The right type of mistake – setting aside voluntary dispositions

Clients hope that, by taking appropriate professional advice, they are likely to avoid making a serious error that leaves them worse off than they would have been if they had tried to achieve the same result in a different way, or if they had done nothing at all.

This assumption is usually right but, occasionally, professionals get it wrong. In that case, the main advantage for the client in having taken professional advice is that they should have someone (who is well-insured) to sue in order to make good their loss.

Where loss has been suffered as a result of arguably negligent advice, there is still a general a duty to mitigate that loss. It is not possible to simply watch your losses accrue and seek to recover all of them, if there is something that could be done to remedy the position, or at least limit the loss. There is, of course, a limit on the duty to mitigate (i.e. to take all ‘reasonable’ steps, rather than all possible steps) and there is no, as it were, duty to ‘litigate to mitigate’. (See Horsfall & anor v Haywards (a firm) [2000] WLTR.)

In the realm of voluntary dispositions by individuals and trustees there are more options, invoking the assistance of the courts, to remedy the position than in many other areas. Although a claim brought in the courts will have a cost attached to it, the cost of any such proceedings may be less than the damage caused by the initial error, particularly in an unopposed claim brought pursuant to Part 8 of the Civil Procedure Rules.

This note mainly concerns the circumstance where it may be possible to seek to set aside (rescind) a disposition entirely on the grounds of mistake, but other possible remedies may include:

1. Seeking a declaration from the court as to the construction / interpretation of a document, with the result that the ‘real’ meaning of the document in question does not lead to the harm otherwise caused by the alternative interpretation. (For an interesting recent example, see A & ors v D & ors [2017] EWHC 2222 (Ch).)
2. In a similar vein to 1., where a question of construction has arisen in relation to a trust (or will) the court can authorise the trustees (or personal representatives) to rely on the opinion of Counsel of at least 10 years’ call. The downside to this approach is that it does not settle the question of the interpretation of the document as such, but it protects the trustees if they proceed to act consistently with the interpretation contained in the opinion they have obtained and on which the court has authorised them to rely.
3. Rectification, whether under the general jurisdiction of the court or (in relation to wills) under s20 Administration of Justice Act 1982. (See also Marley v Rawlings & anor [2014] UKSC 51.)
4. For trustees, pursuant to the so-called rule in Hastings-Bass (see our more detailed article from 2015 here regarding the much-discussed decision in Pitt v Holt, Futter v Futter [2013] UKSC 26 which, in this jurisdiction at least, has severely curtailed the circumstances in which this rule is likely to be relied upon in this jurisdiction)
5. It is also possible to strike out offending provisions of a document entirely, rather than rectify it by substituting new words into the document. (See Price& ors v Williams-Wynn & ors [2006] WTLR 1633.)

All of the above options may be regarded as patching up the issue – where it is possible to retain the benefit of the disposition/document, but without the undesired adverse consequences. In some cases, however, a patch-up job is not enough.

Rescission on the grounds of mistake

If there is a need to wind back the clock and start again, then it may be possible to rescind the disposition on the grounds of mistake. The relevant rule was re-stated in Pitt v Holt, citing Ogilvie v Littleboy (1897) 13 TLR 399, 400, per Lindley LJ (no relation):

“Gifts cannot be revoked, nor can deeds of gift be set aside, simply because the donors wish they had not made them and would like to have back the property given…a donor can only obtain back property which he has given away by showing that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him” (my emphasis).

The equitable rules relating to rescission in the case of gifts are distinct from the jurisdiction in contract cases, which inter alia requires a common assumption between two or more contracting parties of a non-existent state of affairs. (See The Great Peace [2003] QB 679.)

Some of the key, practical points from Pitt are as follows:

1.  If the mistake was about the tax consequences of a disposition, this can be a relevant mistake (this cleared away difficulties arising from the judgment in Gibbon v Mitchell [1990] 1 WLR 1304).
2. Where the mistake is about tax consequences, then the court may think it right to refuse relief, potentially on the grounds of public policy (i.e. emphasising the equitable, discretionary nature of the relief).
3. The mistake must be causative.
4. The distinctions (whatever those may be) remain between mistakes and inadvertence, or mispredictions (“These distinctions are reasonably clear in a general sort of way…” (!) [104], Pitt).

In relation to 4., a discussion of the distinctions took place in Re Griffiths, deceased (see [2009] Ch 162), where an individual entered into some fairly vanilla tax planning arrangements but failed to survive the relevant period needed to obtain the tax advantages, due to an illness (that the court found the deceased was probably suffering from, undiagnosed, at the relevant time). The application was, in part, successful as there was an operative mistake as to the deceased’s state of health at the time of the relevant transaction. It was accepted however that if the same individual had died of, say, an unforeseen (and unforeseeable) illness or accident then it would not have been possible to set aside the transaction on the grounds of mistake: “the mere falsification of expectations entertained at the date of the transaction is not, in my judgment, enough” [23].

Mistake in the English courts, post-Pitt

It is helpful to see how the rules are applied, in practice. By way of some brief summaries:
Freedman v Freedman [2015] EWHC 1457 (Ch):

• Rescission of transfer of properties to relevant property trust that gave rise to £156,000 IHT liability.
• The settlor ‘was not particularly concerned about the precise details of what was involved and did not consider that the creation of the trust might have taxation consequences or other disadvantages.’ HMRC’s submission that this amounted to mere ignorance, rather than a distinct mistake, was however rejected.

Van der Merwe v Goldman [2016] EWHC 790 (Ch):

• Rescission of transfer of property to a relevant property trust that gave rise to a significant IHT liability.
• It was confirmed that the equitable rules apply where rescission would deprive a party of a benefit for which he gave no consideration, as opposed to situations where consideration has been given (where the contractual test will be applied).
• HMRC did not pursue a public policy challenge, along the lines described as a possibility in Pitt, at first instance (see above), although they unsuccessfully (see [2016] EWHC 926 (Ch)) sought permission to appeal on this basis. This may be a line of attack (or rather, defence) that HMRC may seek to develop in the future.

The rules surrounding equitable mistake are flexible, which is helpful when considering the almost limitless capacity (particularly in the field of tax planning) for things to go wrong.

It is not a panacea, however, and it is certainly possible to bring the “wrong kind of mistake” before the court:

Godden v Godden [2015] EWHC 2633 (Ch); Andrew Simmonds QC:

“[The Claimant’s] case on mistake is, in my judgment, confused, inconsistent, implausible, and contradicted by the documentary record. I elaborate on these conclusions below.”

Disclaimer: This note in intended to be a brief explainer only and it should not be relied upon as a substitute for professional advice.