Bound by Trustee’s Contract

In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005).


Settlor signed a contract for the purchase of a home which contained an arbitration clause. After closing, Settlor transferred the house to a previously existing revocable inter vivos trust for the benefit of Daughter. Settlor and Daughter were co-trustees of this trust. Settlor explained that the only reason he signed the purchase contract individually was that he had forgotten to place the home into the trust. Problems later arose with the house. Settlor, Daughter, and the Trust sued the builder who then moved to compel arbitration. The lower court compelled Settlor and Trust to arbitrate but not Daughter under the theory that she was not bound by the arbitration clause because she did not sign the contract.

The Supreme Court of Texas decided that Daughter was bound. Included in its discussion of the arbitration issue, the court explained that “a suit involving a trust generally must be brought by or against the trustee, and can be binding on the beneficiaries whether they join or not.” Id. at 133-34. Even though Daughter did not purport to sue either as a trustee or as a beneficiary of the trust, she was in reality both. Thus, any recovery will directly benefit her as the sole beneficiary of the trust. The court noted that “if a trustee’s agreement to arbitrate can be avoided by simply having the beneficiaries bring suit, ‘the strong state policy favoring arbitration would be effectively thwarted.’” Id. at 134, citing Merrill Lynch, Pierce, Fenner & Smith v. Eddings, 838 S.W.2d 874, 879 (Tex. App.—Waco 1992, writ denied).

Moral: The rights of beneficiaries may be impacted by arbitration clauses contained in contracts signed by the trustee.