RBC Trustees (CI) Ltd & Ors v Stubbs & Ors [2017] EWHC 180 (Ch)

Case No HC-2016-001743[2017] EWHC 180 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 07/02/2017
Before
MRS JUSTICE ROSE
Between
(1) RBC TRUSTEES (CI) LIMITEDClaimants(2) ELIZABETH MARY LE POIDEVINClaimant(3) PHILIP JAMES JACKMAN LE VESCONTEClaimant(4) RBC TRUST COMPANY (JERSEY) LIMITEDClaimant(1) MRS JANATHA STUBBSDefendants(2) GEORGE MERRICK STUBBSDefendant(3) ROHAN GEORGE LAINGDefendant(4) KIAN JOHN DANIEL LAINGDefendant(the Second to Fourth Defendants being minors, acting by their litigation friendDefendantSUZANNE MARRIOTT)Defendant
RICHARD WILSON QC (instructed by Farrer & Co LLP) for ClaimantsCONSTANCE MCDONNELL (instructed by Farrer & Co LLP) for First DefendantSUSANNAH MEADWAY (instructed by Charles Russell Speechlys LLP) for Second, Third and Fourth DefendantsHearing Hearing date: 2nd February 2017
Judgment

Background

[1]This is an application for rectification or rescission brought by the trustees of a settlement created by the First Defendant Mrs Janatha Stubbs. The claim relates to two deeds of revocation and appointment dated 11 November 2008 and 22 April 2014. Each of the Deeds effects a revocation and reappointment of the trusts on which certain shares of a trust fund were held under a settlement that was originally created on 21 May 1964.[2]In summary it is said that the Deeds are wrong because they effect a revocation and reappointment of the trusts relating to two of the settlor’s children, Michael and Joanna whereas they were only intended to effect a rather more limited revocation of certain interests, that is the successive life interests of Joanna and Michael’s then spouses.[3]The First, Second and Fourth Claimants are the current trustees of the Settlement. The Third Claimant Mr Le Vesconte was a trustee for part of the relevant time. The Claimants were represented at the hearing by Richard Wilson QC.[4]The First Defendant is the settlor of the trust. She was represented by Constance McDonnell. Although Mrs Stubbs supports the claim for rectification, Ms McDonnell was instructed to put arguments to the contrary to me so that the court had the benefit of full adversarial argument.[5]The Second, Third and Fourth Defendants are the minor grandchildren of the settlor. George Stubbs, the son of Michael was born in April 1999; Rohan Laing is the son of Joanna born in May 1999 and Kian Laing, born in 2002 is also the son of Joanna. They are represented by their litigation friend Suzanne Marriott, a partner in Charles Russell Speechlys LLP. Together with the Settlor’s other six grandchildren who are all adults, they are the beneficiaries of the Settlement trusts. Their interest is in the Settlement not being depleted by unnecessary tax liabilities. So they all support the application for rectification. They were represented at the hearing before me by Ms Susannah Meadway.[6]The application is supported by the following evidence:a. A witness statement of James Edmondson who is a solicitor and was, at the relevant time, head of the Private Client department at Farrer & Co;b. A witness statement of Jeremy Cline who was a member of the International Private Client team at Farrer & Co at the time of the 2008 Deed but not at the time of the 2014 Deed;c. A witness statement of Alexandra Hollingshead who is currently an associate in the International Private Client team of Farrer & Co and who was involved in the drafting tangentially of the 2008 and more closely in relation to the 2014 deeds;d. Two witness statements of the Second Claimant, Mrs Le Poidevin, who is a Private Client Director of the First Claimant which is a trustee of the settlement and who is also a trustee on her own account;e. A witness statement of Mr Ian Ritchie who is an associate director of the First Claimant (‘RBC Trustees’) and was involved in giving instructions for the 2014 deed;f. A witness statement of Mrs Janatha Stubbs.[7]That evidence has not been challenged by the other parties.[8]The Settlement was established by a deed dated 21 May 1964. At that time Janatha Stubbs had two children, Joanna and Michael, twins born in 1962. She later had a second son Philip in July 1965.[9]Clause 2 of the original 1964 Settlement Deed conferred a wide power of appointment on the trustees, though they had to act with the consent of the settlor. There were various exercises of these powers over the years.[10]One significant subsequent deed was the deed of revocation and appointment executed on 17 March 1991 (‘the 1991 Deed’). This provided for a settled share of one sixth of the trust fund to be held on trust for each of the Mrs Stubbs’ three children, so that each of them had an interest in possession in a one sixth share of the trust fund. The 1991 Deed also conferred on the trustees, by clause 14, a power of revocation in relation to the new trusts created by the 1991 Deed. Clause 14 confers a power to revoke either irrevocably or revocably and either partially or completely. That is important because it is now said that the Trustees could and should have used the power partially to revoke in order to make the changes that I will describe.[11]On 18 May 2004 there was a further deed effecting a revocation and reappointment of the trusts (‘the 2004 Deed’). The Deed was made using the power in Clause 14 of the 1991 Deed. Under the 2004 Deed:a. The trustees exercised their power of revocation contained in clause 14(1) of the 1991 Deed to revoke clauses 4 and 5 of the 1991 Deed concerning Joanna’s settled share and Michael’s settled share and the income thereof.b. They then appointed that they would stand possessed of Joanna’s Settled Share and Michael’s Settled Share upon the same trusts as set out in clause 4 of the 1991 Deed but with the addition referred to below.c. They added a new sub-clause 4(3) which stated that subject to Michael’s life interest, his Settled Share would from the date of the Deed be held upon trust to pay the income to Michael’s wife Helen Stubbs during her lifetime.d. Clause 5 stated that subject to Joanna’s life interest, her Settled Share would from the date of the Deed be held upon trust to pay the income to Joanna’s husband John Laing during his lifetime.e. Clause 6 of the Deed stated that subject to the aforesaid, the trusts powers and provisions declared and contained in the Settlement would continue to apply to Michael’s Settled Share and to Joanna’s Settled Share and its income.[12]In creating a successive life interest for Michael and Joanna’s respective spouses, the Trustees ensured that no inheritance tax was payable upon their one sixth share of the Trust Fund as a result of their deaths if that share went to their spouse. This was because the Settled Share would benefit from an exemption under section 18 of the Inheritance Tax Act 1984 (‘the IHTA’) by reason of the application of section 49 of that Act.[13]In March 2006 some important changes were made to way inheritance tax applies to interests in possession in settled property. The changes largely abolished the interests in possession regime in respect of interests in possession created on or after 22 March 2006 by the interposition of new subsections in section 49 of the IHTA and new sections added after section 49. The effect of these changes is that, subject to limited exceptions, interests in possession created on or after 22 March 2006 do not result in the beneficiaries entitled to them being treated as the beneficial owner of the settled property. That in turn means that the termination of a post-2006 interest in possession followed by the creation of a new interest in possession would, subject to limited exceptions, result in an immediate charge to inheritance tax. However, where an individual continues to have a qualifying interest in possession created prior to 22 March 2006, he or she continues to be treated as beneficially entitled to the property.[14]The changes in 2006 also introduced the concept of the transitional serial interest in section 49D of the IHTA. That had the effect that if the Settled Shares had remained as they were in 2004, the Settled Shares would still have benefited from the exemption from inheritance tax for the future assuming that Joanna and Michael had still been married to John and Helen at the date of death.[15]In 2007 Joanna separated from her husband, John Laing. Mr Edmondson of Farrer & Co was asked to prepare a draft deed to effect a revocation of John’s follow-on life interest. Mr Edmondson’s evidence is that the query about how to respond to Joanna’s decision to separate from her husband came from Ms Cabot who worked for Abacus (C.I.) Limited which had been appointed to be a trustee of the Settlement in April 1995. Ms Cabot wrote to Mr Edmondson on 4 January 2007 saying that they were putting some planning into effect to protect against inheritance tax on the deaths of the life tenants (that is Joanna and Michael) and noting the follow-on life interests for their respective spouses. Now that Joanna had separated from her spouse, Ms Cabot sought some advice on how this would affect the passage of the life interest if they were still legally married but separated as compared with if they were divorced on Joanna’s death.[16]Mr Edmondson forwarded the email to a colleague Jeremy Cline to prepare a response. Mr Cline’s advice given in a lengthy email of 11 January 2007 was that as long as Joanna and Michael were legally married to John and Helen at the date of their deaths, then the provision in the 2004 Deed would take effect even if the couples had separated. Further, there was an argument that even if they were divorced, John and Helen would still receive a successive interest since they were named personally in the deed. In the email Mr Cline said:
“I would suggest that the solution to this uncertainty is to revoke the 2004 Appointment in respect of either successive life interest or revoke the whole of the 2004 Appointment [and replace it] with a new appointment providing that only a widow of Michael or widower of Joanna will be entitled to a successive life interest.”
[17]Mr Cline went on to outline the inheritance tax and capital gains tax repercussions of the change but only as regards the fact that if there was no successive life interest at the time of Michael or Joanna’s death the spouse exemption for the tax would not apply and ‘inheritance tax will be due in the usual way’.[18]On 22 March 2007 Mrs Le Poidevin wrote to Mr Edmondson saying that Joanna had started divorce proceedings:
“I should like to get ahead by asking you to draft a suitable deed to remove her husband John from his beneficial position as follow-on life tenant. …”
[19]Mr Edmondson forwarded the email to Mr Cline and asked him to produce a draft.[20]Unfortunately, how Mr Cline went about this was by revising the copy of the 2004 revocation and new appointment. This therefore incorporated the wording of clauses 2, 3 and 5 of the 2004 Appointment such that the trustees not only revoked John’s follow-on life interest but revoked the whole appointment in the 2004 Deed with respect to Joanna’s Settled Share and then reappointed Joanna’s life interest on the same trusts as were set out in clause 4 of the 1991 Appointment but without any mention of John. Mr Edmondson made some small amendments to the draft. He says that when he was looking at Mr Cline’s draft in 2007, based on the 2004 Deed he did not give thought to the fact that the trustees could no longer create a pre-2006 life interest. Mr Cline says he also did not consider that fact.[21]Mrs Le Poidevin emailed Mr Edmondson again on 15 June 2007 saying that Joanna was divorcing John and she wanted him to be removed as soon as possible as a follow on life tenant from the 1964 Settlement. On 22 June 2007, Mr Edmondson sent her the draft deed that Mr Cline had prepared saying:
“Here is a draft Deed which removes John Laing’s expectant interest in Joanna’s Fund of the 1964 Settlement. Settlor consent needed. This does of course, re-expose the Fund to inheritance tax …”
[22]Mr Edmondson pointed out in that email that Joanna might want to obtain life insurance to cover the liability of her estate for inheritance tax on her death. Mr Edmondson did not mention that the draft revoked Joanna’s life interest.[23]The other correspondence also focuses entirely on the removal of John and does not mention the revocation and reappointment of Joanna’s interest. For example, there is an attendance note dated 6 July 2007 in which Mr Edmondson records speaking to Mrs Le Poidevin about the draft deed which he describes in the note as ‘dealing with the exclusion of Joanna’s husband as a beneficiary”.[24]There was about a year’s delay for reasons which are not relevant to this application.[25]In June 2008 Sarah Farrow at RBC Trustees wrote to Mr Cline. She said:
“In June 2007 Jim [Edmondson] drafted a Deed of Revocation and New Appointment which removed Joanna Laing’s soon to be ex-husband as the successive life tenant on her share of the Janatha Stubbs Settlement of 1964. Joanna has now decided that she wants to proceed with this and would like the Deed in place before she meets with the lawyers to discuss the divorce settlement on 6 August. I have attached Jim’s Deed which I have made some amendments to, mainly to reflect the fact that Abacus (C.I.) Limited underwent a merger and is now called RBC Trustees (CI) Ltd. Could you please have a look at the Deed to ensure it is okay to use and also confirm that it is still okay to use the terms “trustees” in listing the Deeds on page 1, now that the Trustees name has been altered from Abacus to RBC?”
[26]On 1 July 2008, Mrs Hollingshead wrote to Ms Farrow attaching an amended Deed of Revocation and New Appointment in relation to the Janatha Stubbs Settlement. She responded to the questions Ms Farrow had raised. She said at the end of the email:
“I should reiterate the point made in Jim’s email of 22 June 2007 that the Deed will re-expose the Fund to inheritance tax. Liz Le Poidevin’s email of 15 June 2007 refers to insurance – has anything been done in relation to this?”
[27]Following the obtaining of the life insurance and Mrs Stubbs’ consent, the deed effecting the revocation and appointment was executed on 11 November 2008. The recitals to the 2008 Deed refer to the fact that Michael’s and Joanna’s Settled Shares are currently held on trust to pay the income to them during their lives and thereafter to Helen Stubbs and John Laing. It states that the Trustees now wish to exercise the powers of revocation and new appointment conferred by the 1991 Deed and the Settlor wishes to consent to the execution of the deed. Clause 2 of the 2008 Deed then provides that the Trustees revoke the trust powers and provisions of the 2004 Deed in so far as they apply to Joanna’s Settled Share and the income thereof. In clause 3 the Deed provides that the Trustees with the consent of the Settlor hereby appoint and declare that from the date of the deed, the Trustees stand possessed of Joanna’s Settled Share upon the same trusts as are set out in the 1991 Appointment. It provides in clause 4 that Michael’s Settled Share is not affected.[28]Thus rather than simply removing John Laing’s interest, as could easily have been done with a different draft, the 2008 Deed revoked all the trusts in respect of Joanna’s settled share and then reappointed similar trusts omitting the life interest. The effect of this was that Joanna’s interest under the 2004 Deed was terminated and she had conferred on her a new interest in possession under the 2008 Deed.[29]In 2013, Michael’s marriage to Helen broke down and he also wanted to remove the life interest in favour of Helen. Mr Ritchie a senior manager in the Private Client Team at RBC Trustees emailed Mrs Hollingshead at Farrer & Co on 17 March 2014 to tell them of Michael’s impending divorce. Mr Ritchie attached to his email to Mrs Hollingshead a letter from Weightmans who were Michael Stubbs’ solicitors in his divorce proceedings. Mr Ritchie said:
“The attached letter … requests the Trustees revoke Helen Stubbs follow on interest. Given the circumstances and purpose of the Trust the Trustees would consider this in the best interests of the beneficiaries. As written confirmation from Janatha Stubbs is required during her lifetime, and presumably [she] will be party to the deed as before – is this deemed to be written consent or should the Trustees request a formal letter from her prior to proceeding”
[30]The letter dated 14 March 2014 from Weightmans to Mr Ritchie says that Michael “would wish the trustees to immediately revoke this appointment in favour of his wife, Helen Jane Stubbs”.[31]Weightmans then go on to say:
“We are sure we do not need to remind the trustees that if they choose to exercise their power of revocation, Michael’s current life interest must not be effected or altered in any way otherwise this would have adverse tax consequences particularly for Inheritance Tax.”
[32]Despite that warning, the deed that was drawn up to fulfil the Trustees’ instructions contained the same wording as the 2008 Deed, making consequential changes to refer to Michael rather than Joanna where appropriate. According to the evidence no one at Farrer & Co or at RBC Trustees thought about the impact that the revocation and reappointment of Michael’s life interest would have. The draft deed, described as a “deed of revocation as discussed below”, was sent by Mrs Hollingshead to RBC Trustees on 4 April 2014.

The claim for rectification

[33]The Claimants say that both the 2008 and 2014 Deeds contain a mistake because they do not simply do what was intended, namely to revoke the spouse’s successive life interest but also for no good reason revoked and re-appointed the trusts in relation to Michael’s and Joanna’s life interest in their Settled Shares. The mistakes were only discovered during the course of Michael’s divorce proceedings.[34]The effect of this from an inheritance tax point of view is described by Mr Wilson as ‘catastrophic’:a. First, there is an immediate charge to inheritance tax of 20% of the value of the Fund on the creation of the Deed payable out of the settled property. This is because the Fund is governed now by what is called the “relevant property” regime in Part 3 of the IHTA.b. Once the property is in the relevant property regime, it is no longer treated as being beneficially owned by a beneficiary who has an interest in possession. Instead a charge to tax is imposed on its value every 10 years under s 64 of the IHTA.c. If property leaves the relevant property regime in between the 10 year anniversaries, a proportionate charge is imposed under s 65 of the IHTA.[35]The Claimants seek relief under two alternative heads. Their primary case is that the 2008 and 2014 Deeds should be rectified so that they do not affect the life interests of Joanna and Michael but only remove the successive interests of their former spouses. Their alternative case, if I am not satisfied that rectification should be granted, is that the Deeds should be rescinded on the grounds of mistake.[36]HMRC has chosen not to take an active role in the proceedings. In their letter of 21 July 2016 they say that they will not join in the application on the understanding that the Court is referred to the case of Racal Group Services Ltd v Ashmore [1995] STC 1151 (‘Racal’)and the authorities discussed by the Court of Appeal in that case and also to Allnutt v Wilding [2007] EWCA Civ 412 (‘Allnut’). I have read those two judgments.[37]The purpose of rectification was described by Mummery LJ in Allnutt:
“ … rectification is about putting 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. This can be done by the court when, owing to a mistake in the drafting of the document, it fails to record the settlor’s true intentions. The mistake may, for example, consist of leaving out words that were intended to be put into the document, or putting in words that were not intended to be in the document; or through a misunderstanding by those involved about the meanings of the words or expressions that were used in the document. Mistakes of this kind have the effect that the document, as executed, is not a true record of the settlor’s intentions.”
[38]The principles to be applied when considering rectification of a unilateral document such as a deed of revocation and appointment are those set out in the decision of the Court of Appeal in Racal.Those principles have recently been summarised by Barling J in Giles v RNIB [2014] EWHC 1373 (Ch) [2014] STC 1631. Barling J noted that while equity has power to rectify a written instrument so that it accords with the true intention of its maker, as a discretionary remedy rectification is to be treated with caution. He set out the criteria, which he described as closely related, for the grant of rectification.[39]First, because the remedy must be treated with caution, the claimant’s case should be established by clear evidence of the true intention to which effect has not been given in the instrument. Such proof is on the civil standard of balance of probability. But as the alleged true intention of necessity contradicts the written instrument which is ordinarily regarded as the only manifestation of the party’s intent, there must be convincing proof to counteract the evidence of a different intention represented by the document itself.[40]Secondly, there must be a flaw in the written document such that it does not give effect to the parties’/donor’s agreement/intention, as opposed to the parties/donor merely being mistaken as to the consequences of what they have agreed/intended. For example, it is not sufficient merely that the document fails to achieve the desired fiscal objective.[41]Thirdly, the specific intention of the parties/donor must be shown; it is not sufficient to show that the parties did not intend what was recorded; they also have to show what they did intend, with some degree of precision.[42]Fourthly, there must be an issue capable of being contested between the parties notwithstanding that all relevant parties consent to the rectification of the document. (a). Convincing evidence of the subjective intention of the trustees.[43]The kind of evidence that is relevant to establishing the subjective intention of the trustees was discussed in Day and another v Day [2014] Ch 114. In that case a mother granted a general power of attorney to a solicitor. The solicitor executed a conveyance of her home, declaring that the property was to be held by herself and her son as beneficial joint tenants. On her death, the son became the sole legal and beneficial owner of the property by survivorship. The mother’s five other children sought rectification of the conveyance. They were the beneficiaries under the mother’s will which directed that the property be sold and the proceeds divided equally among her children. The claimants alleged that the conveyance had been executed in order to enable funds to be raised for the benefit of the son with the property being used as security; it had been no part of the agreement between the mother and son that he should acquire any beneficial interest in the property. The recorder found that the mother had never intended to give and never thought that she had given a beneficial interest in the property to the defendant. She always thought that once the borrowings had been repaid, the property would be entirely hers again to dispose of in her will. He held that there was no evidence that the mother had given the solicitors any instructions but she had granted the power of attorney so as to enable the son to proceed with raising money by mortgage whilst she was travelling abroad. The recorder dismissed the claim for rectification on the grounds that the grant of the general power of attorney precluded any right to rectification.[44]The Court of Appeal allowed the appeal. On the question of intention, Sir Terence Etherton, C, said:
“22. What is relevant in such a case is the subjective intention of the settlor. It is not a legal requirement for rectification of a voluntary settlement that there is any outward expression or objective communication of the settlor's intention equivalent to the need to show an outward expression of accord for rectification of a contract for mutual mistake. … Although, as I have said, there is no legal requirement of an outward expression or objective communication of the settlor's intention in such a case, it will plainly be difficult as a matter of evidence to discharge the burden of proving that there was a mistake in the absence of an outward expression of intention.”
[45]The Claimants rely on the contemporaneous documents I have set out above to show that it was always everyone’s intention that the 2008 and 2014 Deeds should remove the successive life interests of John Laing and Helen Stubbs once they were no longer married to Joanna and Michael. There was never an intention to revoke and re-appoint the trusts so far as they related to Joanna’s and Michael’s interests in their Settled Shares.[46]The Claimants also rely on the witness statements of the people involved at the time. None of them was called for cross examination so their evidence was not challenged. Nonetheless I accept Ms McDonnell’s submission that the court must evaluate the quality of the evidence by looking carefully at the evidence to see precisely what the witnesses say. The evidence that is relevant is evidence as to what they actually thought and intended at the time, not what they now wish they had thought or now wish that they had intended, in the light of the unintended consequences of their actual thoughts and intentions. Ms McDonnell also points out that the true effect of the document is very clear on the face of the Deeds themselves. This is not a claim relating to some obscure sub-clause hidden away in a long document. Although there is some force in that argument, it is also true to say that the Deeds are drafted in technical language. What was happening may jump off the page for an experienced trust lawyer, but it would not be apparent to a lay person, even one who was a trustee of the settlement.[47]In this case I am satisfied from the evidence that the instructions from the trustees were to draft suitable deeds to remove the spouses from the beneficial interest. The contemporaneous evidence strongly supports the Claimants’ case that that was the clear instruction that was given to Farrer & Co on both occasions and that is the only thing that the trustees wanted to achieve. Mrs Le Poidevin giving the instructions of the trustees in her email of 22 March 2007 did not mention revoking the entirety of the 2004 Appointment. Mr Wilson QC submits that it is clear from this email that she only wanted to revoke John’s life interest. He also points out that the discussion about the need to put in place life insurance only arises if after the revision of the 2004 Deed, Joanna still has a qualifying interest in possession because it is that which generates the charge to tax on her death. The intention to leave Michael’s life interest untouched is even clearer in relation to the 2014 Deed in light of the content of the letter from Weightmans forwarded by Mr Ritchie to Farrer & Co. But I find that it is also clear from the contemporaneous documents in relation to both the 2008 and 2014 Deeds.[48]Ms McDonnell argues that the trustees wanted to achieve the removal of the spouses’ successive life interests but did not mind if that was achieved by the revocation and reappointment of the Settled Share trusts. She refers to the options that were put forward by Mr Cline in his email of 11 January 2007 between a straightforward removal of the successive interests and revoking the whole of the 2004 Appointment and making a new appointment. The trustees did not say which they preferred but left it to Mr Cline to decide the mechanism. They cannot now complain, she submitted, that Mr Cline chose the latter.[49]That is not, in my judgment, a correct reading of the correspondence. The choice that Mr Cline was putting to the trustees was not about the mechanism to be used to remove the spouses’ interests. It was a choice between a simple removal of any reference to spouses at all from the trusts or substituting for the named individuals a generic reference to a widow or widower. It is true that he referred to achieving the first by a revocation of the spousal interests and the second by a revocation and reappointment of the whole 2004 Trust. But it is clear that of the two options put forward, it was the former that the trustees preferred because neither the 2008 nor the 2014 Deed refers to a widow or widower – they simply remove the reference to any successor interest.[50]All the witnesses are very clear about their intentions at the time.[51]Mr Edmondson frankly accepts that the draft of the 2008 Deed contains a mistake. The firm’s instructions had been simply to remove John’s follow-on life interest not to revoke Joanna’s pre-2006 life interest and create a new life interest within the relevant property regime. He makes the same point about the 2014 Deed. Mr Cline accepts that he was not instructed to do anything more than revoke the spouses’ interests. He explains that he did not turn his mind to the difference between the revocation of the successive life interests and the revocation and reappointment of the trusts of the Settled Shares. The reason he did what he did was not because of some choice of mechanism but only because he was using an inappropriate earlier draft as a short cut to producing a suitable document.[52]Mrs Le Poidevin’s evidence is that she did not believe that by asking for a suitable deed to be drafted, she was asking for anything other than a simple revocation of John’s interest, as that was all that had been intended. She did not believe or intend that Joanna’s interest would be revoked and reappointed. Further she said:
“My instructions to Mr Edmondson were to draft a deed to revoke John’s follow-on life interest, but not to revoke Joanna’s qualifying interest in possession. I would have reviewed the draft deed to check that, from a trust law perspective, it achieved the desired result of revoking John’s follow-on life interest, which it did. However, I did not apply my mind to the precise mechanics of how this was to be achieved, and I do not believe that I appreciated that the deed would revoke Joanna’s interest as well as John’s and effect a reappointment of it. I simply assumed that the draft deed complied with the instructions. Had I appreciated that the deed revoked and reappointed Joanna’s interest, I am sure that I would have queried it, if only to confirm that it would not have any wider implications from a trusts or tax perspective.”
[53]Mr Ritchie also says that the trustees’ intention was for the 2014 Deed to remove Helen’s interest and not to revoke Michael’s. He did not apply his mind to the precise mechanics of how this was to be achieved and he did not appreciate that the 2014 Deed would revoke Michael’s interest as well as Helen’s.[54]Mrs Stubbs’s evidence is that she knew she was signing a document that would remove the former spouses’ successive life interests but it was never explained to her and she never appreciated or intended that the deed would also revoke the children’s life interests.[55]I am satisfied, having approached the evidence with the appropriate degree of caution, that the intention of the trustees and the settlor was only to revoke the successive life interests of John and Helen. (b). Is there a flaw in the 2008 and 2014 Deeds?[56]I consider that the two Deeds are flawed because they make changes to the arrangements that were not intended and not wanted or needed.[57]Ms McDonnell argues that there is no flaw because the deeds do in fact achieve their purpose – they do remove the interests of John and Helen. If the only consequence of the alleged flaw is fiscal then that is not enough. This distinction between a flaw in the document which records the settlor’s intentions and a flaw in those intentions was the key point in the Allnutt case. In that case, the deceased settlor had intended to make a potentially exempt transfer of funds to a settlement created for the benefit of his children in order to avoid paying inheritance tax. A settlement was drafted but it did not create an interest in possession but created discretionary trusts in favour of the children. This was because the settlor and his advisers did not appreciate the need to create such an interest in order to benefit from the provision which exempted the arrangement from tax. The Court of Appeal upheld the trial judge’s rejection of the claim to rectify the settlement to change the nature of the trusts. They held that the claim by the trustees in that case involved substituting a wholly different settlement on the ground that the substituted settlement would achieve the tax saving that the settlor intended to achieve but failed to achieve by the document he executed. Mummery LJ said: “19. I am unable to accept the trustees' submission on the availability of rectification in this case. The position is that the settlor intended to execute the settlement which he in fact executed, conferring benefits on his three children. The settlement correctly records his intention to benefit them through the medium of a trust rather than the alternative of making direct gifts in their favour. I am unable to see any mistake by the settlor in the recording of his intentions in the settlement. The mistake of the settlor and his advisers was in believing that the nature of the trusts declared in the settlement for the three children created a situation in which the subsequent transfer of funds by him to the trustees would qualify as a PET and could, if he survived long enough, result in the saving of inheritance tax. 20. That sort of mistake about the potential fiscal effects of a payment following the execution of the settlement does not, in my judgment, satisfy the necessary conditions for grant of rectification. The mistake did not result in the incorrect recording of his intentions. I think that the judge put it well when he said the following in paragraph 23 of his judgment:"23. The case is therefore one in which I find that Mr Strain [that is, the settlor] intended to execute a settlement in exactly the form that Mr Wilding [that was the solicitor] drafted. Insofar as he was labouring under any sort of mistake when he did so, his mistake was not as to the language, terms, meaning or effect of the settlement. The only mistake was that a payment of the £550,000 to it would be a potentially exempt transfer."24. In my judgment a mistake of that nature is not one which the court has any jurisdiction to rectify. Since, for the reasons given, Mr Strain must be assumed to have understood the meaning of the fact of the substantive trust the powers of the settlement he executed and to have intended to execute a settlement in that form and having the legal effect it did, there is no error in the drafting of the settlement or in his understanding of it that calls for correction. Mr Strain's only mistake was in relying in Mr Wilding's implicit advice that the payment of money to that settlement would be a potentially exempt transfer. That was wrong and apparently negligent advice, but in the circumstances of the case the remedy of rectification is not available to cure the damage it has caused." 21. I agree with the judge's analysis of the position. I would therefore reject the ground of appeal which asserts that the judge erred in taking too narrow a view of the law of rectification and in rejecting the claims of the trustees.” "23. The case is therefore one in which I find that Mr Strain [that is, the settlor] intended to execute a settlement in exactly the form that Mr Wilding [that was the solicitor] drafted. Insofar as he was labouring under any sort of mistake when he did so, his mistake was not as to the language, terms, meaning or effect of the settlement. The only mistake was that a payment of the £550,000 to it would be a potentially exempt transfer. "24. In my judgment a mistake of that nature is not one which the court has any jurisdiction to rectify. Since, for the reasons given, Mr Strain must be assumed to have understood the meaning of the fact of the substantive trust the powers of the settlement he executed and to have intended to execute a settlement in that form and having the legal effect it did, there is no error in the drafting of the settlement or in his understanding of it that calls for correction. Mr Strain's only mistake was in relying in Mr Wilding's implicit advice that the payment of money to that settlement would be a potentially exempt transfer. That was wrong and apparently negligent advice, but in the circumstances of the case the remedy of rectification is not available to cure the damage it has caused."[58]I do not agree that this case falls into the same category as Allnutt. Here the mistake is not just about the fiscal consequences of what the Deeds achieved but about the scope of the changes to the 2004 Deed that would be made. It is not the case that, for example, Joanna and Michael’s trusts were revoked and re-appointed because it was thought that that would have some particular tax effect which did not, because of the drafting, in fact arise. Rather it was not intended or thought that the Deeds would affect their interests in any way, only that their spouses’ interests would be removed. I recognise that if there had not been the adverse tax consequences Mr Wilson has described, the parties might not have thought it was worth coming to court to apply to rectify the Deeds. But the need for rectification can be made out here without having to refer to the tax consequences of the mistake. The mistake in the sense of a mismatch between the trustees’ intention and the effect of the Deeds exists independently of the fiscal consequences even though the motivation in seeking the remedy from the court is based on those consequences. That was not the case in Allnutt; there the mistake could only be explained by reference to the tax consequences of the arrangement that the parties had intended to make and had in fact made. (c). The need for a specific intention to achieve something different from what was done[59]The third requirement is more difficult to express. In Racal Peter Gibson LJ said that the court cannot rectify a document merely on the ground that it failed to achieve the grantor’s fiscal objective:
“The specific intention of the grantor as to how the objective was to be achieved must be shown if the court is to order rectification.”
Peter Gibson LJ went on to say that there was considerable difficulty in the case before the Court there in ascertaining from the evidence precisely what the relevant intention was as to a key element of the arrangement, namely the dates on which certain payments should be made.[60]In the present case there is no such uncertainty. It is very clear that the specific intention of the trustees was that John’s and Helen’s successive life interests be removed. There would have been no difficulty about achieving that, as all the parties before me agreed. The fact that there may be a number of different ways of achieving the trustees’ intention without making the mistake that was made does not, in my judgment, prevent this criterion from being satisfied.[61]The First Defendant argues that in order to make good a claim for rectification here the trustees must demonstrate that they had a positive intention not to revoke and reappoint the interests in possession. I do not read the authorities as requiring the applicant in a rectification claim to go that far and such a requirement would lead to a counterintuitive result. If a mistake is made in giving effect to the trustees’ intentions that mistake can create all sorts of unexpected results. It cannot be right that the trustees have to show that they turned their mind to that unexpected result and formed a specific intention not to do that. That would mean that the more bizarre the result of the mistake, the less likely it would be that the trustees could say that they thought about that possibility and deliberately decided not to bring about that result. (d). Is there an issue capable of being contested?[62]As to the fourth criterion, Barling J noted that it has been much criticised and that the purpose of it, and its actual content and scope, are by no means clear. In Racal Peter Gibson LJ expressly approved the following summary of the principle by Vinelott J in the same case. Vinelott J stated that the court must be satisfied:
“that there is an issue capable of being contested, between the parties or between a covenantor or a grantor and the person he intended to benefit, it being irrelevant first that rectification of the document is sought or consented to by them all, and second that rectification is desired because it has beneficial fiscal consequences. On the other hand, the court will not order rectification of a document as between the parties or as between a grantor or covenantor and an intended beneficiary, if their rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit.”
[63]Barling J in Giles held that there is no need for an actual dispute to exist. It is irrelevant that rectification of the instrument in question is sought or consented to by all interested parties.[64]The First Defendant argued that there is no contestable issue here. The only impact of the mistake is a fiscal one because the new trusts under the 2008 and 2014 appointments are identical to the old ones so far as Joanna and Michael are concerned.[65]On this point I heard submissions from Ms Meadway on behalf of the minor defendants. I agree with her submission that there is a non-fiscal issue here namely whether the interests of Michael and Joanna and their children and remoter issue arise under the 2004 Deed or under the 2008 and 2014 Deeds. The fiscal consequences arise not from a change in the law in relation to interests under the 2004 Deed but only because the nature of the interests has changed so that they are now post-2006 interests rather than pre-2006 interests. That in my judgment is a sufficient contestable issue to satisfy this criterion.[66]Ms Meadway helpfully drew my attention to other potential practical effects of the change from an interest deriving from the 2004 Deed and interests deriving from the 2008 and 2014 Deeds. She referred me to the Trusts (Capital and Income Act) 2013. This alters the treatment of income as it arises in trusts by abolishing the statutory rules of apportionment. But it retains the old rules for trusts which do not fall within the definition of “new trusts”. New trusts are those arising on or after the date when section 1 of the Act comes into force which was 1 October 2013. So the 2014 Deed may be affected by this legislation if it is regarded as creating a trust after that date. There may well be other legislation currently on the statute book which will affect these trusts differently depending on whether they are 2004 or 2008/2014 trusts.[67]I am satisfied that this is more than a theoretical issue and it is an issue entirely separate from the fiscal consequences of the Deeds. A change to the date of the governing document is a material change that creates a contestable issue of the kind that was being referred to by the Racal judgment.[68]My conclusion is therefore that the criteria for rectifying the 2008 and 2014 Deeds are satisfied in this case and I should exercise my discretion in favour of granting the remedy the Claimants seek. I invite the parties to draw up an appropriate order.

Cited in 3 later judgments