What are the risks of contracting with a trustee?
A trust is a relationship where one person or company (the trustee) holds assets for the benefit of another (the beneficiary). When contracting on behalf of the beneficiaries, a trustee typically wishes to limit its liabilities to the extent to which it is indemnified out of the trust assets.
There are two major risks associated with the trustee's liability being limited in this way:
- The trust assets may not be of sufficient value to meet any debts incurred by the trustee.
- The trust assets may not be available to meet any debts incurred by the trustee.
What can be done to limit these risks?
If you have concerns about contracting with a trustee, there are a number of due diligence steps and contractual devices that can be used to limit these risks:
Review the trust deed
The extent of the indemnification available to the trustee from the trust assets is usually set out in a deed between the trustee and the beneficiaries. Trust deeds are not publicly available and can only be obtained from the trustee. Without access to the trust deed, it may be impossible to confirm the scope of a trustee's indemnity.
You can ask the trustee to provide a copy of the trust deed so you can determine the scope of the trustee's indemnification although it would not be unusual for the request to be refused on the grounds of confidentiality. Further, there is no guarantee that the trustee and the beneficiaries will not modify the terms of the trust deed at a later date, including amending the scope of the trustee's indemnity out of the trust assets.
Obtain details of the trust's asset holdings for the particular trust
You will want to ensure that the trustee can meet any debts and liabilities arising under the contract. Therefore, you can ask the trustee to provide details of the value of the assets which it holds on trust. One thing to keep in mind is that even if the trust consists of assets of significant value at the time the contract is signed, there is no guarantee that the trust will still consist of those assets at the time that a relevant liability arises.
Ask the trustee to provide financial security
If there are any concerns that a trustee may not have sufficient trust assets to meet liabilities under the contract it might be prudent to require extra security.
Some of the most common forms of financial security in contractual arrangements include cash security deposits or bank guarantees. In some cases parent company guarantees may be appropriate.
Another method of risk management is ensuring that the trustee has adequate insurance, so that the insurance policy can respond if an event covered by the policy occurs. The type and amount of insurance should be customised to the specific contract.
Exclusions from the trustee's limitation of liability
A trustee's power to contract is subject to the limitations in the trust deed. If the trustee incurs debt whilst acting outside of its conferred powers, or whilst acting fraudulently or negligently, these debts usually cannot be recovered from the trust assets. In these circumstances, you should ensure that such conduct is excluded from the trustee's limitation of liability clause in your contract.
Further advice and assistance
Contracting with a trustee can add complexity to any commercial or property transaction. For further advice and assistance, please contact:
Managing Principal Solicitor
Ph: 9947 1430
Acting Managing Principal Solicitor
Ph: 9947 1435