In the Matter of A Trust [2009] JRC 245

The Royal Court has clarified the test to be used in considering an application to set aside a disposition made by reason of mistake; and also tackles the issue of whether the resulting invalidity of a trust makes the trust void or merely voidable.

This is not a Hastings-Bass application, because that procedure for setting aside a transaction is only available to trustees. In A Trust, the trustee did exactly what it intended and took no strong position on the application save for ensuring that it could retain its fees in any event.

A central issue was what test the Royal Court ought to apply in considering the application. In Ogilvie v Littleboy (1897) the House of Lords had set out a broad principle of injustice as the test for setting aside a voluntary disposition.

However, the more often cited test is that laid down in Gibbon v Mitchell (1991), a case where the court did not appear to take note of Ogilvie. In Gibbon a more stringent test was set out, on the basis that the mistake had to be ‘as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it’ before it might be set aside.

The Royal Court analysed the two authorities, and also considered more recent cases on mistake in a number of different jurisdictions.

On balance the Court preferred the broader Ogilvie test and on the facts as presented, concluded that Mrs B had not been advised of and did not understand the terms of the trust and was therefore mistaken as to its effect. It was a serious mistake, giving rise to an immediate IHT charge of over £1m. It did not matter whether the mistake was one of fact or law.

In all such cases the matter is one for the discretion of the Court so all surrounding circumstances were considered.

For that reason the Court set aside the disposition in full. (On the facts, the Court would have been prepared to set aside for mistake even on the narrower Gibbon test).

The Court also had to consider whether the resultant invalidity of the trust led to the trust being void ab initio – for all purposes as if it had never existed – or merely voidable, so that a valid and effective trust existed until such time as it was set aside. That issue has often been referred to – but not conclusively decided – in the context of a Hastings-Bass application.  The consequence for the applicant was not a financial one in this case but a reporting one – a voidable trust had once existed, and therefore gave rise to a reporting obligation to HMRC.

The Court preferred the view that by definition the court was being asked to consider overturning a disposition which must have had some legal effect. The disposition therefore stands unless and until set aside; and is therefore voidable, not void.

Why is the case worthy of note?

In the previous Jersey authority on mistake, JP v Atlas Trust Company [2008]JRC 159, the Royal Court had expressly left open the question as to which was the correct test for mistake and, therefore, how high the burden was on the applicant before an application might be successful. This decision gives clear guidance for the test in Jersey, although the English court in Pitt v Holt has since preferred the narrower Gibbon v Mitchell test; and in both JP v Atlas and Pitt v Holt the Courts did question whether the two tests were actually a distinction without a difference.

The consideration of the void or voidable point is also of note and it will be interesting to see whether the same reasoning is applied to subsequent applications by trustees to set aside dispositions under the Hastings-Bass principle.