Charles Rounds, ‘Arbitration Contracts Between Trustees And Their Investment Agents: A Warning Label’

This Article considers whether arbitration clauses in contracts between trustees and their investment managers are binding on the trust beneficiaries. Nowadays, it is default law that a trustee may delegate investment discretion to an investment manager (IM); provided the IM has been prudently selected by the trustee and the IM’s activities are prudently monitored on an ongoing basis by the trustee. The core relationship is one of agency, the trustee being the principal and the IM being the agent. The two, as well, are in a contractual relationship incident to the agency. The IM, however, also owes fiduciary duties that run directly to the trust beneficiaries, though the beneficiaries are parties neither to the agency nor the contract. These duties are imposed separately by equity. Assume the beneficiaries bring an action directly against the IM for breaching one or more of his or her equitable duties to them. Should the trust beneficiaries be bound at law by the arbitration clause in the contract between the trustee and the IM? The Article concludes that they should not be; but if they are then the trustee could well have been in breach of his or her equitable duty of undivided loyalty to the beneficiaries by having acquiesced to the clause’s insertion in the first place. And as to the IM, he or she, under general equitable principles, may well have a fiduciary duty to the beneficiaries to waive his or her rights at law to have the dispute arbitrated, at least to the extent that it is in the interests of the beneficiaries that he or she does so.

Charles E Rounds, Jr, Arbitration Contracts Between Trustees And Their Investment Agents: A Warning Label, North Dakota Law Review volume 93:2 (2018).

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