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.
The Broader Context of Arbitration in Financial Services
The debate over arbitration clauses extends beyond trust and estate planning. The Consumer Financial Protection Bureau recently finalized a controversial rule prohibiting financial-service companies from including arbitration clauses that block consumers from joining class action lawsuits. While the rule doesn’t prohibit all arbitration clauses, it highlights the ongoing tension between arbitration and traditional litigation.
In securities arbitration, which differs from trust arbitrations, investors typically pay $4,000 to $5,000 in FINRA fees, including filing fees and daily arbitrator fees. While multiple investors can join one arbitration to divide costs, FINRA isn’t equipped to handle more than a few claimants together. This cost structure can prevent the filing of low-value claims and deter individuals from pursuing legitimate grievances.
These challenges in the financial services sector offer important lessons for trust and estate planning. Just as arbitration may favor large financial institutions over individual consumers, mandatory arbitration in trusts can create unexpected barriers for beneficiaries seeking to protect their inheritance rights.
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.
Conclusion
While arbitration has its place in many commercial contexts, trust and estate matters present unique challenges that make mandatory arbitration clauses problematic.
Estate planning attorneys should carefully consider whether arbitration clauses truly serve their clients’ interests or merely add complexity to an already difficult process for grieving families. At Perry Morgan, we help clients navigate trust disputes whether they arise in court or arbitration forums. If you’re facing a trust dispute or need guidance on estate planning matters, contact us at (925) 660-7544 for a consultation. Our experienced trust litigation attorneys can help you understand your options and protect your rights, regardless of the forum.
