A person in a fiduciary position, like a trustee of a trust, is in a very special position of trust. He must at all times show and maintain the utmost good faith and loyalty in the pursuance of his duties with respect to the trust property held for the benefit of the beneficiaries.

In American law, the meaning and content of a fiduciary relationship are explained under what is referred to as the trustee’s duty of loyalty. The concept which says that a trustee should at all times act like a bonus et diligens paterfamilias is well known in South African law. This expression also means that a trustee should act honourably and without any motive of self-enrichment and that he should fulfil his duties with the utmost good faith.

A degree of independence on the trustee’s part is essential. If the trustee acts on instructions from others, he is an employee or agent and not a trustee in his own right.

A degree of independence on the part of the trustee should not be regarded as an essential element of a trust. It is rather an element of trusteeship that the trustee should act independently and without interference from an outside party.

In the law of agency, the principal may control the action of his agent. Here an independent body of trustees exercise control.

Facts of the case

Relevant parties to this application

The applicant in the particular case was a provident fund established by a trade union for its members and their dependents, whilst the respondent was the trade union.

Board of trustees of the fund

The fund rules clearly stated that the sole management of the fund is vested in the trustees.
The board of trustees consisted of employers’ trustees and members’ trustees. The majority of trustees were members’ trustees.

Resolution passed by the union

At some point in 2002, the trustees decided to terminate the mandate of the then fund administrators and to appoint a different administrator. This decision was not approved of by the union.

As a direct result of this decision, the trade union adopted a resolution and thereby imposed certain obligations on the trustees of the provident fund, which was nominated by the trade union. The idea was that the trustees so elected by the union should take mandates from the union members before and after they attend board of trustee meetings – in other words, these trustees should be accountable to the union and the members of the fund who selected them.

It was further stated in the resolution that all trustees who fail to adhere to these democratic principles of the trade union must be disciplined in terms of the union’s constitution.

Decision taken by the trustees

In 2006, the trustees unanimously resolved to amend certain aspects of the fund rules, the effect being to dilute the effective control that the union had over the members’ trustees. These changes were deemed necessary to comply with newly promulgated provisions of the Pensions Fund Act. It was felt that the composition of the board of trustees at that stage contravened the provisions of the Pensions Fund Act and discriminated against non union members.

Objection by the union and disciplinary enquiries to follow

The union objected to this decision. Later in October 2006, the majority of the members’ trustees were issued notices by union representatives to appear before a disciplinary enquiry with various charges of misconduct.

Objections by the trustees

Legal representatives of these members’ trustees objected to the charges and raised amongst others the point that if a fund trustee complies with the mandates of the union without him or her believing that the mandate would serve the best interests of the fund and its members, he or she would be in breach of its fi duciary duties.

Legal procedures and question of law

The union decided to persist with the disciplinary charges and hence an application was lodged to this court of law on behalf of the fund. The principal question before the court was whether the resolution taken by the union was enforceable or contrary to public policy.

Court’s decision

Fiduciary duties of trustees

Judge Freund made it clear that since the management of the fund is vested in the trustees and that the primary object of the fund is the payment of benefits to its members and other beneficiaries, the trustees are bound to deal and are entrusted with the property for the benefit of others, and that fact manifestly gives rise to a fiduciary obligation.

Accountability of the board of trustees

The Pension Fund Act also makes it clear that the board of trustees is the fund’s board and not that of an outside party. Similarly to the principles applicable to company directors, each trustee of the fund is required by law to exercise an independent judgement as to what constitutes the best interests of the fund, regardless of the views of the person(s) who procured his or her appointment as trustee.

Resolution passed by the union reflected a wrong focus

The assertion in the resolution that, on occasion, the union will take decisions which the trustees are obliged to implement is contradictory to the fundamental concept of the trustees’
fiduciary obligations.

The resolution purported to require trustees who belonged to the union to execute instructions given to them by the union (mandates), and if they failed to do so, to subject such trustee(s) to disciplinary processes. This is irreconcilable with the fiduciary obligation of a trustee to exercise independent judgement.

The learned judge further stated that the resolution reflects a belief that the member trustees’ primary duty is to represent the union and its members when taking decisions regarding the fund, instead of the focus being to act in the best interests of the fund, its members and the benefi ciaries. None of the trustees represents the party or parties which appointed them when the fund’s affairs are being decided on.

Legality of the resolution?

The judge found the resolution contrary to law and therefore unenforceable. He mentioned that there is nothing unlawful or improper in the union expressing its views in issues to be decided by the fund’s trustees or even in seeking to persuade them to accept its views. However, it is unlawful for the union to seek to compel the trustees to take mandates from them and implement them, and failure to do so will incur a risk of disciplinary steps.

Application of the decision to family trusts

Also applicable to family trusts
This court case dealt with the fi duciary obligations of trustees of a pension fund. The ratio to be taken from this decision is, however, just as applicable to so-called private or family trusts.

The administration of trustees is one of the areas in the law of trusts which has received a lot of attention from the courts in the past couple of years. Just think of the following cases: Tijmstra v Blunt-Mackenzie 2002 (1) SA 459 (T), Land Agricultural Bank of South Africa v Parker 2005 (2) SA 77 (HHA) and Thorpe v Trittenwein 2006 (1) SA 30 (HHA), to name but a few.

The case under discussion is merely emphasising one of the aspects of trusteeship, i.e. the independence attached to the offi ce of trustee, which is a direct result of the fiduciary obligations inherent to such office.

Tijmsta v Blunt-Mackenzie

In the Tijmstra case, the grandmother of the family created an inter vivos trust in order to accommodate certain estate-planning exercises. Valuable assets were over time transferred to and or accumulated in this trust. The grandmother, her son and his children were appointed as the trustees of the trust. Various disputes arose with regards to the decision making and administration of the trust. The grandmother (in her 80s) then lodged an application to the High Court to remove her son and her grandchildren as trustees from the trust. She argued that her son dealt with the trust assets as if they were his own and her grandchildren were nothing more than mere puppets of their father, hence neither of them performed their tasks with
the diligence legally required of a trustee of the trust.

The son, with the support of his children, then lodged a counter application to remove his mother as trustee, claiming that she was becoming senile. In considering these applications, the Court emphasised, amongst others, that the children did not act in any way independently and merely relied on the direction given by their father. The Court eventually decided to remove all the trustees from offi ce and left it to the Master to appoint other, better equipped trustees.

Independent trustees.

The concept of the appointment of an independent trustee emanates from the Parker case. In most cases, such a trustee is appointed by the family based on the criterion that such person will support the decisions of the estate planner.

Should a decision need be taken at some stage, and the independent trustee realises that such decision might be to the beneficiaries’ detriment, it can be asked whether the other trustees or an outside party such as the estate owner may enforce their will on the independent trustee.

From the decision in the case under discussion, it is clear that an independent trustee must apply his mind independently and always in line with the best interests of the beneficiaries. The other trustees can try to persuade the independent trustee towards their viewpoint(s) but may not force
any decision on him.

Dr. Stefan Strydom

Dr. Strydom is a Director (Tax and Estate Planning) at Havenga Rossouw Viljoen Chartered Accounts & Auditors in Bloemfontein.