Fixing the mistakes
What gets written in a trust deed is not always what the settlor and the trustee meant to say or what they asked to have drafted. This sort of mistake in a legal document, any type of deed or contract, can be fixed by a process called rectification. Rectification is an equitable remedy available to ensure a document does not state something unintended by the people who signed it; or more legalistically; to ensure the document does not become ‘an instrument of fraud’.
It is important to understand that what can be rectified is the document not the consequences of entering into the document. For example:
Lisa settles a discretionary trust to benefit her client John, his wife and his children. John agrees to act as trustee of that trust for the benefit of himself, his wife and his children. Some years later John decides he would like his brother to be a beneficiary of the trust. This is not something that can be rectified as the intention of both John and Lisa at the time the trust was settled had not been to include John’s brother as a beneficiary. In contrast, if the deed had been drafted to say the trustee could not benefit from the trust this would be able to be rectified as both John and Lisa were aware John was the trustee when the trust was settled and both intended the trust fund should benefit John as well as his wife and his children.
Rectification is traditionally a remedy sought in the Supreme Court and is available at the court’s discretion. It is unlikely to be granted if the mistake is too fundamental or extensive. Despite this Courts have rectified some quite extensive errors.
In 2015 the South Australian Supreme Court rectified three trust deeds to which transfers of farm land had been made (Keadly Pty Ltd & Ors [2015] SASC 124). Both the settlor and trustee of each trust gave evidence that it was intended each deed document a restricted class of beneficiaries such that the stamp duty concession for the transfer of farm land would apply. The deeds were not documented with that restricted class. Bampton J accepted that there was adequate evidence of the mutual mistake; that is the subjective intention of both the settlor and the trustee was to limit the range of beneficiaries allowed, and she granted rectification. RevenueSA while not a party to the proceedings had agreed to abide by the outcome.
Although certainty is only achieved by a Court Order the process of obtaining one can be costly and time consuming. Frequently, solicitors rectify errors in deeds or other documents by providing a deed of rectification. A deed of rectification is a written acknowledgement by the original trustee and the settlor that the original document did not actually state what they both intended at the time the original deed was settled. The types of errors we commonly rectify include typos; errors in names and Australian Business Numbers or Australian Company Numbers, omissions or the inclusion of clauses not intended by the parties.
In 2000 Hill J recognised a deed of rectification as an alternative to obtaining a Court Order. He said provided the deed of rectification honestly recorded that the parties were under a mutual mistake about what was written in the original deed and set out what should have been written it would be effective from the start (Davis v Commissioner of Taxation (2000) 171 ALR 654).
Recently Logan J considered rectification by deed as evidence of the intentions of both original parties to the deed. He stated that a deed of rectification was effective in relation to the parties and if challenged by a third party such as the taxation office or state revenue office can evidence the parties’ true intentions in seeking a Court Order (Trustee for the Michael Hayes Family Trust v Commissioner of Taxation [2019] FCA 426).