Pitfalls in dealing with trusts: lessons to be learned from recent decisions of the SCA
30 October 2014
Posted by: Author: Dale Hutchison
Author: Dale Hutchison (ENSafrica)
In two fairly recent cases, the Supreme Court of Appeal (SCA) has gone out of its way to warn about some of the legal dangers facing people who transact with trusts. These dangers relate mainly to the capacity of the trust to conclude the transaction and the authority of a trustee to bind the trust.
In Nieuwoudt & Another NNO v Vrystaat Mielies (Edms) Bpk1 N and his wife W were the sole trustees of their family trust, through which they conducted their faming business. Purporting to act on behalf of the trust, N concluded a forward sale of the following year’s mealie crop at a price of R785 per ton. A year later, when the price of mealies had risen to R1239 per ton, he denied the validity of the sale on the grounds that his fellow trustee W had not consented to or signed the deed of sale. The SCA accepted that the trustees had to act jointly in order to bind the trust, but referred the matter for the hearing of oral evidence on the question whether the trustees, acting jointly, had authorised N to conclude the transaction on behalf of the trust, as their agent.
Similarly, in Land and Agricultural Bank of SA v Parker and Others,2 P and his wife W conducted their farming business through a family trust, with themselves and their attorney as trustees. When the trust defaulted on loan obligations (in excess of R16 million) owed to the Land Bank, the bank successfully applied to the High Court for the sequestration of the trust and its founder, P. On appeal counsel for the trust argued that the loans were invalid because at the time when they were entered into, there were only two trustees in office (the attorney having earlier resigned as trustee), and the trust deed required a minimum of three trustees. The SCA agreed with this contention, but dismissed the appeal nonetheless, on similar grounds: upon his sequestration P was disqualified from acting as trustee, and there being a sub-minimum number of trustees in office, the trust lacked the capacity to prosecute the appeal.
Legal capacity of a trust
Unlike a company, a trust is not a legal person. The assets of the trust vest in the body of trustees whose powers to deal with the assets are determined by the provisions of the trust deed – the ‘constitutive charter’ of the trust, as Cameron JA described it in Parker’s case. Any action taken by the trustees outside the scope of their powers is null and void. Thus it is vitally important for anybody contracting with a trust to have sight of the relevant trust deed in order to ascertain not only the identity of the trustees but also the limits of their powers, and the minimum number of trustees required to enable the trust to act. As Parker’s case shows, if the number falls below the minimum prescribed by the trust deed, the remaining trustees will be incapable of binding the trust and the trust will lack the capacity to act until further trustees are appointed.
Moreover, it is a fundamental rule of trust law, confirmed by the two cases above, that unless the trust deed provides otherwise, the trustees must act jointly if the trust is to be bound by their acts. Thus, even if a majority of trustees agrees to and signs the contract, the contract will not be binding upon the trust. This goes to trust capacity: the group in question is not the body of trustees empowered by the trust deed to act.
If the trust deed provides for decisions to be taken by majority vote, the majority cannot act without consulting the minority; the trustees as a group must consider the matter and if there is disagreement the majority view will then prevail.3
Authority of trustee to bind the trust
Even if a trustee has been properly appointed in terms of the trust deed, or by the court in terms of general trust law, he or she may not act on behalf of the trust until authorised to do so by the Master.4 Any such act performed by a trustee prior to receiving Letters of Authority from the Master will be null and void and incapable of ratification.5 Such authorisation by the Master must be clearly distinguished from an authority granted to an individual trustee by the board of trustees to perform some act on its behalf.
The fact that trustees have to act jointly does not preclude them from expressly or impliedly authorising someone to act on their behalf, and that person may be one of the trustees. Thus, acting jointly, they may delegate certain functions to one of their number, or even to an outsider, whilst retaining responsibility for the actions taken on their behalf. This brings the law of agency into play.
In accordance with general principles of agency, when a trustee purports to contract on behalf of the trust, the trust will be bound only if the board of trustees had conferred upon the trustee the requisite authority so to act. The granting of such authority may be express or implied. If the contract fails because the trustee lacked authority, an action for damages will lie against the trustee for breach of warranty of authority, but this may be of little solace in the circumstances.
The trust will be bound despite the trustee’s lack of authority if:
- the board of trustees subsequently ratifies the actions taken on its behalf, or
- if the trustee had "ostensible authority” to bind the trust; that is, if the board of trustees created the impression that the trustee had the necessary authority to represent them, and the other party reasonably relied on that representation. In such circumstances the board would be precluded (i.e. "estopped”) from denying the existence of the authority.
Ratification is not possible in circumstances where the agent is required by statute to obtain authorisation from the principal before entering into the transaction. On this ground a sale of land was declared invalid in Thorpe and Others v Trittenwein and Another6. The deed of sale had been signed on behalf of a trust by a single trustee whose conduct was thereafter ratified by the remaining trustees. The court held that such ratification could not save the transaction because section 2(1) of the Alienation of Land Act of 1981 requires prior written authorisation of the agent.
What if it is clear from the trust deed that an individual trustee can be authorised to represent the trust provided that certain internal formal or procedural requirements have been met, for example, that the body of trustees has resolved to delegate to the trustee the power to sign contracts on its behalf? In those circumstances, must a third party dealing with the trustee check that the requirements have been met, or is it entitled to assume that all is regular? That depends on whether or not the so-called "Turquand Rule” of company law applies to trusts too.
The Turquand Rule: applicable to trusts?
The Turquand Rule is part of the common law relating to companies, and derives from the famous English case of Royal British Bank v Turquand,7 where it was held that –
"persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed, and are not bound to enquire whether acts of internal management have been regular.”
A statutory version of the rule is now to be found in section 20(7) of the new Companies Act of 2008:
"A person dealing with a company in good faith … is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all of the formal and procedural requirements in terms of this Act, its Memorandum of Incorporation and any rules of the company, unless, in the circumstances, the person knew or ought reasonably to have known of any failure by the company to comply with any such requirement.”
Thus, for example, if a company’s Memorandum of Incorporation provides that the managing director can conclude contracts on behalf of the company, provided the board has delegated such power to the director, a third person dealing with the company would generally be entitled to presume, when its managing director signs the contract on behalf of the company, that the necessary delegation has occurred. The effect of the rule is that the company will be bound even if the director lacked authority because the internal requirement of delegation had not been met.
Whether the Turquand Rule should be made applicable also to trusts is somewhat controversial, and the issue was expressly left open by the Supreme Court of Appeal in the two cases discussed above. In Nieuwoudt Harms JA was rather sceptical, because in company law the rule is closely associated with the doctrine of constructive notice (third parties dealing with a company were, and to some extent still are, deemed to have knowledge of the contents of the company’s constitutional documents), and he doubted whether the general public could similarly be deemed to have knowledge of the contents of trust deeds, which are essentially private documents. However, in Parker’s case Cameron JA expressed the view that "[w]ithin its scope the rule may well in suitable cases have a useful role to play in securing the position of outsiders who deal in good faith with trusts that conclude business transactions.”
Clearly, in the present state of the law, it would be prudent for those dealing with trusts to assume that the rule does not apply to trusts.
Persons who contemplate contracting with a trust should, before committing themselves to the deal, take the following elementary precautions:
- insist on seeing Letters of Authority from the Master authorising the trustees to act as such;
- insist on seeing the trust deed itself, to make sure that the board of trustees is properly constituted and has the capacity to enter into the type of contract in question; and
- check that all internal formal or procedural requirements have been met, particularly as regards the granting of authority to a particular trustee to enter into and sign the contract on behalf of the trust. An assurance from the co-trustees that the contracting trustee has the necessary authority will usually suffice, since that will preclude the board from subsequently denying his or her authority.
By the same token, trustees who conclude contracts on behalf of the trust should ensure not only that they have the necessary authority to do so, but also that there is strict compliance with all the provisions of the trust deed.
1 2004 (3) SA 486 (SCA)
2 2005 (2) SA 77 (SCA)
3 Parker’s case, para 17; Van der Merwe v Hydraberg Hydraulics 2010 (5) SA 555 (WCC), par 16.
4 Trust Property Control Act 57 of 1988, section 6(1).
5 Simplex (Pty) Ltd v Van der Merwe and Others NNO 1996 (1) SA 111 (W); Lupacchini NO v Minister of Safety and Security 2010 (6) SA 457 (SCA)
6 2007 (2) SA 172 (SCA)7(1856) 6 E&B 327
This article first appeared on ensafrica.com.