Practitioners often strive to settle a client’s trust dispute through an ADR process in a bid to avoid litigation. It doesn’t always work out that way.
Steering clear of court involvement is often a worthy goal. But it may be an own goal if an ADR settlement falls foul of s 144 of the Trusts Act 2019.
Whenever s 144 is engaged, the High Court must become involved in two critical steps in the ADR process for any internal trust matters: first, the court must appoint representatives for certain beneficiaries; and second, any resulting ADR settlement must obtain court approval.
A clear example of when the section will be engaged is when a couple with children under 18 have separated and dispute what should happen with the family trust and its assets.
Before they mediate that dispute, they must first obtain orders from the High Court to appoint representatives for their children at the mediation. If a settlement is agreed between all those parties, it will still need separate approval by the court. Failing to ensure they follow the procedure mandated under s 144 would expose the settlement to challenge and may expose the practitioners who have advised them to liability for that failure.
Applying the section
Section 144 applies to any ADR process of an internal matter that involves beneficiaries who lack capacity or are unascertained. So, several elements are involved.
Dealing first with what is an ADR process and what constitutes an internal matter:
- ADR process is defined widely under s 142 as meaning “an alternative dispute resolution process (for example, mediation or arbitration) designed to facilitate the resolution of a matter”. It could include a structured settlement process between solicitors who do not engage a mediator but manage to work through and document a resolution of their respective client’s dispute.
- A ‘matter’ is also given a wide definition under s 142 to mean not just a legal proceeding but also a dispute “that may give rise to a legal proceeding”. However, it excludes a proceeding or a dispute about the validity of all or part of a trust. So, s 144 may well not apply where any dispute includes claims such as those impugning a will for undue influence or lack of testamentary capacity.
- Section 144 (3) confines its application to any ‘internal matter’ in a trust. That phrase is defined under s 142 to mean “a matter to which the parties are a trustee and one or more beneficiaries, or a trustee and one or more other trustees, of the trust”. So, s 144 does not apply to disputes between a trust and external parties.
Overlapping claims
There will grey areas. For example, a dispute may have arisen in a family trust where a beneficiary believes a trustee has wrongfully conferred a benefit on a second family trust. The heart of the dispute may be about matters that are internal to the first trust. But resolution of the dispute may require a settlement with that other trust as a party to the settlement. Arguably that may be an external matter so s 144 will not apply.
Decisions from the courts will provide more clarity as to the edges of where s 144 does and does not apply. See, for instance, the discussion in S v N [2021] NZHC 2860, where the court declined to refer a matter to mediation under s 145 of the Act.
Which classes of beneficiaries must have court-appointed representation? Beneficiaries who lack capacity and those who are unascertained.
Section 9 of the Act defines two classes of beneficiaries who are deemed to lack capacity: a child beneficiary (anyone under 18) and any beneficiary who “is not competent to manage the beneficiary’s own affairs for reason”. Unascertained beneficiaries are those unborn and unknown.
The Act does not specify the consequence of failing to comply with the mandatory steps of applying to the court to appoint representatives for those particular beneficiaries, and having the court approve the settlement.
At the least, failing to comply with those steps when s 144 is engaged will open the door to arguments that the settlement agreement is void or voidable, or supports other grounds to challenge the settlement. It is something mediators ought to be alert to when convening a mediation.
Practical steps
The issue might be approached practically by asking these questions and taking the following steps:
- Does the trust have any beneficiaries under 18 or who lack the competency to manage their own affairs, or any unascertained beneficiaries?
- If the answer to this is yes, then consider whether there is an ADR process that relates to an internal matter.
- If it is an internal matter, then an application to court must be made to appoint representatives for those beneficiaries during the ADR process. That should cover the issue of who will pay for their representation.
- If all parties agree on terms of a settlement, it will still need court approval. The court will not rubber stamp an ADR settlement.
Richard Thompson is an Auckland barrister (Park Chambers).
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