Court of Appeal Rewrites Test For Trust Rectification in Jersey10 Dec 2018
For the first time, the Court of Appeal ("CA") has considered the rectification of trusts in Jersey and expanded the long-standing three stage test with a new seven stage test in B and C v Virtue Trustees (Switzerland) AG and Ors re The C Trust JCA219. The CA also found that an "excluded person" could still be a beneficiary of a trust.
The case concerns an appeal against the decision of the Royal Court of Jersey on 11 June 2018 (Representation of Virtue Trustees (Switzerland) AG and Anor re The C Trust  JRC 100) whereby the terms of a declaration of trust known as The C Trust ("the Trust") were rectified.
The economic settlor of the Trust was A. Shortly before the Trust was executed in 1998, A struck out the name of the original protector and substituted D's name instead. One of the consequences of naming D as a protector was that her issue each became an "Excluded Person". This is because the definition of "Excluded Person" in the Trust included any issue of the protector.
Under the Trust, the trustee could not exercise its power of addition of beneficiaries so as to add an Excluded Person to the beneficial class. However in 2003, A wrote to the former trustee to instruct it to add the issue of D as additional beneficiaries to the Trust and the trustee obliged.
In 2017 it was recognised that the Trust did not allow D's issue to be added to the Trust's class of beneficiaries. Therefore, the current trustee applied for rectification of the Trust and validation of all past distributions made under it. The application was opposed by other beneficiaries of the Trust. The Royal Court decided to rectify the Trust by amending the definition of Excluded Person so that it did not include the issue of the protector.
Broadly, an appeal against this decision to rectify the Trust was raised on the grounds that:
1. the Royal Court's conclusion that the Trust failed to give effect to A's intention was incorrect;
2. the addition of D's issue was a product of a change of mind by A and was contrary to his intention; and
3. the basis of the Royal Court's decision was its erroneous view that an Excluded Person meant someone who could not benefit.
Test for rectification
In its judgment, the CA examined the well-established three stage test for rectification under Jersey law adopted by the Royal Court. This is as follows:
1. 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;
2. there must be full and frank disclosure; and
3. there should be no other practical remedy and the remedy remains a discretionary remedy.
The CA concluded that the three stage test is too summarily expressed. It preferred and adopted the following seven stage test for rectification:
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;
4. there must be an issue capable of being contested between the parties affected by the mistake notwithstanding that all relevant parties consent;
5. there must be full and frank disclosure;
6. that no other remedy is available to achieve the same end; and
7. that even when the requirements for rectification are satisfied the court retains a discretion whether or not to rectify.
Whilst no definitive conclusion was reached, the COA also suggested the same seven stage test would apply in the rectification of wills.
The CA upheld the Royal Court's decision that the Trust should be rectified, although it challenged some of the Royal Court's reasoning. In particular, it highlighted that there was nothing in the Trust to prevent a person being at the same time a beneficiary and an Excluded Person. This meant the Royal Court's rationale for ordering rectification on the basis that A made a "manifest mistake" in adding D as a protector and excluding her derived from flawed reasoning. This is because naming D did not prevent her from benefitting from the Trust.
The CA identified the critical question being as to whether or not A intended to exclude D's issue from benefit. This required considering the state of mind of A and the original trustee at the time when A amended the draft of the Trust, in particular by substituting D's name for that of the original protector.
The COA concluded that the consequences of adding D as a protector were a product of a mistake and not intentional. This was on the basis that:
1. the appointment of D was designed to strengthen her position, not to disadvantage her or her issue;
2. D's issue were still capable of being benefitted by an exercise of certain powers under the Trust; and
3. A's only intention in amending the Trust was to change the protector and not to change the effect of any other provision in the Trust.
This amounted to convincing evidence that the Trust as executed failed to record the true intention of A and that the Royal Court was justified in reaching its decision.
In circumstance where an error in a trust document is identified and the seven elements of the test identified by the CA can be satisfied, rectification can be an extremely useful and powerful remedy. However, the remedy is discretionary and the court will be required to consider the availability of any alternative remedies. Generally, it is expected that in order to meet the requirements of the seven stage test and establish the trust document does not carry out the true intentions of the parties, it will be important that applications for rectification are brought promptly while memories are still fresh and relevant evidence is readily available. However, in this instance, the CA held that the fact that the rectification application was brought twenty years after the Trust was established caused no prejudice as there remained sufficient convincing evidence to justify the rectification.
It was also interesting to see that the CA interpreted the Trust so that someone could be an "Excluded Person" and a beneficiary of the Trust. This is particularly so given that the Trust's power of exclusion distinguished between being "wholly or partially excluded from future benefit" and an "Excluded Person" and the common understanding of the term "excluded person" as a person who cannot benefit.