Background
Court of Appeal's approach
Royal Court of Jersey's approach
Comment
The court has equitable jurisdiction to set aside a voluntary disposition on the grounds of mistake, but there has been some confusion about the correct test to apply.
The generally accepted test was that a voluntary transaction could be set aside on the grounds of mistake of either law or fact, provided that the mistake was about the effect of the transaction, as opposed to a mistake as to its consequences, such as an unintended tax liability.(1)
However, it is sometimes argued that the correct test is set out in Ogilvie v Littleboy (1897), in which it was held that for a gift to be set aside, it would be necessary for the mistake to be of so serious a character as to make it unjust for the donee of a gift to keep the assets being given.
In Pitt v Holt, which was decided earlier in 2011, the Court of Appeal held that the correct test is a combination of the two tests outlined above. Thus, a court cannot set aside a voluntary disposition on the grounds of mistake unless a three-part test is satisfied:
- There must be a mistake on the part of the donor.
- The mistake must be as to the legal effect of the disposition or as to an existing fact that is basic to the transaction, as opposed to a consequence or economic effect.
- The mistake must be sufficiently serious for it to be unjust for the donee to retain the property being given.
All parts of the above test must be satisfied before the courts will set aside a disposition on the grounds of mistake.
Royal Court of Jersey's approach
However, in the matter of the Representation of R(2) the Royal Court of Jersey rejected the Court of Appeal test and the distinction between effects and consequences.
The representor had transferred shares in a company to the trustees, which settled the shares on trust. The representor sought legal advice and was advised that no inheritance charge would be incurred on the transfer of assets into trust, as business property relief would be available. This advice was incorrect. There were also issues with regard to US taxation.
The court held that the test for invoking the court's equitable jurisdiction of mistake was to ask:
- Was there a mistake on the part of the representor?
- Would she 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?
The test as applied by the Court of Appeal is phrased so as to protect the recipient (and also Her Majesty's Revenue and Customs if any tax is due). A donor who seeks to have his or her actions set aside in the English courts will have a more difficult case to prove than those who submit to the jurisdiction of Jersey, where the Royal Court's test is seemingly more concerned with ensuring that a remedy is available. The latter test was constructed to achieve justice and fairness and to avoid an outcome similar to that in Pitt v Holt. The test as construed by the Court of Appeal is narrower than that of the Royal Court, making it more difficult for a donor to satisfy. If there is a choice of jurisdiction, it may well be less advantageous for a donor to bring an application before an English court.
Leave to appeal to the Supreme Court has been granted in Pitt v Holt, as well as in Futter v Futter. The latter case was being heard jointly with Pitt v Holt in the lower courts on a different but related point of law, known as the rule in Re Hastings-Bass. If the Court of Appeal decision in relation to mistake is appealed, the recent Jersey decision is likely to form part of the appeal. It will be interesting to see whether English law and Jersey law fall back into step, or whether they are set to take different courses on this point.
For further information on this topic please contact Peta McLean at Lawrence Graham by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).
Endnotes