TY - JOUR
AU - Weaver, Elizabeth
AB - Abstract What can be done where an action taken by trustees is ineffective, because of a procedural or substantive defect? This article considers the remedies available in England and Jersey, comparing and contrasting those jurisdictions’ approach to putting things right. In particular, it looks at the lesser-known principles by which equity will assist defective execution of a power which has been the subject of a recent case in Jersey. The purported exercise of a discretionary power on the part of trustees will be void if what is done is not within the scope of the power. There may be a procedural defect, such as the use of the wrong kind of document, or the failure to obtain a necessary prior consent. There may be a substantive defect, such as an unauthorised delegation or an appointment to someone who is not within the class of objects.1 Trustees may purport to exercise a power under a settlement under a mistaken understanding of the wishes of the settlor or beneficiaries or an inaccurate appreciation of the effect or the consequences of the exercise of the power. In other words, things can, and frequently, do go wrong in the establishment or administration of a trust. In this article, I consider some of the means available to put matters right where settlors or trustees have taken some action which is ineffective or flawed. The accompanying paper, Putting It Right (2) by Francis Tregear QC, considers some of the solutions that may be available where the problems have arisen, not because the action taken is defective but because of the status of the person taking the action. The underlying and unifying principle is that equity will intervene to protect beneficiaries and ensure the proper operation of trusts. In Abacus Trust Co (Isle of Man) v Barr,2 Lightman J, in considering the rule in Re Hastings-Bass (as it was then referred to) described it as: only one of the protections afforded to beneficiaries in respect of the due administration of the trust by the trustees. In Davis v Richards & Wallington Industries Ltd,3 Scott J (as he then was) in dealing with a potentially defective deed executed by pension trustees, referred to ‘an ameliorating principle of equity’ by which equity would support the parties’ intentions and hold the deed was valid. This article considers the practical side of equity’s intervention. In what circumstances can these principles be used and what are the limitations on them. In doing so, it will look, briefly, at the differences in approach which have developed between England and the off-shore jurisdictions, in particular Jersey. The first issue that needs to be considered is the outcome that needs to be achieved: do the parties want to get out of the transaction that has resulted from the exercise of the power or do they want to uphold what is otherwise an ineffective or flawed exercise of a power. In the first situation, we are in the area of rescission for mistake and transactions which may be impeachable because of failures by the trustees in their decision-making process, i.e what was formerly known as the Hastings-Bass principle. As those principles are under review in England because of the appeal to the Supreme Court in the Pitt v Holt and Futter v Futter cases, I will only consider them briefly. As the law currently stands in England, a voluntary transaction entered into by a settlor in establishing a settlement or by trustees pursuant to a trust power, eg by way of an appointment of funds, can only be set aside if: there was a mistake on the part of the settlor or trustees as to either the legal effect of the disposition or an existing fact which was basic to the disposition; the mistake was of such gravity that the donor would not have entered into the transaction but for the mistake; and the mistake was of so serious a character as to render it unjust on the part of the donee to retain the property received.4 A mistaken belief as to the tax implications of the disposition is not a mistake as to and not legal effect of the disposition but only as to its consequences and so will not bring the equitable jurisdiction of rescission into play. A wider principle has developed in the off-shore jurisdictions which does not restrict the nature or type of mistake that can lead to the principle being invoked and which does not draw a distinction between effect and consequences: see eg the Jersey cases of Re the A Trust5 and Re the Lochmore Trust.6 In Re the A Trust, the Royal Court identified the necessary conditions for invoking the equitable principle of rescission of a voluntary gift or transfer for mistake as being: there was a mistake on the part of the settlor or donor; the settlor or donor only made the disposition because of the mistake—a ‘but for’ link; the mistake was of so serious a character that it would be unjust on the part of the donee to retain the property transferred. In the light of the Royal Court of Jersey’s review and rejection of the reasoning and result in Pitt and Futter in the case of Representation of R in the matter of the S Trust7, it seems likely that this divergence of approach will continue in the event that the Supreme Court upholds the Court of Appeal decision. Before Pitt v Holt, England and the off-shore jurisdictions had developed a principle that allowed transactions by trustees to be set aside, essentially because of flawed decision making. This principle was defined in Sieff v Fox8 as follows: Where a trustee act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account or taken into account considerations which they ought not to have taken into account. The relevant considerations for the purpose of the principal included fiscal considerations. The effect of the Court of Appeal decision in Pitt and Futter is to really limit the principle as a separate means of remedying mistaken exercises of powers by trustee by allowing the parties to escape from the transaction, at least in England. The position as restated is that: an exercise of power which is not within the scope of that power (because of a procedural or substantive defect) will be void; an exercise of a power which is within the scope of the power will be valid unless it involved a breach of fiduciary duty on the part of the trustees; a failure to take account of relevant (and only relevant) considerations (which can include tax considerations) will be a breach of fiduciary duty making the transaction voidable by the beneficiaries; however, trustees will not have failed to take account of relevant considerations provided they have taken advice from apparently competent advisers, even if advice on which they had acted is materially wrong. From a practical point of view, one of the key points of the restated position is that the trustees will not, usually, be able to apply to the court to set aside the transaction when its undesirable aspects come to light. One or more of the beneficiaries will have to grasp the nettle of starting proceedings in which they have to allege and prove a breach of fiduciary duty. That may well be in the face of an exculpation clause in the trust deed. It remains to be seen whether other jurisdictions will restrict the application of the Hastings-Bass rule if the appeal in Pitt and Futter fails. The converse situation is where the parties want to uphold and validate a transaction is void or defective. The first remedy that comes to mind is the equitable doctrine of rectification. The essence of the doctrine is that, because of some mistake, a document does not accurately record a party’s intentions. The document can then be corrected to bring it into line with what was the intention. When voluntary dispositions or unilateral transactions are involved, as in the trust context, the English courts tend to take a slightly more relaxed attitude to invoking the remedy than in contract cases, in particular the court does not need to be so concerned with finding of an outward expression or manifestation of the party’s intention. What will be needed for rectification in such a situation is clear evidence that, due to a drafting error or because the language chosen had a different effect or meaning from what was understood, the document did not achieve what was intended. So, by way of examples: The definitions of trustee and settlor in a settlement were amended to ensure that the settlors were excluded from benefit as intended.9 Deeds were rectified to remove references to section 31(2) of the Trustee Act 1925 to ensure that minor unmarried beneficiaries would have interests in possession.10 A settlor obtained rectification of an accumulation and maintenance settlement by correcting the ages at which his children would take interests from 30 years to 25 years.11 A deed of appointment was rectified to add in a revocation clause to give effect to the appointor’s wish to retain flexibility in dealing with her property.12 English case law establishes (although this has not yet been revisited in the light of Pitt and Futter) that rectification will not be ordered if the only effect is to secure a fiscal advantage, but provided that the order for rectification will make some alteration to or otherwise have an effect on the rights of persons affected by the disposition, it is irrelevant that the reason for seeking rectification is because it would have beneficial tax consequences.13 Other jurisdictions have also evolved a flexible approach to rectification. For example, under Jersey law, if a settlement or other instrument is otherwise properly made but by genuine mistake does not record the intention of the maker, the court may order its rectification so that it reflects the true intention, provided that there is no other practical remedy available.14 Despite this flexibility, rectification is subject to the fundamental restriction that it applies to documents, not transactions. Its role is to make the document conform to the intended transaction. If there is a problem with the intended transaction, that cannot be solved by rectification. A neat illustration is the Court of Appeal decision in Alnutt v Wilding15 where an application for rectification was made by trustees of a settlement on the basis that as drafted it did not give effect to the settlor’s inheritance tax planning intentions. The proposed ‘correction’ involved rewriting the settlement to turn it from a discretionary trust into an interest-in-possession. The application failed on the basis that the settlor had intended to execute the trust deed in the form drafted. There was no error in it. The only mistake was his belief that the transfer into the settlement would be a potentially exempt transaction. This inherent limitation on the remedy of rectification means that it cannot assist in cases where the exercise of a power is ineffective because of some procedural or more substantive omission, eg if the formalities required for the execution of a deed are not complied with or if a document is not executed by all necessary parties. The remainder of this article considers two further equitable principles that may be applied to remedy such problems. The first is the principle by which equity will aid defective execution of a power. It is described in Halsbury’s Laws of England in these terms: Whenever a person who has the power over an estate whether or not a power of ownership shows an intention to execute the power in discharge of some moral or natural obligation, equity will act on the conscience of those entitled in default of appointment and compel them to perfect the intention. Case-law has established that the necessary conditions for the principle to apply are: an intention by the person with the power to exercise it; there must have been an attempted execution of the power—there is no jurisdiction to remedy a failure to execute the power at all or to exercise it in time;16 the defect in execution must be formal—the court will not give relief which has the effect of defeating anything that was material to the intention of the donor of the power or the method of execution; the purported exercise must have been a proper exercise of the power—the court will not assist where there would be a fraud on the power or a breach of trust; the doctrine will operate in favour of: purchasers for value creditors charities persons to whom the appointor is under a natural or moral obligation to provide. The principle is of great antiquity; the founding authority dates from 1762. Until recently, it could probably fairly be described as moribund, having last been applied, successfully, in 1908. However, new life has been breathed into it by a decision of the Royal Court of Jersey earlier this year: In the matter of the Shinorvic Trust.17 One of the issues which the Royal Court had to consider was whether and how the principle applied in modern social conditions. The old case law in which the principle was developed stated that persons to whom a natural or moral obligation was owed were a wife of the appointor and their children but not a husband of the appointor, an illegitimate child, or any remoter relations of the appointor. The facts of the case provide a good illustration of a problem which the other equitable remedies that I have mentioned cannot solve. A discretionary settlement conferred a power on the settlor to add a person to the class of beneficiaries by ‘written instrument’. The settlor signed a deed of declaration (which was also executed by the trustees) which stated that he was adding Mrs B to the class of beneficiaries. In a Letter of Wishes signed later, the settlor expressed the wish that Mrs B’s welfare should be the trustees’ paramount concern. Subsequently, it came to light that the deed of declaration was not validly executed. The trust deed contained an extended definition of written instrument which required the settlor’s signature to have been witnessed. It had not been. The invalidity of the deed of declaration was only appreciated after the settlor’s death and after the trustees, having regard to the Letter of Wishes, had appointed funds to Mrs B. The potential problems in trying to involve the equitable principle were, first, that the previous case law all concerned dispositive powers, whereas the power here was to add to the class of beneficiaries. More significantly, Mrs B was not the wife or child of the settlor. Instead, she had had a long but unconventional relationship with the settlor over 40 years during which they had never married. Indeed, Mrs B had rejected offers of marriage from the settlor. They had lived together for about 20 years although, during that period, Mrs B had had a brief marriage to another man. After they stopped living together, the settlor still spent considerable time with Mrs B and maintained her financially but he also had other women friends and had married another woman. There was clear evidence that the settlor remained very close to Mrs B through his life, supported her financially, and was always concerned to ensure her happiness and well-being. She was named as a beneficiary in his will. In its judgment, the Royal Court held that the principle that equity will aid the defective execution of a power was part of the law of Jersey. The Bailiff described the principle as ‘an entirely beneficial one’ which: prevents errors in formality leading to real hardship for those to whom the donee of the power owes a moral or natural obligation and resulting in the clear intention of the donee being defeated for no good reason. He went on to say that the principle should be developed to take account of modern standards and mores. Therefore, it could operate in favour of any person to whom the donee of the power is under a natural or moral obligation to provide, which would be a question of fact in each case. In the light of the evidence as to the relationship between the settlor and Mrs B, he held that she was within the category of people to whom the principle applied. He therefore applied the principle to declare that she had been validly added to the class of beneficiaries. In its judgment, the Royal Court agreed that the principle was not limited to powers of appointment. More importantly it held that the principle validated Mrs B’s addition to the class of beneficiaries from the date of the deed of declaration which added her. This meant that there could be no challenge to the validity of the payments made to her by the trustees between the date of the deed of declaration and the Court’s order. There will be situations where the defect in what has been done goes beyond a mere failure to comply with formalities. By way of example, there may be a question as to whether all the trustees have been party to or executed a disposition pursuant to a trust power. In such a case, it may be possible to get assistance from the approach of English (and now Jersey) law to the execution of powers. The execution of a power requires: (i) that the donee of the power has the capacity to exercise it, (ii) that any formal requirements for its exercise are complied with; and (iii) that there is a sufficient indication of the intention to exercise it in the instrument alleged to exercise it.18 In relation to element (iii), English law takes a wide view of what can amount to a sufficient intention to exercise a power. Either a reference to the power or a reference to the property subject to the power will usually be treated as a sufficient indication of intention.19 Although well-drafted instruments exercising a power will contain an express reference to the relevant power, a specific reference is not essential. Therefore, the fact that an instrument attempting to execute a power has been badly drafted may not be fatal if there is sufficient if even non-specific reference to the power intended to be exercised or the property which is to be transferred. Indeed, an oblique or indirect reference can be treated as sufficient evidence of the intention to execute the power. Thomas on Powers states: Provided the requisite intention to exercise the power is manifested, the means by which this is achieved does not necessarily matter. Thus powers have been held to have been executed by a recital in a settlement … by the appointment of a new trustee … by enumeration of parties to be benefitted … .20 Farwell on Powers21 described the principles in these terms: If the donee of a limited power of appointment erroneously recites that he has thereby appointed this recital, this recital is evidence of an intention to execute the power … If, however, the donee of the power has himself done some act which in itself would not be sufficient to operate as an execution of the power, and then in an instrument capable of executing the power, recites or states that the donee is thereunder entitled, this will amount to an execution of the power The Shinorvic case provides a good example of how, in practice, this principle may operate to remedy a defective execution of a power. After the settlor had signed the invalid deed of declaration in respect of Mrs B, he executed another deed of declaration adding his brother to the class of beneficiaries. That deed was validly executed in accordance with the requirements of the settlement. It contained a recital that described it as supplemental to a deed of declaration ‘ in terms of which [Mrs B] was added to the class of beneficiaries’. Relying on the principles set out above and the case of Lees v Lees,22 it was submitted on behalf of Mrs B that the recital in the second deed of declaration was an effective exercise of the power in the settlement to add Mrs B as a beneficiary. The Royal Court accepted that submission. The Bailiff stated that it was in the interests of justice to treat these principles as being part of the law of Jersey. The Court was merely treating as done what was clearly intended by the settlor to have been done by the earlier deed purporting to add Mrs B and which he had confirmed as having been done by the later duly executed deed. In certain circumstances, English law will go so far as to impute an intention to execute a power even in circumstances where the donee of the power did not in fact have an intention to execute it. Thomas on Powers explains the width of the principle in these terms: The courts have always been prepared to hold that a power may have been exercised by implication (even in cases where the existence of the particular power does not seem to have been in the donee’s mind) provided that it is clear that there was an intention to bring about a particular result or effect which could only be achieved by means of an exercise of that power. Where appropriate this principle will apply to uphold the validity of transactions which would otherwise be defective. For example, in Re Farnell,23 a will contained a power for the will trustees to appoint new trustees. The asset held by the will trust was a renewable lease. The power to appoint new trustees was vested in the surviving will trustee. A renewal of the lease was granted to four people who had not been appointed as trustees. The surviving will trustee was a party to the new lease that described the four lessees as ‘the present trustees of the will’. The court accepted that it could infer from that reference an intention on the part of the surviving trustee to have appointed the other four as trustees. Therefore the lease was valid. Davis v Richards & Wallington24 concerned the validity of a deed relating to a pension scheme. The deed had been executed by the company and two of three trustees. The third trustee had resigned by letter. It was contended that the third trustee’s resignation was not effective and that, consequently, the deed was invalid because it had not been executed by all the trustees. The rules of the pension scheme gave the company the power to remove trustees. The court held that, on the assumption that the third trustee’s resignation had not taken effect, the execution by the company of the deed represented, by implication, the exercise of the company’s power to remove the trustee. As the trustee had been removed, then the deed had been validly executed by all current trustees. The Judge stated the principle in these terms: A disponor (A) purports to make a disposition of property. The disposition cannot be effective unless associated with the exercise of a power vested in A and that A could properly have exercised in order to make the disposition. The disposition makes no mention of the power and does not purport to be an exercise of it. The effect of the principle … is that A’s intention to make the disposition justifies imputing to him an intention to exercise the power, provided always that an intention not to exercise cannot be inferred. If the requisite intention can be inferred, the court will treat the disposition as an exercise of the power. This principle was referred to by the Royal Court of Jersey in Shinorvic. It was not applicable (because the settlor did not need to appoint Mrs B as a beneficiary in order to add his brother to the class), but it seems clear that the Bailiff regarded the principle as being part of the Jersey law. Given the principles in this area of the law are intended to operate to protect beneficiaries and promote the due administration of trusts, it is good to see the emphasis that was given in the Shinorvic case to the intentions of the parties and achieving a fair result. Those considerations seem to have been rather relegated in importance in the Pitt and Futter decision. Elizabeth Weaver is a barrister practising at XXIV Old Buildings, Lincoln's Inn. She has considerable experience in trusts work, especially contentious work, often with an offshore or overseas dimension. 1. Pitt v Holt [2012] Ch 132 at 170 para 96 (Lloyd LJ). 2. [2003] Ch 409 at 415 para 13. 3. [1990] 1 WLR 1511 at 1531. 4. Pitt v Holt, Futter v Futter [2012] Ch 132 at para 210. 5. [2009] JLR 447. 6. [2010] JRC 068. 7. [2011] JLR 375. 8. [2005] 1 WLR 3811 (Lloyd J). 9. In the matter of Hampel Discretionary Trust 27/6/12 Lawtel. 10. Fine v Fine [2012] EWHC 1811. 11. Bartlam v Coutts [2006] WTLR 1165. 12. Summers v Kitson [2006] EWHC 3655. 13. Price v Williams-Wyn [2006] EWHC 788, following Racal Group Services v Ashmore [1995] STC 1154 at 1157. 14. In re Smouha Family Trust (1998) JLRN 19. 15. [2007] EWCA Civ 412. 16. See eg Breadner v Granville-Grossman [2001] Ch 523, where the English High Court rejected an attempt to use the principle to validate a power of appointment on to new trusts prior to a specified closing date. By error the trustees did not execute the deed of appointment until just after the closing date. 17. [2012] JRC 081. 18. See eg Geraint T, Thomas on Powers (2nd edn), OUP, para 5-177; John Mowbray and others, Lewin on Trusts (18th edn), Sweet & Maxwell, paras 29-166 and 29-172. 19. Re Ackerley [1913] 1 Ch 510 at 515. 20. Para 5-191. 21. Farwell on Powers (3rd edn) at paras 222–3. 22. (1871) IR 5Eq 549. The headnote is in these terms: A recital, in an instrument capable of operating as an execution of a power, of a past transaction which would by itself have been inadequate, is sufficient execution of such a power. 23. 33 Ch D 599. 24. [1990] 1 WLR 1511. © The Author (2012). Published by Oxford University Press. All rights reserved.
TI - Putting it right (1): remedying problems in trusts and trust documents
JO - Trusts & Trustees
DO - 10.1093/tandt/tts142
DA - 2013-02-01
UR - https://www.deepdyve.com/lp/oxford-university-press/putting-it-right-1-remedying-problems-in-trusts-and-trust-documents-POD0yB0N0U
SP - 31
EP - 38
VL - 19
IS - 1
DP - DeepDyve
ER -