The trust industry in Switzerland is still flourishing
 

Trusts, as a common and popular instrument for wealth management, estate planning and business succession, continue to be a commercial success in Switzerland. While the long-debated introduction of a Swiss trust has still not materialized, trusts are recognized legally and can be administered in Switzerland because of Switzerland’s ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985 (the Hague Trust Convention 1985). In fact, Switzerland remains a preferred jurisdiction for trust-related structuring with trustees, family offices and financial institutions, having built significant expertise in managing and administering foreign trusts. According to the information provided by the Swiss Association of Trust Companies (SATC), there are currently around 1’500 trust and estate practitioners working in Switzerland, which corresponds to approximately 8% of the more than 20’000 recognized professionals worldwide, which is proof of a thriving the trust industry in Switzerland.

In view of the flourishing Swiss trust industry, the 2021 revision of the Swiss Private Internal Law Act (PILA) and the subsequent introduction of the Swiss Rules of International Arbitration for Trust and Estate Disputes (TEF Rules) have opened new avenues for the resolution of trust-related disputes through arbitration in Switzerland.

The revision of the PILA: the gateway to arbitrating trust disputes in Switzerland
 

On 1 June 2021, two important changes occurred in the Swiss arbitration landscape: The Swiss Chambers’ Arbitration Institution became the Swiss Arbitration Centre, and the revised PILA entered into force. The 2021 revision of the PILA aimed at updating the Swiss arbitration framework to make Switzerland even more attractive and competitive for arbitration disputes but also to keeping the legal framework in line with the times and current practice. The revised PILA now expressly recognizes and allows arbitration clauses in unilateral acts. With this change, the PILA introduced the possibility of including arbitration clauses in trust, deed, will or articles of associations and bylaws. This legislative clarification bridged the conceptual gap between the unilateral nature of trusts and arbitration’s consent-based foundations. The revised PILA thereby laid the groundwork for the introduction of TEF Rules, a procedural framework for arbitrating trust-related disputes.

The TEF Rules: a tailor-made procedural framework for arbitrating trust disputes in Switzerland
 

Litigating trust disputes often proves challenging in practice, particularly in Switzerland, where trusts do not constitute a domestic legal institution and no substantive Swiss trust law exists (yet). As a result, trust-related disputes related to Switzerland – for example with a trustee as a resident in Switzerland or trust assets located and/or managed in Switzerland – inevitably have an international element. Many trusts connected to Switzerland are established under Anglo-Saxon regimes such as Guernsey, Jersey, or the Isle of Man, meaning disputes often need to be litigated in those jurisdictions, with the assistance of local counsel – an approach that can be both very costly and procedurally burdensome. These foreign proceedings can be burdensome and lengthy, fee cost are traditionally very high. Furthermore, trust-related disputes often involve public figures or politically exposed people, which heightens the need for strict confidentiality to protect sensitive financial and family information, something that state court litigation often cannot provide.

These legal challenges not only relate to trust disputes, but more generally to private wealth-related disputes in Switzerland with an international element, such as complex inheritance proceedings with a cross-border element (e.g. because of beneficiaries living abroad, multiple nationalities, or estates structured through foreign trusts or foundations). The TEF Rules were exactly introduced to provide a dedicated procedural framework to arbitrate private wealth-related disputes in Switzerland, including those arising out of trusts matters. The TEF Rules offer mechanisms tailored to multi-party and cross-border disputes, and the need for strict confidentiality thereby addressing many of the shortcomings of traditional state court litigation in private-wealth disputes. They are also a practical instrument to handle complex trust matters, addressing many of the shortcomings of traditional litigation in trust disputes. Let’s look at some major features:

One central feature of the TEF Rules concerns the participation of individuals or entities related to a private-wealth dispute that are not a party to the proceeding, under the TEF Rules referred to as "Entitled Persons". Trust-related disputes frequently concern the rights and obligations of various parties that may include minors, or unborn beneficiaries or also individuals who lack legal capacity. To ensure that such individuals are given the opportunity to be heard and to be adequately represented, the TEF Rules set out specific provisions regarding the information, notification and representation of such Entitled Persons. The TEF Rules for example, provide that the Notice of Arbitration must, where relevant, include a list of Entitled Persons including their relationship to the dispute and proposals for appointing legal representatives where needed. The Secretariat of the Swiss Arbitration Center is responsible for notifying Entitled Persons of the arbitration documents, either on the parties’ request or at the tribunal’s direction if the parties fail to do so. The TEF Rules further stipulate that any Entitled Persons may comment on the appointment of the arbitral tribunal. 

Another particular complexity in trust-related disputes is the inherently sensitive nature of the information involved, which often concerns public figures, persons of public interest (PEPs), or highly confidential financial matters. The TEF Rules address this particularity by extending the confidentiality obligations that apply to the parties to an arbitration proceeding to Entitled Persons who might be notified or participate in the proceedings without formally becoming parties. This ensures that sensitive family, financial and reputational information disclosed in arbitration remains protected, even though individuals outside the circle of contracting parties are kept informed. In doing so, the TEF Rules attempt to strike a balance between the confidentiality expectations of the parties to the proceeding and the rights of the Entitled Persons potentially affected by the outcome of the proceedings. The TEF Rules, however, remain silent on how in practice the confidentiality obligations are to be enforced vis-à-vis any Entitled Persons because such individuals or entities do not become parties to the proceedings. In practice, one tool could be to have any Entitled Person to sign a confidentiality obligation before being granted any access to the arbitration file. In other words, access to information by Entitled Persons would be considered conditional: by accepting notifications, documents, or participation, they are deemed to accept the confidentiality undertaking creating some sort of a procedural contract. Another option could be to retain an independent trustee who, after having signed a confidentiality agreement, is given access to the documentation and provides the Entitled Person only with the information he or she absolutely needs (such measures are known from state court proceedings; see, e.g., art. 156 of the Swiss Civil Code, which reads as follows: “If the taking of evidence jeopardizes the interests of a party or third parties that are worthy of protection, such as, in particular, their business secrets, the court shall take the necessary measures.”). Depending on the seat of the arbitration and the applicable substantive law, national courts could also provide assistance through injunctive relief if Entitled Persons do not respect the confidentiality obligations. 

The TEF Rules also do not set out the consequences of non-compliance with the information, notification and obligations towards Entitled Persons, either. However, non-compliance with such obligations may impact the enforceability of an award or risk disrupting the proceedings through applications for interim measures or injunctions sought by such Entitled Persons whose rights were violated. 

Ultimately, it remains to be seen how arbitral tribunals and the Swiss Arbitration Centre will handle the practical enforcement of these issues.

Conclusion

The introduction of the TEF Rules marks an important step in positioning Switzerland as a hub for the arbitration of trust and private-wealth disputes. By providing a tailor-made framework that addresses confidentiality, multi-party dynamics, and the involvement of Entitled Persons, the TEF Rules close significant procedural gaps parties face in state court litigation. While practical questions remain, the TEF Rules offer a promising first step toward more efficient and secure dispute resolution in this sensitive field. They also include model arbitration clauses designed to be incorporated into trust deeds and the Swiss Arbitration Center provides an Explanatory Note on the TEF Rules on its website: 

• Supplemental Swiss Rules for Trust, Estate and Foundation Disputes and Model Arbitration Clauses for Trust, Estate and Foundation Disputes
• Explanatory Note to the Supplemental Swiss Rules for Trust, Estate and Foundation Disputes

Our team at Bratschi can assist with any questions related to the TEF Rules or arbitrating trust disputes more generally.