Is a provision in a trust agreement requiring arbitration of trust disputes enforceable?

Kelly v. Giuliano

In the case at issue, Kelly v. Giuliano, the settlor's nephew filed a lawsuit asserting various claims, including claims that a trustee breached their fiduciary duties and improperly took trust assets. Defendants responded to the lawsuit by arguing that the nephew was required to submit his claims to arbitration because the trust agreement at issue contained an arbitration clause stating that, "[a]ny disputes arising hereunder shall be subject to binding arbitration pursuant to the Virginia Uniform Arbitration Act."

Seems straightforward, right? On the surface, it seems clear that the nephew would be stuck arbitrating his claims. However, as is often true in the law, things are not as simple as they seem.

Per the Fairfax Circuit Court, a trust agreement isn't a contract.

Under Virginia's Uniform Arbitration Act, there are two circumstances when an arbitration provision is enforceable: (1) when there is a written agreement "to submit any existing controversy to arbitration"; or (2) when there is "a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties."

The dispute in Kelly didn't exist when the trust agreement was signed. So option (1) doesn't apply. For the arbitration provision in the trust agreement to be enforceable, it must satisfy option (2). But that raises the question: Is a trust agreement a "contract?"

The Fairfax Circuit Court says the answer to that question is "no." A contract requires an agreement between parties (i.e., "mutual asset") and an exchange of something of value (i.e., "consideration"). A trust agreement, on the other hand, is a unilateral act of the settlor, not an agreement between two parties. In that sense, it is like a will, and Virginia law makes clear that wills are not contracts.

What about the Uniform Trust Code?

Interestingly, although the court in Kelly determined that a trust agreement isn't subject to Virginia's Uniform Arbitration Act because it isn't a contract, the court also noted that Virginia's Uniform Trust Code expressly grants trustees the power to resolving disputes involving the interpretation or administration of a trust by arbitration. In this case, however, the arbitration language used in the trust agreement at issue, which required arbitration of "disputes arising hereunder," is construed narrowly. According to the court, such language only requires arbitration of disputes involving the interpretation or enforcement of an agreement. The nephews claims sought neither. So, even if an arbitration clause in a trust agreement could be enforced generally, it would not be enforced in this particular case.

What if the arbitration clause used in the trust agreement was broader? Would the court have compelled arbitration, despite its ruling that a trust agreement isn't a contract subject to the Uniform Arbitration Act in the first place? The court doesn't really make that clear. It also doesn't really explain the import of the language in the Uniform Trust Code expressly contemplating the arbitration of trust disputes. Those are issues for another day. Given the large number of estate and trust litigation cases the Supreme Court of Virginia has taken recently, perhaps we will get some answers from the Commonwealth's highest court sooner than later.

Disputes involving trusts and estates are complex.

If the Kelly case makes one thing clear, it's this: Disputes involving trusts and estates often involve complex, nuanced issues. If you are involved in a dispute invovling an estate or trust, you will want to hire an attorney with experience handling such complex disputes. Don't wait. Contact us today.

Do You Need To Contest A Will In Virginia Or Speak To An Estate Law Lawyer Regarding A Will, Trust Or Estate Dispute?

When a person dies, or even before dying, their wealth is placed into the hands of someone, such as a trustee or an executor. This entity has a fiduciary duty to manage the wealth properly and to make sure it’s given at the appropriate time to the beneficiaries who were entitled to receive it as part of their inheritance.

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