Texas Supreme Court enforces arbitration clause in a trust

Texas Supreme Court enforces arbitration clause in a trust

Today, the Texas Supreme Court released an anticipated opinion in Rachal v. Reitz. In the opinion, the Court upheld an arbitration clause in a trust dispute, requiring the trust beneficiaries to bring their claims against the trustee in arbitration instead of court.

Arbitration clauses are typically only enforceable against those who sign a contract containing the clause.  However, the Court decided that the beneficiaries were bound by the clause under the doctrine of direct benefits estoppel, stating:

[A] beneficiary who attempts to enforce rights that would not exist without the trust manifests her assent to the trust’s arbitration clause. For example, a beneficiary who brings a claim for breach of fiduciary duty seeks to hold the trustee to her obligations under the instrument and thus has acquiesced to its other provisions, including its arbitration clause. In such circumstances, it would be incongruent to allow a beneficiary to hold a trustee to the terms of the trust but not hold the beneficiary to those same terms.

It will be interesting to see if estate planners begin to routinely insert arbitration clauses into trust agreements.  Arbitration often sounds like a great idea to laypersons and lawyers who aren’t litigators.  And sometimes it can be an efficient method of resolving disputes.

I have been involved in a number of arbitrations.  The rate for an experienced and qualified arbitrator can be $400 an hour or more.  That adds up quickly, particularly if the arbitration clause provides for a panel of three arbitrators.  The result may be the trustee and beneficiaries paying many, many tens of thousands in arbitrator and administrative fees.  And that doesn’t include the attorney’s fees for each side in the dispute.  That might still be preferrable to years of protracted litigation, but estate planners would be doing their clients a disservice not to advise them of both the advantages and disadvantages of arbitration.

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