Test for Rectification Clarified

Background

The Trust that was sought to be rectified was a discretionary Jersey settlement, settled in 1998 by way of unilateral declaration of trust.

The named beneficiaries of the Trust were the Settlor, the Settlor’s second wife, the Settlor’s two sons and their issue, the wives and widows of the Settlor’s sons and the Settlor’s mother.

The Trust included a power to add beneficiaries save that no person could be added as a beneficiary if that person was an “Excluded Person.” There was no other provision as to the effect of being an Excluded Person.

Excluded Person was defined in the Trust as:

“Any Trustee Protector Appointor or former Trustee Protector or Appointor of this Trust or any person related to any such person by marriage or any issue or parent of such person or any company in which any such person is interested”.

The Trust also contained a power to declare that any person could be named as an Excluded Person or be wholly or partially excluded from future benefit.

Shortly before the Trust was executed, the Settlor reviewed a draft and made changes to it. The principal change the Settlor made was to replace, in manuscript, the name of the proposed corporate Protector of the Trust with the name of his second wife. The trust was then executed by the first trustee.

Because of the relationship between the definition of Excluded Persons and the appointment of the Settlor’s wife as Protector, all of the named beneficiaries of the Trust were automatically rendered Excluded Persons because they were related, either by blood or by marriage, to the Protector.

Shortly after the Settlor’s death in 2003, the Trustee executed an instrument of addition of beneficiaries to add the Settlor’s stepdaughter (the daughter of the Protector from a previous marriage) and her issue as beneficiaries of the Trust.

On the face of the Trust instrument, the stepdaughter and her issue, as persons related to the Protector of the Trust, were Excluded Persons and, under the terms of the Trust, were incapable of being added as a beneficiary.

The Settlor and his wife are now both dead. On the basis that it was desirable to remove any uncertainty as to who was entitled to benefit from the Trust, the Trustee applied to the Royal Court in 2017 for an order that the Trust fund be rectified. In Representation of Virtue Trustees (Switzerland) AG and Anor re The C Trust [2018] JRC 100 rectification was ordered. The effect of that order was to validate the appointment of the Settlor’s stepdaughter and her issue as beneficiaries of the Trust. She and her issue were, it was held, never intended to be Excluded Persons.

The Settlor’s sons from his first marriage, who were both named beneficiaries in the Trust instrument, appealed to the Court of Appeal.

The Law

The Royal Court summarised the test for rectification of trusts in 2001 in In re Westbury Settlement in four parts:

1. There must be sufficient evidence of the error;
2. It must be established to the highest degree of civil probability that a genuine mistake has been made;
3. There must be full and frank disclosure; and
4. There should be no other remedy, that is to say no other practical remedy.

In Re Amethyste Trust [2002] JRC 186, the Royal Court deleted the second element of the Westbury test, saying that it did not add anything; and thus removed any reference to the quality of evidence required or the standard of proof. The resulting three-part test was adopted in In Re R.E. Sesemann Will Trust 2005 JLR 421. Thereafter, in the context of trusts, Sesemann was generally cited and the three-part test applied, as follows:

1. The Court must be satisfied by sufficient evidence that a genuine mistake has been made so that the document does not carry out the true intention of the party(ies).
2. There must be full and frank disclosure.
3. There should be no other practical remedy.

The evidential threshold was described as “sufficient” evidence of a mistake, without any indication as to what would be sufficient.

Over the same period, the statement of the test for rectification in the context of trusts appeared to have diverged from the approach taken in cases concerning the rectification of wills. The wills cases, starting with In Re Vautier 2000 JLR 351 have continued to stress that the evidence of a mistake must be compelling.

The Court of Appeal has now definitively clarified the test for rectification in trust cases, by reference to the test set out in the current edition of Lewin on Trusts:

1. There must be convincing proof to counteract the evidence of a different intention represented by the document itself;
2. There must be a flaw (that is an operative mistake) in the written document such that it does not give effect to the Settlor’s intention;
3. The specific intention of the Settlor must be shown; it is not sufficient to show that the Settlor did not intend what was recorded; it must also be shown what he did intend; and
4. There must be an issue capable of being contested between the parties affected by the mistake notwithstanding that all relevant parties consent.

The Court affirmed that there is a duty of full and frank disclosure on the party seeking rectification, that it must be established that there is no alternative remedy to achieve the same end, and that even when the requirements for rectification are satisfied the court retains a discretion whether or not to rectify.

The Issues

The Royal Court decided to rectify the Trust on the basis that notwithstanding the absence of any such provision in the Trust instrument the term “Excluded Person” had a commonly understood meaning, which prevented such a person from benefiting in any way from the Trust, even if they had been named as beneficiaries at the outset. The Royal Court considered that it needed to rectify the Trust because it would be an absurd result for the Settlor to name beneficiaries of the Trust but for them to be unable to benefit by reason of their all being related to the Protector (rendering them Excluded Persons). The Royal Court’s decision to rectify was therefore founded on an assumption that an Excluded Person could not be a beneficiary of the Trust.

The appellants contended that the Royal Court proceeded on an erroneous basis. The Trust only provided that an Excluded Person could not be added as a beneficiary. It did not say that Excluded Persons already named as beneficiaries could not benefit. By definition, a named beneficiary had no need to be added as a beneficiary. The effect of making the Settlor’s widow the Protector was to close off the possibility that anyone related to the Protector, who was not already a beneficiary, could ever be added to the beneficial class.

The appellants argued that the only contemporaneous evidence of the Settlor’s intention was the Trust itself and the original letter of wishes, which made no mention of any future provision for his wife’s family. The appellants argued that there was no convincing evidence that the Trust instrument diverged from the Settlor’s real intention. The Settlor was a lawyer and a very careful man, who should be taken to have understood the legal effect of the change he made to the identity of the Protector of the Trust.

The respondent trustee argued that when naming his wife as Protector the Settlor’s only intention was to protect her position after his death. He did not name her as Protector in order to exclude her descendants (but no one else in the world) forever from benefit. Further, there was an overriding power of appointment in the Trust capable of permitting provision to be made for the step-daughter and her family notwithstanding that they were Excluded Persons, so it was not clear that he had intended to exclude them from any benefit. Further, on the face of the Trust, there appeared to be a possibility that the named beneficiaries could revocably be excluded from benefit (for example for temporary tax reasons), but would then be incapable of being added back as beneficiaries because they were Excluded Persons.  The Settlor could not have intended that result.

The Result

Despite concluding that the Royal Court had misdirected itself as to the relevant mistake upon which it proceeded to rectify the Trust, the Court of Appeal nevertheless considered that the Trust should be rectified. The court substituted its own rectification for that made by the Royal Court to cure what it considered to be the real mistake. It did so on the basis:

• If the Settlor’s true intention was to designate his step-daughter and her issue as persons who could never be added as beneficiaries of the Trust, it was open to him to do so in a way that was express. Had he genuinely intended to do that, he would have communicated that fact to the Trustee. He did not. There was no evidence of an intention to exclude his step-daughter and her family from ever being added as beneficiaries of the Trust, while not excluding anyone else in the world.
• If the Settlor’s intention had been to exclude the possibility of the step-daughter and her family being added as beneficiaries, he would have understood that her and her issue were capable of being benefited by an exercise of the power in the Trust instrument to appoint trust funds on new trusts (of which they could be beneficiaries). Given that that was a possibility, the Settlor could not have intended to exclude her and her issue from any possibility of benefit.

Conclusions

In the Matter of the C Trust [2018] JCA 219 is now the leading authority on the Jersey law of rectification of trusts. The test set out in In Re R.E. Sesemann Will Trust 2005 JLR 421 has been superseded. This decision affirms that the evidential threshold is a high one. The proof that there has been a mistake that does not reflect the Settlor’s intention must be convincing.

The Court of Appeal made clear that rectification is not an opportunity to invite the court to re-write the Trust instrument to say what everyone wishes it would. The rectification should go no wider than is strictly necessary to correct what appears to be the mistake.

The Court of Appeal has confirmed that where a trust is settled by unilateral instrument the relevant intention for the purposes of rectification is that of the Settlor (i.e. the person providing the funds) and also the intention of the first trustee. Ordinarily there will be an alignment of their respective intentions but where the Settlor intends something that he does not fully communicate to the first trustee (or assumes the trustee knows), that has the potential to lead to a relevant mistake.

Comment

Those dealing with Settlors should keep meticulous notes of what it is they understand the Settlor to intend. Where the Settlor suggests changes to a standard form draft of discretionary trust instrument (particularly as in this case where the effect of the changes on their face appear to have an unusual consequence), those changes should be examined closely and discussed with the Settlor so that both he and the Trustee fully understand their impact on how the Trust is intended to operate. Particular care should be taken when exploring with Settlors the basis upon which individuals or classes of persons are to be excluded from benefit.