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Arbitration Agreement in Trust Is Unenforceable

Virginia court says the clause isn’t part of a contract, because trusts aren't contracts.

In Kelly v. Giuliano, CL-2020-0007479, (Va. Cir. Ct. Sept. 21, 2020), the Fairfax County City Court ruled that a trust isn’t a contract, and therefore, an arbitration provision contained in a trust agreement is unenforceable.

In the underlying suit, the plaintiff filed a seven-count complaint alleging various breaches of fiduciary duties and conversion. The defendant asserted that the plaintiff was subject to the arbitration clause contained in the trust agreement. The plaintiff responded that there was no written contract in which plaintiff agreed to arbitrate his future claims and that the trust itself isn’t a contract.

Relying upon Virginia Code Section 8.01-581.01, the court found that there are two envisioned circumstances for which arbitration would be enforceable and that neither applied to the current matter. Specifically, an arbitration provision would be enforceable when there’s a “written agreement to submit an existing controversy to arbitration” or when there’s a “written contract to submit to arbitration any controversy thereafter arising between the parties.” Since the controversy at hand didn’t exist at the time the trust was established, there could be no requirement to arbitrate under the “existing controversy” scenario. Additionally, since contracts require mutual assent and consideration, the independent act of a settlor of the trust doesn’t create a contract under the law, and therefore, the second scenario was inapplicable.

Although the court had already ruled in plaintiff’s favor, the court furthered its analysis by stating that even if the trust was a contract, due to the narrow application because of the terms of the trust, only disputes regarding interpretation or enforcement of the trust agreement would be subject to arbitration. Since the issue at hand involved the conduct of the trustees and didn’t involve interpretation or enforcement of the trust agreement, arbitration wouldn’t be required under the terms of the trust.

This case may cause more estate and trust beneficiaries to engage in litigation as opposed to alternative dispute mechanisms, such as mediation or arbitration.

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