STEP

Title Research

Surely some mistake? The widening jurisdiction of the Court to set aside voluntary transactions

  • Author : William East
  • Date : February 2010

 Imagine the following (not all too infrequent) factual scenario: a wealthy person, in a moment of generosity, makes a gift by deed of a considerable proportion of his property. Later, second thoughts begin to strike. The benefactor wants to set aside the gift. In what circumstances can he do so?

In Gibbon v Mitchell 1 Millett J held:

‘...wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is 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.’2

The latter distinction between a mistake as to ‘effect’ and as to ‘consequences’ has provoked considerable academic and judicial criticism. In a series of recent cases, both in England and Wales and in foreign jurisdictions, the test employed in Gibbon has been undermined in favour of a broader basis for relief, utilising a House of Lords authority, Ogilvie v Littleboy,3 that was previously little followed.

This article considers the extent to which the test in Gibbon has been departed from, and then discusses whether the move towards a new test for mistake is justified in principle and given the nature of the decision, in Ogilvie itself.

The meaning of the Gibbon test and criticisms

The distinction between mistakes as to ‘effect’ and mistakes as to ‘consequences’ is not always easy to grasp. The lack of any natural linguistic distinction between the words is highlighted by the fact that each is listed in the Oxford English Dictionary as meaning the other.4 As the Chancery barrister Jonathan Hilliard has pointed out, relief under the test in Gibbon v Mitchell appeared to be limited to mistakes that were ‘internal to the deed’ and which related to what the disponor was doing, not why he was doing it.5

Sometimes, the ‘what’ and ‘why’ of the transaction are unified. For example, in Gibbon itself, the claimant believed that what he was doing by entering into the transaction was making his two living children absolutely entitled to the fund; his reason for entering into the transaction was to achieve that same thing. The deed did not have such an effect and so was set aside.

Where, however, the claimant is perfectly aware of what he is doing by executing the transaction, but his reason for entering into the transaction is not reflected in the results, the effects/consequences distinction comes into play. This is crucial, as it rules out from Gibbon v Mitchell relief transactions where the claimant is aware of what the deed says but is mistaken about the tax consequences.6

The effect/ consequences distinction has been criticised by judges as being hard to apply in a number of cases.7 Outside the judicial arena, the point has been made that the distinction is a peculiar one to draw, given that parties often regard the consequences of transactions they undertake to be more important than their narrow legal effect.8 More importantly, the fact that the test cannot be reconciled with older case law has been recognised.9

The distinction begins to unravel

In 2002, the decision of Davis J in Anker-Petersen v Christensen10 brought the older case law back into play. The claimants sought to set aside deeds of assignment of their interests under certain UK trusts in favour of the defendants, who were trustees of Jersey trusts under which the claimants were also beneficiaries. The claimants made the assignments in the belief that their entitlement under the Jersey trusts would not differ from their entitlement under the UK trusts and that the whole transaction was being carried out for tax reasons. In fact the assignment onto the Jersey trusts was an adverse move for the claimants in several ways: not least because their interests as life tenants could be ended at any time by exercise of an overriding power of appointment given to the trustees of the Jersey trusts.

Davis J held that the claimants were entitled to the relief sought. While there was no evidence that either of the claimants had not understood the effect of the assignment itself, they had not appreciated that the overall effect of the whole transaction was to exchange their position under the UK trusts for an inferior entitlement as beneficiaries of the Jersey trusts. Davis J referred to Gibbon v Mitchell and then stated that ‘the mistake or misapprehension in my view does not necessarily have to be as to the direct terms or direct effect of the document in question; it may also be as to the indirect effect of the document in question.’11

As an example of an earlier authority in which relief had been granted on similar facts, Davis J cited Lady Hood of Avalon v Mackinnon.12 This was a case which was cited in argument before Millett J in Gibbon but not referred to in the judgment. The claimant, Lady Hood, had made two appointments out of the Hood settlement worth GBP8,600, one to her elder daughter and one to her younger daughter. Entirely forgetting about the appointment already made to the elder daughter, and wishing to ensure that both daughters received the same amount, she made a further appointment of GBP8,600 to the elder daughter. Granting relief, Eve J held that ‘when a person has forgotten the existence of a pre-existing fact, and assumes that such fact did not pre-exist, he is labouring under a mistake’.13

Lady Hood of Avalon shows the difficulty of reconciling the older cases with the Gibbon distinction. It might well be said that Lady Hood’s mistake related to the consequences of the transaction:- that her two daughters would not have received the same out of the trust as she supposed. To label the mistake as being one as to the pre-existing fact that the daughters had already received the same amount of money may be only engaging in semantics.

Mistakes of ‘sufficient seriousness’: the revival of the test in Ogilvie v Littleboy

In Sieff v Fox,14 Lloyd LJ raised the possibility (without deciding the question) that the test laid down by the Court of Appeal and the House of Lords in Ogilvie v Littleboy sets out a ‘broad principle of injustice as the test for setting aside a voluntary disposition’ which ‘might allow fiscal consequences to be taken into account, if they were sufficiently serious.’15Ogilvie will be more fully considered later, but for now it is sufficient to say the following. The claimant, a widow, had executed deeds founding two charities and placed a large proportion of the funds she had inherited from her husband under the control of the charitable trusts. She sought to set them aside on the grounds, inter alia, that she had not preserved to her the power of disposing of the income or capital of the fund as she thought fit during her lifetime (including for non-charitable purposes and for her own benefit) and that she was liable to interference by the Charity Commissioners in, for example, selling the land under the trust. The Court of Appeal and House of Lords held that the deeds could not be set aside. The remarks picked up by Lloyd LJ from the Times’ reports of the case (the case was not reported in the law reports)16 are those by Lindley LJ and Lord Halsbury LC in the Court of Appeal and House of Lords respectively. Lindley LJ stated:

‘In the absence of... circumstances of suspicion [undue influence, fraud etc.], 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.’17

Lord Halsbury, while expressly concurring with Lindley LJ’s judgment, referred to ‘circumstances when misunderstanding on both sides may render it unjust to the giver that the gift should be retained.18 The other members of the judicial committee sitting on the case agreed with him.

In Ogden v Trustees of the RHS Griffiths 2003 Settlement,19 Lewison J became, it appears, the first judge in over a century to apply the test laid out in Ogilvie. The case concerned Mr Ronald Griffiths, who, when aged 73, had made three potentially exempt transfers (PETs) of property of a substantial value in the hope that he would survive long enough that inheritance tax (IHT) would not be payable on the gifts after his death. The following year he was diagnosed with lung cancer and died several months after the diagnosis. The PETs failed, resulting in a substantial IHT liability.

The claimants, who were Mr Griffiths’ executors, sought to set aside the gifts on the grounds, inter alia, that Mr Griffiths had made them under a mistake, the mistake being that he believed that he had a reasonable chance of surviving long enough that some or all of the possible IHT liability on the gifts might be mitigated. Lewison J held that relief could be granted on the back of such a mistake under the test in Ogilvie providing that: (1) the mistake related to a fact which existed at the time of the transaction, (2) the mistake was of a sufficiently serious nature, (3) knowledge of the mistake would have prevented the disponor from entering into the transaction and (4) it would be unjust on the part of the donee to retain the gift. It should be noted that (3) is an addition by Lewison J to the test laid out in Ogilvie but may well simply express how serious the mistake has to be.20 On the facts, while the first two transactions had taken place when Mr Griffiths did not have lung cancer, the third took place when he did and his chances of survival in order even to partially mitigate the IHT liability on his death were remote. Mr Griffiths was unaware of that fact, which would have caused him not to go ahead with the transaction if he had known of it, and accordingly the third gift would be set aside.

Since the test laid out in Ogilvie apparently sets out a broad principle for when relief should be available in cases of mistake, rather than one that simply relates to a scenario where there is a mistake as to a pre-existing fact, the ‘revival’ of Ogilvie by Lewison J may well be a significant step towards the abandonment of the effect/consequences distinction and towards opening the door to claims where the only mistake is as to the fiscal results of the transaction.

This has been confirmed by two recent authorities from foreign jurisdictions, McBurney v McBurney21 (Isle of Man) and In Re K Holdings Trust (Jersey).22 Both were cases of mistakes as to the fiscal consequences of transactions, and in both the Court decided to abandon the Gibbon v Mitchell test in favour of the test laid out by the Court of Appeal in Ogilvie, together with the embellishment added by Lewison J. In McBurney v McBurney, some concern was also shown as to whether the dominant motive of the transaction was tax mitigation or avoidance, although it is not clear whether this actually forms part of the test for relief in the Isle of Man.23

There is no England and Wales authority which has decided that the Ogilvie test has superseded the test in Gibbon in this way. However, the difficulty of applying Ogilvie in one type of mistake case and not another was demonstrated in the decision of Martin Mann QC in Bhatt v Bhatt.24 The claimant was a widow whose first language was Gujarati. She was advised erroneously that she would face an IHT bill on her husband’s death, and as a result executed a deed of variation of her husband’s Will and a declaration of trust, which resulted in one-half of the property being held in discretionary trusts for her children. Under a clause in the trust deed, the children were entitled to live in the property without paying any rent. This clause arguably amounted to a PET by Mrs Bhatt, in that it might be regarded as creating interests in possession in the property for the children concerned, with potentially disastrous tax consequences.

There were three mistakes made by Mrs Bhatt: (1) that her husband having died, she faced a large IHT bill, (2) that by entering into the transaction she would save IHT on her own death and (3) that her unrestricted right to control and occupy the property would continue. The first can be analysed as a mistake as to a ‘pre-existing fact’, adopting the analysis in Ogden, while the third is a more straightforward mistake as to effect, falling within Gibbon v Mitchell. The second, however, seems to be a mistake as to the fiscal consequences of the transaction.

In granting relief, the judge appeared to conflate the two tests in Gibbon and Ogden:

‘the documents did not carry Mrs Bhatt’s intentions or instructions accurately into effect, and... her expectations in the giving of those instructions, rather than merely as to the consequences of those instructions were so seriously falsified in the sense Lewison J described in Re Griffiths that the documents cannot stand.’25

It is also noteworthy that, in referring to Mrs Bhatt’s ‘intentions or instructions’ the judge was very much using the language of rectification claims, which focus on whether the deed is a true record of the claimant’s intentions, rather than mistake claims, which focus on the claimant’s knowledge (or lack of knowledge) of the transaction.

Should the test as laid out in Ogilvie be adopted for all claims?

The question remains, after the decision in Bhatt, whether the ‘sufficiently serious’ test should be adopted for all cases in which the claimant seeks to set aside a written voluntary transaction. There are two issues which arise in answering this. First, does Ogilvie v Littleboy really lend support to a broad principle that the threshold for relief should be crossed whenever a ‘sufficiently serious’ mistake occurs? Second, is it desirable for policy reasons that a wider test should be adopted?

The trial in Ogilvie was heard by Byrne J. The text of the full judgment, contained in the Parliamentary Archives, shows that he held that the question in the case was as follows: ‘do the deeds fully express the nature of the arrangement the Plaintiff wished to make, and were their full purport and object clearly and distinctly made known to her?’26 It is clear that the word ‘purport’ is used in the sense of ‘purpose’ from a passage later in the judgment.27 This may well suggest a wide threshold to relief, which extends not just to what is in the deeds, but also to the reasons why the particular clauses have been added.

A hint of the later generation of the test of seriousness in the Court of Appeal is to be found at the point of the judgment at which Byrne J decides that relief should be refused:

‘I believe that their [the deeds’] meaning and intent was fully and duly appreciated... by the Plaintiff, and although she may not have appreciated every possible legal consequence which might flow from the execution of the deeds... I am satisfied that she intelligently understood the true meaning and effect of what she had approved and executed.28

The seriousness of the ‘mistakes’ under which Mrs Ogilvie said she laboured at the time of the transaction only really became an issue, however, in the Court of Appeal as a reaction to an apparent recognition that not all of them could be dismissed as evidentially unfounded. Lindley LJ concluded, for example, that the fact that the deed of gift stated that trust property could be sold without the consent of the Charity Commissioners, when that was later revealed not to be possible by law29, was not ‘so material as to affect the validity of the deeds’ as ‘the Plaintiff herself never contemplated that she should wish to sell.30 A number of other potential ‘mistakes’ about which, although unproven, there appeared to be some ‘obscurity’, were dismissed as not being of sufficient importance.31

Was the phrase referring to a ‘mistake of so serious a character’32 intended by Lindley LJ to be the encapsulation of the test for setting aside a voluntary transaction? This is not at all clear from either the full judgment or the Times report. It is curious to note that only a few lines further down, Lindley LJ comments that in relation to Mrs Ogilvie’s case:

‘Mr. Swinfen Eady [Mrs Ogilvie’s counsel] was quite right in staking his case on his ability to show that the deeds did not carry out the Plaintiff’s intentions as expressed to those whom she employed to carry them out.33 This very different question is close to what might be posed in a modern rectification claim. It might be possible to reconcile the two statements made by Lindley LJ by arguing that, as in the High Court, the test remained whether the deeds executed reflected the broad nature of the arrangement Mrs Ogilvie wished to make, with the minor legal consequences of the transaction that were not appreciated by Mrs Ogilvie being irrelevant to answering that question.

Perhaps the most interesting passage of Lindley LJ’s judgment, however, comes at the end. Mrs Ogilvie had also complained in a new point raised on appeal that she had wished that all new trustees should be approved by a General Meeting of the Society of Friends, but the possibility of the Society declining to take any part in appointments was not brought to her attention. Lindley LJ held that this was a danger, which had been appreciated by her advisors, but which had not been communicated to her, as if they did communicate this ‘she might even then abandon her whole scheme.’ However, it was not something that could prompt the deed to be set aside:

‘The complaint is not that her intentions have not been carried out. It is that a possible danger known to her advisers was not pointed out to her. I am not aware of any legal principle which goes this length or anything like it.’34

This last phrase is potentially significant, as it adverts to the legal difficulty of setting aside a deed where the mistake relates not to whether the wording of the deed itself reflects the disponor’s intentions, but to a misprediction about the practical results of the transaction. This does raise the question of whether Ogilvie places a bar on relief being granted where the mistake relates to a result (using a neutral word) of the transaction, which is possible but not certain at the date of execution.

Conclusion: policy considerations

The risk of an approach to mistake claims involving voluntary transactions based on the Ogilvie test is that such a broad basis for relief might provide a ‘get out of jail free’ card for lawyers who are unable competently to advise clients as to the tax consequences of a transaction. As Lord Neuberger pointed out in a lecture, which focused on Re Hastings-Bass claims, but which also has relevance for this topic, a broad basis for relief could even encourage disponors to engage in speculative tax schemes in the knowledge that the schemes could later be set aside if they failed.35 More generally, as Lawrence Collins J (as he then was) commented in AMP (UK) Plc v Barker, it is important to keep the relief available within reasonable bounds and not to extend it to situations when parties simply have second thoughts.36 If the test in Ogilvie as developed in Ogden is adopted, the Courts’ development of the meaning of the phrase ‘sufficiently serious’ may be critically important to striking the right balance. Equally, it may be sensible, as hinted at in McBurney v McBurney, to impose limits on relief where the dominant motive of the transaction was tax avoidance or mitigation.

It is also worth considering the interrelation between, for example, rectification claims and the type of cases we are presently dealing with. There is clear Court of Appeal authority that rectification is not available where the complaint solely relates to the tax consequences of the transaction.37 While rectification and rescission are regarded as having separate conceptual bases38, the older mistake authorities, including Ogilvie, do not suggest that there has always been a great difference, focusing as many of them do39 on whether the deed reflected the intentions of the disponor. There is also some argument that the threshold for relief in rescission claims should be higher than in rectification claims, and not the other way around. 40Whatever the resolution, this is clearly an area of the law that will continue to foster further fascinating development.

William East is a Barrister practising at 5 Stone Buildings, Lincoln’s Inn, London.

[1990] Ch. 1304.
At 1309 D-E.
Reported at (1899) 15 T.L.R. 294 (HL) and (1897) 13 T.L.R. 399. The case is also known as Ogilvie v Allen and others.
See OED Online.
J. Hilliard, ‘Gibbon v Mitchell reconsidered: mistakes as to effects and mistakes as to consequences: Part 1’, (2004) P.C.B. 357.
See Anker-Petersen v Christensen (Official Transcript 2001 WL 1743261), at paragraph 38, where Davis J confirmed that ‘if a party enters into a deed (with a view to saving tax) on terms which are fully understood and where the effect of such terms is fully appreciated and if for whatever reason the anticipated tax consequences thereafter do not flow, it would really not be open, in the ordinary way at least, to such person to seek to set aside that deed on the ground that he had not understood its nature or effect’.
See Anker-Petersen at paragraph 38, Sieff v Fox [2005] 1 W.L.R. 3811, 3841 at paragraph 94 and Ogden v Trustees of the RHS Griffiths 2003 Settlement [2009] Ch. 162, 168 at paragraph 23.
Hilliard at 364.
See Lewin on Trusts, (London, Thomson/Sweet & Maxwell, 18th edn, 2007) at 4-58.
Official Transcript 2001 WL 1743261
At paragraph 39.
[1909] 1 Ch. 476.
At 482.
[2005] 1 W.L.R. 3811.
At page 3842, paragraph 100 and page 3844, paragraph 106.
Although the full judgments of the High Court and the Court of Appeal are available in the Parliamentary Archives and material from the Archives has been utilised in this article, at the time of writing the speeches of the members of the House of Lords in the case were not available.
See page 400 of the Times report.
Page 295 of the Times report.
[2009] Ch. 162.
In McBurney v McBurney [2009] W.T.L.R. 1489 (Isle of Man), a subsequent case applying Ogden, the judge held that the best measure of whether the mistake was sufficiently serious was to ask if the transaction would have been effected ‘but for’ the mistake.
[2009] W.T.L.R. 1489.
Available online as an unreported judgment from 16 December 2009 – see http://www.jerseylaw.je. A summary of the result of the case by the Claimant’s legal team can be found at http://www.kyc360.com/article/get_file/94.
See paragraphs 14-17 of the judgment.
[2009] EWHC 734 (Ch).
At paragraph 41.
See the Appendix to the House of Lords bundle (‘App’) in the case contained in the Parliamentary Archives, p. 901. Both the High Court and Court of Appeal judgments are contained in the Appendix. The same test was applied in Phillipson v Kerry (1863) 32 Beav. 628, (later upheld by the Court of Appeal).
In my opinion the deeds do fully express the nature of the arrangement, and their full purpose and effect were clearly and distinctly made known to her’, App p. 908.
App p. 908-9.
Lindley LJ refers to Re Mason’s Orphanage and London and North Western Railway Company [1896] 1 Ch. 596.
See the Times report, p. 401.
App, p. 918.
See above.
App, p. 917.
App, p. 923-4.
‘Aspects of the Law of Mistake’, delivered to the Chancery Bar Association Conference, 16 January 2009, to be found at http://www.chba.org.uk/library/conference_2010/?a=69532. See paragraph 17.
[2001] W.T.L.R. 1237, paragraph 70.
Allnutt v Wilding [2007] W.T.L.R. 941.
See Lewin on Trusts, 4-54.
See Walker v Armstrong (1856) 8 D. M. & G. 531, Phillipson v Kerry (1863) 32 Beav. 628, at 638 and Walton’s Settlement [1922] 2 Ch 509 at 513 and, for Ogilvie, App p. 917.
See Ogilvie (1897) 13 T.L.R. 399 at 400, where it was suggested by Lindley LJ that where a deed of gift was long and complicated, it was a ‘much more serious matter’ to set it aside than to rectify it.

Advert

Article Search

Browse jurisdictions by clicking on the map regions below

© 2010 Society of Trust & Estate Practitioners