Nov 27, 2020 | Article

Outsiders often assume that trustees have both the authority and the capacity to enter into transactions binding the trust. If trustees have not ensured that these requirements are met, to what extent can outsiders be deemed to have known?

In the instance of companies and close corporations, the Courts have adopted a principle called the “Turquand Rule”, which provides that a contracting party, who was dealing in good faith, can assume that acts have been properly and duly performed and that the required approvals were obtained, subject however to the requirement that those acts have to be within the company’s constitution. Section 20(7) of the Companies Act 71 of 2008 provides that a person dealing with a company in good faith, is entitled to presume that the company, in making any decision while exercising its powers, has complied with all the formal and procedural requirements in terms of the Companies Act, the company’s Memorandum of Incorporation (MOI) 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 requirements.

There is no such equivalent provision in the Trust Property Control Act. The Court in the van der Merwe NO and Others v Hydraberg Hydraulics CC and Others, van der Merwe NO and Others v Bosman and Others case of 2010 held that the “Turquand Rule” could not be applied to the trust, because the trust instrument did not provide a power to the trustees to authorise one or more of them to make decisions on the board of trustees’ behalf, or to act as principals in respect of the trust’s affairs, without acting jointly with the rest of the trustees.

In the Nieuwoudt v Vrystaat Mielies case of 2004, the Court held that the powers provided to the trustees in the trust instrument only related to the fact that they could sign on behalf of the rest of the trustees; not that they could make decisions on behalf of the board of trustees.
The Court held in the Land & Agricultural Bank of SA v Parker case of 2005 that “within 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.”
It is advisable for those dealing with trusts to assume that the rule does not apply to trusts in the present state of South African law. The liability is therefore on the outsider to ensure that due process was followed, unlike where one deals with a company, in which case the company will be bound even if, for example, the director lacked authority because the internal requirement of delegation had not been met.

What about property transactions?
Contracting parties are particularly cautious in the case of the purchase or sale of immovable property. In terms of the Land Alienation Act, any deed of sale of immovable property has to be in writing, and the parties thereto or their agents have to be legally authorised to act at the time of signing of the contract.

The Thorpe v Trittenwein case of 2007 confirmed the principle that where one trustee is authorised to act on behalf of other trustees, and the sale of land is involved, such authorisation must be received in writing in the form of a resolution duly signed by duly authorised trustees by the Master of the High Court. Any deed of sale entered into by one trustee purporting to act on behalf of other trustees, where that trustee is not authorised to do so by their co-trustees, may be deemed null and void. This is because it will not comply with the requirements of the Alienation of Land Act (Section 2), and cannot be ratified thereafter. This case confirmed that a sale cannot be ratified by the signature of a written authorisation to act after the fact. The written authority, therefore, must be granted prior to the signature of the deed of sale to the duly authorised trustee.

What should a contracting party do?
·       View the Letters of Authority from the Master authorising the trustees to act
·       View the trust deed to make sure that the board of trustees is properly constituted and has the capacity to enter into the type of contract in question
·       Ensure that all internal formal or procedural requirements have been met such as a resolution authorising a trustee to sign a contract on behalf of the trust.

This is a useful article written by Phia van der Spuy

-Ant Jenkins