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Arbitration Clauses in California Trusts

November 4, 2013

Under the right circumstances, binding arbitration can be a welcome alternative to court litigation. Arbitration can save the litigants time and money, and provide a forum designed specifically to address the nature of their dispute. As a result, mandatory contractual arbitration is a common forum for disputes throughout California. When opening securities accounts, customers typically agree to submit their claims to arbitration before the Financial Industry Regulatory Association (FINRA). Standardized residential real estate contracts used throughout California, including in Contra Costa County, allow buyers and sellers to elect arbitration as an alternative to litigation in court. Commercial contracts often contain clauses calling for the resolution of disputes before the American Arbitration Association (AAA) or other commercial arbitration administrators. The arguments in favor of arbitration include speed (it’s faster than court), cost (it’s cheaper than court), finality (it typically doesn’t allow for appeals), and expertise (arbitrators may have expertise in the subject matter giving rise to the dispute). California and Federal statutes, as well as state and federal courts, strongly favor arbitration and the enforceability of arbitration clauses.

Recently, we have noticed an increase in mandatory arbitration clauses appearing in living trusts. These clauses express a desire by the drafter to require disputes between multiple trustees, or disputes between trustees and beneficiaries, to be submitted to binding arbitration. We suspect the drafting attorneys add the arbitration clauses to trusts because they and their clients are familiar with the arguments favoring arbitration described above. Although the intention of the drafter may be in the right place, the practical reality turns out to be quite different.

In trust and estate litigation, mandatory arbitration clauses fail to deliver on many of arbitration’s promises. Probate courts have the expertise litigants often seek in arbitration. Costs associated with court filings are typically far lower than the forum fees associated with private arbitration where the litigants can be required to pay the arbitrator(s) hourly rate. Arbitration often takes longer than court litigation in the trust and estate litigation context, which increases the expense to the litigants. There is no alternative dispute forum set up specifically to arbitrate trust and estate related litigation. Finally, uncertainty about an arbitrator’s jurisdiction over successor trustees and beneficiaries (who never signed the trust or agreed to submit to arbitration) may be an obstacle in the administration of the trust and resolution of disputes. As a result, we urge drafters to be cautious when including arbitration clauses in trusts and other estate planning documents.

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