The question which arises when contracting with a trust is whether or not the trustee you are contracting with has the necessary authority to enter into a contract and bind the trust as an entity to the contract. In this article we briefly examine what you can do to safeguard yourself when contracting with a trust and what potential ramifications exist when you do contract with a trustee who does not have the necessary authority.
Firstly, one must briefly consider the nature of a trust to understand the legal implications of dealing with a trust. A trust can be defined as a legal institution in which a person, namely a trustee, holds and administers property separately from his own property for the benefit of another person(s). A trust is therefore created by a founder through a contract for the benefit of a third party(s) who on the acceptance of the benefit acquires certain rights under the trust. In South African law we distinguish between two types of trusts, namely a trust set up by a living founder, legally referred to as an inter vivos trust, and a trust that is set up by a deceased person in his will, legally referred to as a mortis causa trust. The former will more often than not be the form encountered when dealing with a trust in daily life.
The trust deed is the founding document of a trust and is a public document which is lodged with the Master of the High Court. Each trust is also allocated a unique identifying number by the Master and the Master issues Letters of Authority to each trustee authorising him to represent the trust.
The trust deed is vitally important as it provides for the appointment and powers of the trustees to act under the trust. If a trust deed for example provides a trustee with the power to sell trust property, this does not automatically include the authority to rent the property to third parties, unless the trust deed also makes provision for such powers.
Accordingly, when contracting with a trust it is important to have insight into the contents of the trust deed. The trust deed may contain provisions regarding which trustees may represent the trust and whether all of the trustees’ consent is necessary for the conclusion of a contract and if not, what authorisation is then required from the other trustees.
It is clear in our law that, unless the trust deed specifically provides otherwise, trustees must act jointly when dealing with third parties if they are to validly bind the trust estate. Therefore a third party dealing with a trust should as a rule of thumb always assume that the contractual powers of the trustees have to be exercised jointly by all the trustees unless the trust deed specifies otherwise.
What then are the consequences of a third party entering into a contract with a trustee who is not authorised to act on behalf of the trust?
It has been suggested that in some instances a third party could still hold the trust bound to the terms of the agreement, notwithstanding the fact that the trustee was not authorised to represent the trust or conclude an agreement to bind the trust, if the third party can show that he was falsely misled to his detriment into a contract with an unauthorised trustee. The applicable remedy for the third party in that instance may be estoppel, unless the third party was aware of the contents of the trust deed and that it did not empower the trustees to delegate their powers to one of them, in which event the third party would not be able to rely on estoppel.
However, as a trust deed is a public document and accessible to the public, it is a far safer approach to request the other contracting party for a copy of the trust deed and authorising resolution providing the necessary authority. Additionally, obtaining a copy from the relevant Master’s office is also a possibility, although not necessarily an easy exercise. Once obtained, these need to be scrutinized to ensure that the trustee representing the trust has the necessary authority and that the trust deed makes provision for the type of agreement that is being entered into.
One should also tread carefully if the trust deed allows for a trustee to be authorised, but that authorisation has not been given yet, even though verbally confirmed to be present or “will be provided” by the representing trustee. Our courts have held that in some cases an agreement, depending on the underlying requirements for the conclusion of a specific type of agreement, may be void in totality even though all of the trustees after the fact consented to the conclusion of the agreement.
In conclusion, it remains prudent to be cautious when contracting with a trust. Firstly, always request the third party for a copy of the trust deed and verify that the trustees who purport to represent the trust are indeed representatives of the trust. Secondly, you should have insight into the trust deed to establish whether the trust may conclude the type of agreement it intends to conclude. Thirdly, should there be more than one trustee, they must act jointly if the trust is to be held bound by the terms of the agreement unless the trust deed indicates otherwise. Finally, should a trustee indicate that he is authorised to act on behalf of all of the trustees, then a resolution by all the trustees to that effect and signed by all of the trustees must be provided together with clear provision in the trust deed that allows for such authorisation.
To assist in ensuring that your transaction is successful and enforceable it is important that you request the assistance of a legal advisor to scrutinize the provided information and advise you regarding possible concerns in relation to the transaction and the authority of the purchaser to effectively bind the trust in your transaction.