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A modern take on an old classic - equity aiding the defective execution of a power

15 January 2013

There is a long-standing principle in English law that, in certain circumstances, equity will aid the defective execution of a power. In the recent case of In the matter of the Shinorvic Trust, the Royal Court of Jersey had to consider whether this principle applied in Jersey and, if so, whether it applied in a modern, unconventional scenario. Following arguments presented by Advocate Springate of Bedell Cristin acting on behalf of the Representors, the Royal Court held that it did.

The principle is that whenever a person who has the power over an estate, whether or not a power of ownership, shows an intention to execute the power in discharge of some moral or natural obligation, equity will act on the conscience of those entitled in default of appointment and compel them to perfect the intention.

While equity will not provide relief for the complete failure to exercise a power of appointment by executing the relevant instrument, where by reason of mistake or accident there is a formal defect in the execution of the power, equity will grant relief against formal defects in favour of certain individuals who are regarded as having provided good consideration. Equity looks to substance not form.

The Shinorvic Trust
The Shinorvic Trust was established by a Deed of Settlement dated 19 July 1988 (the "Trust Deed"). On the 21 February 1990, the Settlor purported to exercise his power to add his girlfriend, Mrs B, (with whom he had a close relationship since 1965) to the class of beneficiaries (the "1990 Deed"). The Settlor died in 2005 and the Representors took over as trustees in 2009.

In 2011, when seeking tax advice, all of the Deeds of Declaration executed by the Settlor were reviewed and it was discovered that the Settlor's signature on the 1990 Deed relating to Mrs B had not been witnessed, as required by the terms of the Trust Deed. Accordingly, there was an issue over whether she was ever added as a beneficiary, despite having received distributions from the trust fund. The issue for the Royal Court to determine was whether equity would remedy the defective execution.

Would equity assist?
At trial, the Representation was challenged by another beneficiary, the sister of the Settlor. Whilst both sides agreed that the equitable principle existed, the extent of its application was in dispute.

The Representors argued that the Settlor had a sufficiently close relationship with Mrs B, he had provided for her financially throughout his lifetime, the letter of wishes described her as his "paramount concern" and that this was sufficient for equity to assist.

The contrary argument posed was that the class of persons who may claim relief is closed, with only children and wife falling "within the consideration." It was submitted that Mrs B did not fall within this class as her relationship with the Settlor was unconventional because they were unmarried and the Settlor had other girlfriends.

The Representors argued, however, that the application of the doctrine should take account of and reflect the fact that, with modern family relationships and changed social attitudes, obligations to support financially now extend to a much wider category of people, for example illegitimate children, step children, same-sex partners. Both sides relied on old (sometimes arguably archaic) case-law and sought opinions from senior English Chancery Counsel in this regard to assist the Court.

The Court's finding of fact was that despite the unconventional nature of their relationship and the fact that the Settlor had a number of other lady friends, he had a long standing and very close relationship with Mrs B and considered himself under a moral obligation to provide for her after his death as well as during his life. The equitable doctrine was therefore applied and it was declared that Mrs B was validly added as a beneficiary from the date of the 1990 Deed.

In reaching its decision the Royal Court stated, "We think that the general principle is an entirely beneficial one and prevents errors in formality leading to real hardship for those to whom the donee owes a moral or natural obligation and resulting in the clear intention of the donee being defeated for no good reason. We see every reason to develop the principle to take account of modern standards and mores. We hold therefore that, under Jersey law, the principle may operate in favour of any person for whom the donee of the power is under a natural or moral obligation to provide; and that will be a matter of fact to be decided in each case." (at paragraph [55])

The decision is significant in that it clarifies a doctrine which has, perhaps surprisingly, not had a wide application in modern times. In addition, it provides a solution to a real problem which may occur from time to time in the administration of trusts.

However, although the doctrine has moved with the times, it is clear from the judgment that the Royal Court will be careful in monitoring its development and that the determination of any future cases will entail a detailed analysis of the relevant relationship in order to determine whether there is a sufficient connection and moral obligation.

Imputed intention - an alternative solution
The Royal Court also considered an alternative argument in order to overcome the problem posed by the defective 1990 Deed. In light of Re the T 1998 Discretionary Settlement [2008] JRC 062, the question was whether in these circumstances, Jersey law can impute an intention to exercise a power even in a situation where the donee of the power did not in fact have such an intention.

By a later Deed of Declaration in 1998, (the "1998 Deed") the Settlor added his brother as a beneficiary. The recitals to the 1998 Deed stated that it was supplemental to the 1990 Deed "in terms of which [Mrs B] was added to the class of Beneficiaries". It also recited the power in the Settlement to add to the class of beneficiaries and was validly executed. The question was whether the 1998 Deed amounted to a valid exercise by the Settlor of the power to add Mrs B as a beneficiary.

The Royal Court held that the principle applies in such a case where there is an express reference to the power in the recital and positive evidence that the Settlor had intended to exercise that power in the document to which he refers in the recital. It was held that the Court is merely treating as done what was clearly intended by the Settlor to have been done in 1990 and which has been confirmed as having been done by him by means of a duly executed instrument in 1998. Accordingly, the Royal Court also held that if it was wrong on the application of the equitable doctrine remedying the 1990 Deed and adding Mrs B as at that date, then the 1998 Deed was effective to add her as from this later date.

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