Oops! I’ve made a mistake.

30 November 2012

Oops! I’ve made a mistake.

Will England or Jersey law fix it for me?

Elspeth Talbot Rice QC

Hear the Right Honourable Lord Millett on this topical issue.
see conference details below…

The law on avoiding a contract for mistake was fixed by the Court of Appeal in Great Peace Shipping v Tsavliris Salvage (International) Ltd [2003] QB 679. Broadly speaking the mistake made has to be a real whopper: in legal terminology there has to be a mistake about something which renders the effect of the contract “fundamentally different” from that which the parties had believed to exist. So, in the Great Peace case itself, the fact that a tug (the Great Peace), which was retained to escort and stand by the damaged Cape Providence for the purpose of saving life, turned out to be 410 miles away from the Cape Providence rather than the 35 miles which the parties thought at the time the contract was made, was not a big enough mistake for avoidance of the contractual obligations which had been entered into.

The overtones from this approach of the defence of non est factum ring out. For a non est factum defence to be raised, the document must be “radically” or “fundamentally” different from what was understood by the person executing it (Gaillie v Lee [1971] AC 1004)

The law on avoiding a voluntary disposition in equity however has taken a different course, and there is current debate over whether England has got it right.

In Gibbon v Mitchell [1990] 1 WLR 1304, Millett J, as he then was, held that a voluntary disposition in equity could only be set aside if the mistake made was as to the effect of the transaction, not where it was only as to its consequence. A debate raged as to whether a mistaken triggering of a tax liability was a mistake as to the effect of the transaction or a mistake as to its consequences, particularly as many of these cases arose where the disposition in question was only made as part of a tax structuring programme. This debate was settled when it was held in Anker-Peterson v Christensen [2002] WTLR 13 that a mistake as to fiscal consequences will not do.

The Gibbon v Mitchell effect/consequences test has not received universal support. A moment’s thought about whether a mistake in a particular scenario is as to the effect of the transaction or as to its consequences can show that it is a distinction of some difficulty. Perhaps this is in part because the first definition in the Oxford English Dictionary of “effect” is “consequence”, and “consequence” is similarly defined as “effect”.

Those of us who have difficulty grasping the distinction between effect and consequences need not feel foolish, for we are not alone. Lewison J (as he then was) described the distinction in Ogden v Griffiths Trustees [2008] EWHC 118 as “a difficult one to grasp” and he sidestepped the effect/consequences approach in deciding that, consistently with Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476 a voluntary disposition could be set aside for a mistake “of sufficiently serious nature

However, the Court of Appeal reinforced the effect/consequences test in the conjoined appeals of Pitt v Holt and Futter v Futter [2011] EWCA Civ 197 (9th March 2011) in which a settlor of a trust contended that she had made a mistake when settling funds into that trust. Lloyd LJ held: “for the equitable jurisdiction to set aside a voluntary disposition for mistake to be invoked, there must be a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact which is basic to the transaction … Moreover the mistake must be of sufficient gravity as to satisfy the Ogilvie v Littleboy test …The fact that the transaction gives rise to unforeseen fiscal liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.” The Ogilvie v Littleboy test is “a mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him”

The Royal Court of Jersey has parted company with England on this point, and the battle has commenced: England v Jersey.

Round 1

In Re A [2009] JLR 447 the Royal Court of Jersey fixed a three pronged test for mistake in a voluntary disposition case

– Was there a mistake?

– Would the settlor/donor not have entered the transaction “but for” the mistake? And

– Was the mistake of so serious a character as to render it unjust on the part of the donee to retain the property?

1- 0 to Jersey

Round 2

The English Court of Appeal criticised Re A in Pitt v Holt in March 2011.

The English Court draw level at 1 – 1.

Round 3

The case of Re S came before the Royal Court of Jersey on 21st June 2011 and Sir Philip Bailhache Lt sitting with 2 jurats was therefore called upon to decide whether or not to follow the English Court of Appeal’s decision in Pitt v Holt or reinforce the Jersey Re A approach. He delivered a body blow to England by siding with Jersey, following the previous decisions of the Jersey Court in Re A, Re First Conferences Ltd Benefit Trust [2010] JRC 055A and the Lochmore Trust [2010] JRC 0068 and, dismissing the Court of Appeal’s criticism of Re A.

2 – 1 to Jersey who take the lead.

What of Round 4?

It might be thought that Round 4 of this battle will take place in the hallowed halls of the Supreme Court when their Lordships examine this topic (along with the associated topic of what has become known as the rule in Hastings Bass) in March 2013 on the conjoined appeals of Pitt v Holt and Futter v Futter.

But no! Round 4 will take place on 6th December 2012, when, in a clash of the Titans, Lord Millet, the author of the effect/consequences test, will thrash the point out with Edward Mackereth of Ogier, Jersey at a conference “ A Fresh Look at International Trust Disputes” to be held at the Cumberland Hotel, London. Ringside seats are in high demand! Please click here for full details of the programme.