NOTE: This article was published in May 2011 and reflects the law as it stands on the date of publication and not at any later date.

Introduction

Rectification is:

• an equitable, discretionary remedy;

• to correct the wording of a document or instrument;

• by adding, deleting or varying words;

• where by mistake;

• there has been a failure to express the intentions of the parties due to the inadvertent addition or omission of words, or the use of inapposite wording;

• so that the  instrument accords with what the parties agreed (in the case of a multi-lateral transaction);

• or with what the donor or settlor intended (in the case of a voluntary, unilateral transaction, such as a settlement).

The justification for intervention is that the mistaken party should not be prejudiced by the operation of an instrument, reliance on which would, without rectification, be unconscionable.

The purpose of rectification is to reformulate instruments in which the parties have mistakenly expressed their intentions, i.e. to correct errors whereby something has been written down wrongly. What is rectified is not a mistake in the transaction itself, but a mistake in the way in which that transaction has been expressed in writing.

Rectification operates retrospectively, even though this involves the validation of acts which would have been invalid under the document in its original form.

Rectification is most commonly sought of contracts. However, it can relate to a wide variety of instruments including:

• contracts;
• conveyances and transfers;
• settlements;
• wills;
• deeds of variation;
• instruments of appointment;
• leases;
• policies of life assurance;
• company registers (but not the articles of association of a company)

Common mistake

A bilateral or multilateral agreement, such as a contract, can be rectified on the grounds of “common mistake”. i.e. that there has been a mistake in expression which is common to all parties. The party seeking rectification of an instrument must show that:

(a)   the parties had a common intention, whether or not amounting to an enforceable contract, continuing up to the execution of the instrument;

(b)   there was an outward expression of accord; and

(c)    by mistake, the instrument did not reflect that common intention.

 

Unilateral mistake

However, there are circumstances in which a bilateral agreement may be rectified even though only one of the parties is mistaken. The party seeking rectification must show that:

(a)   by mistake the document did not represent his true intention at the time it was executed;

(b)   the other party was aware of that mistake;

(c)    the non-mistaken party omitted to draw the mistake to the other party’s notice;

(d)   the mistake was one calculated either to benefit the non-mistaken party or (probably) to operate to the detriment of mistaken party.

If these requirements are satisfied, the court may regard it as inequitable to allow the non-mistaken party to resist rectification so as to give effect to the true intention of the mistaken party, despite the absence of any mistake common to the parties.

Rectification of settlements

A settlement is, in one sense, a bilateral transaction in that involves two parties: (a) the settlor; and (b) the trustees. However, in order to rectify a settlement, it is not generally necessary to show that there is a common mistake, shared by both the settlor and the trustees. Nor is it necessary to show that there is a unilateral mistake where the trustees are aware of the settlor’s mistake.

Assuming that there is no bargain between the settlor and the trustees (as in the case of an ante-nuptial marriage settlement) it is only necessary to show that the settlor is mistaken as to the terms of the settlement. A voluntary settlement can be rectified where, by mistake, it fails to express the real intention of the settlor.

The irrelevance of the trustees’ intentions was established by Re Butlin’s Settlement Trust [1976] 1 Ch 251. In that case the settlor, Sir Billy Butlin, executed a voluntary settlement which was intended to include a clause giving the majority of the trustees the power to bind the minority in the exercise of their dispositive powers. In fact, by reason of a draftsman’s error, the clause conferring the power to act by a majority only applied in limited circumstances. The settlor sought rectification some 28 years after execution of the settlement.

There were five original trustees. Only one of the five (the settlor’s solicitor) knew what the settlor intended. Another trustee (the wife of the settlor) opposed the application without giving reasons. Was it fatal to the application for rectification that not all of the trustees shared, or were aware of, the settlor’s mistake?

Brightman J held that it was not fatal. A settlor may seek rectification by proving that the settlement does not express his true intention: in the absence of a bargain between the settlor and the trustees, it is not necessary for the settlor to prove that the settlement does not express the true intention of the trustees (262F-G).

However, the Court has a discretion as to whether to order rectification, even if the settlor was mistaken. It could, for instance, decline to rectify a settlement against the will of a protesting trustee who objects to rectification:

 

• if the effect would be to give the majority of trustees a power to compel a protesting trustee, who was ignorant of the settlor’s intention when he took office, to concur in conduct of which he might strongly disapprove; or

• if the effect would be to exclude a minority trustee, particularly of a discretionary trust, from an effective say in the trusteeship where the trustee is the parent of named beneficiaries.

 

However, in Re Butlin’s Settlement Trust, the only objection was by the settlor’s wife, and she had not seen fit to swear an affidavit giving her reasons for opposing rectification. It was, therefore, impossible to tell whether she had any valid objection.  The settlement was, therefore, rectified so as to accord with the settlor’s intentions.

 

Deeds of Variation

Where X enters into a deed of variation of a Will redirecting a gift to X to Y, the only relevant intention is that of X, even if the executors and/or Y are joined as parties to the deed (Wills v Gibbs [2007] EWHC 3361 (Ch), at para. 16).

However, if the deed contains an element of bargain, as where there is an internal re-arrangement of the testator’s testamentary dispositions by a number of beneficiaries, the intentions of all the beneficiaries would be relevant. It would be sufficient that an executor, who has been joined as a party to the deed, may have entertained no intention beyond that of being ready to go along with the wishes of the beneficiaries (Ashcroft v Barnsdale [2010] WTLR 1675, at para. 21).

Mistake as to meaning or legal effect of a provision

Re Butlin’s Settlement Trust is also authority for the proposition that rectification is available not only in a case where particular words have been added, omitted or wrongly written as a result of careless copying or the like: it is also available where the words of the document were purposely used, but it was mistakenly considered that they bore a different meaning from their correct meaning as a matter of true construction (260G-261A).

In Re Butlin the settlor had not appreciated that the wording of the settlement did not, as a matter of law, permit majority voting by the trustees. The wording had been deliberately used. However, this was not a valid objection to rectification.

Therefore, a mistake as to the legal meaning of words can found a claim for rectification (AMP (UK) Plc v Barker, at para. 70).

An example is Frey v Royal Bank of Scotland [2001] WTLR 1009 where a trust was set up for the benefit of a class of beneficiaries, including Marc Bolan’s “children”. The English lawyers who drafted the trust did not appreciate that under Bahamian law, which governed the settlement, references to “children” did not include illegitimate children. The settlement was rectified, so as to add illegitimate children to the class of beneficiaries, on affidavit evidence to the effect that the settlor and Marc Bolan had intended to include illegitimate children as beneficiaries. This was a straightforward mistake as to the legal meaning of the word “children”.

The mistake may also be as to the legal meaning of a whole clause or provision. In Stephenson v Stephenson [2009] WTLR 1467 the settlor settled property upon trust for himself for life, remainder to his children.  He mistakenly thought that he could have access to the capital. However, he was mistaken. The settlement contained a power of advancement. However, that power did not permit advances to be made to a life tenant who had no interest in capital.

The Court found that there was compelling evidence that the settlor wrongly believed that the effect of the settlement was that he could have access to capital. This was a mistake as to the meaning or legal effect of the settlement. Such a mistake was sufficient to found a case for rectification.

Mistake as to consequences

Equitable relief for mistake, including rectification, is not available if the mistake relates only to the consequences of the transaction or the advantages to be gained by entering into it.

This reflects a policy that equitable relief should not be available to a person who is mistaken about the commercial aspects of their transactions or had second thoughts about them (AMP (UK) Plc v Barker, para. [70]).

It may, however, be difficult to draw the line between mistakes as to the meaning or legal effect of an instrument (which are rectifiable) and mistakes as to consequences or advantages (which are not).

Tax consequences

(a)    Rectification refused where mistake as to tax consequences

In the private client context, unintended consequences are often tax consequences. The Court will not rectify an instrument merely on the ground that it has unintended tax consequences (see Racal Group Services v Ashmore [1995] STC 1151; Ashcroft v Barnsdale [2010] WTLR 1675, at para. 17).

In Allnutt v Wilding [2007] WTLR 941 rectification was refused because the settlement was in the form that the settlor intended, even if he did not intend the tax consequences. The settlor had transferred £550,000 to a discretionary settlement for the benefit of his three children in the belief that he was making a PET, so that no IHT would be payable if he survived for 7 years. In fact, the transfer was immediately chargeable being a transfer to a non-interest in possession trust. It would only have been a PET if it had been a transfer to an interest in possession trust. The trustees, with the consent of the beneficiaries, sought rectification of the settlement by, in effect, substituting an interest in possession settlement.

It was argued that the settlor had made a mistake as to the legal effect of the transaction, as opposed to its consequences. However, the Court of Appeal upheld Rimer J’s decision that the mistake was not as to the language, terms, meaning or effect of the settlement. The settlor intended to execute the settlement which he in fact executed, conferring benefits on his three children. His only mistake was to rely on legal advice that the payment of £550,000 to the trustees would be a potentially exempt transfer. The remedy of rectification was not available to cure the damage caused by that sort of mistake (i.e. as to the tax consequences of a transfer into a settlement, as opposed to the meaning or legal effect of the settlement itself).

The distinction between “effect” and “consequences” is well established. It applies to all claims for rectification, not just to claims to rectify settlements (Ashcroft v Barnsdale [2010] WTLR 1675, at para. 15).

 

(b)   Rectification granted where mistake as to tax consequences

However, there are cases where an instrument may be rectified even if the mistake is as to the tax effect or consequences of the instrument (Ashcroft v Barnsdale [2010] WTLR 1675, at para. 17).

In essence, one of the express purposes of the transaction must be to save tax, but wording must have been included in, or excluded from, the instrument which – as the settlor or donor mistakenly fails to appreciate  – defeats that tax-saving purpose. This may be contrasted with a case where the donor or settlor does not have any specific tax saving in mind in effecting the transaction.

There are three cases which illustrate this principle.

In Farmer v Sloan [2005] WTLR 1615 a widow executed a deed of variation of her husband’s Will redirecting the former matrimonial home to her daughter, with the specific intention that the home should be excluded from her IHT estate. The solicitor, without instructions, included a provision reserving to the widow a right of occupation. It was not appreciated by any party that the effect was to defeat the widow’s intention that the home be excluded from her IHT estate. The Court ordered rectification so as to delete the right of occupation on the basis that the widow would herself have deleted that provision if she had known that its effect was to defeat her intention to exclude the home from her estate.

In Wills v Gibbs [2007] EWHC 3361 (Ch) the testator’s cousin executed a deed of variation of the testator’s estate redirecting substantial assets to his son. The cousin’s instructions were to the effect that he wished to the deed of variation to be tax-efficient. However, the solicitor failed to implement those instructions, as by mistake he failed to include statements in the deed that IHTA 1984, s. 142(1) and TCGA 1992, s. 62(6) should apply to the variation. The Judge accepted that the purpose of the claim was to achieve a tax advantage. That purpose had been frustrated by the omission of the requisite statements. The deed was rectified so as to include the statements.

In Ashcroft v Barnsdale a deed of variation was executed of W’s Will redirecting £410,000 to her children, and her residuary estate to her husband. The gift to the children was treated as being free of tax, with the result that the husband had to bear the tax on the gift. This had not been the intention of the parties. The Court ordered rectification of the deed so as to make the gift to the children “subject to inheritance tax”. There was a specific common intention (albeit “unarticulated and unexpressed”) to achieve a fiscal objective whereby the husband would receive his entitlement free of IHT. The parties’ legal advisers failed to give effect to that objective in that they had not inserted the words “subject to inheritance tax”.

It is also said that rectification should only be ordered if the parties’ substantive rights would be changed. In other words, the Court will not order rectification if the order would make no difference to the parties’ substantive rights, its only effect being to save tax.

However, the Court will often be astute to find that the parties’ substantive rights are affected, if there has clearly been a mistake which negates the tax-saving purpose of the transaction. In Wills v Gibbs there was held to be a substantive issue between the parties. If the deed was not rectified, it gave rise to a PET by the cousin, and the executors would be entitled to retain the gifted property as security for any IHT payable should the cousin die within 7 years. However, if the deed were rectified, and the gift was treated as having been effected by the testator on his death, there would be no PET by the cousin, and the executors would not be able to retain the property as security for IHT.

In all these cases, the solicitor had, by mistake or ignorance, included or excluded wording which defeated the specific intentions of the client, which was to enter into a transaction which saved tax.

Certainty of settlor’s actual intentions

(a)    Rectification ordered

There was a possible objection to rectification in Stephenson v Stephenson. The settlor had not formulated in his own mind the wording of any provision necessary to give him an interest in capital, nor given any thought to how this might be achieved. He merely had the general intention that he should have access to capital.

However, the Judge stated that it was only necessary to show that the settlor had an intention as to the substance of what would be achieved by rectification. It was not necessary that he should have had in mind the precise form of words to be inserted in the settlement. It was sufficient that the settlor intended that the settlement should include a provision whereby capital might revert to himself. The Judge considered that he was “mending”, not making a new settlement, by including a power to advance capital to a life tenant.

However, there are some cases where the Court has, in effect, made a new settlement.

In Whalen v Kelsey [2009] EWHC 905 (Ch) a husband and wife intended to set up a settlement for the benefit of their children. However, the drafting of a settlement was a complete mess. The trustees were given power, before “the Perpetuity Day”, to appoint capital to the settlors’ children living on “the Perpetuity Day”. Unfortunately, “the Perpetuity Day” was not defined. The power of appointment was void. The result was that a charity was entitled to the trust capital on the death of  the survivor of the settlors. Needless to say that was not what they intended.

However, it was almost impossible to rectify the settlement without starting again. No one, least of all the settlors, had given proper consideration as to how it should operate, even in substance, rather than detail.

Nonetheless, the Judge did, in effect, re-write the settlement. He supplied a definition of “the Perpetuity Day”, rewrote a sub-clause, and even deleted the default provision in favour of the charity in its entirety.

This was justified on the basis that it accorded with the true intentions of the settlors, and how the solicitor who drafted the settlement, would most likely have set out the settlors’ intentions, “had he considered those intentions more fully and had regard to exactly what they required”. This approach no doubt went beyond that permitted by previous authorities (none of which were cited in the judgment). However, the case may illustrate that the Courts are increasingly prepared to be constructive in correcting mistakes even by re-writing the settlement.

 

(b)   Rectification refused

Whalen v Kelsey may be contrasted with Tankel v Tankel [1999] 1 FLR 676 where the terms of the settlement prohibited any application of the trust fund in favour of any of the trustees for the time being. The settlor’s daughters were two of the four trustees, and appointments had been made to them as beneficiaries. Rectification was sought to permit the trustees to exercise their discretions in favour of a beneficiary who was also a trustee. Park J refused to rectify a settlement on the basis that “it is not enough for the Court to consider that it would have been better if the original document had been differently worded, or that the settlor would have altered the terms of the settlement had his attention being drawn to the consequences of a particular phrase”.  It must be shown that the draftsman has departed from clear instructions in drafting the terms of the settlement, or, perhaps, that the inclusion of the provision in question has been a “maverick aberration” of the draftsman. The draftsman had not departed from clear instructions: there were no instructions to the effect that beneficiaries could be trustees and continue to receive benefits. Nor was the prohibition against applying capital in favour of a trustee a maverick aberration. It had been drawn from a much respected and widely used book of precedents (Potter & Monroe, Tax Planning).

 

Who may apply

The settlor may, of course, apply for rectification. A beneficiary or trustee can also apply for rectification, where the settlor has died, on the basis that the deed was not in accord with the settlor’s intentions (In re Slocock’s Will Trusts [1979] 1 All ER 358, at 361). However, the Court may well insist upon nothing but “the clearest and most certain demonstration of error and of actual intention” on the part of the settlor (Weir v Van Tromp (1900) 16 TLR 531).

The Court will not rectify a settlement, at the instance of a beneficiary, during the settlor’s lifetime, against the wishes of the settlor. This is so even though the applicant may rely on evidence that the settlor was mistaken when he made the settlement. The settlor cannot be compelled to perfect his imperfect gift. In Lister v Hodgson (1867) L.R. 4 Eq 30, at 34, Lord Romilly M.R. said of a settlor that:

“… no amount of evidence, however conclusive, proving that he did so intend, will at all justify the Court in compelling him to introduce a clause into the deed which he does not choose to introduce now, though he might at the time have wished to do so.”

 

Nature of evidence

“Convincing proof” is required as to the settlor’s intention (Joscelyne v Nissen [1970] 2 QB 86). If there is not “cogent evidence”, certainty and ready enforceability of transactions could be hindered by consistent attempts to cloud the issue (AMP (UK) Plc v Barker [2001] WTLR 1237, para. 59). Rectification must be cautiously watched and jealously guarded (Whiteside v Whiteside [1950] Ch 65, 71).

The claimant does not have to meet more than the civil standard of balance of probabilities, but convincing proof is required to counteract the cogent evidence of the party’s intentions displayed by the instrument.

Ideally, evidence of the settlor’s intention will take the form of contemporaneous written instructions, memoranda, or drafts (Bonhote v Henderson [1895] 1 Ch 742, at 748-9). However, if the settlor’s intention is sufficiently clear, the relevant evidence of intention can take any form.

In AMP(UK) plc v Barker Collins J left open the question of whether there was a requirement for there to be an outward expression or objective manifestation of the settlor’s intention; or whether it might be sufficient to rely upon uncontradicted evidence of the settlor’s subjective intention (as had been permitted in some of the earlier cases). However, he noted that, otherwise than in exceptional circumstances, the certainty of transactions would be undermined if the court could execute on the assertion of a party to the transaction. In any event, without an objective manifestation of intention, there may not be a convincing proof of mistake.

The uncontested affidavit evidence of the settlor may suffice. However, the Court may require corroboration of the settlor’s intention, particularly if the settlement, as rectified, would be of benefit of the settlor (as was the case in Stephenson v Stephenson [2009] WTLR 1467).

Procedure

The claim may not be contested by the respondent beneficiaries or trustees. The beneficiaries may benefit from the application; or may not be prejudiced; or may have no evidence to contradict that in support of the application. The respondents may, therefore, not put in evidence in reply and/or not cross-examine and/or not be represented in Court. In such a case the Court may decide to hear oral evidence in chief from the relevant witnesses even if that evidence is not tested by cross-examination (Stephenson v Stephenson [2009] WTLR 1467). In a contested case, cross-examination will be appropriate.

 

Construction

Rectification will not be ordered if the error can be “corrected” as a matter of construction. It may be possible to supply or omit words, by a process of construction, where there has been an obvious error, and it is clear what correction is required to carry out the intentions of the parties (see Schneider v Mills [1993] STC 430).

 

Alternative remedy of rescission

There is an alternative remedy of setting aside a voluntary transaction on the grounds of mistake on the part of the donor/settlor.

Sometimes the donor/settlor will want to rectify the transaction, rather than set it aside. In Allnutt v Wilding it would not have assisted to have set aside the settlement since the effect would have been that the trust fund would have reverted to the settlor’s chargeable estate for IHT purposes. That was why the claim was framed as one of rectification so as to substitute an interest in possession trust to which the settlor would have made a PET.

However, in other cases, there may be a tax advantage in setting aside gifts into a settlement, e.g. if the settlor has died, and the settlor has left his residuary estate to his or her spouse (which would be exempt for IHT).

There may be a difficulty in rectifying the transaction because the settlor had no clear idea as to what should have been in the settlement. However, in those circumstances, the settlement could still be set aside, if what was actually in the settlement did not accord with the settlor’s intentions.

 

The test

The law has very recently been reviewed by the Court of Appeal in Pitt v Holt [2011] EWCA Civ 197.There must be (para. 210):

• a mistake on the part of the donor either as to the legal effect of the transaction or as to an existing fact which is basic to the transaction; and
• the mistake must be of sufficient gravity that it would render it unjust on the part of the donee to retain the property given to him.

However, the fact that a transaction gives rise to unforeseen tax liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.

 

Mistake as to legal effect of transaction

A transaction may be set aside if there is a mistake as to the legal effect of the transaction. A good example is Gibbon v Mitchell [1990] 1 WLR 1304. In that case the protected life tenant of a trust surrendered his interest with the intention of accelerating the interests of his children in capital. This was a mistake. Because his life interest was protected, the surrender gave rise to a discretionary trust. The surrender was set aside because the protected life tenant did not intend the surrender to have the effect that it did. It would also have been unconscionable for the objects of the discretionary trust, such as grandchildren, nephews and nieces, to insist upon their strict legal rights once they had become aware of the circumstances in which they acquired them.

 

Mistake as to a basic fact

In Ogden v Griffiths Trustees [2009] Ch 162 Mr Griffiths made a number of PETs into trust. He died within 3 years, with the result that the transfers were chargeable to IHT. He was, at least when he made the last and largest transfer, suffering from lung cancer, of which he was unaware. His executors sought to set aside the transfers on the grounds that they had been made under a mistake. This had a tax advantage since, if the transfers were set aside, the property would fall into residue for the benefit of Mrs Griffiths by way of an exempt transfer.

In Ogden Lewison J alluded to the difficult distinction between the effect of a transaction, and its consequences or advantages, and to the debate as to whether a transaction could be set aside where there is a mistake about its fiscal consequences. However, he neatly sidestepped the issue. On the facts that was no mistake as to fiscal consequences. The relevant mistake (at least in respect of one of the transfers) was a mistake about Mr Griffith’s state of health.

He said that a transaction could be set aside where:

• there is a mistake about an existing or pre-existing fact of a sufficiently serious nature; and
• if the settlor had been aware of the true facts, he would not have acted as he did by transferring funds to the settlement.

The last of the transfers was set aside on the basis that at that time Mr Griffiths had been mistaken about his state of health. He was at that time unaware that he was suffering from lung cancer, such that his chance of surviving for 3, let alone 7, years was remote. He would not have acted as he did, if he had known this.

In Pitt v Holt Lloyd L.J. criticised the decision on the grounds that Mr Griffiths had been advised to take out term insurance to cover the risk that he might not survive between 3 and 7 years. He declined to do so. Therefore, he took the risk that he might not survive, and it was not unconscionable for the recipients of the gift to retain it. However, he nonetheless approved the general principle that a mistake as to an existing fact of sufficient seriousness is sufficient (para. 206).

Unintended tax consequences

At first instance in Pitt v Holt [2010] 1 WLR 1199 Robert Englehart Q.C. affirmed the traditional view that it is not possible to set aside a transaction merely on the grounds that there has been a mistake as to its tax consequences. Mrs Pitt, as the receiver for her husband, settled monies on a discretionary trust. Neither she, nor her advisers, appreciated that this would give rise to IHT liabilities. Mrs Pitt sought to have the settlement set aside. The claim was rejected on the basis that the settlement had achieved what Mrs Pitt intended by way of legal effect. Any mistake had not been as to the effect of the transaction, but as to its unforeseen tax consequences. Since Mrs Pitt had not thought about IHT at all, and saving IHT had not been the point of the transaction, there was, in fact, no mistake.

In the Court of Appeal this decision was upheld, albeit on different grounds. It was held that there was a mistake, even though IHT was not specifically considered. Mrs Pitt was, in fact, advised that there would be no adverse tax implications in creating the settlement (even if she was not specifically advised as to IHT). That was a sufficient mistake.

The mistake was also sufficiently serious. The value of the trust fund for Mr Pitt (£800,000), which was intended to cover his needs, was diminished by a charge to IHT of £100,000. There was also the prospect of future periodic and exit charges.

However, the claim failed because the relevant mistake was a mistake as to the tax consequences of the transaction, not as to its legal effect. The fact that Mr Pitt, as the settlor, came under an IHT liability (and the trustees under a secondary liability) was a mistake as to tax consequences, not as to the legal effect of a discretionary trust. The impact of taxation on or as a result of a particular transaction is a consequence, rather than part of the legal effect, of the transaction, and therefore outside the scope of the jurisdiction to set aside for mistake.

Mistake as to tax consequences and other matters

However, if there is a mistake as to the tax advantages of a transaction, and also other mistakes as to its non-tax effects, the transaction may be set aside.

In Bhatt v Bhatt [2009] EWHC 734 (Ch) the claimant was advised to execute a number of documents, giving her children interests in her home, so as to save IHT. Those transactions were set aside on the basis that the documents had not carried her intentions or instructions accurately into effect, and her expectations in the giving of those instructions were so seriously falsified that the documents could not stand. The transaction had no IHT advantages, in fact might be disadvantageous. However, the claimant’s mistake went further than that: she had unwittingly given up control over her home, and arguably conferred interests in possession upon her children that she did not intend to confer, during her lifetime, for no tax benefit. Her mistake was, therefore, one as to the effect of the transaction, not merely as to its tax consequences or advantages.

Overseas cases

There have been as number of overseas cases where foreign courts have set aside trusts on the grounds that there has been a mistake as to tax consequences which was sufficiently seriously as to make it unjust for the trust to stand; and that the transaction would not have been effected but for the mistake (Clarkson v Barclays Private Bank and Trust (Isle of Man) Ltd [2007] WTLR 1703; McBurney v McBurney [2009] WTLR 1489 (Isle of Man); Re Trust A (2010) 12 ITELR 886 (Jersey); Re K Holdings Trust [2009] JRC 245). These cases were disapproved by Lloyd L.J. in Pitt v Holt (para. 208) on the grounds that they ignore the distinction between legal effect, and tax consequences.

The rule in Hastings-Bass

It was long thought that the exercise of a discretion by trustees could be set aside on the grounds of mistake, including a mistake as to tax consequences, if the trustees would not have exercised the discretion in the way that they did, if they had been aware of, and taken into account, such tax consequences (see Sieff v Fox [2005] 1 WLR 3811, at [119]).

This often led to applications by beneficiaries, or even the trustees, to set aside the exercise of discretionary powers by trustees had, mistakenly, failed to take into account a relevant consideration. It was a convenient way of avoiding a large tax liability, and a possible consequent negligence claim against the trustees’ advisers.

However, it is now clear from the judgment of the Court of Appeal in Pitt v Holt and Futter v Futter [2010] EWCA Civ 197 that most of these claims will now fail. The exercise of the trustees’ discretion will only be set aside if the trustee has acted in breach of trust. If the trustees take tax advice (in general or specific terms) from apparently competent advisers, and follow that advice, they will not generally have acted in breach of trust, even if the advice turns out to be materially wrong.

Three practical consequences follow. Firstly, if it is desired to set aside the exercise of a trustee’s power, it will be a matter for the beneficiaries to prove a breach of trust. Only rarely will be appropriate for the trustees to commence the proceedings (unless they are seeking the directions of the court when the beneficiary has alleged breach, but not commenced proceedings).

Secondly, it may be possible to set aside a transaction where the trustees have not taken tax advice at all.

Thirdly, it will not be possible to set aside a transaction for negligent failure to take tax advice if there is an exoneration clause exempting the trustees from liability except for fraud.

Declarations of trust of land

An express, written declaration of trust of land is conclusive evidence as to beneficial ownership unless and until the declaration is set aside or rectified on the grounds of mistake or fraud. There are cases where the declaration has been rectified on the grounds of mistake. However, in Pink v Lawrence (1978) 36 P & CR 98, at 99 there was no mistake where the parties had neither read nor signed the declaration of trust.

In Wilson v Wilson [1969] 3 All ER 945 a property had been acquired in the name of two brothers, pursuant to a transfer containing an express declaration of a joint tenancy. However, the evidence showed that one brother provided all the cash funds and the other’s name was only used in order to satisfy the lender’s requirements as regards the part of the cost that was met by an advance on mortgage, and the first made all the payments due under the mortgage. It was also clear that the solicitor who included the declaration as to a beneficial joint tenancy had done so without instructions and that the declaration was inconsistent with the true basis of the transaction as agreed between the two brothers. Buckley J rectified the transfer by  deleting the declaration. He held that the two brothers held the property on trust for the brother who had provided the funds.

In Re Colebrook’s Conveyances [1972] 1 WLR 1397 a declaration of trust that a father and son should be beneficial joint tenants was rectified so as to substitute a tenancy in common in equal shares.

 

Rectification of Wills

Statutory basis

Pursuant to s. 20 of the Administration of Justice Act 1982 if a court is satisfied that a Will is so expressed that it fails to carry out the testator’s intentions, in consequence of (a) of a clerical error or (b) of a failure to understand his instructions, it may order that the Will shall be rectified so as to carry out his intentions.

An application for an order for rectification shall not, except with the permission of the court, be made after the end of the period of 6 months from the date on which representation with respect to the estate of the deceased is first taken out (s. 20(2) AJA 1982).

There are 3 relevant questions (Re Segelman [1996] Ch 171, at 180).

• what were the testator’s intentions with regard to the dispositions in respect of which rectification is sought;
• whether the Will is so expressed that it fails to carry out those intentions; and
• whether the Will is expressed as it is in consequence of either (a) a clerical error or (b) a failure on the part of someone to whom the testator has given instructions in connection with his Will to understand those instructions.

Convincing evidence that the Will does not reflect the testator’s intentions is necessary (Re Segelman, at 184). Speculation is no basis upon which to interfere with a formal expression of testamentary intentions.

The statutory jurisdiction to rectify a Will does not go so far as the equitable jurisdiction to rectify a lifetime trust. In the case of a Will, there must be a clerical error, or a failure to understand the testator’s instructions.

However, it will often be the case that the solicitor has introduced words, to which he has applied his mind with a proper understanding of his instructions, but which (perhaps through failure properly to understand the law) do not achieve the objective which the solicitor and the testator intended (Re Selegman, at 184). Such an error is not caused by a failure to understand the instructions. Nor is it a clerical error.

If, therefore, a Will draftsman had made the error made by the draftsman of the settlement in Stephenson v Stephenson (by including a power of advancement without appreciating that it could not be used to benefit the settlor/life tenant) the Will trust could not be rectified.

There will also be no remedy where the Will makes no provision in relation to a relevant matter, because the solicitor has failed to take any instructions on that matter (Littlewoood v Wilkinson Woodward [2009] PNLR 566).

Clerical error

The Courts have given a wide meaning to the term “clerical error”. A testator writing out or typing his own Will can make a clerical error just as much as someone else writing out or typing a Will for him (Re Williams [1985] 1 WLR 905, at 912A). However, in the case of a home-made Will, there will often be a lack of evidence as to the testator’s actual intention.

In Wordingham v Royal Exchange Trust Co Ltd [1992] Ch 412 the testatrix instructed her solicitor to draft a new Will making changes to her previous Will concerning specific bequests, but otherwise leaving the provisions of the previous Will intact. The solicitor drafted the new Will, but by mistake excluded a provision, contained in the previous Will, exercising a power of appointment. A clerical error was defined to mean an error made in the process of recording the intended words of the testator in the drafting or transcription of the Will. The failure to copy the provision exercising the power of appointment, from the previous Will into the new Will, amounted to a clerical error.

There will also be a clerical error where the relevant provision – by reason of which the Will is so expressed that it fails to carry out the testator’s intentions – has been introduced, or not been deleted, in circumstances in which the draftsman has not applied his mind to its significance or effect. In Clarke v Brothwood [2007] WTLR 329 the testatrix had intended to give 20% of her residuary estate to each of her 4 godchildren. The Will provided for gifts to the 4 godchildren of 1/20 (not 20%) of the residuary estate, which had the effect that 60% of her estate remained undisposed of. There were two possibilities. Firstly, the testatrix may have said 20%, and the solicitor written down 1/20. That would be a clerical error. Secondly, even if the testatrix had said 1/20, and the solicitor had correctly recorded 1/20, there would still have been a clerical error since, if the solicitor had applied his mind to the problem, he would have appreciated that the testatrix could not have meant 1/20.

In Pengelly v Pengelly [2008] Ch 375 the draftsman left out the word “only” in a clause in the Will. There was no evidence that this was due to a failure to understand the testator’s instructions. In fact, the instructions were quite clear as to the testator’s intentions. The draftsman had negligently or inadvertently left out the word “only”. He had failed to implement his instructions, rather than failing to understand them. However, the Judge held that this was a mistaken omission (as opposed to an introduction) of words which could be categorised as a “clerical error”.

In Walker v Medlicott [1999] 1 WLR 727 there was a negligence claim against a solicitor for allegedly failing to implement the testatrix’s instructions to include in the Will a gift of the testatrix’s house to the claimant. The claim was rejected in part because the Court of Appeal found that, if, as the claimant asserted, the Will failed to carry out the testatrix’s intentions, that must have been in consequence either of a clerical error of the solicitor in recording her instructions in his attendance note, leading to a corresponding error in the Will as drafted; alternatively, of a failure on his part to understand her instructions. On either basis the Will could have been rectified, and there was a failure to mitigate. The moral of the tale is to bring proceedings for rectification, rather than negligence, in these circumstances.

Failure to understand instructions

Rectification may be ordered under s. 20(1)(b) AJA 1982 where the error is caused by the solicitor’s deliberate choice of words, if that choice of words is caused by the failure to understand the testator’s instructions (see Wordingham v Royal Exchange Trust Co Ltd [1992] Ch 412, at 419).

This will often involve a meticulous examination of the evidence as in Sprackling v Sprackling [2009] WTLR 897 where the Court found that the solicitor had misunderstood his instructions, despite the solicitor’s evidence that he had not. The Judge concluded that the solicitor’s recollection was a “false memory, perhaps induced by the spectre of a half-million-pound negligence claim against the firm.”