Contracting with a Trust by Roger Green

The recent unreported Supreme Court of Appeal case of Thorpe versus Trittenwein underlines the caution which must be exercised when contracting with a trust.

With the oral concurrence of the other Trustees, a Trustee of an inter vivos trust signed an offer to purchase land. Some months passed as the land needed to be subdivided. When the time came for transfer to be passed, the Trustee was asked for the resolution of Trustees which authorised the Trustee to sign the offer. As a resolution had not been signed when the offer was made, the Trustees signed a resolution which purported to ratify and confirm the actions of the Trustee. The seller of the land claimed that a valid sale had not been concluded because the Trustee who signed on behalf of the Trust had not been authorised in writing as required by Section 2 (1) of the Alienation of Land Act of 1981. A Deed of Alienation is signed by the parties thereto or "by their agents acting on their written authorisation".

The Trustees applied to court for an Order to declare the sale and purchase of the land to be valid and enforceable. The application was dismissed but leave was granted to appeal to the SCA.

The Appeal Court held that although the Trustees had agreed to purchase the land and even though the Trustee who signed the offer intended to lend money to the Trust to enable it to purchase the land, the signature of "a single trustee to a contract (unlike in the case of a partner) will not bind the trust…… The reference in the Section (of the Act) to "agents" must be understood as including a trustee who may in a sense be said to sign as a principal (i.e. as the trust) but whose power to bind the trust is nonetheless dependent upon the authority of the co-trustees". The court ruled that the agreement of sale was void and of no force or effect. The attempt at ratification was ineffective because the contract had been void ab initio.

The court recognised the harshness of the decision. In dismissing the appeal, the Judge stated that "the result may seem somewhat technical, especially since Thorpe was the founder of the trust, is clearly the dominant trustee and is also, with members of his family, a beneficiary of the trust. Counsel was at pains to point out that it was not – as is usual in this type of case – the trustees who were seeking to escape the consequences of the sale; it was the seller who was not in any way prejudiced by the absence of the written authority of the other trustees. But the trust is typical of the modern business or family trust in which there is a blurring of the separation between ownership and enjoyment, a separation which is the very core of the idea of a trust. Those who choose to conduct business through the medium of trusts of this nature do so no doubt to gain some advantage, whether it be in estate planning or otherwise. But they cannot enjoy the advantage of a trust when it suits them and cry foul when it does not. If the result is unfortunate, Thorpe has himself to blame"

When contracting with a trust, a certified copy of the current Letters of Authority issued by the Master must be obtained to establish who the Trustees are. The Deed of Trust must be scrutinised to ensure that the Trustees have the necessary powers to enter into the transaction and also that any formalities prescribed by the Deed of Trust are complied with. Where a sale or purchase of land is involved, the Trustees are required to sign a resolution before concluding the transaction. Failure to do so could result in a transaction being declared void.

In the Thorpe case the court distinguished the position of a trustee from that of a partner. Each partner has authority to perform an act on behalf of a partnership. "That authority arises by implication of law and the partnership will accordingly be bound."

By virtue of the provisions of Section 69 (1) of the Companies Act of 1973, the courts have held that the requirement of written authorisation is not applicable where a contract is concluded on behalf of a company if the person acting on behalf of the company acts "under the company's authority, express or implied". The signatory must in fact have authority to sign. It would be prudent to call for a resolution of directors to ensure that the person is acting with authority. Implied authority could be inferred from the conduct of the parties representing the company or the status of the signatory, such as a managing director.

If a sale of land by a company represents the greater part of the assets of that company, the sale will not be valid unless authorised or ratified by a resolution of the shareholders of the company as required by Section 228 of the Companies Act. A purchaser should always insist on the production of such a resolution.

COX YEATS
ROGER GREEN
rgreen@coxyeats.co.za
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