Rectification of trust documents18 Mar 2011
In circumstances where an error is identified in trust documents, one of the possible solutions to consider is the remedy of rectification. Rectification is awarded by the Royal Court in the exercise of its discretion. Where the remedy is awarded, the usual order is for the relevant trust document to be rectified with retrospective effect, with the idea being that the document is "corrected" to reflect what was originally intended.
The test for rectification is well established under Jersey law and is as follows:
- The court must be satisfied that there is sufficient evidence that a genuine mistake has been made so that the document does not carry out the true intentions of the parties.
- There must be full and frank disclosure.
- There should be no other practical remedy.
Standard of proof
With regard to the standard of proof required to be satisfied, the test for rectification was at one time formulated as a four-stage test, with the first two stages being that (1) there must be sufficient evidence of the error and (2) that it must be established to the highest degree of civil probability that a genuine mistake had been made. However, these first two stages have now been combined to create the first stage of the test as noted above and what is required is that the court should be satisfied to the civil standard that a mistake has been made so that the relevant document does not carry out the true intentions of the parties.
Linked to the issue of the standard of proof required is the question of delay, it being noted that, the longer the period of delay between an error being made and an application for rectification being brought to court, the more difficult it might become to produce evidence of sufficient quality to discharge the burden of proof.
It has also been noted that the existence of a delay in making an application for rectification can be a relevant factor for the court to consider when deciding whether or not to exercise its discretion to award the remedy. In this regard, the Royal Court has indicated that a trustee who is aware of an error is under a duty to apply promptly to correct it and that unreasonable delay might cause the court to penalise a trustee in costs.
No other practical remedy
The test for rectification requires that there should be no other practical remedy. The availability of any other form of remedy is therefore clearly something which the court will consider carefully in order to determine whether or not it is appropriate to exercise its discretion. However, the fact that rectification has retrospective effect is a very significant consideration.
In circumstances where the other discretionary remedy of mistake might also be available, rectification has been preferred because it allows for the preservation of what the settlor intended to establish. With mistake, by contrast, the effect of the court's order is to set aside what the settlor intended to achieve.
Where a mistake has been caused by professional advisers, the courts have also expressed the view that, to require a settlor in such circumstances to bring proceedings against those advisers (and to incur the attendant costs and time delays) is not a sufficiently practicable alternative to rectification.
The general approach of the courts is that applications for rectification of trust documents should not be heard in private. Such hearings will ordinarily be heard in public, but confidentiality can be respected and protected by ensuring that the court's judgment does not disclose the names of the settlors and beneficiaries of the relevant trusts.
Insofar as the availability of the remedy of rectification in relation to matters of taxation is concerned, it has been made clear by the court that the existence of a fiscal motive behind an application for rectification does not mean that the application cannot succeed. The key to a successful application is to ensure that the three stages of the test are established. In relation to the first element of the test, there is a distinction to be drawn between the transaction itself and the objective behind the transaction. The court can rectify a trust document which does not reflect the transaction which the parties intended to achieve, but the remedy is not available to allow the parties to enter into a document which, with the benefit of hindsight, they wished they had, in place of the document which they actually intended to enter into at the time of execution.
Scope of the remedy
The remedy of rectification has been granted in a variety of circumstances including, for example, cases where the trust instrument does not reflect the settlor's intentions as to the exclusion of himself and/or his spouse from benefit, where a beneficiary is wrongly excluded from benefit and where a beneficiary is not correctly identified.
The Royal Court has also awarded rectification so as to substitute an interest in possession trust for a discretionary trust where the settlor had been advised that the former was indeed the type of settlement that he required in order to achieve certain tax planning objectives albeit that his professional advisers drafted a discretionary trust in error. This can be contrasted with, and distinguished from, a similar case in which the Court of Appeal in England declined to award rectification. It would seem that the key difference in that case was that, although the settlor intended to achieve a tax planning objective, he did not know and intend that he should establish a particular kind of settlement (i.e. an interest in possession settlement) in order to achieve that objective.
In circumstances where an error in a trust document is identified and the three elements of the test can be satisfied, rectification can be an extremely useful and powerful remedy. In many cases, the principal feature of the remedy will be its retrospective effect, allowing for a trust document (whether the initial trust instrument or a subsequent supplemental deed) to be corrected and to reflect the parties' intentions at the time when the documentation was originally executed. However, the remedy is discretionary and the court will be required to consider the availability of any alternative remedies and, in order to discharge the burden of proof and establish that a genuine mistake has been made so that the trust document does not carry out the true intentions of the parties, it will be important that applications for rectification are brought promptly whilst memories are still fresh and relevant evidence is readily available.