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Agreement for Sale and Purchase, Cases, Deed of Trust, Limitation Act, Removal of trustees, Trustee retirement, Trustees, Trusts

What’s in a name?

The Court of Appeal decision in Cowan v Martin highlights the need to clearly identify when parties are acting as trustees or the trustees’ agents.  While in this case the agency argument may seem a little contrived, and is available only because of the commonality of capacity and parties, the case remains instructive.

The lessons to be kept in mind can be stated as follows:

  • Where (as is commonly the case) beneficiaries or settlors purchase a property with a view to the purchase being settled by trustees, provided the trust is in existence, the prudent course of action is that the trustees enter into the agreement; or the agreement should be assigned to trustees.  This is because absent assignment or similar, the trustees may not have the rights under the contract that the named purchaser has; and
  • When trustees are filing proceedings – identify the plaintiffs as such.  This may seem trite.  However, as the facts of Cowan v Martin highlight – the failure to do so can be expensive and risky.

Background

26/10/05 – agreement for sale and purchase between Mr and Mrs Cowan as vendors and Julia Martin and Stephen Farrell as purchasers.

25/11/05 – Stephanie Martin and Collen Ciobo complete the purchase as trustees of a family trust.

10/07 – Stephanie Martin resigns as a trustee and Dr Sturm is appointed a trustee

27/10/11 – Julia Martin and Stephen Farrell issue  proceedings against the Cowans relating to alleged defects in the property.  Importantly the proceedings do not note in what capacity Martin and Farrell are acting.

12/01/12 – Ciobo and Sturm retire as trustees and Martin and Farrell are appointed.  The property is transferred to the new trustees on 28/2/12.

The Cowans unsuccessfully sought summary judgment arguing that Martin and Farrell have no standing to sue and that the limitation period had expired by the time they were appointed.  The Cowans then appealed to the Court of Appeal.

In the course of the High Court proceedings the arguments put forward by the Cowans were expressed as:

  • Firstly, “because it was the trustees who had owned the property and not Martin and Farrell, Martin and Farrell had no standing to sue.  Martin and Farrell could not themselves make a valid claim in contract unless and until they became trustees, which did not happen until January 2012 – that is, after the limitation period had expired.”
  • Secondly, as Martin and Farrell were suing in their personal capacities (rather than as the trustee owners) they had suffered no loss. 

In respect of the first argument Martin and Farrell argued that they had been verbally appointed as trustees in October 2011.

While the Associate Judge saw problems with arguments and the defences these were not considered insurmountable.

In the Court of Appeal, the issues for determination became [32]:

(a) Is it arguable on the evidence that Martin and Farrell were trustees at the time they issued the proceedings?

(b) If not, is it arguable they issued the proceedings as agents for the trustees or as a representative claim?

(c) Is the failure to specify that they were suing in some capacity other than their personal capacities an error in the nature of a mere misnomer (as distinct from a misidentification) and so able to be cured by amendment of the statement of claim?

Were Martin and Farrell trustees when the proceedings were filed?

The Court of Appeal rejected the proposition that Martin and Farrell were appointed verbally, noting at [41] that:

“We know of no authority that has held an oral appointment of new trustees is valid in the absence of any provision under the trust deed authorising oral appointments.”

Deficiencies in the facts and evidence were also noted.

Argument that Martin and Farrell issued the proceedings as agents for the trustees

On these grounds the defendants were on a surer footing.  However, the reasoning from the judgment requires consideration as each such matter will turn on its own facts:

“[51] Under cl 12.33 of the deed establishing the family trust, the trustees were empowered “… at their uncontrolled discretion instead of acting personally to employ and pay any person … to do any act of whatever nature relating to the trust …”.

[52] In the High Court, the Associate Judge considered an agency argument was not tenable because as a matter of law “an agent cannot bring proceedings for trustees”. That assertion is supported by a footnote in the decision that reads:

It is clearly established that a trustee must bring proceedings personally and only in an extreme case will beneficiaries be entitled to bring proceedings in the name of a trust. See Hayim v Citibank [1987] AC 730 [a Privy Council decision from a Hong Kong appeal].

[53] Our understanding of the relevant law is as follows:

(a) Where a claim is based on a duty owed to a trust, a beneficiary of the trust does not have a separate cause of action in their own right against the third-party wrongdoer. The beneficiary cannot supplant the trustee and bring a separate action.

(b) A beneficiary may bring a derivative action; that is, an action in right of the trust and in the room of the trustee.

(c) A beneficiary may only bring a derivative action in special circumstances.

[54] Significantly, special circumstances have been held to include a situation where it is clear that liberty to use the trustees’ names would have been granted if sought.

[55] If that is so, a case where permission has been obtained and the trustees have expressly authorised another person to issue proceedings on their behalf must be stronger still. In our view the line of authority represented by Hayim does not prevent an argument that these proceedings were in principle capable of being issued in the name of Martin and Farrell as authorised agents for the trust.

Failure to identify agency capacity – misnomer or misidentification?

It is here that the crux of the matter arises and how the misdescription of Martin and Farrell’s capacity might be addressed.  Because of the limitation issues the parties did not have the luxury of time to correct any error in the proceedings.  If the failure to specify that Martin and Farrell were suing as agents for the trustees was misidentification any amendment would not be allowed due to the rule that a court will not allow an amendment if the result is deprive a party of a limitation defence (Chilcott v Goss).

However, if the failure to identify their capacity is merely a misnomer, no harm is done, and the correction takes effect from the date  the proceedings are filed.  The difference between misnomer and misidentification has been considered by the courts previously, and the decision is useful reading at [56] to [64].  The test is two staged.  First requiring a determination of whether there is a misnomer, and second, if there is whether a prejudice might exist so that the misnomer should not be corrected.  Where the correction of a misnomer would allow the substitution of a new party such a correction will not be allowed (Davies v Elsby Brothers Ltd).

In the case at hand the Court of Appeal notes at [62] that “… we are satisfied that the misdescription is properly characterised as a misnomer, rather than a misidentification. Although the statement of claim does not mention the trust and the Cowans were unaware that the trustees had authorised Martin and Farrell to bring the proceedings, the Cowans did know from the outset that the property had been settled by the family trust, not Martin and Farrell personally, and that the trustees were the registered proprietors. The loss pleaded in the statement of claim included diminution in the value of the land, which by its nature was something that could only be suffered by the owner, the trust. The other two categories of loss involved losses that would be most unlikely to have been suffered by Martin and Farrell in their personal capacities.”

The message

While an assignment of the initial contract might have helped the execution of the matter, the real issue lay in the fact that no consideration appears to have been given as to who had the right to sue and who would benefit from the action.  The case provides a useful lesson in the importance of correctly analysing a claim involving trustees and who should be party to the claim.

References:

  • Cowan v Martin [2014] NZCA 593
  • Nimmo v Westpac Banking Corp [1993] 3 NZLR 218
  • Parker-Tweedale v Dunbar Bank plc (No 1) [1991] Ch 12 (CA)
  • Hayim v Citibank [1987] AC 730
  • Harmer v Armstrong [1934] Ch 65 (CA)
  • Halsbury’s Laws of England (5th ed, reissue, 2013, online ed) vol 98(3) Trusts and Powers at [525]
  • Chilcott v Goss [1995] 1 NZLR 263
  • Davies v Elsby Brothers Ltd [1961] 1 WLR 170 (CA).

 

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