Categories: How to Business

Can a trust be party to a contract?

(Standard Bank v Johannes Gerhardus Swanepoel NO [2015) ZASCA 71). Standard Bank provided an agricultural produce loan and a business…

Swanepoel signed as personal surety for these accounts. The trust defaulted on repayment of the loan and was overdrawn on the business account.

The bank instituted action against Swanepoel and claimed that Swanepoel had entered into the contracts in his capacity as a trustee of the Harne Trust.

However, the agreement reflected Harne Trust as the borrower. It was signed by Swanepoel ‘on behalf of the borrower’ (and not in his capacity as a trustee of Harne Trust).

Swanepoel stated that the contracts were between the bank and the trust, not the bank and himself in his capacity as trustee of the trust.

As the trust was not a ‘legal person’, it had no contractual capacity and hence no valid contracts were concluded. This resulted in the suretyship obligation being unenforceable. The lower court agreed with Swanepoel.

The Appeal Court had to ascertain if the contracts were concluded by Swanepoel in his capacity as trustee of the trust, even though the word ‘trustee’ was not mentioned.

It found in favour of Standard Bank, confirming that Swanepoel signed the loan agreement in his capacity as trustee of the trust, as was evidenced by the Trust Deed and external evidence.

The following are the reasons for reaching this decision.

  • A trust is defined in the Trust Property Control Act 57 of 1988 as “the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed” to a trustee or to beneficiaries of the trust. The assets and liabilities of a trust vest in the trustees who are empowered to administer the trust. A trust has legal existence irrespective of whether it’s referred to as an entity, institution or arrangement.
  • A trust is a legal entity although it does not have legal personality. Because a trust does not have legal personality it requires the authorization of the trustees, as required by the trust deed, to be bound by a contract. However, this does not mean the trust cannot be party to a contract. It merely expects that all trustees act together to bind a trust, unless the trust deed allows one trustee to do so in terms of a resolution signed by the other trustees.
  • In respect of suretyship obligations involving trusts, one needs to look at the trust deed and external evidence to determine the identity of the principal debtor. If the identity of all the parties can be determined by reference to a Trust Deed, or external evidence, then a suretyship agreement is deemed to be in place.
  • It is important that the principal debtor (in suretyship agreements involving trusts) be referred to as the ‘named trustees’, in their capacity as trustees of the trust. However, external evidence and the Trust Deed can be relied on to determine the identity of the creditor, the principal debtor and the surety.
  • Where a trust is named as a party to the contract (in the absence of the trustees being mentioned), the contract will be valid where it can be shown the trustees acted on behalf of the trust in concluding the contract, although a trust does not have a legal personality.

Disclaimer

The foregoing does not constitute financial or any other advice, and does not take into account your personal financial circumstances. For this reason, it’s recommended you speak to an accredited broker or financial adviser to consider all your options and draw up a plan to achieve your financial goals.

You can also contact Koos Nel, Head of Old Mutual Agri via email  knel1@oldmutual.com.

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