In the matter of the Representation of R, which was heard by the Royal Court of Jersey on 21 June 2011, the Royal Court was called upon to decide whether to uphold or depart from the recent decision of the English Court of Appeal in Pitt v. Holt  EWCA Civ. 197. The case of Pitt v. Holt considered the equitable principles under English law for avoiding a voluntary disposition entered into under a mistake.
The Court of Appeal held that in order to be voidable under English law a mistake must relate to the legal 'effect' of a transaction, and it is not sufficient for a transaction to be set aside because of a mistake as to the 'consequences' of the transaction. In reaching this decision the Court of Appeal criticised the position under Jersey law where the Royal Court has "set its face against the 'effects/consequences' distinction." It stated that the case of Re A  JLR 447, in which the Royal Court had ruled that a transaction could be set aside under Jersey law on the basis of a mistake as to the tax consequences of the transaction, was "a great deal too relaxed."
The Representation of R was the first case following the decision in Pitt v. Holt, where the Royal Court was presented with the opportunity to re-visit the Jersey approach to the law of mistake in light of judicial developments in England. Having had the opportunity to consider the position of the English Court of Appeal, however, the Royal Court took the bold step of declining to follow the English position. Instead, it re-affirmed the earlier judgments of the Royal Court in the case of the Re A Trust and the Re Lochmore Trust  JRC 068.
In the context of trust applications under Jersey law it remains the position that a voluntary disposition, including a transfer of assets into trust, can be set aside by a donor on the basis that the transaction was entered into under a mistake as to the consequences of the transaction. It is also necessary under Jersey law to demonstrate that the gift would not have been entered into but for the mistake, and that the mistake is of so serious a character that it would be unjust on the part of the donee to retain the gift.
Tax Planning is Not a Vice
In applications seeking to set aside a transfer of assets into trust, the mistake in question will often relate to the tax consequences of a transaction. In the Representation of R the donor was able to satisfy the Royal Court that a transfer of assets into trust should be set aside on the basis that the donor had been mistaken as to both the English and US tax consequences of the transaction.
In adopting a broader test to that under English law, the Royal Court recognised that there may now be an advantage in choosing one jurisdiction over another when making applications of this nature and accordingly felt that it was necessary to satisfy itself that the judicial approach being followed under Jersey law should be maintained.
The Royal Court went on to find that the test applied under Jersey law was not only fair and just but also presented significant hurdles, which meant that it was not too easy for the donor to retrieve a gift simply because things did not turn out precisely as he had anticipated. The Royal Court also expressed concern at the weight given to the interests of the tax authority under English law and, in defending its position not to follow the English Court of Appeal's decision, Bailhache Commissioner stated:
"... in Jersey it is still open to citizens so to arrange their affairs, so long as the arrangement is transparent and within the law, as to involve the lowest possible payment to the tax authority. We see no vice in this approach. We accordingly see no reason to adopting a judicial policy in this country which favours the position of the tax authority to the prejudice of the individual citizen, and excludes from the ambit of discretionary equitable relief mistakes giving rise to unforeseen fiscal liabilities."
Voidable or Void?
The Royal Court stated that whilst its role will often be to declare that a donor is entitled to avoid a gift on the basis of mistake, the action which avoids the gift under the equitable doctrine remains the action of the donor and not the court. As a consequence, transfers into trust are likely to be held to be voidable at the instance of the settlor and not void.
Consideration was also given to the role of HMRC in applications to set aside trusts on the grounds of mistake. On the facts of the present case it was not deemed appropriate to inform HMRC, but this is something that applicants will need to give consideration to on a case by case basis.
Scope of Judgment
Whilst this judgment is a seminal one, its application is limited purely to the doctrine of voluntary dispositions made by mistake. The Representation of R was not a Hastings Bass application and it remains to be seen what stance the Royal Court will take following Pitt v. Holt and Futter v. Futter in relation to applications to set aside discretionary decisions of trustees.
It is also worth highlighting that appeals to the Supreme Court are pending in both Pitt v. Holt and Futter v. Futter and that until these appeals are heard the position under English law remains subject to further review.
This article was originally published in Finance, Offshore – Autumn 2011
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