ABC & Ors v JKL

Rectification of a voluntary settlement for mistake requires convincing evidence of the settlor’s or trustees’ specific intention, an operative drafting mistake, and a document that fails to give effect to that intention. It is unnecessary to prove the precise wording intended. A general fiscal objective may support the evidence, and the fact that rectification produces a fiscal benefit does not prevent relief. The court must be satisfied that leaving the mistake uncorrected would be unjust and should make the minimum changes needed to correct it.

The claimants, current trustees of trusts relating to an English estate, sought rectification or, alternatively, rescission of a 2010 deed concerning the defendant’s sub-fund. The defendant did not oppose the claim and HMRC declined to be joined, although it requested that relevant authorities be considered.

The trustees intended to prolong the defendant’s existing life interest. They believed that the deed would preserve powers to apply capital for the defendant, his unmarried partner and their children, and would avoid inheritance tax consequences. The deed had materially different legal and fiscal effects. The court ordered rectification, making consideration of rescission unnecessary.

1. Disposition. Rectification of the 2010 deed was ordered in the terms sought. The court treated that as the minimum necessary correction. The alternative claim for rescission was not considered.
2. Applicable conditions. Rectification for mistake in a voluntary settlement required convincing proof overcoming the contrary indication of the document; an operative mistake in the written instrument; proof of the specific intention of the settlor or trustees; and an issue capable of being contested between the affected parties, even where all relevant parties consent. The claimant bears the burden. It is sufficient to prove the intended substance with reasonable precision; the exact wording need not have been formulated.
3. Fiscal objective. The court questioned whether the former proposition that a general intention to achieve a fiscal objective was insufficient had survived Pitt v Holt [2013] UKSC 26. In any event, rectification is not barred merely because it furthers a fiscal objective.
4. Application. The evidence established that the trustees intended only to prolong the defendant’s existing life interest. The deed instead terminated that interest and created a new one, restricted the power to apply capital for the defendant’s partner and children, and generated unintended inheritance tax and capital gains tax consequences. The drafting therefore contained operative mistakes.
5. Construction and extension. The court accepted that an existing life interest can be enlarged, extended or prolonged without being determined, relying on Holmden v IRC [1968] AC 685 and DC v AC [2016] EWHC 477. The theoretical possibility of construing “children” to include the defendant’s children did not remove the need for rectification, since construction would not cure the other defects.
6. Justice and contestability. Delay was understandable, HMRC would otherwise obtain an unintended windfall, and contestable issues existed concerning the restriction of the trustees’ power. The statutory and factual conditions for relief were therefore satisfied.