Correcting “Mistakes” in Trusts and Commercial Contexts

By Melodi E. Ulku, Loberg Law, Calgary        May 28, 2019

In the context of trusts – which is a construct of equity based on conscience – the rule in Hastings-Bass (the “Rule”) had permitted trustees to make applications to the court to ‘correct’ a transaction that resulted in unintended consequences.  The U.K. court’s reasoning in that 1975 decision was that as trustees must manage the trust assets in the best interests of the beneficiaries, if that which was done, with all its defects and consequent limitations, was not “capable of being regarded as beneficial to the object”, it was outside the scope of the power, and thus no (valid) exercise of the power at all. 

In 1990 the Mettoy Pension Trustees Ltd case expressed the Rule as follows: “where a trustee acts under the discretion given to him by the terms of the trust, the court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have”. Thus for many years trustees were able to undo transactions that resulted in e.g., unfavourable tax consequences, on the basis that they had failed to take into account relevant considerations. 

However in 2013 the U.K. Supreme Court, in considering whether a trust could be revoked on the basis that the settlor was acting under mistaken information when the trust was settled, decided that the law took a wrong turn regarding the Rule.[1] It held that the Rule depended on a breach of duty in the performance of something within the scope of the trustee’s powers, such as the failure to take into account relevant considerations, but not to decisions taken on the basis of expert advice that turned out to be wrong.

Some offshore jurisdictions subsequently reinstituted the unrestricted Mettoy formulation of the Rule by codifying it in their trusts legislations.

The doctrine of “mistake” also is an equitable doctrine, available for transactions made by fiduciaries and non-fiduciaries, where the mistake is sufficiently serious that it would be unconscionable or unjust to leave the mistake uncorrected.  Such ‘sufficiently serious’ mistake would either relate to the legal character or nature of a transaction, or as to some matter of fact or law that is basic to the transaction.[2]  The doctrine is subject to equitable defences and third-party rights (such as good faith purchasers for value).  Where such mistake is established, the equitable remedy of rescission (setting aside the transaction) is one of the tools available to repair the mistake.  In Pitt v Holt the UKSC agreed to set aside the trust because it was settled in part for tax purposes and the parties had received incorrect advice that lead to a mistaken assessment of the legal nature of the transaction, resulting in serious tax consequences.

Another remedy for mistakes is rectification, which is available for contracts or instruments in writing, where it is proven that the parties’ intention was different than how it was ultimately recorded or implemented.  It is also subject to equitable defences and third-party rights.  If granted it is retrospective for all purposes (including tax).

In Canada (Attorney General) v Fairmont Hotels Inc. (2016) SCC 56 the S.C.C. reiterated that the purpose of rectification is to give effect to the parties’ true intentions, rather than to an erroneous transcription of those true intentions.  Thus, rectification in Canada is limited solely to cases where a written instrument has incorrectly recorded the parties’ antecedent agreement.  The court’s task is to restore the parties to their original bargain, not to rectify a belatedly recognized error of judgment.  The Court held that: “Courts do not “rectify” agreements where their faithful recording in an instrument has lead to an undesirable or otherwise unexpected outcome”.[3]  In this case Fairmont Hotels’ general intention was to achieve tax neutrality regarding a transaction, which the court described as being “at best an inchoate wish to protect, by unspecified means [the parties’] from foreign exchange tax liability”, which did not qualify as an antecedent agreement incorrectly recorded and the application for rectification of the transaction as transacted failed. 

In so deciding the S.C.C. noted the need to maintain the confidence of the commercial world in written contracts by declining to adopt a relaxed approach to rectification as a substitute for due diligence.  This, I suggest, is the crux of the difference between availing upon a court’s equitable jurisdiction to correct a trustee’s mistake versus the mistake of a commercial party.  In the case of a trust the court has inherent supervisory jurisdiction over trusts and trustees, so as to protect the beneficiaries who are vulnerable to the trustee’s decisions.  As to commercial parties the case for availing upon the court’s equitable powers to permit a party to backtrack a transaction to achieve a more favourable tax effect is not so clear.  To the contrary, an essential element that underpins commerce is certainty with respect to written contracts.

Loberg Law practices in commercial and estates litigation.  Melodi E. Ulku is a lawyer with the firm while also a master’s student of Trusts Law at the University of London, and has in-depth level understanding of trusts law in Canada, the U.K. and offshore.

[1] Pitt v Holt; Futter v Futter [2013] UKSC 26, followed in Canada since Re Pallen Trust 2015 BCCA 222.

[2] Ibid.

[3] Canada (Attorney General) v Fairmont Hotels Inc. (2016) SCC 56, at para. 39.

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