NOTE: This article was published in July 2012 and reflects the law as it stands on the date of publication and not at any later date.

Intention of settlor

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.

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.

 

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).

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).

 

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 mistake

In Tankel v Tankel [1999] 1 FLR 676 Park J refused to rectify a settlement so as to remove a clause prohibiting 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. Those appointments would be void, if there were no rectification. Obviously this was not something that the settlor would have wanted if the matter had been brought to his attention when the settlement was made.

 

However, 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:

 

(a)   The draftsman has departed from clear instructions in drafting the terms of the settlement; or,

 

(b)  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).

 

Mistake as to meaning of words

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).

There is no requirement, as there is in the case of a Will, that the mistake must be the result of a clerical error, or a failure to understand instructions.

 

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.

 

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”.

 

Mistake as to legal effect of provision

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.

The Court could order rectification so as to include a power to advance capital to the settlor. It did not matter that the settlor did not specifically have a power to advance capital in mind. He had a general intention that he should have access to capital. The court could give effect to that intention by inserting a power to advance capital into the settlement for the benefit of the settlor.

 

Mistake as to (tax) 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. The Court will not, therefore, rectify an instrument merely on the ground that it has unintended tax consequences.

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).

 

Mistake as to legal effect of trust

A settlement may, however, be rectified, where it gives rise to tax consequences which the settlor did not intend, provided that there is also a mistake as to the nature and effect of the settlement.

In Chisholm v Chisholm [2011] WTLR 187 the claimant was the settlor of two trusts for the benefit of his children. He had intended to create bare trusts for his children, having been advised that the use of a bare trust was the only way to make gifts to trusts for his children without incurring inheritance tax if he survived seven years (PETs). However, he was also (wrongly) advised that the children could be entitled to the capital under the bare trusts on attaining the age of 25. In fact, this modification of the maturity date (from 18 to 25) meant that the transfers to the trusts were immediately chargeable to IHT. The settlor sought rectification so as to amend the settlements so that they were bare trusts.

The court held that the jurisdiction of the court to rectify a voluntary settlement that did not express a settlor’s true intention did not extend to mistakes relating entirely to the fiscal advantages of a transaction. However, in this case, the claimant was also under the mistaken impression that the settlements, as drafted, took effect as bare trusts. The claimant not only intended to save inheritance tax but also intended to do so in a specific way, namely by creating bare trusts. He had specifically instructed his solicitors to prepare bare trusts, and if he had known that inclusion of a 25-year maturity date was incompatible with a bare trust, he would not have agreed to it. It followed that rectification should be granted.

 

Rectification of Wills

 

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). The draftsman might, for instance, have deliberately included a provision in a particular form wrongly believing that it confers a power to advance capital to a life tenant, when as a matter of law it does not. Such an error is not caused by a failure to understand the instructions. Nor is it a clerical error.

 

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.

 

(a)  Words wrongly included

 

In Re Segelman, a solicitor took instructions for a Will. Of his initiative, he included a proviso intended to include as beneficiaries of a discretionary trust issue of beneficiaries who predeceased the testator or died within 21 years of his death. Subsequently, he received further instructions, and drafted further provisions benefiting named beneficiaries and their issue. In adding the new provisions, he failed to appreciate that the proviso, which he had originally included without instructions, was inappropriate, since it only permitted issue of a beneficiary to benefit if the beneficiary had died. The intention was, however, to benefit beneficiaries and their issue, whether or not a beneficiary had died. The solicitor should have deleted the provision, but simply forgot that it was there. The result was that the Will had a different effect from that which the testator intended, by reason of the solicitor’s inadvertent failure to delete the relevant proviso. That failure amounted to a clerical error.

In Austin v Woodward [2011] EWHC 2458 (Ch) the testatrix gave instructions for her Will to be updated. Her existing Will included a gift of her house to the claimant absolutely. She did not give any instructions to change her Will in this regard. There were also documents indicating that the testatrix retained her intention to give her house to the claimant absolutely. However, when the new Will came to be drafted, the solicitors had updated their precedents, with the result that they included an inappropriate provision, relating to the house, was used when drafting the new Will.  Words were inadvertently included in the Will which had the consequence that the absolute gift of the house to the claimant failed. The Court held that the inadvertent inclusion of the offending words, by a thoughtless application of a precedent, amounted to a clerical error. The Will could, therefore, be rectified so as to remove the offending words.

In both these cases there was cogent evidence that the relevant provision had been introduced, or not deleted, by reason of a mistake of the solicitor, who had either not appreciated its significance, or who had forgotten that it had been included, or who had not considered its effect having regard to the amendments made to the draft Will. In both cases, the solicitor admitted the mistake, and explained how it had arisen.

 

(b)           Words wrongly omitted

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”.

 

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 in order to establish whether there has, indeed, been a mistake by reason of a failure to understand the testator’s instructions. In Boswell v Lawson [2011] W.T.L.R. 931 the Court of Appeal upheld the Judge’s decision that the Will in question did, indeed, reflect the testator’s intentions, and that the solicitor had not misunderstood his instructions. This conclusion was reached even though the solicitor had written to the testator describing the effect of the draft Will as being different from its actual effect, and the testator had replied saying that he was happy with the Will. The most likely explanation was that the mistake was in the solicitor’s letter, not in the Will, and that the testator had not read the letter carefully before replying that he was satisfied with the terms of the Will.

The court concluded that there was a mistake, by reason of a failure to understand the testator’s instructions, where a Will gave rise to a partial intestacy, in failing to make any provision following the death of a life tenant of a share of residue. There was nothing in the evidence to suggest that this was intended by the testator (Gerling v Gerling [2011] W.T.L.R. 931).

In Sprackling v Sprackling [2009] WTLR 897 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.”