Clause and effect
Modernised legislation for resolving trust disputes has helped pitch the Cayman Islands as an arbitration centre among its fellow IFCs, says Robert Lindley
International financial centres such as Cayman had not seen much demand for alternative dispute resolution mechanisms. But the Cayman Islands Arbitration Law, which came into force on 2 July 2012, gave the regime an overhaul, bringing it into line with the current UNCITRAL Model Law on International Commercial Arbitration.
Cayman's Grand Court is well equipped to handle commercial and trust disputes for sophisticated international parties in a cost-effective and expeditious manner. It has a financial services division, which is dedicated to handling trust and certain commercial disputes.
Comparable jurisdictions, for example Bermuda and Singapore, have done a great deal to develop ?successful arbitration industries, demonstrating that there is a place for such dispute resolution mechanisms to coexist with and complement an efficient court system. In the offshore market, and especially in current economic conditions, it has become apparent that buyers of financial services and products have increasing regard to the quality of dispute resolution mechanisms in choosing between competing jurisdictions.
The 2012 law creates an opportunity for settlors of Cayman Islands trusts to include arbitration provisions in their trust instruments that would compel arbitration if and when a trust dispute or other question requiring a determination arises. This should reduce the costs of resolving disputes, which are traditionally dealt with in the courts. Including arbitration provisions in the trust instrument may also provide a more conducive forum for resolving trust disputes, which should be more efficient and cost-effective.
Advantage point
Arbitration is private and confidential, whereas court proceedings may lead to details about the trust going on public record. However, the Cayman court may agree to implement privacy measures, such as sealing the court file, anonymising proceedings and holding hearings in private, where there is legitimate reason to do so.
The cost of resolving a trust dispute by arbitration is likely to be less than in traditional court proceedings because the procedure is quicker and simpler, avoiding unnecessary procedural steps, limited disclosure and lengthy filing timetables. An arbitrator's written decision is final and binding with only a limited right to appeal on questions of law unless this is specifically excluded by the parties, thus the final determination of the dispute is likely to be quicker and less costly than litigation.
There are some claims that cannot be arbitrated, for example those relating to internal trust disputes that require the court exercising the statutory power of removing a trustee. The arbitrator does not have the same statutory power.
However, the trust instrument may provide (although it may be rare in practice) for the arbitrator to have such a power. Another example is applications for directions and guidance on behalf ?of trustees.
Cayman has astutely recognised the need to develop itself as an arbitration centre by amending the Cayman Islands Grand Court rules, which now provide that every arbitration application (any proceeding or application that concerns or relates to arbitration proceedings in the Cayman Islands) starts in the Grand Court's financial services division.
Consequently, arbitration applications will be assigned to well-qualified judges who have substantial experience of resolving complex trust disputes.
Also, enforcing an arbitral award is probably easier to achieve than a court judgment. The Cayman Islands has been a party to the New York Arbitration Convention since 1981 and the Foreign Arbitral Awards Enforcement Law gives domestic effect to the convention.
As a consequence, a foreign arbitral award made in the territory of a state that is a party to the New York Convention will be recognised and enforced by the Cayman Islands Court on production of the original arbitration agreement and award (subject to limited defences).
The Arbitration Law provides that an arbitral award, irrespective of the country in which it was made, may be recognised as binding and shall be enforced by the Cayman Islands court as long as it satisfies the criteria set out in the New York Convention. This means that all domestic and foreign awards will now be enforceable in the Cayman Islands, subject to the leave of the court.
No contract
Unlike commercial agreements, the relationship between trustees and beneficiaries is not founded on contractual provisions. The Arbitration Law provides that the parties to a dispute must have entered into an arbitration agreement. The trust instrument is between the settlor and the trustee and an arbitration clause in the trust instrument must be drafted in such a manner to ensure that the parties to the trust accept and agree that all disputes under the trust are referred to arbitration.
A "party" to an arbitration agreement includes "any person claiming through or under a party to an arbitration agreement or a party to the arbitration proceedings". A beneficiary is not usually a party to the trust or the trust instrument and therefore not a party to the arbitration agreement. However, a beneficiary may be considered as a "person claiming through" the settlor. Also, by seeking to benefit from the trust, a beneficiary may be deemed to have acquiesced to the arbitration agreement and therefore deemed to have agreed to be bound by the arbitration clause.
There is some argument on this point and it has not yet been tested before the Cayman Courts. Therefore, to bind a beneficiary to the trust instrument, and thus the arbitration agreement, the trust instrument may include a forfeiture clause under which the beneficiary forfeits their right to benefit from the trust if court proceedings begin.
Another option, would be for the settlor to compel a beneficiary to arbitrate a dispute by providing the trustee with the power to exclude a beneficiary (i.e. not make a distribution) if the beneficiary refuses to consent to arbitration (i.e. an in terrorem clause). Such clauses have been held by the Grand Court to be valid in certain circumstances, although not in the context of arbitration.
Alternatively, a beneficiary may agree to certain conditions, i.e. expressly agreeing to submit any future dispute to arbitration, on receiving a distribution from the trust.
There is no Cayman authority on applying the Arbitration Law relating to exclusive arbitration clauses in trusts, so it will be interesting to see how the Cayman courts view such clauses in the future, in particular determining whether or not they bind beneficiaries. The key point is that careful drafting will be necessary when considering arbitration clauses in trust instruments.
Arbitration, therefore, is an ideal method for resolving trust disputes, particularly because of its private and confidential nature, which will be a key priority for high net worth individuals and families. The 2012 law has modernised the regime in Cayman and will stimulate the development of its international arbitration industry. And the Cayman Islands Grand Court rules have been revised to provide the necessary infrastructure to support Cayman-seat arbitrations.
On a cautionary note, practitioners must be aware of potential pitfalls when it comes to drafting arbitration clauses in trust instruments, but for Cayman Islands trusts this should not be a deterrent to include such a useful provision to resolve disputes.
Robert Lindley is a senior associate in the private client and trusts practice group at Appleby in Cayman