Commentary on Sections Part 1 – Trusts 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.)