Use of ADR under the Trusts Act

The Trusts Act 2019 (the Act) came into force in 2021. It brought a number of significant changes to trust law and was the first major reform in 70 years. One of the most significant and novel developments in the Act is its express provision^[1] for ADR processes, such as mediation and arbitration, to resolve trust disputes.^[2]

Trust disputes – ‘internal’ vs ‘external’ matters under the Act

The Act divides trust disputes into two broad categories: external trust matters and internal trust matters.^[3]

Internal trust matters are disputes which arise between trustees, or between a trustee and a beneficiary.
External trust matters are disputes between a trustee and an external third party (a party who is not (or is not acting in their capacity as) a trustee or beneficiary of the trust.

Section 145 compulsory referral to ADR (internal matters only)

Section 145 of the Act gives the Court the power to compel parties to an internal matter^[4] to use ADR, even if some are reluctant or refuse to attend.

The Court can make this order on the application of a trustee or beneficiary, or of its own accord. It can also appoint who the mediator or arbitrator will be, and it can order that the costs of using ADR will be paid from the trust fund.

There are two primary questions the Court will address when faced with a section 145 application:

1. Is there jurisdiction to order ADR?

The Court must first determine whether it has jurisdiction under section 145 to order the parties to mediate (or arbitrate), that is, whether the dispute is an internal matter and whether there is anything in the trust deed preventing referral to ADR.

2. Should the Court order ADR?

Once jurisdiction to make a section 145 order is established, the Court will consider whether it is appropriate in the circumstances to exercise its discretion and order the unwilling party to attend mediation.

When will the Court order parties to use ADR? The caselaw so far…

It is now almost four years since the ADR provisions in the new Act came into force, and the case law on Court-ordered ADR is beginning to emerge. In each of the cases so far, the ADR had been requested by a party to existing legal proceedings before the Court.

The Court has ordered the parties to mediate in around half of these applications. But even where it has declined to exercise the discretion, the Court has repeatedly expressed its high regard for the suitability and advantages of ADR in resolving trust disputes, and given detailed reasoning explaining why mandatory mediation would not be appropriate in the particular circumstances.

S v N – consideration factors

The first case on section 145 to come before the Court was S v N.^[5] Wylie J stated that in exercising its discretion to compel parties to mediate, the Court must be mindful of the wishes of the parties and the underlying circumstances and history.

Wylie J set out a non-exhaustive list of relevant factors,^[6] which the Court has repeatedly referred to in subsequent section 145 decisions:

cost
confidentiality
speed
seriousness and complexity of the matter
suitability of the proposed mediator
wishes of the parties
wishes of the settlor (if known)
finality
enforceability
utility.

Having considered some of these factors and identified some unusual circumstances of this case, Wylie J declined to order the unwilling party to mediate.

Wright v Pitfield – if you take a horse to water it usually does drink

In Wright v Pitfield,^[7] the Court had little difficulty in ordering the reluctant party to mediate.

Venning J confined the outcome of S v N to its unusual circumstances,^[8] and pointed out that by enacting section 145, Parliament specifically intended to force unwilling parties to mediate. He noted that mandatory mediation is common in other jurisdictions, including New South Wales, and referred to a speech by Lord Phillips on its success rate:^[9]

Those opposed argue that compulsion is the very antithesis of mediation. The whole point of mediation is that it is voluntary. How can you compel parties to indulge in a voluntary activity? You can take a horse to water but you cannot make it drink. To which those in favour of compulsory mediation reply ‘yes but if you take a horse to water it usually does drink.’ Statistics show that settlement rates in relation to parties who have been compelled to mediate are just about as high as they are in the case of those who resort to mediation of their own volition.

He further pointed out that while an order under section 145 forces a party to attend mediation, it does not force that party to resolve matters at the mediation.

He identified that in the current case, mediation may resolve more issues than the main proceedings would, avoid costs and preparation costs of the hearing and maintain commercial confidentiality.^[10] He concluded that with appropriate assistance, the issues between [the parties] should be capable of sensible resolution.

In an addendum to the decision, Venning J noted that the mandatory mediation had resulted in successful settlement of all issues between the parties.

Terry v Terry – agreement on the issues to be mediated?

In Terry v Terry,^[11] Johnson J had high praise for the use of mediation to settle trust disputes:

When approached in the appropriate manner by all participants, mediation convened by a skilled mediator tends to resolve a high percentage of cases of all sorts, from the heaviest commercial disputes through to the most trivial matters. And, where successful, mediation is almost always a more efficient process than going to trial. There is every reason then why the Court should encourage use of the process, and the legislation has recognised this in enacting ss 142-148.

However, he saw no realistic prospect of settlement in the circumstances, and declined to order the mediation. This was primarily because the beneficiary bringing the main action (removal of trustee) and requesting mediation had made it clear that his real intention was to have the trust assets distributed to him. This ‘disguised’ issue of distribution was not the issue in the main action and it was something the trustees had no intention of engaging in at mediation.

Wiggins v Wiggins – will all parties be in the room?

In Wiggins v Wiggins,^[12] Churchman J refused to order mediation because a third party company involved in the dispute would not be a party to the mediation, and without that company’s agreement, a final and enforceable settlement could not be reached. In those circumstances, the Court considered ordering mediation at that stage would be premature and futile, and waste costs.

Gatfield v Hinton – orders for mediation and arbitration

In Gatfield v Hinton,^[13] the Court not only compelled two reluctant beneficiaries (the plaintiffs in the main action against a trustee) to mediate; it also ordered that if the mediation was unsuccessful then the dispute must be determined by arbitration, and appointed the arbitrator. Both orders were made on the application of the trustee who was the defendant in the main proceedings.

Order for mediation

Lester J noted that just because the trustee now requesting mediation had previously turned down offers of ADR, this was not a barrier to her requesting it now:

People’s views of a dispute change. Sometimes the benefit of independent advice leads a party to reflect on their part in the dispute and on the desirability of resolution.

The Court stated that one of the key advantages of ADR …[is] it is a quicker and cheaper process than commercial litigation and repeated the benefits of ADR described in Terry v Terry above, attaching high importance to the confidential nature of mediation and arbitration in family trust disputes:

There is a general confidentiality interest in family matters bring dealt with privately… I consider the desirability of family matters being dealt with confidentiality to, on balance, favour ADR.

Lester J explained that unlike in Terry v Terry, the parties here agreed on which matters were in dispute and the trustee wanted to mediate the very issue the resisting parties were pursuing in the main proceedings.

He also pointed out that some of the outcomes which the plaintiffs were seeking in their pleadings could in fact only be achieved by mediation,^[14] noting that mediation can explore non-monetary outcomes …and is aimed at addressing the parties’ interests and not necessarily their strict legal rights.

One of the advantages of ADR is that, at least as regards mediation, the parties are not necessarily tied to pleadings when exploring issues and outcomes … at ADR a wide range of issues can be addressed, not necessarily only those in a pleading.

Unlike in Wiggins v Wiggins, in the present case all other persons (the other beneficiaries) whose agreement was required to make a mediated settlement final and enforceable were willing to attend.

Lester J further noted that:

even if an overall settlement is not reached, the reality is that a mediation serves the secondary purpose of being an issues conference… If mediation is not wholly successful, then there will be some cost saving in terms of the issues being narrowed.

A skilled mediator will get the parties to critically examine the assumptions that underpin their [view] of the merits of their positions. It is also not uncommon for mediation to result in a solution that neither party has contemplated.

The judge noted his view that the reluctant parties were unrealistically pessimistic at what can be achieved at a well-run mediation, and in response to their objection that confronting the trustee would be “psychologically unsafe” for them, he reassured them that a skilled mediator can deal with the emotion in this case.

Order for arbitration

On the application for referral to arbitration (if mediation were unsuccessful), Lester J agreed that an arbitrator would be able to exercise the same jurisdiction as a High Court judge, including any inherent jurisdiction. He added that:

All the interlocutory applications available in this Court are available in arbitration but can be dealt with more quickly in arbitration. That also creates cost savings. Interlocutory issues are dealt with by the final decision maker, creating a practical incentive for the parties to demonstrate that they are adopting a reasonable approach to the litigation as their whole conduct of the litigation will be under the scrutiny of the final decision maker.

Lester J noted several advantages of arbitration over litigation, including that the parties would be lucky to get a [Court] hearing in 2026 and by rejecting ADR, the unwilling parties are saying they prefer approximately two years of complicated and expensive litigation. Whereas, if they used arbitration, they would avoid Court filing fees of approximately $33,600, have a choice of venue and hearing date and likely see the matter determined before the end of the year.

The Court acknowledged that the losing party may be exposed to potentially higher costs in arbitration than in the Court, in the event that the arbitrator orders them to pay the arbitrator’s fee. However, Lester J noted that this is a shared risk for each party and in his view should not carry significant weight because it is a risk inherent in the section 145 ability to order arbitration.

Lester J ordered the parties to attend mediation, and if the mediation was unsuccessful, appointed an arbitrator to conduct an arbitration.

Leave to appeal and stay of mediation and arbitration orders

The unwilling parties applied for leave to appeal the decision and requested a stay of the orders for mediation and arbitration pending the appeal.

Lester J granted the stay of the order for arbitration pending the application for leave to appeal, but denied a stay of the mediation, and ordered that it proceed as scheduled.^[15]

Lester J found there was no prejudice to the unwilling parties in attending the mediation:

If settlement is reached, all well and good. If settlement is not reached, then at least the parties will have had an opportunity to explore the issues in this proceeding with the benefit of input from the mediator, a senior King’s Counsel, who will help them test the assumptions that underlie their positions.

The parties attended the mediation. However it was unsuccessful.

In September 2024,^[16] Lester J held it was appropriate to grant the application for leave to appeal to the Court of the Appeal given the lack of existing authorities on the new section 145 power to order arbitration.

Addleman v Lambie Trustee Limited – disclosure before mediation?

In Addleman v Lambie Trustee Limited,^[17] Andrew J observed that

Parliament has clearly recognised the significant benefits that ADR might offer in contrast to the expense and damage that adversarial litigation can give rise to.

In this case the reluctant party was resisting mediation on the basis that the defendant trustee had not complied with court-ordered disclosure of trust information, leaving her unable to be fully informed and advised of her settlement options ahead of the mediation.

Andrew J acknowledged that the parties’ position was polarised and far apart and that the reluctant party was handicapped by the lack of disclosure. However, he reassured her that there is a clear mechanism within a mediation referral for resolution of outstanding disclosure issues:

Disclosure issues will, of course, not be unfamiliar to any experienced mediator… The parties, with the assistance of good counsel and an experienced mediator, are more than capable of designing a process to address outstanding disclosure issues. This might involve a pre-mediation meeting with the mediator. …

Andrew J ordered the mediation and directed that the mediator resolve any disputes regarding disclosure necessary for the parties to attend mediation. He further required that the reluctant party, who is based overseas, should attend in person in New Zealand, not by videoconference:

In my view, there is a clear need for some honest reckoning in this case which would involve the parties sitting down in the same room and candidly and sensibly addressing their concerns… there is a clear need to try the alternative route of ADR with a view to avoiding the real risk in this case of extreme cost and delay leading to further and irreparable breakdown in the relationship between the parties. ADR potentially presents a wider range of settlement options for the parties and despite what appears to be an intractable dispute, disputes of this kind are not unfamiliar to experienced mediators … Resolution of even some of the issues at mediation may materially reduce the extent of discovery eventually required as well as the length of any trial.

Innes v Darlow – likelihood of settlement in unmeritorious claims

In Innes v Darlow,^[18] Paulsen J stated that the Court should be slow to order mediation where the case is plainly unmeritorious.

The Court found it could not order mediation in the present case because the dispute was an external matter.^[19] As this was not an internal matter, it did not come within section 145.

However, Paulsen J went on to note that in the unusual circumstances of this case, even if it had been an internal matter, he would not order the requesting party’s eight reluctant siblings to attend mediation with her.

Paulsen J’s reasons included the high costs involved in mediating with such a large number of parties, that the main action claim had no merit and that there was little chance of settlement as the requesting party’s conduct and damaging actions against her siblings in previous public litigation meant that she could not now expect them to mediate with her.

Conclusion

Trust disputes are particularly suited to ADR. The arbitration or mediation of trust disputes can help parties to avoid publicly litigating their private matters in the courts.

Litigation in the courts is not only an expensive, stressful and time-consuming option but it also often involves the public disclosure of matters which are inherently personal to the parties. This can include personal information as well as financial and business matters which would otherwise remain confidential.

The emerging case law on mandatory trust ADR clearly shows the Court’s recognition of these and other benefits. While most of the cases so far have focused on mediation, we look forward to guidance from the Court of Appeal on the recent orders for mandatory trust arbitration in Gatfield v Hinton.

Voluntary agreement to try ADR – internal and external matters

It is well worth remembering that internal trust matters (where all parties to the dispute are acting in their capacity as a trustee or beneficiary) can be referred to ADR without Court involvement,^[20] if all of the parties (and all beneficiaries) are willing to attend.

Under the Act, trustees can also refer external matters (disputes with a third party) to ADR if the other party agrees to it. Trustees do not require beneficiaries’ consent to use ADR to resolve external matters.

NZDRC provides expert arbitration and mediation services for Trust disputes. We place great importance on effective and efficient dispute resolution processes. Our services cater to various needs, whether you prefer arbitration to avoid court proceedings or mediation to preserve relationships. Our robust and efficient service ensures the best outcomes for parties dealing with Trust disputes. With a high success rate and a reputation for cultivating positive outcomes, NZDRC is a trusted choice for dispute resolution. You can find out more about our trust ADR services on our website.

References

[1] Sections 142–148 of the Act.

[2] Disputes about the validity of all or part of a trust cannot be referred to ADR.

[3] “Matters” include legal proceedings or disputes which may lead to legal proceedings.

[4] The Court does not have the power to order ADR for external matters, nor if the trust deed precludes ADR.

[5] S v N [2021] NZHC 2860. The case concerned resettlement of trust assets of former spouses.

[6] S v N, above n 5 at [29] referring to Andrew Butler, Arbitration of Trust Disputes under the Trusts Act 2019 [2021] NZLJ 106, and at [35].

[7] Wright v Pitfield [2022] NZHC 385. The case concerned the control and sale of trust assets of former spouses (including the sale of a company) and removal of trustee.

[8] There was a protection order in place preventing the party requesting mediation from contacting the unwilling party, they had already agreed by consent orders that the issues would be decided by independent trustees, and the Judge considered the requesting party was using the application for mediation as a further delaying tactic.

[9] Lord Phillips, Lord Chief Justice of England and Wales Alternative Dispute Resolution: an English Viewpoint (India, 29 March 2008).

[10] The underlying issues involved the valuation and proposed sale of a company

[11] Terry v Terry [2023] NZHC 884. The case concerned mirror trusts owning a farm run by a mother (a settlor) and one of her four children, following the death of their father (a settlor). The mother and son had fallen out over management of the farm. The son sought removal of his mother as trustee.

[12] Wiggins v Wiggins [2024] NZHC 863. This was a dispute between a brother and sister who were the trustees of their family trust which received income from shares in a family business.

[13] Gatfield v Hinton [2024] NZHC 1712. The dispute concerned two will trusts and the ownership of a family bach. The plaintiff beneficiaries claimed the defendant trustee had agreed to sell a share in the bach to them but instead sold it to other beneficiaries.

[14] The plaintiffs wanted the share in the bach to be transferred to them (from beneficiaries who were not parties to the proceedings), as well as an apology from the trustee.

[15] Gatfield v Pearson [2024] NZHC 2074.

[16] Gatfield v Hinton [2024] NZHC 2603.

[17] Addleman v Lambie Trustee Limited [2024] NZHC 1790. The proceedings are part of a long-running dispute brought by a beneficiary (the reluctant party) against her sister, the trustee-beneficiary of a very lucrative family trust. In 2021 the Supreme Court ordered disclosure of all trust accounts and legal advice paid for from the trust fund up to the date of commencement of proceedings.

[18] Innes v Darlow [2024] NZHC 2614. The case concerned a family trust with nine sibling beneficiaries. The plaintiff claimed a larger share of the trust fund from her siblings because of services she had provided to their parents (the deceased settlors) in caring for them.

[19] The dispute was a claim brought by a sibling in her capacity as an alleged creditor of the trust (and therefore, a third party), not in her capacity as one of the beneficiaries.

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