In an important decision, and in the face of criticism of the Jersey law position by the English Court of Appeal in the recent English case of Pitt v Holt, the Royal Court has nevertheless upheld and confirmed the pre-existing Jersey law position on voluntary dispositions by donors which are sought to be set aside on the grounds of mistake.(1)
The representor had been advised that gifts she wished to make into trust would have no adverse inheritance tax consequences. This advice was wrong and the consequences were significant. Further, she was additionally not advised of the risk that the principal beneficiaries, who were US resident, could be liable to tax on any distributions from the trusts, up to a value of 100% of the distribution. The representor's evidence was that had she realised the true position, she would not have made the gifts into trust, but would have structured her affairs differently.
The first step is to identify the law governing the gift or transfer, as it is this law that governs whether the gift is voidable by reason of a mistake. As though the representor was resident and domiciled in England when she made the gift, and the trust was governed by English law, the donee company was a Jersey company and the trust was administered in Jersey. As neither a contract nor immovable property was involved (to which other rules apply), Jersey law was held to be the law of the transfer, as it is the law of the country in which the enrichment of the donee occurred.
In view of the difference that now exists between English and Jersey law on mistaken gifts, determining (ideally in advance) the law that will apply to the transfer may become more important in future years. The use of a Jersey trustee may afford increased insurance for a donor or settlor in the (hopefully unlikely) event that all does not go according to plan when transferring assets to a trust.
The Jersey legal position in relation to gifts made pursuant to a mistake remains as that set out in a series of cases starting with Re the A Trust ( JLR 447). The test as drawn from that case, and those following it, is as below:
- Was there a mistake on the part of the donor or settlor?
- Would the donor or settlor not have entered into the transaction 'but for' the mistake?
- Was the mistake of so serious a character as to render it unjust on the part of the donee to retain the property?
As a result of the application of this test, which was itself based on an earlier English authority, the court need not concern itself with the complications and uncertainties of having to decide whether the mistake in question is one of the 'effect' or the 'consequence' of the transaction, an approach favoured by other English authorities. Further, no distinction is drawn between mistakes of fact and mistakes of law. Both are grounds for an application to set aside, provided that the above conditions are satisfied.
The Court of Appeal in Pitt v Holt ( EWCA Civ 197) determined that under English law:
- there must be a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact that is basic to the transaction;
- the mistake must also be both of such gravity that the donor would not have entered the transaction but for the mistake, and be so serious in character as to render it unjust on the part of the donee to retain the gift; and
- the fact that the transaction gives rise to unforeseen fiscal liabilities is a 'consequence' of the transaction, not an 'effect', and as such is not sufficient to bring the mistake jurisdiction into play.
Thus, under English law, it must be shown that there has been a mistake, and that it is of the relevant type and of sufficient seriousness. If the mistake is not of the relevant type, it is unnecessary to proceed to considering the third element of seriousness.
As a result of the decision in Pitt v Holt, the English and Jersey legal positions are now clearly different. With respect to the English Court of Appeal, one might take the view that the Jersey law test is preferable.
There is arguably more certainty in the application of the Jersey test and therefore the ability to give clearer advice to donors and trustees alike. In Pitt v Holt, a fiscal liability amounting to a 12% charge on the trusts fund was held to be a fiscal 'consequence' of the transaction, not an 'effect'. It was therefore the wrong type of mistake and did not give rise to the ability to set aside. In the Jersey case, the potential fiscal liability was 100% of the distributions. The practical effect was therefore to exclude the intended beneficiaries and substitute the US government in their place. The Jersey court considered that even under the Pitt v Holt test, this would amount to a mistake as to the legal effect of the gift. If so, there was therefore uncertainty as to where on the spectrum between a 12% and 100% fiscal liability the excluded 'fiscal consequence' transformed into a qualifying 'legal effect'.
The English decision also appears to have retained a distinction in some degree between mistakes of fact and mistakes of law, a distinction which has otherwise disappeared from English law. The first element of the English test - namely, that there must be a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact that is basic to the transaction - appears to exclude the prospect of a mistake of law, which is basic to the transaction being sufficient grounds to set aside the transaction, unless the mistake can be framed in terms of 'legal effect'. A fundamentally adverse fiscal result arising from an existing mistake of law is arguably basic to the transaction, and yet under the English test it would somewhat arbitrarily appear to be excluded from the ability to seek relief.
The Jersey court was also unsympathetic to what it saw as the English test giving preference to the interests of the revenue authorities. While in no way condoning tax evasion, the Jersey court saw no reason for adopting a judicial policy in Jersey that favoured the position of the tax authority to the prejudice of the individual citizen and, as a result, excluded from the ambit of discretionary equitable relief mistakes, thus giving rise to unforeseen fiscal liabilities. As the court noted: "Leviathan can look after itself."
The Jersey court saw no fairness in the English approach. When the basis for the approach in this field of law is equity, justice and fairness, the application of the English test to the particular facts in Pitt v Holt had, in the Jersey court's view, produced an apparently highly unfair and unjust result that would require the applicant to embark on yet more uncertain and expensive litigation in order to obtain redress. This troubled the Jersey court and confirmed it in its view that the approach to mistake derived from the earlier Jersey authorities was to be preferred.
The Jersey court first confirmed the decision in Re the A Trust that on the finding of a mistake, the transaction is voidable at the instance of the donor, rather than void. The donor may therefore elect to affirm the transaction or seek to set it aside. In practice, it would seem that once the mistake is realised, if the donor takes no action, he or she may be taken to have affirmed.
Further, some years after the initial gift into trust, the trustee of the original trust had transferred assets to new trusts. Having found that the representor satisfied the requisite test for setting aside the original transaction on the grounds of mistake, the Jersey court also held that this later transaction was similarly voidable at the instance of the representor, because the trustees of the new trusts were not bona fide purchasers for value of the assets transferred.
For further information on this topic please contact Kerry Lawrence at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]).
(1) Representation of R in the matter of the S Trust ( JRC 117).