Contracting with trustees

A recent case serves as a reminder to ensure that the basic rules for contracting with trustees are followed.

A bank issued a letter of credit (LC) on behalf of a trust. Under the terms of issue, the trust was required to reimburse the bank for any amounts paid under the LC. The documentation was only signed by one of three trustees.

When the bank sought to exercise its right of reimbursement, the court found that the trust was not liable to pay because the transaction was not authorised by all of the trustees.

The trustees were not deemed to have knowledge of the LC because correspondence was addressed to the trust and not to each individual trustee.

In this case, the LC secured facilities granted by another bank to a company that was 25 per cent owned by the trust.

When the facility was not paid, a call was made under the LC. In turn, the issuing bank called on the trust to reimburse it, pursuant to certain security documents signed by the trustees prior to issue of the LC.

The trustees denied liability to pay and the bank sued the trustees under the following causes of action:

• Breach of contract
  

  The bank claimed that the one trustee who arranged the LC did so as the delegate of all of the trustees pursuant to a trustee certificate signed previously.
  
  The court rejected the claim, noting that the certificate did no more than warrant that, if the trustees unanimously agreed to incur a liability to the bank, then all necessary resolutions and approvals would be attended to.

  The bank also claimed that all of the trustees were aware of the LC and had failed to notify the bank that it had been arranged without their consent.

  The court also rejected this claim, noting that, as all correspondence from the issuing bank was addressed to the trust and not to each individual trustee, the other trustees did not have knowledge of the LC.

  In addition, the bank claimed that the signing trustee warranted to it in the general terms and conditions that he had the power to enter into obligations on behalf of the trust.

  The court decided that the bank could rely on the warranty because the trustee not only held himself out as having the necessary authority by course of conduct, but he also positively reinforced that position to the bank.
  
  

• Unjust enrichment

The bank claimed that, as the trust held 25 per cent of the shares in the borrowing company, the trust was enriched by the payment under the LC.

The court was satisfied that the trust was enriched by the amount by which its liability under a separate guarantee to the receiving bank was reduced, that the benefit was clearly at the expense of the issuing bank and that it would be unjust for the trustees to retain that benefit.

• Guarantee

The bank also claimed that two of the trustees were liable to pay the amount claimed pursuant to guarantees previously executed by them in relation to facilities provided to the trust, including future obligations.

The court rejected this claim, finding that the consent of all of the trustees would be required before the guarantees could be relied upon.

• Misleading and deceptive conduct

The court decided that, as the signing trustee acted “in trade,” his conduct was misleading and deceptive for the purposes of section 9 of the Fair Trading Act.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.