THE USE OF ARBITRATION IN ESTATES AND TRUSTS

 

I.     OVERVIEW AND HISTORY

Arbitration is here to stay.  Driven by what parties perceive as fundamental deficiencies of the formal judicial system, including expense, protracted length, gamesmanship, belligerency, and wastefulness, arbitration has grown exponentially in the last ten years.  Because of its confidentiality,  empirical statistics are difficult to come by. Nonetheless, the American Arbitration Association ("AAA"), probably the largest administrator in the world, notes a 34% increase in commercial case filings alone from 1993 to 2002¿i.e., from 12,713 to 17,105 cases per year.^[1] The National Association of Securities Dealers ("NASD"), where arbitration is mandated in customer agreements, notes a 64% increase  in   securities   claims  filings from 1994  to  2003¿i.e,  from  5,500  to 8,500 cases per year.  See http://www.nasdadr.com/statistics.asp.  And  courts and legislatures¿both federal and state¿continue wholeheartedly to sanction this trend. Arbitration's dramatic increase must be viewed as a seismic shift in the notions of justice in this America. Given the $200 to $300 billion annual cost of civil litigation, studies seem to confirm general public acceptance of the process. For an empirical study, see generally Dispute-Wise Management: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts American Arbitration Association (2003) for an interesting but non-empirical survey of attorneys and Survey of Arbitration ABA Section    of    Litigation,    Task   Force  on ADR Effectiveness (August 2003)  http://www.abanet.org/litigation/taskforces/adr/surveyreport.pdfstudy.

But contrary to its being perceived as a new process, arbitration has been on the scene for centuries. Long before courts were organized and formal  law enacted, there had to be principles of law to govern a variety of disputes.  Conflict is a part of human experience. Arbitration and mediation were regularly used to resolve a variety of conflicts involving boundaries, trade, general business, personal transactions, international transactions, and even family relationships.

While arbitration may not be as old as Methuselah, the Bible does record that Moses established an "alternative" system of dispute resolution for use during Israel's forty-year journey in the wilderness.  Exodus 18:13-21.  Arguably, Paul's exhortation for the Christian community to resolve disputes without using the courts of the pagans was an appeal to the arbitral process.  I Corinthians 6:1-6.  The Greeks and Phoenicians regularly used arbitration to settle trading disputes, as did Marco Polo. The Use of Arbitration in Wills and Trusts, Vol. 17, No. 3, ACTEC NOTES  at 177 (Winter 1991) [hereinafter "ACTEC NOTES"].

Arbitration has also been used extensively throughout America's history to resolve issues such as the ownership of colonies, the ownership of particular pieces of territory, the recovery of money owed by one state to another, and all sorts of religious matters.  1 Arbitration in Action,  Nos. 4 and 5, at 5 (April-May 1943), cited in Manual for Commercial Arbitrators American Arbitration Association at 11 (1999).  In the specific context of wills, no less a personage than the father of our country,  George Washington,  included an arbitration clause in his will:

 

My will and direction expressly is, that all disputes (if unhappily should any arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chosen by the disputants¿ each having the choice of one and the third by these two. Which three men thus chosen shall, unfettered by Law, or legal constructions, declare their Sense of the Testators intention¿and such decision is, to all intents and purposes to be as binding on the parties as if it had been given by the Supreme Court of the United States.

 

Perhaps because of the inchoate development of the judicial system in the 19^th Century,  arbitration appears to be a favored mechanism for resolving disputes.  Nonetheless, the process had its deficiencies because of the common-law doctrine of the reversibility of an arbitrator's decision established by  Lord Edward Coke's decision in Vynior's case (1608).  An arbitrator was seen not as a judge whose purpose was to decide on the merits of the controversy but, rather, as an agent trying to affect compromise, somewhat akin to the modern notion of a moderated settlement conference or mini-trial.

The early part of the 20^th Century saw two competing trends affecting arbitration.  First, the  judicial system, suspicious of the power of arbitrators to encroach on its jurisdiction,  attempted to limit the power of the process.  The court's rationale in Robert Grace Contracting Co. v. Chesapeake & O.N. Ry., 281 F. 904 (6th Cir. 1922), is typical:

 

The attack upon the [arbitration clause] is by reason of its universality . . ., [which] provides for vesting an arbitrator with the exclusive right to decide all questions that may arise between the parties on the subject matter, thereby ousting the courts from all power to hear and decide those questions.

 

Id. at 905.

 

Second, the explosive economic growth of the United States after the First World War induced businessmen to seek an alternative way of resolving their inevitable but often increasingly sophisticated disputes accompanying that growth.  In 1920,  New York became the first state to enact a modern arbitration statute.  It differed significantly from the earlier common-law arbitration in that it encouraged the use of binding arbitration for future as well as existing disputes.  In 1926, Congress passed the Federal Arbitration Act.  Prompted by Congress and legislatures, judicial disapproval waned, and eventually courts actually began to encourage the process, no doubt reflecting the courts' awareness of the merits of arbitration as well as to give effect to the parties intent.  At present, endorsement of arbitration at federal and state levels continues unabated despite objections.  (See Part III, infra.)  If arbitration can continue to deliver faster, less expensive, and less problematic results, this trend will accelerate.

The author anticipates that arbitration will become more utilized in the estate and trust context as well. The number of non-traditional and multiple-marriage family arrangements with their conflicting loyalties and confusing expectations is fertile ground for disputes to germinate. Even  changing law seems to promote controversy. For example, the Uniform Prudent Investor Act (UPIA), Tex. Prop. Code ¿¿ 117.001-117.012 (2004), which  became law in Texas effective January 1, 2004, dramatically alters standards for investment management from prior law. It adopts the so-called "total asset management" approach.  Id. ¿ 117.004.  Similarly, the UPIA's sister Act, the Uniform Principal and Income Act, id. ¿¿ 116.001-116.173, allows trustees broad discretion to reallocate between principal and interest to protect the relative rights of income versus remainder beneficiaries.  Id. ¿116.105.  With the spiraling of wealth in managed accounts, these Acts, given their  breadth and ambiguity, are certain to spawn litigation on investment performance and trustee discretion in making adjustments.  Arbitration is the perfect vehicle to provide relatively inexpensive and expeditious resolution of these sophisticated controversies with a minimum of public scrutiny.^[2]

In a nutshell, arbitration is the process whereby a dispute is submitted to one umpire or a panel of three umpires¿the arbitrators¿for a final and binding determination, known as the award.  The panel conducts itself similarly to a judge.  That is, it conducts an evidentiary hearing, hears opening and closing arguments, rules on evidence,  reviews the testimony and evidence presented by the parties, and renders an award enforceable in court.  Typically, to maintain the integrity of the process and to handle the numerous administrative details that inevitably come up, a neutral administrator such as the AAA, Judicial Arbitration and Mediation Services ("JAMS"), or the National Arbitration Forum ("NAF") is used, although not required by law. Arbitration does not replace the formal litigation system but, rather, coexists with it as an alternative; hence, it is one of the alternative dispute resolution ("ADR") procedures, along with mediation, mini-trials, summary jury trial, and moderated settlement conference.  It is often repeated that arbitration is not viewed as a diminution of the rights of the parties but merely as a change in the venue.

Normally, arbitration takes place only in the context of a consensual relationship between the parties, i.e., an arbitration clause in a contract.  Thus, arbitration law is governed by classic principles of contract law.  As such, courts construe arbitration clauses just like they construe any other contract clause to give effect to the parties' intent.  Although parties may enter into such an arrangement either at the beginning of their contractual relationship or at some later date after the controversy has arisen, the former is more common.  Wills and trust instruments that include an arbitration clause represent a departure from this "consensual" arrangement since the dispute will likely involve non-signatory parties, such as beneficiaries.

In comparing arbitration to formal litigation, it is helpful to note these major features of arbitration:

 

A written clause for resolving disputes by the use of arbitration.

 

As noted, an exception this general rule is the inclusion of an arbitration clause in a will or trust.

 

Informal procedures.

 

Procedural rules relative to court procedure are simple:  strict rules of evidence are not applicable, and there are no requirements for transcripts of the proceedings or for written opinions of arbitrators unless the parties agree otherwise.  See AAA Estate & Trust Rules 19, 31, 37 [hereinafter "AAA E&T Rule __"] (Appendix A).  although  there is no formal discovery, AAA E&T Rule 16 allow the arbitrator to require the "production of relevant documents and other relevant information."  While frowned upon, depositions are permissible, particularly if the parties are in agreement.

 

Objective and knowledgeable neutrals serve as arbitrators.

 

Arbitrators are selected by the parties for the specific cases because of their knowledge of the subject matter.  Based on that experience and expertise, arbitrators can render an award based on thoughtful and thorough analysis. Thus, the selection of an appropriate arbitrator is critical, and studies show that an arbitrator's knowledge of a specific type of case is the most important qualification for his or her effectiveness, not whether the arbitrator has litigation or judicial experience. Typically, most arbitrators are practicing attorneys who, unlike judges, do not maintain "dockets" of hundreds of seemingly anonymous cases like judges; hence, they have a comprehensive grasp of each individual case.

 

Arbitration is confidential.

 

Hearings are closed, and proceedings are not a matter of public record. In sensitive estate, trust, or other family matters, this keeps the "dirty laundry" from being hung out to dry on the front page of the newspaper. 

 

Economy.

 

The costs of arbitration proceedings are generally less, even including the not insubstantial fees to  the administrator and panel, than formal litigation, primarily because of the absence of formal discovery, extensive motion practice, rescheduling, or interlocutory and post-award appeals.

 

Speed.

 

The AAA reports that the vast majority of cases are disposed of within twelve months from the date of filing, with 90%  of all arbitration hearings concluded in two days or less; the National Arbitration Forum notes the median time of an arbitration from filing to award at two-thirds that of a formal lawsuit.

 

Final and binding awards are enforceable in court.

 

Arbitrators have broad discretion in rendering awards.  AAA E& T Rule 37 provides that an arbitrator "may grant any remedy or relief that the arbitrator deems just and equitable within the scope of claims or counterclaims being arbitrated."  Court intervention and review are limited by applicable state and federal law, and award enforcement is facilitated by these same laws.  Judicial review is generally limited to egregious defects in the arbitration procedure, not with the merits of the case.  Arbitration laws draw narrow limits around the court's authority to review awards.

The Federal Arbitration Act (FAA), 9 U.S.C.A. ¿¿ 1 et seq., is a substantive (as opposed to procedural) statute which encourages arbitration and makes arbitration awards binding and enforceable in federal court. Each state has its own act, , the Texas Arbitration Act,  Tex. Civ. Prac. & Rem Code ¿¿171.001 et seq. (2004).

 

II.   ANATOMY OF AN ARBITRATION

The beauty of arbitration is derived in its flexibility to customize each individual arbitration to the needs of the parties.  It is designed to be user friendly.  While the parties' knowledge of the minimal rules is indispensable, arbitration is not designed to be a trap for the unwary.  For example, there are no default procedures in arbitration for parties who do not answer by a certain date.

Once the parties have selected the panel by reviewing a list of candidates and striking the conflicts from a list provided by the institutional provider, the parties have a preliminary conference.  Most of the time this is done by telephone, but in complex arbitrations it is done in person with all parties or attorneys in attendance.  This conference is a frank but informal discussion tool to resolve issues, identify the scope of the dispute, address the future conduct of the case, such as clarifying issues and claims, setting deadlines to exchange witness lists and documents and to engage in discovery, scheduling the hearings, and any other preliminary matters.  In the author's experience, the importance of this meeting cannot be underestimated in setting the tenor of the case and the respect to be accorded the panel as well as the process.  Other issues that may be addressed in a preliminary hearing include (1) the very issue of the arbitrability of the dispute; (2) whether the parties are subject to the arbitration clause; (3) determination of the status of any collateral arbitration or pending litigation and whether to sever or consolidate if appropriate; (4) and ruling on any question of waiver by either party.  Preliminary hearings may last fifteen minutes, fifty minutes, or two hours.

After the preliminary hearing has been held, the panel typically issues a scheduling order which sums up all that was decided during the preliminary hearing.  In larger cases, it is drafted by the parties and approved by the panel.  The scheduling order serves as the governing document for the case.  Scheduling orders can be as short and to the point or as long and creative as the case and the attorneys can conceive.  Generally, the panel does as much as possible to encourage the parties to agree to the order, particularly as to reasonable discovery, since it is the parties and their attorneys who presumably have the best grasp of the case.

During the next phase of the process, the parties engage in discovery usually without a great deal of involvement from the panel.  If the panel has done a good job during the preliminary hearing, the discovery controversy will be kept at a minimum.  On the other hand, the efficiency of the process is such that when and if a discovery controversy comes up a hearing can be held promptly, often by telephone with the panel, and an order issued directly.  This remedies the complaint heard about many lawsuits that discovery motions either simply drag on for months without any resolution or force the case to settle on terms that might have been different had discovery been forthcoming due to the parties having grown weary of the process.

Generally, the parties have to make a stronger showing than in formal litigation for the need of depositions, and the question of depositions will usually be specifically addressed at the preliminary hearing.  It avoids the "Rambo" type tactics of burying the other side in expensive, wasteful, time-consuming discovery.  Once again, panels try to encourage agreement.

The hearing proceeds several months down the line much like any formal trial.  Oaths are administered to witnesses, there is often a stenographic record of these hearings, attorneys ask questions, and so forth.  Attorneys advocate their clients' position similar to court proceedings.  The panel has broad discretion on the conduct of the proceedings.  AAA E&T Rule 30.  Absent specific direction in an arbitration clause (such as a directive that the panel use the Federal Rules of Evidence), it is up to the panel to determine the admissibility, relevance, and materiality of evidence, and the panel should take into account the applicable principles of privilege, such as attorney-client confidentiality.  Given the informality of the process and the specialized knowledge of the panel, a great deal of evidence¿i.e., hearsay¿that comes in at the hearing probably would not be allowed in court.  Even affidavits are permissible.   Arbitration otherwise is very similar to the judicial trial with opening arguments, evidence, resting, more evidence, closing arguments, etc.

After the hearing is over, the panel will sometimes schedule  post-hearing briefing and even oral arguments before the panel.  This is particularly true in complex cases. Once the hearing is "closed," the arbitrators have thirty days to render their decision ("the award"), much like a court's judgment.  Arbitrators may grant any remedy or relief that is deemed just and equitable and within the scope of the agreement of the parties.  AAA E&T Rule 43.  Once the award is delivered to the parties, they may seek to reduce it to judgment by a court.

Courts have generally held that an arbitrator is not bound to apply the strict letter of the law,  and courts will not second guess an arbitrator's interpretation of the law even if it is "mistaken."  In re Nestle USA Beverage Division, Inc., 82 S.W.3d 767, 777 (Tex. App.¿Corpus Christi 2002, orig. proceeding); Anzilotti v. Gene D. Liggin, Inc.,  899 S.W.2d 264, 266  (Tex. App.¿ Houston [14^th Dist.] 1995, no writ).  The standard to reverse or "vacate" an arbitrator's award on its substantive merits is that of "manifest disregard of the law," perhaps  the most stringent existing. There is nothing resembling the factual or legal sufficiency inquiries found in the record of a formal appellate court.

State and federal statutes spell out the narrow grounds for reversing an arbitration award on procedural grounds. Under  Section 10(a) of the FAA, the court may enforce an arbitration award unless one or more of the following statutory grounds are proven:

 

1.     Where the award was procured by corruption, fraud, or undue means;

2.     Where there was evident partiality or corruption of the arbitrators;

3.     Where the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown or in refusing to hear evidence pertinent and material to the controversy; or

4.     Where the arbitrators exceeded their powers or "so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made."

 

III.  CASE LAW DEVELOPMENT

A.    Arbitration Law Generally

"Arbitration is a contractual proceeding by which the parties, in order to obtain a speedy and inexpensive final disposition of disputed matters, consent to submit the controversy to arbitrators for determination."  J.M. Davidson, Inc. v. Webster, 49 S.W.3d 507, 512 (Tex. App. ¿Corpus Christi 2001), rev'd on other grounds, 128 S.W.3d 223 (Tex. 2003); see also In re John M. O'Quinn, P.C., 2003 WL 11468619, at *3 (Tex. App.¿Tyler June 25, 2003, orig. proceeding), vacated as moot, 2003 WL 21571427 (Tex. App.¿Tyler July 10, 2003) (mem. op.); 6 C.J.S. Arbitration ¿ 2 (2003).  Like a lawsuit, arbitration is a mechanism that allows parties to reach a binding resolution of their disputes, Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217, 221 (Tex. App.¿Houston [1st Dist.] 1996, orig. proceeding), in an arbitral rather than a judicial forum.  In re Burton, McCumber & Cortez, L.L.P., 115 S.W.3d 235, 237 (Tex. App.¿Corpus Christi 2003, orig. proceeding); see also In re American Homestar of Lancaster, Inc., 50 S.W.3d 480, 485 (Tex. 2001) (orig. proceeding) (arbitration does not result in a party forgoing substantive rights but merely results in the submission of the claim to an arbitral forum rather than a judicial one).  As is the case with other alternative dispute resolution proceedings, the overarching purpose of arbitration is to keep parties out of the courtroom.  Cayan v. Cayan, 38 S.W.3d 161, 165 (Tex. App.¿Houston [14th Dist.] 2000, pet. denied).  In fact, "the very purpose of arbitration is to avoid the time and expense of a trial."  In re Bruce Terminex Co., 988 S.W.2d 702, 704 (Tex. 1998) (orig. proceeding); see also In re MHI Partnership, Ltd., 7 S.W.3d 918, 921-22 (Tex. App.¿Houston [1st Dist.] 1999, orig. proceeding) (same).

The perceived benefits of arbitration clauses are more than just avoiding a trip to the courthouse.  In addition to allowing parties to pick the forum where the dispute is resolved, parties may also (depending on the language of the arbitration agreement) (1) have the right to pick their own arbitrators, Porter & Clements, 935 S.W.2d at 221; (2) determine the rules under which the arbitration is to be conducted, J.D. Edwards World Solutions Co. v. Estes, Inc., 91 SW.3d 836, 842 (Tex. App.¿Fort Worth 2002, pet. denied); and (3) keep matters that they want to remain private out of the public eye because an arbitration (unlike a lawsuit) is not a public proceeding.  Additionally, the consensual nature of arbitration means that it is perceived as being (and in fact usually is) far less expensive than a lawsuit.  Porter & Hedges, 935 S.W.2d at 221.  In short, the ability to agree to arbitrate allows parties to either craft their own unique arbitral jurisdiction that will settle any disputes that arise between them or, if they do not want to go through the trouble of creating their own jurisdiction from scratch, to chose from the array of "pre-packaged" arbitral jurisdictions that are available.

For all these reasons, "[t]he law strongly favors arbitration."  New Concept Constr. Co. v. Kirbyville Consolidated Indep. Sch. Dist., 119 S.W.3d 468, 471 (Tex. App.¿Beaumont 2003, pet. denied).  Arbitration agreements are favored by federal law. The United States Supreme Court has consistently held:

 

The [Federal] Arbitration Act thus establishes a "federal policy favoring arbitration," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941, 74 L. Ed.2d 765 (1983), requiring that "we rigorously enforce agreements to arbitrate."  Dean Witter Reynolds Inc. v. Byrd, supra, 470 U.S., at 221, 105 S. Ct., at 1242. . . . 

 

As we observed in Mitsubishi Motors Corp. v. Soler Chrysler‑Plymouth, Inc., [473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985),] "we are well past the time when judicial suspicion of the desirability of arbitration and of the competence of arbitral tribunals" should inhibit enforcement of the Act. . . . " Shearson/ American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S. Ct. 2332, __ (1987).

 

Accord Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944 (Tex. 1996) (orig. proceeding) (per curiam); In re Sun Communications, Inc., 86 S.W.3d 313, 317 (Tex. App.¿Austin 2002, orig. proceeding); City of Lubbock v. Hancock, 940 S.W.2d 123, 125 (Tex. App.¿Amarillo 1996, orig. proceeding).  They are likewise favored by Texas law.  Cantella & Co., 924 S.W.2d at 944; Blue Cross Blue Shield of Texas v. Juneau, 114 S.W.3d 126, 134 (Tex. App.¿Austin 2003, no pet.); Hancock, 940 S.W.2d at 125.  Although many practitioners see arbitration as the "new kid on the block," this view is mistaken: Agreements to resolve disputes privately, through arbitration, have not only been around but have been the objects of judicial favor for a long time.  See, e.g., Brazoria County v. Knutson, 176 S.W.2d 740, 743 (Tex. 1944).

Because arbitration is so favored, once it has been shown that two parties have entered into an agreement to arbitrate their differences, it is presumed that any difference that may arise is subject to being arbitrated.  Burton, McCumber & Cortez, 115 S.W.3d at 237; In re Rolland, 96 S.W.3d 339, 345 (Tex. App.¿Austin 2001, orig. proceeding).  If there is any doubt as to whether a dispute is subject to being arbitrated, these doubts are resolved in favor of arbitration, In re First Texas Homes, Inc., 120 S.W.3d 868, 870 (Tex. 2003) (orig. proceeding) (per curiam); Brown v. Anderson, 102 S.W.3d 245, 247-48 (Tex. App.¿Beaumont 2003, no pet.), unless it can be said with "positive assurance "that the agreement to arbitrate cannot be interpreted to encompass the dispute in question.  Sun Communications, 86 S.W.3d at 317.

However, no matter how favored it may be, an agreement to arbitrate is, at its heart, an agreement, and a court cannot force a party to arbitrate in the absence of its agreement to do so.  Freis v. Canales, 877 S.W.2d 283, 284 (Tex. 1994) (orig. proceeding) (per curiam); see also Rolland, 96 S.W.3d at 345; In re EGL Eagle Global Logistics, L.P., 89 S.W.3d 761, 764 (Tex. App.¿Houston [1st Dist.] 2002, orig. proceeding) (mand. denied).  In the words of the Dallas Court of Appeals:

 

Although arbitration is encouraged, it is a contractual matter and, in the absence of an agreement to arbitrate, a party cannot be forced to forfeit the constitutional protections of the judicial system and submit its dispute to arbitration.

 

Jenkins & Gilchrist v. Riggs, 87 S.W.3d 198, 201 (Tex. App.¿Dallas 2002, no pet.).

 

B.    Arbitration Clauses  in Wills, Trusts, and Family Limited Partnerships

Arbitration provisions are becoming common, even ubiquitous, in certain kinds of business contracts, in construction contracts, and even in employment agreements, but they still are not widely used in wills or inter vivos trusts.  To understand why this is, it is necessary to look at the cases involving these instruments.

 

1.     Quasi-Arbitration Provisions

The interest in avoiding litigation is not a new one, and over the years many testators and trust settlors have included provisions in their wills and trusts that attempt to make litigation unnecessary.  Because people have not changed either, these quasi-arbitration provisions were often challenged.

One of the most interesting cases challenging one of these provisions is Pray v. Belt, 26 U.S. 670 (1828).  The case required the interpretation of the terms of a very prolix will left by one James P. Heath, which appointed a number of executors to handle his affairs post-mortem and left detailed instructions regarding the disposition of bonds, the construction of "fire-proof buildings" on lots he owed, etc.  Id. at 671-72.  Recognizing that his will was "lengthy" and that it was "possible that I have committed some error or errors," Mr. Heath empowered his executors to decide disputes regarding the will by majority vote and provided that these determinations would be "final and conclusive, without any resort to a Court of Justice."  Id. at 672-73 (emphasis in original).

A dispute  arose regarding the disposition of Mr. Heath's estate, and a suit was filed.  Id. at 673.  The executors contended that because Mr. Heath had given them the authority to construe the will any decisions they made were final and were not subject to judicial review.  Id. at 676.  In rejecting this assertion, Chief Justice Marshall noted that, while provisions empowering executors to make decisions regarding the estate are proper, they are subject to being interpreted in order to determine what the testator reasonably intended.  Id. at 679-80.  Finding that a reasonable testator would not have intended to allow his executors to make decisions contrary to the plain language of the will¿such as "paying to A, a legacy bequeathed to B"¿the Supreme Court held that the executors' decisions could not be final and binding in all respects and that the only entity that could determine whether such a "gross misconstruction of the will" had occurred was the court.  Id. at 680.  Over the years, other cases from other jurisdictions have reached similar results.  See, e.g., Taylor v. McClave, 15 A.2d 213, 112 (N.J. Ch. 1940); Nations v. Ulmer, 122 S.W.2d 700, 703 (Tex. Civ. App.¿El Paso 1938, writ dism'd); see also 96 C.J.S. Wills ¿ 828 (2003).^[3]

In essence, these cases recognize that a testator can make the determination of named individuals regarding the estate, claims against it, etc., but these decisions are nevertheless still subject to judicial oversight and review.  For example, the El Paso Court of Civil Appeals cited with approval cases holding that, although the decisions of an appointed arbitrator may be "final and binding on all the parties interested," these decisions are binding only if they were "fairly and honestly made," and therefore decisions that "evidenced a gross departure from the manifest intent of the testator as disclosed in the will" are subject to judicial review.  Nations, 122 S.W.2d at 703; see also Coffee v. William Marsh Rice Univ., 408 SW.2d 269, 284 (Tex. Civ. App.¿Houston 1966, writ ref'd n.r.e.) (citing Nations for the proposition that the court cannot interfere with the exercise of a trustee's discretion except "in a case of fraud, misconduct, or clear abuse of discretion").  In another case, the Michigan Supreme Court held that an agreement to submit the question of a testator's mental competence to "a leading Detroit attorney" for determination did not affect the probate court's right to make the same determination on its own, without reference to the decision of the agreed-upon arbitrator.  In re Meredith's Estate, 266 N.W. 351, 352-53, 356-57 (Mich. 1936).  A few years later, in a case involving a testamentary trust, the same court held that a provision empowering two trustees to interpret the will, which required them to seek the opinion of a third if they could not agree, did not mean that their decisions could not be reviewed by the court.  Matter of Estate of Jones, 99 N.W.2d 365, 367 (Mich. 1959).

I have characterized such provisions as "quasi-arbitration provisions" because, although they somewhat resemble an agreement to arbitrate disputes, they also differ from arbitration agreements in many important respects.  First, although quasi-arbitration provisions empower someone to make a binding decision without reference to the courts, the decisions are often being made not by a third-party arbitrator but instead by an individual with some interest in or connection with the estate or trust, such as the executor or the trustee.  Therefore, unlike "true" arbitration provisions, the decisions are not being made by a neutral decisionmaker, but instead by someone whose own interest may color the result, a fact that may explain why courts are more willing to review the determinations of these quasi-arbitrators.  Additionally, because these quasi-arbitration provisions are subject to broader review by the courts, they do not remove a dispute from the jurisdiction of the courts in the same way a "true" arbitration agreement does; ultimately, there is still a judge lurking in the background, perhaps even Chief Justice Marshall.

 

2.     True Arbitration Provisions

The question then becomes how to include a valid and binding "true" arbitration provision in a will, trust, or family limited partnership.  In this respect, the primary hurdle is also one of the central elements of any arbitration agreement: the element of consent.  As set forth above, Texas courts will not send parties to arbitrate their differences unless they have all agreed to do so in a binding manner, and beneficiaries under a will, trust, or similar instrument are almost never parties to the agreement and therefore are almost never in a position to have agreed to arbitration before a dispute arises.  I believe that this is the reason we have not seen arbitration clauses used more widely in connection with wills and the like, despite the fact that the advantages arbitration offers are the same in a dispute arising under a trust as they are in a dispute arising under a contract, and despite the fact that these advantages are widely recognized.  See, e.g., Stanard T. Kleinfelter & Sandra P. Gohn, Alternative Dispute Resolution:  Its Value to Estate Planners, 22 Est. Plan. 147, 147-48 (May/June 1995).^[4]  In an attempt to address this consent issue, I have come up with three possible ways to make an arbitration provision in a will, trust, or family limited partnership binding.

The first is far and away the most direct and obvious and consists simply of having those who will be affected by the document sign the document, i.e., have the beneficiaries sign off on the will or trust.  However, for all of its simplicity, there are several disadvantages to such an approach.  The first is that it is somewhat cumbersome, requiring potentially dozens of beneficiaries that are possibly scattered all over the country sign a single document.  Additionally, it will result in the beneficiaries knowing in advance what it is they will receive, with all the potential for trouble and hurt feelings that cans be created.  It may also restrict the right of the testator or settlor to change the terms of the instrument at a later date, at least without getting everyone to sign again.  Finally, such a regime would be very far at odds with current practice, which means that it is less likely that lawyers and clients would be willing to adopt it. ^[5]

If the parties want to use a mediator to resolve an existing dispute, they can enter into the following submission.

The parties hereby submit the following dispute to mediation administered by the American Arbitration Association under its Commercial Mediation Rules. (The clause may also provide for the qualifications of the mediator(s), the method of payment, locale of meetings, and any other item of concern to the parties.)

The services of the AAA are generally concluded with the transmittal of the award. Although there is voluntary compliance with the majority of awards, judgment on the award can be entered in a court having appropriate jurisdiction if necessary.

Arbitration Rules for Wills and Trusts

1. Incorporation of These Rules into a Will or Trust *

A testator or settlor shall be deemed to have made these rules a part of the will or trust whenever the will or trust has provided for arbitration by the American Arbitration Association (hereinafter AAA) or under its Arbitration Rules for Wills and Trusts. These rules and any amendment of them shall apply in the form obtaining when the demand for arbitration or submission agreement is received by the AAA. The parties, by written agreement, may vary the procedures set forth in these Rules.

* The AAA applies the Supplementary Procedures for Consumer-Related Disputes to arbitration clauses in agreements between individual consumers and businesses where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices. The product or service must be for personal or household use. The AAA will have the discretion to apply or not to apply the Supplementary Procedures and the parties will be able to bring any disputes concerning the application or non-application to the attention of the arbitrator.  Consumers are not prohibited from seeking relief in a small claims court for disputes or claims within the scope of its jurisdiction, even in consumer arbitration cases filed by the business.

2. Administrator and Delegation of Duties

When a will or trust provides for arbitration under these rules, the AAA is authorized to administer the arbitration. The authority and duties of the AAA are established in the will or trust and in these rules, and may be carried out through such of the AAA's representatives as it may direct. The AAA may, in its discretion, assign the administration of an arbitration to any of its regional offices.

3. National Panel of Arbitrators

The AAA shall establish and maintain a state-by-state panel of will and trust arbitrators, who shall be attorneys whose practice has been primarily devoted to estate and trust matters for at least ten years, and shall appoint arbitrators from this panel as provided in these rules.

4. Initiation under a Submission

Parties to any existing dispute may start an arbitration under these rules by filing at any regional office of the AAA three copies of a written submission to arbitrate under these rules, signed by the parties. It shall contain a statement of the matter in dispute, the amount involved, if any, the remedy sought, and the hearing locale requested, together with the appropriate filing fee.

5. Initiation under an Arbitration Provision in a Will or Trust

Arbitration under an arbitration provision in a will or trust shall be initiated by the claimant in the following manner.

The initiating party shall give written notice to all other parties (hereinafter respondent) of its intention to arbitrate (demand), which notice shall contain a statement setting forth the nature of the dispute, the amount involved, if any, the remedy sought, and the hearing locale requested, and shall file at any regional office of the AAA three copies of

the no