It Was All a Mistake! - International Law Office

Facts
Law of Mistake
Court's Discretion
Procedural Postscript

Facts

A recent Royal Court of Jersey judgment demonstrates the court's approach to an application to set aside a trust and certain gifts made under it on the grounds of mistake. It also provides some useful guidance on the approach to be taken by convening parties on trust-related applications.

In The Matter of the R Remuneration Trust ([2009] JRC164A) the applicant and settlor, acting on professional advice, had settled an English law discretionary trust with a Jersey trustee. The trust deed's terms excluded him and 'connected' persons (as defined under the Income and Corporation Taxes Act 1988) from being beneficiaries. The settlor was subsequently advised that, contrary to his understanding at the time of the trust's establishment, loans could not be made to him by the trust as he had originally envisaged. In addition, there was some uncertainty over whether his wife and children could be added as beneficiaries of the trust upon his death.

The settlor contended that had he been aware of these facts, he would never have established the trust. He sought to set aside the trust and historical transfers made into and out of it on the grounds of mistake.

Law of Mistake

In this case the trust in question was expressed to be governed by English law. The court received opinions from English queen's counsel on the English law of mistake, which is summarized within Justice Millett's judgment in Gibbon v Mitchell ([1990] 1 WLR 1304):

"wherever there is a voluntary transaction by which one party intends to confer bounty to another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it."

The court found that the factual scenario in this case constituted a mistake of fact and a mistake as to the effect of the transaction. The mistake was the understanding that the trustee had the power under the terms of the trust to make loans to the settlor on terms more favourable than commercial loans (eg, there would be the option to roll up on interest, there would be no need to provide security and there would be an ability to extend the terms of the loan indefinitely).

The court declined to make a finding as to whether a mere uncertainty over the possibility of the settlor's wife and children becoming beneficiaries of the trust after his death constituted a mistake of fact under English law.

Court's Discretion

Having found a mistake under English law, the court was then invited to exercise its discretion as to whether to set aside the trust and transactions made under it.

It highlighted that two factors must be taken into account when deciding whether to exercise its equitable jurisdiction: whether (i) it would be unjust on the beneficiaries for the settlement to be set aside, and (ii) the position of third parties would be prejudiced if the settlement were to be set aside.

With regard to the first consideration, the court expressly referred to the observations made in Gibbon v Mitchell that "equity acts on the conscience" and, consequently, that beneficiaries who are mere volunteers cannot conscionably insist upon their legal rights under the deed once they have become aware of the circumstances in which they acquired them.

In this case the court was satisfied that there was no good reason for the court not to exercise its discretion to set aside the transactions on the grounds of the settlor's mistake.

Procedural Postscript

The court emphasized that the starting point in all matters in which the court is sitting in its supervisory capacity over trusts is that (as the trust property is held beneficially for the beneficiaries) it is normally appropriate for them to be convened. If the applicant is bringing an application in which it does not seek to convene the beneficiaries, he or she must make the court aware of this fact at an early stage and invite the court to agree with this course of action.

For further information on this topic please contact Eloise Layzell or Bruce Lincoln at Mourant du Feu & Jeune by telephone (+44 1534 609 000), fax (+44 1534 609 333) or email (eloise.layzell@mourant.com or bruce.lincoln@mourant.com).