Kelly v. Giuliano: Arbitration Provision in a Trust Agreement is Unenforceable

Hook Law News | Oct 29, 2020 | Shannon Laymon-Pecoraro, CELA

In September, the Honorable Bruce D. White of the Fairfax County City Court issued an opinion that found that a trust is not 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 filed a Plea in Bar asserting that the Plaintiff was subject to the arbitration clause contained in the trust agreement. Plaintiff responded that there was no written contract in which Plaintiff agreed to arbitrate his future claims and that the trust itself is not a contract.

Relying upon Virginia Code § 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 is a “written agreement to submit an existing controversy to arbitration” of when there is a “written contract to submit to arbitration any controversy thereafter arising between the parties.” Since the controversy at hand did not 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 does not 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 did not involve interpretation or enforcement of the trust agreement, arbitration would not be required under the terms of the trust.

The impact of this case may have a major impact as more estate and trust beneficiaries may engage in litigation as opposed to alternative dispute mechanisms such as mediation or arbitration.

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