Update: Arbitration Provision in Trust Enforceable

In Rachal v. Reitz, No. 11-0708, 2013 WL 1859249 (Tex. May 3, 2013), the Texas Supreme Court determined whether an arbitration provision contained in an inter vivos trust was enforceable against the trust beneficiaries. The trust contained a provision requiring all disputes regarding the trust and the trustee to proceed to arbitration. When a trust beneficiary sued the trustee alleging that the trustee violated the terms of the trust, the trustee moved to compel arbitration. The trial court denied the motion; the appellate court affirmed. The Supreme Court of Texas held the arbitration provision was enforceable against the beneficiary for two reasons.

First, the trust settlor determines the conditions attached to her gifts, and courts must enforce trust restrictions on the basis of the settlor’s intent. The settlor’s intent in the Rachal trust was to arbitrate any disputes over the trust. Because the arbitration language was unambiguous, the court was required to enforce the settlor’s intent and compel arbitration if the arbitration provision was valid and the underlying dispute was within the provision’s scope.

Second, mutual assent to an agreement to arbitrate may be manifested through the doctrine of direct benefits estoppel. The doctrine estops a non-signatory to an agreement from accepting benefits under the agreement while simultaneously attempting to avoid the agreement’s burdens. A formal written contract is not required for the doctrine to apply. Thus, the beneficiary’s acceptance of the benefits of the trust and suit to enforce its terms constituted the assent required to form an enforceable agreement to arbitrate. Further, the beneficiary’s claims that the trustee violated the terms of the trust fell within the scope of the arbitration provision. Therefore, the trial court erred by not compelling arbitration because the arbitration provision was valid and the underlying dispute was within the provision’s scope.

Texas Supreme Court to Determine if Arbitration Clause in Trust is Enforceable

 

 

 

In Rachal v. Reitz, 347 S.W.3d 305 (Tex. App.--Dallas 2011, pet. filed), a beneficiary of a trust (the “Beneficiary”) sued the trustee (the “Trustee”), alleging failure to provide an accounting and breach of fiduciary duties.  The Trustee filed a motion to compel arbitration and to stay litigation, arguing that the Beneficiary must arbitrate his claims against the Trustee pursuant to a provision contained in the trust document.  The arbitration clause at issue stated:

Arbitration.  Despite anything herein to the contrary, I intend that as to any dispute of any kind involving this Trust or any of the parties or persons concerned herewith (e.g. beneficiaries, trustees), arbitration as provided herein shall be the sole and exclusive remedy....

The trial court denied the Trustee’s motion, and the Trustee appealed.

The existence of an arbitration agreement is based on Texas contract law. The sole evidence presented to support the Trustee’s motion—the trust document—expressed the settlor's intent that disputes involving the trust be resolved by arbitration.  The court of appeals held that the Trustee did not establish how the settlor's expression of intent satisfied all of the required elements of a contract or how this expression of the settlor's intent transformed the trust provision into an agreement to arbitrate between the Beneficiary and the Trustee. Accordingly, the court of appeals held that the arbitration provision in the trust document was not enforceable as an agreement to arbitrate.

The Texas Supreme Court agreed to review the appellate court's decision and is expected to issue a ruling in this case of first impression next year.