Rectification of Trust Documents: all may not be lost.
Often, as a cost saving device, Advocates and legal advisors on request give corporate service providers and other clients a selection of precedents suitable for the establishment and management of trusts. A precedent is selected by the administrators which they imagine is required, names are added, some changes may be made to reflect particular needs, wishes and instructions of the clients and the deed or other document is produced. However, all too often what is brought into effect thereby has sweeping unintended consequences.
The Legal Profession has emphasized for years the risks a bank of precedents in the hands of inexperienced drafters can create, signally demonstrated by the facts of two cases:
- Marley v Rawlings  UKSC 2
This case in fact relates to errors in the execution of identical mirror wills, prepared under the care and guidance of a London Solicitor. The husband and wife signed each other’s wills as opposed to their own “and nobody noticed” (paragraph 5 of the judgment). As the error was only identified approximately ten years after the death of the first dying spouse and following the death of the second dying, the consequences were far-reaching. The wills in effect appointed as ultimate beneficiary and executor Mr Marley, (the appellant). If the wills were invalid, the assets passed on the dying of the last spouse to their children (the respondents) by intestacy.
I mention this case for two reasons. It is a unanimous and therefore a compelling judgment of the Supreme Court of the United Kingdom. (It is also universal in its application to the principles of rectification of documents) Secondly, it is quoted with approval and in support of the court’s right to rectify errors in trust deeds by the Isle of Man courts.
- CMI Trust Company case 2014.
In this case Deemster Doyle, First Deemster and Clerk of the Rolls, was presented with a situation where the draftsman having used the wrong template inadvertently excluded the settlor as a beneficiary to the trust. The settlor received “significant trust assets” by way of distributions in breach of the trust’s deed as drafted – in effect, a ‘fraud on the power’. However, the Deemster fortunately had sufficient evidence before him to be satisfied that the true intention was that the settlor should have been a beneficiary of the trust.
By mistake Mrs A was not named within the settlement as a beneficiary. The mistake arose due to the settlement being drafted by [the trust service provider] using [their own] template for a Gift Trust, as opposed to … the template for an Income Trust. … The settlement plainly does not reflect the true intentions of the Settlor.
For many years the view prevailed in the case of trust and testamentary documents it was virtually impossible to unpick errors. The consequences would have to be tolerated unless efforts were made to have the documents declared a nullity. Indeed, in the Marley case the court of first instance and the Court of Appeal concluded the wills were a nullity and the principles of intestacy applied.
Lord Neuberger in Marley, relying on the “correct approach to the interpretation, or construction, of commercial contracts…” restated the principles:
When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but…
He then went on to deal with rectification of wills:
When it comes to interpreting wills, it seems to me that the approach should be the same. Whether the document in question is a commercial contract or a will, the aim is to identify the intention of the party or parties to the document by interpreting the words used in their documentary, factual and commercial context.
Lord Neuberger concludes with a universal statement on rectification of documents which, includes trust deeds:
As at present advised, I would none the less have been minded to hold that it was, as a matter of common law, open to a judge to rectify a will in the same way as any other document: no convincing reason for the absence of such a power has been advanced.
Lord Neuberger’s judgment on the extent of any rectification quotes with approval Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd  1 AC 1101:
[T]here is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.
For reasons apparent from the Marley judgment it is however important to look carefully at the statutes regulating documents before applying the common law principles as there may be a statutory impediment to rectification.
In the CMI Trust case the court held:
I am satisfied that I have the power to rectify the settlement in this case. It is well established that a settlement can be rectified where there has been a mistake and the court can intervene if it is proved that the settlement fails to express the real intention of the settlor.
We all accept that errors and mistakes will happen and the CMI Trust Case shows that the true position can be achieved and rectification granted with a simple application to court. As Deemster Doyle stated in his judgment, however, there must be “indisputable” evidence for rectification. Without that, the application may fail. When setting up and managing structures therefore, it is essential that the parties, including settlors, corporate services providers and advisors maintain and keep full records and all correspondence so that in the event of any error, contemporaneous documents reveal the true intention of the parties via a comprehensive paper trail. Without such a trail comprehensively recording the intention of the parties, in the event of a mistake manifesting in the documents, all may well be lost!
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Tim Henwood is a Trust and Estates Practitioner. He is also a Registered Legal Practitioner in the Isle of Man and was admitted as an attorney in South Africa in 1985. He is presently training to be a Manx Advocate.