Setting the Record Straight

Written by Hugh Elder

Hugh Elder explains how to help clients seeking rectification of voluntary settlements

The equitable remedy of rectification is the power of the court to change the wording of a document to reflect what the parties really intended where the document does not do so, for instance because of a mistake being made when it was drafted.

The underlying and essential rationale of the principle is that a person should not be prejudiced by the terms of a written document if (a) those terms fail to give effect to the intention of the relevant parties (that is both parties in the case of a bargain, or the maker in the case of a voluntary transaction), and (b) reliance on the terms as written in that document against that person would be unjust in consequence.

One of the leading authorities for the rectification of a voluntary settlement is Re Butlin’s S.T. [1976] Ch 251. In that case, the settlor Sir William Butlin (of holiday camp fame) had intended to provide that the trustees could take decisions by a majority. That is how he, the trustees (at least those who had read the settlement deed) and both draftsmen of the settlement (leading and junior counsel) had understood the deed.

But many years later, after the original solicitor trustee had retired, a new firm of solicitors took the administration of the trust and noted that majority rule would prevail only in certain circumstances such as the illness of a trustee or his absence abroad. It appears that difficulties had by then arisen between the settlor and his second wife, who was one of the trustees, and it was important (at least for the settlor) that the majority rule should prevail.

Both the settlor and the solicitor gave evidence that this had been the settlor’s intention. This was backed up by the production of counsels’ written opinion which accompanied the draft of the settlement, the relevant part of which read: “We have expressly empowered a majority of the trustees to exercise any of the powers over the income or capital of the trust fund given to them by the settlement”. In these circumstances, the judge accepted this evidence that the trust deed did not reflect the settlor’s intention.

That still left the hurdle as to how to treat the trustee who opposed the application (Lady Butlin). For, where a deed is to be rectified on the grounds of mistake, that mistake must be mutual as between the parties to the deed. The judge felt able to distinguish the position of a trustee who knows of the terms of a settlement before execution but who does not ‘strike a bargain’ with the settlor as to its terms, and someone who enters into a contract (‘bargain’) with another party on specifically-agreed terms.

It is important to remember that what the court rectifies is the document, not the transaction – the underlying reason for the creation of the document. In Allnutt v Wilding [2007] WTLR 941 at 944, the judge (Rimer J, approved in the Court of Appeal) said that the function of the discretionary equitable remedy of rectification is: “to enable the parties to correct the way in which their transaction has been recorded. In other words, rectification is about setting the record straight. In the case of a voluntary settlement, rectification involves bringing the trust document into line with the true intentions of the settlor as held by him at the date when he executed the document”.

In that case, the settlor had intended to make a potentially-exempt transfer of funds to the trustees of a settlement for the benefit of his children, thereby reducing the amount of IHT payable on his death. However, in fact, the trust deed created discretionary trusts for the children, rather than creating interests in possession.

In refusing the application, both the trial judge and the Court of Appeal explained that rectification was intended to correct a mistake in a document that failed to reflect the settlor’s intentions, not to create a completely different trust structure so that the fiscal advantage that had originally been intended could thereby be achieved.

This must, on occasion, be a fine distinction. When does rectifying the wording in a settlement that does not reflect the settlor’s intention become so fundamental to the underlying reason for creating the settlement that it crosses the line between correcting an error (rectification granted) and creating a different transaction with a different legal effect (rectification refused)?

It is, however, a distinction that any client seeking advice on rectification must clearly understand. As can been seen from Allnut, just because a settlor asks the court to rectify a settlement and all other interested parties (such as trustees and beneficiaries) support the application and agree that a mistake has been made, it does not necessarily follow that rectification will be ordered.

The client’s witness statement must carefully deal with what the client thought was the effect of the document he signed, avoiding the benefit of hindsight. On documentation, contemporaneous evidence of the settlor’s intentions is vital, especially where there has been a considerable lapse of time between the drafting and execution of the document and the application to rectify. One of the more remarkable features of Butlin was that 26 years had elapsed between the execution of the settlement and commencement of the rectification proceedings.

However even if the delay is not of Butlin proportions, the draftsman’s file is clearly the place to start. Paradoxically, where it is the draftsman who has made the mistake, the better he has maintained his file and the more meticulous his attendance notes, the easier it is to prove his error. It is likely that the settlor will also have kept other advisers, such as an accountant or IFA in the loop as to his proposed arrangements. Their files, too, may provide corroboration of his intentions.

While the burden of proof is the ordinary civil standard of balance of probabilities, “convincing” evidence is required, reflecting the need to counteract the evidence found in the document itself: Thomas Bates and Son Ltd. v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505 at 521 per Brightman LJ, applied in Racal v Ashmore [1995] STC 1151 at 1154, Gibson LJ; and Chisholm v Chisholm [2011] WTLR 187 at 194 B-E.

Incidentally, where the error in the document arises from the mistake of the draftsman (and an embarrassing number of the reported cases stem from solicitors’ mistakes), the claimant should, as a general rule, mitigate his loss by bringing proceedings for rectification before issuing proceedings against the draftsman (see Walker v Medlicott [1999] 1 Ll.LR 20 at 28).

The fact that rectification will generate a tax advantage for the claimant, or even the fact that it is the sole purpose of the application for rectification, is by itself no bar to the grant of the remedy, where a case for it is otherwise made out. Since, in many rectification cases, the incidence of tax will be affected by the application, it may be prudent to write to HMRC in advance of the application and invite it either to be joined as a party (an invitation that is rarely taken up) or to state if there is any specific authority to which it wishes the court to be referred (such as Chisholm).

This may be especially important where the application is unopposed and also where the application is being made in a common law jurisdiction that follows English law, such as the Cayman Islands, but where the fiscal effect will be felt in the UK. The advantage of doing so is of course to try to ensure that HMRC will accept the effect of an order for rectification and there will not be a protracted argument as to whether the court’s attention was drawn to the appropriate case law, especially those where rectification was refused.

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Hugh Elder

Gordon Dadds