Setting aside a trust on grounds of mistake

29th January 2008

Today I received a note from Carey Olsen in Jersey about a recent case there (In the Matter of the DSL Remuneration Trust - hearing 20 December 2007, Judgment published 28 January 2008), in which a trust was set aside on grounds of mistake.

The trust was governed by English law and had a Jersey Trustee. Under the terms of the trust certain persons, including the settlors, were prevented from receiving any benefit. When establishing the trust the settlors were given tax and legal advice by solicitors in England. They were told that. although they were excluded from benefiting under the trust, they could have access to the trust funds by way of loans on what was known as a “deep discount basis”, which would not be subject to income or any other form of UK tax. It turned out that this advice was wrong in that the settlors could not benefit as advised. Rectification was not an option either.

The note, which was prepared by Robert McRae and Victoria Connolly, states:

“The Trust was governed by English law, which provides that there is jurisdiction for the court to set aside a voluntary disposition on the basis of a mistake as to its effect, arising (1) from a legal defect in the disposition itself, (2) from a mistake of fact as to the position under the relevant trusts or as to the effect of the disposition in the hands of the donee, or (3) from a misunderstanding of the nature of the trusts which would affect the property after the disposition, due to a failure on the part of the advisers to explain the position properly. A mistake as to the consequences of the disposition (for example, its tax consequences) would not be sufficient to allow the Court to set the disposition aside.

“The Court found that Mr and Mrs L, the two directors and shareholders of DSL, were under a mistake of fact as to the position under the relevant trusts. Whilst Mr and Mrs L were not the settlors of the Trust, they were the two directors of DSL, and in the case of a company which acts through its directors, the intentions of the directors are the intentions of the company. The evidence of Mr and Mrs L was therefore the primary evidence as to the intention of DSL as settlor when entering into the transaction.”

Their comment on the case is as follows:

“This is an important decision for Jersey trustees, since it is the first time the Jersey Court has agreed to set a trust aside on the ground of a mistake by the settlor.”

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