Chapter 4 – Contractual rights, damages and the validity of certain transactions and documents
Contractual rights
65.Section 38 of the Act implements recommendations 60, 61 and 63. It specifies whether a person who has entered into a contract with trustees can enforce their legal rights against the trust or against the trustees personally. To some extent this depends on whether the trustees had power to make the contract (in which case it is an intra vires contract) or did not (ultra vires). Section 38 applies irrespective of when the trust was created but only in relation to a contract entered into after commencement of the section. Subsections (1) and (2) implement recommendation 60. They provide that, where trustees enter into an intra vires onerous contract with a party who is aware that they are acting in their capacity as trustees, then, subject to contrary provision in the contract, that party can enforce their rights against the trust property only. In other words, the trustees will not be held to be personally liable. Subsection (2) is subject to the two following subsections. Subsections (3) and (4) implement recommendation 61. They apply to contracts in which the trustees have incurred personal liability under a contract but also have a right of relief against the trust property (i.e. they can seek reimbursement from it). In that situation the other contracting party may elect, under subsection (4), to enforce the right against the trustees’ private property, or directly against the trust property, or both. By way of example, suppose that there are three trustees of a trust, who enter into a contract with T Ltd. In the course of the contract they incur personal liability under it, but they also enjoy a right of relief against the trust property. If T knows this, it may elect to pursue its contractual rights against any or each of the three trustees personally or, alternatively, against the trust property. This maximises the chances of recovery for T. By subsections (5) and (6), which implement recommendation 63, a party who enters into an onerous contract with trustees which is ultra vires cannot recover from the trust property; but, if that party contracted in good faith, then that party may seek recovery of any losses from the trustees’ private property. This puts the onus on the contracting party to investigate whether the contract is within the trustees’ powers. (The alternative, whereby the trust property is liable under ultra vires contracts, would be detrimental to the beneficiaries, as they would suffer from the diminution in the trust property as a consequence of a contract which was both ultra vires and about which they may also have had no knowledge.)
Damages
66.Section 39 of the Act implements recommendation 66. It is concerned with the satisfaction of awards of damages for loss suffered by a third party resulting from trustees’ acts or omissions in the ordinary course of administering the trust. Subsection (2) provides that the general rule is that such damages are payable only from the trust property; therefore, the trustees are not personally liable. If, however, the Court of Session is satisfied that a trustee has failed to meet the required duty of care, as specified by section 31 of the Act, and the delictual act or omission was in any way attributable to that failure, then it may specify that the damages are payable (in whole or in part) from that trustee’s private property to reflect the trustee’s personal failure with the balance, if any, coming from trust funds. Section 39 applies irrespective of when the trust was created but only in relation to acts or omissions which occur after commencement of the section (subsection (4)).
67.Section 40 of the Act implements recommendation 67. It specifies how an injured party can raise proceedings in delict following a loss sustained as a result of the acts or omissions of one or more trustees. Subsection (2) states that the party may choose to raise a court action against either the trustees as a body (i.e. against all of the trustees in that capacity) or against the individual trustee(s) at fault (or jointly and severally against both). The advantage of being able to sue the individual(s) directly is that, if the trust property is insufficient to meet the award of damages, the pursuer can enforce it against the individual(s) at fault without the need for a second court action. Subsection (3) permits the body of trustees, if they are sued on their own, to bring in as a defender any individual trustee so that the action lies against those considered to be personally at fault as well as against the general body of trustees.
68.Section 41 of the Act implements recommendation 68. Where the trustees as a body have been found liable in delict, but no individual trustee has incurred personal liability, the damages will be paid out of the trust property. If, however, the award exceeds the value of that property, the trustees themselves are liable for the excess. Subsection (2) provides that any trustee who makes a contribution to that excess can seek to recover the costs from the other trustees. Subsection (3) states that this is subject to the relief which the court may grant under the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 (by which it determines the proportion of the award which each trustee must contribute). Section 41 applies irrespective of when the trust was created but only in relation to liability incurred after commencement of the section (subsection (4)).
69.Section 42 of the Act implements recommendation 69. It makes particular provision for liability arising from obligations under environmental law or occupier’s liability. Depending on the nature of the trust property, this can be a significant source of concern for trustees, beneficiaries and any third parties where trustees bear such responsibilities as landowners. By subsections (1) and (2), where such liability falls on trustees in the ordinary course of administering the trust, damages are payable out of the trust property only. But subsection (3) provides that, where a trustee has breached the duty of care set out in section 31, the Court of Session may specify that damages are payable partly from the trust property and partly from that trustee’s private property. In this way, innocent trustees are protected from personal liability. Section 42 applies irrespective of when the trust was created but only in respect of liability arising after commencement of the section (subsection (4)).
Validity of certain transactions and documents
70.Section 43 of the Act implements recommendations 62 and 65. The effect of subsections (1) and (2) is that the validity of an onerous transaction (or contract) between the trustees and another party is not subject to challenge on either of two grounds: first, that the purported exercise of the trustees’ power conflicted with the actual terms and purposes of the trust or, secondly, that the procedures adopted by the trustees were flawed. This clarifies the current law: section 43(2)(a) replaces section 2(1) of the 1961 Act, whilst section 43(2)(b) is in substitution for section 7 of the 1921 Act. (Both of these provisions are repealed, so far as relating to trustees, by section 87 and schedule 2.) Section 43(3), which makes special provision for situations in which trustees are acting under the supervision of the accountant of court, is a re-enactment of the proviso to section 2(1) of the 1961 Act. By section 43(4), the earlier subsections do not affect any liability of the trustees between themselves. This is the position under the current law. The current law also places beneficiaries in the same position as trustees, with the result that a beneficiary who transacts with the trustees is unable to rely on the equivalent protections to those in subsections (1) to (3). This section adopts a different approach and extends such protection to beneficiaries, on the basis that the provision is restricted to transactions which are onerous. The trustees will therefore have received value and so the transacting party, including a beneficiary, is worthy of protection against challenge on the grounds in subsection (2). In line with recommendation 65, the current requirement, contained in section 7 of the 1921 Act, of good faith on the part of the other party is not reproduced in this section (on the basis that the onerous character of the transaction should ensure that the trust property is not prejudiced). Section 43 applies irrespective of when the trust was created, but only to transactions entered into after commencement of the section (subsection (5)).
71.Section 44 of the Act clarifies the current law on the execution of documents by trustees. It is a default rule. At present, while it is clear that a decision – for example, to sell trust property – can validly be made by a majority of the trustees, it is less clear how many trustees are required to execute the disposition or other document. Subsection (1) provides that, for the document to be validly executed, it is sufficient that a majority of the trustees have signed it(12). Subsection (2) indicates that, alternatively, the trustees may authorise an agent to execute a document on their behalf (under section 22(1)(b)). This may be particularly useful where a decision of a majority of trustees under section 14 cannot otherwise be implemented by executing a document where an absolute majority is required due to incapability or being untraceable. By subsection (3) the rule in subsection (1) applies irrespective of when the trust was created but only as respects documents executed after commencement of the section.
This is different from the SLC recommendation 64 which disregarded incapable or untraceable trustees from what constituted the majority. Concerns were raised that such a rule would mean those relying on the signed document would have to look behind the trust deed and inquire as to the traceability and capability of trustees.