The court’s ability to help out by relieving against the consequences of mistake has long been a cornerstone of the equitable jurisdiction exercised by courts based on the English common law system.
The variety of circumstances in which it can be applied in the context of civil cases is relatively wide ranging, for example, extending from rectification of a document so that it accords with the true terms it was meant to record, and thereby effectively validating it, to setting aside a transaction that is grounded on some relevant error as to fact, or indeed law, and whether made by trustees or by individuals including the settlors of trusts.
Both of these examples can be very important in trusts and other fiduciary relationships. In particular, a mistake by a settlor, a trustee or other fiduciary as to the nature of what they are doing in the creation of, or the exercise of powers subsisting under a trust can have seriously adverse consequences, in particular as to who is entitled to what or in terms of fiscal liabilities.
The tax liabilities issue has recently come into particularly sharp focus with the advent of the UK ‘requirement to correct’ legislation which takes effect on 30 September 2018. Many previously unrecognised and unwelcome UK tax liabilities, some arising from steps taken many years ago, have emerged as a result of the fresh scrutiny given to trust structures by trustees, their settlors and their beneficiaries in advance of the obligation to report unsettled liabilities arising from offshore arrangements to HM Revenue and Customs.
Stuff happens; a trust may be created, or a disposition under it made on the basis of a fundamental error as to what result it will produce in tax terms. That may be the result of incorrect professional advice or, occasionally, the failure to take any relevant advice at all (see the Jersey case of Re S  JRC 117, in which a trust was created mainly for perceived UK inheritance tax advantages (which were in fact not achieved) but its principal beneficiaries were US persons and no advice as to US tax consequences had been taken).
Just before the UK deadline, the Cayman Islands Grand Court heard a case where the settlor/principal beneficiary had believed that documentation provided to him by the trustee had the limited effect of appointing a new trustee. In fact, although the new trustee was indeed appointed, the settlor was creating a wholly new trust. His UK domiciled status meant that transfer from one trust to another caused substantial tax liabilities. No tax or any other advice had been taken, nor was the settlor advised to take any advice. Mangatal J. set aside the deeds of amendment and appointment by which this was effected to the great relief of the settlor – and no doubt that of those who had facilitated the settlor’s misunderstanding and their insurers. She was satisfied that this was a genuine mistake on the part of the settlor even though he admitted that he should have been more careful to understand the documents he was signing.
What is the Law?
The potential fiscal dimension of relief from trustee/settlor mistakes has made the jurisdiction to grant it something of a legal hotbed in recent years. It is well known that after years of adverse/critical judicial comment (both from the bench and in extra-judicial commentary), the English Supreme Court finally clarified the so-called ‘rule in Hastings-Bass’ ( Ch 25) in its decision in Pitt v Holt/Futter v Futter  UKSC 26 (Pitt v Holt). The decision also clarified the English law as to mistake, which we will refer to in more detail below.
The aftermath of Pitt v Holt is a good illustration of the sometimes edgy but still essentially symbiotic relationship between doctrines first developed by the English courts and their application by courts in the principal English common law-based international financial centres. Some jurisdictions (such as Jersey and Bermuda) have effectively enshrined the Hastings-Bass jurisdiction as it had been understood before Pitt v Holt through legislation. The Cayman Islands have not done so, or not yet. However, the separate but related doctrine of mistake as explained by the Supreme Court seems to have been generally accepted by most leading jurisdictions in that formulation.
The Cayman Islands Law
In Schroeder Cayman Bank and Trust Company Limited v Schroder Trust A.G. [2015 (1) CILR 239] (Schroeder) the Chief Justice of the Cayman Islands cited with approval the Pitt v Holt/Futter judgement and distilled from it four ‘guiding principles’:
(i) The equitable jurisdiction to set aside a voluntary disposition on the ground of mistake is exercisable whenever there was a causative mistake which was so grave that it would be unconscionable to refuse relief.
Unilateral mistake is enough and a mistake due to carelessness on the part of the person making the voluntary disposition does not matter, unless the circumstances are such as to show that he deliberately ran the risk, or must be taken to have run the risk, of being wrong.
(i) A causative mistake differed from ‘inadvertence, misprediction or mere ignorance’, but forgetfulness, inadvertence or ignorance, although not as such, a mistake, could lead to a false belief or assumption which the law would recognise as a mistake.
It is not surprising that the Supreme Court had acknowledged "some uncomfortably fine distinctions" between mistake and ignorance while approving the judgement of the Court of Appeal of Victoria in Hookway v Racing Victoria Ltd  VSCA 310 (JB/14) where it was held that mistake certainly comprehends "a mistaken belief arising from inadvertence to or ignorance of a specific fact or legal requirement."
(iii) The gravity of the mistake had to be assessed by a close examination of the facts, including the circumstances of the mistake, its centrality to the transaction in question and the seriousness of its consequences, including any tax consequences for the disponer.
A central question for the court is whether it would be ‘unconscionable’ not to correct the mistake and that this would require that the ‘gravity of the causative mistake be assessed in terms of injustice’. In so doing this would require "close examination of the facts, whether or not they are tested by cross-examination, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition. Other findings of fact may also have to be made in relation to the change of position or other matters relevant to the exercise of the court’s discretion”.
In Pitt v Holt the Commissioners of HM Revenue and Customs were a party to the proceedings (for the first time on a case involving the Hastings-Bass principle). They opposed Mrs Pitt’s application (and appeal) on a number of grounds, one of which was that a mistake which relates exclusively to tax cannot in any circumstances be relieved. Lord Walker rejected this submission and found it to be at odds with the approach of the House of Lords in Deutsche Morgan Grenfell Group plc v Inland Revenue Comrs and another  1 AC 558 (paragraph 130 at JB-16).
(iv) The court then had to make an objective evaluative judgement as to whether it would be unconscionable or unjust to leave the mistake uncorrected: “the injustice (or unfairness or unconscionableness) of leaving [a mistake]… uncorrected must be evaluated objectively, but with an intense focus … on the facts of the particular case”..
What are the Lessons?
Despite the ‘uncomfortably fine distinctions’ which have to be drawn in individual cases between such concepts as ‘misprediction’ and ‘inadvertence’, the ability of the court to set aside transactions for mistake has proved to be enormously useful in practice. It may now be too late to invoke the assistance of the court before the ‘requirement to correct’ deadline expires if reporting is to be avoided, but there is no reason why such applications should not still be made in proper cases as and when mistakes are discovered. Such is human frailty that mistakes of all kinds, tax-related or not, will always be made and it is a tribute to the flexibility of equity and the courts administering it that they stand ready to help in a proper case.
But do remember that ‘delay defeats equity’. This is a discretionary remedy and if the parties dither for too long once a mistake is recognised it may be too late to persuade the court to exercise its discretion. That may also be the case if other steps have been taken subsequently which depend on the validity of the original mistaken transaction. There can be nothing automatic about a jurisdiction the central theme of which is unconscionability.
Shan Warnock-Smith QC is a barrister who provides advisory and litigation services to professional clients in the wealth structuring field. From her bases in London and Cayman, Shan has an international practice, which takes her around the globe to advise and litigate.
Andrew De La Rosa
Andrew De La Rosa has a recognised expertise in cases involving the application of equitable principles and remedies in international disputes, in particular where fiduciary relationships in trust, succession, partnership, corporate governance and investment management spheres are involved. He practices from Cayman and London and has a long-term connection with the Arabian Gulf jurisdictions.