In the matter of DD [2010] JRC 193

In the matter of DD [2010] JRC 193

This recent case of the Jersey Royal Court considered the legal test for rectification and, in particular, whether suing a professional advisor who had given mistaken advice on which the settlor relied, is an alternative practical remedy to rectification.

Facts

The settlor, who at the time of the establishment of the trust was a UK resident non-domiciled individual but deemed domiciled for IHT purposes, sought specialist tax advice about the implications of transferring assets into a trust. The advice given to the settlor was that if funds were to be transferred to a trust, that it should be a trust in which the settlor and his spouse had successive life interests and not a discretionary trust.

The settlor instructed the tax advisor to proceed with the transfer of securities held through two bank accounts to a trust. The tax advisor then mistakenly instructed the original trustee to establish a discretionary trust, not an interest in possession trust. In addition, the trust deed mistakenly referred to a third personal account of which the settlor did not in fact transfer control.

The mistake was realised following the appointment of a new trustee, following which, advice was given that the settlor and trustee were liable in respect of IHT liabilities arising on the assets transferred into trust, together with penalties and interest for unpaid tax on chargeable transfers and potential charges on each ten year anniversary. The new trustee and the settlor, therefore, made a representation to court seeking the discretionary remedy of rectification.

Remedy of rectification

There is a well established three stage test to be satisfied on rectification. Firstly, 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 intentions of the parties. Secondly, there must be full and frank disclosure. Thirdly, there should be no other practical remedy.

In considering the test, the court considered whether suing the settlor’s tax advisor would be alternative practical remedy to rectification and, in doing so decided, that the cost and risk of such litigation to the settlor, who had already been let down by his professional advisors

was not a remedy sufficiently practicable to decline the remedy of rectification.

The court also considered whether the discretionary remedy of mistake would be an alternative practical remedy. Whilst the remedy of mistake would be at the disposal of the court, rectification, the remedy which preserved the trust, was to be preferred to mistake, a remedy which set aside that which the settlor intended to establish.

Conclusion

In a decision which follows In the matter of GLG Green Trust (2002) and the growing Jersey case law on rectification, the court granted rectification of the trust retrospectively from the date that the trust was established and avoided the prospect of additional litigation for the settlor.

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