High Court in Chhaya Shriram. The Delhi High Court held, “… there is no doubt that a beneficiary can have benefits of the trust only in accordance with the terms of the Trust. But he is granted benefits by the Trust not out of any contract between his and the Trustees and the Settlor... Any dispute between the beneficiaries can be referred to the arbitration only if there is an independent Arbitration agreement between the beneficiaries...” The learned Single Judge distinguished these observations by stating that the arbitration clauses in the two cases were different. With respect, this appears to be no real distinction at all: the Delhi High Court had held that as a matter of law, there must be a separate arbitration agreement among the beneficiaries. The correctness of this proposition does not depend on the wording of the specific clause, but on the nature of a trust, and of interests under a trust. It thus appears that there is a conflict between the High Courts on the issue of the proper approach to be taken towards arbitration clauses purporting to bind beneficiaries (both, vis-a-vis trustees, and also inter se).

Additional note: Besides the article by Justice Edelman referred to earlier, readers may also refer to an article on 'Arbitration of trust disputes', (2012) 18 (4) Trusts and Trustees 296. It is noteworthy that a strong view that trust disputes of this nature are not arbitrable at all, has been put forward by a report of the Trust Law Committee authored by of John Wood, David Brownbill QC and Christopher McCall QC: one of the reasons being that the trust concept itself is the creature of the courts of equity, exercising discretion which can be exercised only by the court: hence, the rights of beneficiaries and trustees can only be validly determined by Courts. In reliance, one can look to the decision of the Privy Council in Schmidt v Rosewood, (2003) 2 AC 709; and that of Danckwerts J in In re Wynn, (1952) Ch 271, holding that neither a settlor nor a trustee can wholly oust the jurisdiction of Courts; and Courts always retain inherent supervisory jurisdiction. In April 2012, the Trusts Law Committee (Chaired by Sir Peter Gibson) opined that while in principle arbitration of trusts disputes was desirable, new legislation would be needed for this. AN interesting discussion is also available in an article by Toby Graham and Joanna Pool, available here


vswami said...

Random thoughts / Posers:

As a general proposition, one could validly urge, the very concept of 'arbitration' has the inherently essential objective of resolving any dispute out of / in relation to anything covered in any contract agreement or arrangement of every kind. Trust is one such arrangement. Should that be so, and proceeding on that premise, the posers are:

1. Why any dispute, of whatever type, arising in relation to a trust is not a matter to be first tried and settled only through arbitration, by way of honoring the prima facie intention of the author of the trust, as clearly borne out by the very fact that in the Deed there has been an arbitration clause?

2. Why, then, such a right to press for an arbitration should, by applying the principles of natural justice, -instead of being bogged down by going into the scope under the statute on arbitration, - not to be regarded to be dependent on facts such as, whether any beneficiary named (or even otherwise), was a minor or major, so as to avoid the controversy of whether or not he was a 'party'.

Incidentally, none can afford to ignore the sublime wisdom behind the (s)age-old-saying, "LAW IS AN ASS". As such, as may be well imagined, the point for right-minded legal pundits to consider is this: - Should, in order to simplify and thereby avoid scope for any such possible mind-boggling controversies, and court litigation between trusties and all intended beneficiaries (minor or major, or future off-springs), any author of the trust need to, by way of abundant caution, have the 'arbitration clause' suitably drafted in as comprehensive manner as feasible.

(< unedited)

S. said...

Very strange judgment, and I loved the post :-) Perhaps some weight should also be placed on how a jurisdiction looks at the concept of a beneficiary. If there is recognition of rights in equity and beneficial ownership, there are probably stronger grounds for saying that the beneficiary could "harmoniously" be read into the arbitration agreement. On the other hand, in jurisdictions like India which do recognise a beneficial interest but not necessarily a "right of ownership" the case for that is weaker.

Also, on the issue of privity, have there ever been situations when obligations in an agreement have been made applicable to third parties? Basically a flip on the concept of third party beneficiaries? I'm not aware of this. If not, then we're proceeding on the basis that this is some sort of an oral contract, which presumes that beneficiaries to a trust are even capable of consenting to their status.

Mihir Naniwadekar said...

Thanks for the comment.

On the first point: while there is a strong point to what you have suggested regarding jurisdictions which do or do not accept beneficial 'ownership', even jurisdictions which purport to accept 'beneficial ownership' may be using 'ownership' in a different manner than generally assumed. The article by Justice Edelman referred to in the post deals with these issues, and on what 'beneficial ownership' and beneficial interest really are.

On the second aspect (of obligations arising out of third party contracts) in an arbitration context specifically, it is harder to run a 'non-party' case. Further, there are some exceptions to privity (on its burden side) - covenants running with the land etc (extended to burden running with the goods, too: see the Privy Council advice in Lord Strathcona v Dominion Coal. A sub-bailment on terms is another example, but that can perhaps be understood as being based on an 'implied consent' type theory. (Somewhat like deemed acquiesence theory used in the arbitration context referred to in the post: but then one needs to consider the effect of s 7). In connection with a sub-bailment on terms, see Morris v CW Martin (particularly the obiter of Lord Denning MR), 1966 1 QB 716, approved subsequently by the Privy Council in The Pioneer Container