Analysis
The trustees of a settlement dated 16 December 2003 made by the first claimant, Brian Kennedy, (the settlement) sought an order to correct a mistake made in the terms of an appointment dated 1 October 2008 (the October 2008 appointment).
Under the terms of the settlement, of which Mr Kennedy was originally the sole trustee, Mr Kennedy had a life interest in possession. The settlement contained a power of appointment exercisable by the trustees in favour of Mr Kennedy, his children and remoter issue. In default of appointment, the capital was held on trust for Mr Kennedy’s children. The settled assets included shares in various companies.
Mr Kennedy’s professional advisers, including Mr Alan Sturrock of Addleshaw Goddard LLP, suggested that Mr Kennedy might consider appointing some of the assets in the settlement on trusts for his children and grandchildren and the remainder to himself absolutely since that would reduce any future inheritance tax liability.
Mr Sturrock went into hospital in February 2008 and was away from work for about three months. In Mr Sturrock’s absence Mr Kennedy discussed issues relating to the settlement with his accountants, KPMG, and without reference to Addleshaw Goddard. Mr Kennedy decided that an unrealised loss of about £7m would be used in the 2007-2008 tax year to offset a gain on the sale of shares. He also decided that some of the assets in the settlement would be appointed to himself, but not certain shares in four companies (the relevant shares). The intention of Mr Kennedy and his instructions were to retain the relevant shares in the settlement in order to avoid any capital gains tax liability in respect of them for the foreseeable future.
In September 2008 Addleshaw Goddard provided Mr Kennedy with two deeds relating to the settlement. The first, dated 29 September 2008, appointed Mr Kennedy’s wife and Mr Sturrock as additional trustees of the settlement. The second, the October 2008 appointment, made certain appointments in favour of Mr Kennedy’s children and grandchildren, and then provided in clause 2.1(c) for the remainder of the assets in the settlement to be appointed irrevocably on trust for Mr Kennedy absolutely.
Mr Kennedy executed the October 2008 appointment in the mistaken belief that it gave effect to his intention that the relevant shares would remain in the settlement. Instead, the effect of clause 2.1(c) was to appoint to Mr Kennedy (in addition to a substantial cash sum) the relevant shares. This generated a significant capital gains tax liability of approximately £650,000.
Mr Kennedy’s wife executed the October 2008 appointment in the mistaken belief that it gave effect to Mr Kennedy’s intention and instructions to his professional advisers.
Mr Sturrock believed that Mr Kennedy wished and intended that the remainder of the assets in the settlement should pass to him outright. He was not aware that the unrealised loss of about £7m had been used in the 2007-2008 tax year, and so he believed that there were considerable capital gains tax losses within the settlement which would preclude any possible capital gains tax on the transfer of assets to Mr Kennedy.
Mr Kennedy and his wife, as the present trustees of the settlement, sought (1) a declaration that the relevant shares were not appointed on the trusts of the October 2008 appointment; alternatively (2) an order setting aside clause 2.1(c) of the October 2008 appointment; alternatively (3) rectification of the 2008 appointment by the addition of words excluding the relevant shares from the operation of clause 2.1(c).
The defendants, comprising Mr Kennedy’s children and grandchildren and The Commissioners for HM Revenue and Customs, were not represented at trial.
Held (ordering that clause 2.1(c) be set aside):
- 1) The principles applicable to rescission of a non-contractual voluntary disposition for mistake were comprehensively set out in the judgment of Lord Walker in Pitt v Holt [2013] WTLR 977. They may be summarised as follows:
- a. There must be a distinct mistake as distinguished from mere ignorance, inadvertence or a ‘misprediction’ relating to some possible future event. On the other hand, forgetfulness, inadvertence or ignorance can lead to a false belief or assumption which the court will recognise as a legally relevant mistake.
- b. A mistake may still be a relevant mistake even if it was due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he or she deliberately ran the risk, or must be taken to have run the risk, of being wrong.
- c. The causative mistake must be sufficiently grave as to make it unconscionable on the part of the donee to retain the property. That test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction or as to some matter of fact or law which is basic to the transaction. The gravity of the mistake must be assessed by a close examination of the facts, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition.
- d. The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively but with an intense focus on the facts of the particular case. The court must consider in the round the existence of a distinct mistake, its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected.
- 2) Those elements are satisfied in the present case. Each of the trustees of the settlement executed the October 2008 appointment under a distinct mistake. The mistakes were causative and very serious. The October 2008 appointment was not an artificial tax avoidance arrangement or part of one. All of those matters, taken in the round, make it unconscionable in principle to leave the October 2008 appointment uncorrected.
- 3) The claimants are entitled to an order setting aside clause 2.1(c) of the October 2008 appointment. The principle that there cannot be a partial rescission of a contract does not apply to a self-contained and severable part of a non-contractual voluntary transaction.
- 4) A declaration that the relevant shares were not appointed on the trusts of the October 2008 appointment is refused. A Pitt v Holt mistake makes the voluntary disposition voidable in equity not void at law. Even if this head of relief were treated as an application to set aside the transfer of the relevant shares, this faced the fundamental difficulty that clause 2.1(c) did not separately identify the relevant shares. If the relief were granted there would be a mismatch between the unrectified wording of clause 2.1(c) and the legal effect of partial rescission of the disposition of ‘the remainder of the Trust Fund’.
- 5) An order for rectification is refused. Rectification cannot be granted unless the wording or legal effect of clause 2.1(c) did not represent the trustees’ true intention. Intention must be distinguished from motive. Mr Sturrock’s intention was to include in clause 2.1(c) the wording which it actually contained, and that it should have the legal effect which it had. The mistake in thinking that clause 2.1(c) would not give rise to a capital gains tax charge was extraneous to the document, and was not a mistake which could found a claim for rectification.
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