Family Trust Arbitrations: Recent Developments in Dubai International Financial Centre (DIFC) Law

Arbitration is gaining popularity as a preferred method of resolving family-related business disputes. There are several reasons for this. First, arbitration helps ensure the dispute and the underlying arrangements remain confidential. Second, it enables the parties to select an arbitrator or arbitral tribunal with expertise in trust disputes. And third it affords the parties the flexibility of choosing procedures that align with their preferences.

Indeed, international arbitral institutions are beginning to take note of this growing popularity. For example, the International Court of Arbitration of the International Chamber of Commerce recently updated its guidance note on Arbitration Clause for Trust Disputes, providing guidance on how trusts can include arbitration as mode of dispute resolution in these instruments.

The attractiveness of arbitration as a means of resolving family-related business disputes is also being recognized at the regulatory level as well. This article discusses the impact on the arbitration of family-related business disputes of Article 7.6 of the recently enacted DIFC Family Arrangements Regulations of 2023 (New Regulations), which became effective on 31 January 2023 (repealing and replacing the Single-Family Office Regulations of 2011 (Former Regulations)). Among other things, this provision introduces innovative provisions enhancing the role of arbitration in disputes arising from family trusts (i.e., legal instruments governing the affairs of family arrangements and trusts).

Background

The nature of family-related business disputes, which often revolve around a family trust, raises unique issues from an arbitration perspective, including the question of whether an arbitration clause in a trust instrument binds beneficiaries who typically do not sign the trust instrument (or accept any burdens thereunder).

In a DIFC context, this question was addressed to some extent by the DIFC Arbitration Law and the DIFC Trust Law. Article 12 of the DIFC Arbitration Law requires only that an “Arbitration Agreement shall be in writing”; it does not require the arbitration agreement to be signed by the parties thereto.

The application of the DIFC Arbitration Law to trust disputes – which was not addressed under the Former Regulations – was not addressed until the enactment of the DIFC Trust Law (DIFC Law No. 4 of 2018). Article 31(1) (Arbitration of trust disputes) of the DIFC Trust Law provides as follows:

“(1) Where a trust instrument provides that any dispute or administration question arising between any of the parties in relation to the trust shall be submitted to arbitration (‘a trust arbitration’), that provision shall, for all purposes under the [DIFC] Arbitration Law have effect as between those parties as if it were an arbitration agreement and as if those parties were parties to that agreement.”

In addition, Schedule 2 (Application Of The Arbitration Law) of the Trust Law provides:

“1. The [DIFC] Arbitration Law shall apply and be construed with respect to a trust arbitration, as stated hereunder.

2. In the Arbitration Law, ‘dispute’ includes an administration question.
3. Article 12(1) of the Arbitration Law shall apply as if it read –

‘The settlor of a trust shall be free to determine (by provision in the trust instrument) how, in relation to a trust, disputes are resolved, subject only to such safeguards as are necessary in the public interest;’.

4. Where in the Arbitration Law reference is made to a matter agreed between the parties to an arbitration agreement (including a matter which may be authorized, chosen, conferred, designated, nominated or vested by the parties) that matter shall (except where no effective provision is made) be determined as provided in the trust instrument.
5. Neither Article 12 of the Arbitration Law nor any rule of law or construction treating an arbitration agreement separate to any agreement of which it is a part shall apply in relation to a trust arbitration.”

And Article 30 of the Trust Law helpfully clarified that:

“30. Articles 31, 32 and Schedule 2: Interpretation

For the purposes of Articles 31 and 32 and Schedule 2: […]

‘the parties in relation to the trust’ means any trustee, beneficiary or power holder of or under the trust, in their capacity as such.”

Family Trust Arbitration Provision in the New Regulations

In contrast to the Former Regulations, Article 7.6 of the New Regulations does address the arbitration of family trust disputes. It provides makes express provision for the following:

• Article 7.6.1provides that where the instrument governing the affairs of a family entity or a trust within a Family Structure provides that any dispute or question arising between any of the parties shall be submitted to arbitration, that provision shall have effect between those parties as if it were an arbitration agreement and those parties were parties to that agreement for purposes of the DIFC Arbitration Law.
• Article 7.6.2 provides that where the instrument governing the affairs of a family entity or a trust within a Family Structure does not provide for arbitration as a form of dispute resolution, but the parties have agreed in writing separately to have it resolved by arbitration, that agreement shall, for all purposes under the DIFC Arbitration Law, have effect as between all the parties affected by the dispute as if it were an arbitration agreement between those parties.
• Article 7.6.3 provides that where a foundation or trust governed by DIFC Law is a Family entity or forms part of a Family Structure, the application of the DIFC Arbitration Law to any dispute where that dispute relates to the affairs of the foundation or trust as the case may be shall be construed in accordance with the relevant provisions and schedules in the Foundations Law or the Trust Law (on which, see Background, above).
• Article 7.6.4 allows the DIFC Courts to make orders in relation to arbitration or possible arbitration as it deems appropriate in the circumstances.
• Article 7.6.5 grants additional powers to arbitral tribunals seated in the DIFC to exercise all the powers of the DIFC Courts in relation to the administration of a Family Entity or Trust within a Family Structure and rights of any party in relation to the Family Entity or Trust within the structure.
• This provision further grants arbitral tribunals the power to appoint a person to represent the interests of any person (including a minor or a person who is unborn or unascertained) or class of person in an arbitration concerning a Family Entity as the DIFC Courts have in relation to court proceedings. These are powers that are generally reserved for the court; however, under the New Regulations, they are extended to arbitral tribunals as well in arbitrations concerning a Family Entity.

Conclusion

The New Regulations build on the provisions of the DIFC Trust Law, which clarified the application of the DIFC Arbitration Law to the arbitration of trust disputes, confirming that an arbitration clause in a trust instrument can bind beneficiaries who are not parties thereto.  This is a welcome clarification given the increasing usage by Family Businesses of the DIFC Trust law to provide for multi-generational succession planning and the preference for confidential arbitration to govern familial disputes.