(D) VOIDABLE VOLUNTARY TRANSFERS

The making of a gift by deed may also be rescinded in Equity by virtue of the claimant’s mistake. This was recognized in Lady Hood of Avalon v Mackinnon,^[1] where a deed was rescinded where the claimant had appointed property for the benefit of one of her daughters, forgetting that she had made provision for that daughter previously. This was regarded as a sufficiently serious mistake to enable the court to rescind the deed, since the claimant had never intended to make double provision for the daughter.

The operation of the equitable jurisdiction to rescind voluntary dispositions has been clarified by the Supreme Court in Pitt v Holt; Futter v Futter.^[2] Lord Walker identified three interlinked elements before the equitable jurisdiction is engaged:

• (i) The donor must have been mistaken.^[3]
• (ii) The mistake was sufficiently serious.
• (iii) The assertion of the donee’s rights would be objectively unjust or unconscionable rendering the mistake of sufficient gravity to rescind the disposition.

The second test, that ‘[t]he mistake was sufficiently serious’, is more stringent than the usual test of ‘but for’ causation, but is not as stringent as the test of fundamental mistake to rescind a contract. This appears to be because a deed is a formal legal document which should not be set aside easily but, because we are concerned with voluntary transfers, it should be easier to set it aside than a contract.

Prior to the decision of the Supreme Court, a controversial issue concerned whether a mistake as to the consequences of a voluntary transfer could constitute a relevant mistake, or whether the mistake had to relate to the legal effect of the transaction.^[4] This was a significant issue since a common reason for a donor wishing to set aside a voluntary transfer was because of its adverse tax consequences, rather than the legal effect of the transfer. In Pitt v Holt Lord Walker rejected the need to distinguish between consequences and legal effect and focused instead on the seriousness of the mistake.^[5] Crucially, he recognized that:^{[6] [7]}

the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only where there is some mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.

This expands the types of mistake which might be sufficient to engage the equitable jurisdiction to set aside the deed, since a mistake as to the tax consequences of the disposition might be relevant if sufficiently serious. The distinction between effect and consequence has not disappeared completely, however, but may remain of evidential significance since, as Lord Walker recognized,^{3 7} a mistake as to the essential nature of a transaction is likely to be more serious than a mistake as to its consequences.

The third test involves unconscionability which renders the mistake of sufficient gravity to rescind the disposition. The determination of unconscionability requires close examination of the facts, including ‘the circumstances of the mistake and its consequences for the person who made the vitiated disposition’, change of position, and ‘other matters relevant to the exercise of the court’s discretion’.³⁰⁸ Lord Walker used the language of ‘unconscionableness’, as he called it, interchangeably with that of ‘justice’ and ‘unfairness’,^{3 9} so that the test of gravity appears to turn simply on an assessment of fairness determined through the exercise of judicial discretion.

On the facts of Pitt v Holt it was held that a mistake as to the tax consequences of a disposition to a trust was sufficiently serious and grave to trigger the equitable jurisdiction to rescind the disposition for mistake.³¹⁰ In Pitt v Holt, Mrs Pitt’s husband had been seriously injured in an accident, for which he received substantial compensation. Mrs Pitt sought advice as to how best to invest this money and was advised to transfer it to a trust. This disposition was then authorized by the Court of Protection. Unfortunately the method of disposition which Mrs Pitt adopted had adverse tax consequences, which could easily have been avoided. In reaching the decision that this disposition could be rescinded, a matter of particular significance was the fact that the disposition did not form part of an artificial or abusive tax avoidance scheme and also that it had been authorized by the Court of Protection. In Wright v National Westminster Bank plc³¹¹ a trust was set aside by virtue of the settlor’s mistaken belief that income from the asset which was settled on trust would continue to be available to him and his wife to maintain their existing standard of living.

Had the equitable jurisdiction been invoked in Futter v Futter,³¹² which was the other case considered by the Supreme Court with Pitt v Holt, Lord Walker considered that it would have been more difficult to establish that the mistake was sufficiently serious and grave to justify rescission. In that case the trustees of a discretionary trust had exercised powers of advancement on the understanding that, although this would result in a tax liability, that liability could be set off against allowable losses. The decision to exercise the power was made after the trustees had obtained advice from solicitors, but it ignored the effect of a statute which provided that the tax liability could not be set off. The settlor and the beneficiaries incurred a significant tax liability as a result of the trustees’ mistake. Unlike the disposition made by Mrs Pitt, this case involved an artificial tax avoidance scheme which had gone wrong. ³ Lord Walker described such schemes as constituting ‘a social evil’,^{[8] [9] [10] [11]} and emphasized that the court might refuse to award equitable relief to rescind a voluntary disposition on the ground of public policy, suggesting that there are moral questions which need to be examined by the court in determining whether it is appropriate to exercise the jurisdiction to rescind the disposition. It does not appear to be unconscionable for the Revenue to keep tax paid as part of an artificial avoidance scheme entered into by mistake. It follows that many claims based upon a mistake as to the fiscal implications of a disposition seem destined to fail. Where, however, the settlor or trustees have conferred a benefit on the donees in a tax efficient manner as contemplated by statute, this will be characterized as legitimate such that it would be unconscionable not to rescind the disposition for mistake.³¹⁵

The determination of whether a voluntary disposition should be rescinded in Equity appears to involve judicial manipulation of the most blatant kind. Confusingly, the distinction between seriousness of the mistake and its gravity assessed by reference to unconscionability is likely to merge to form a single test turning on the justice of the case. What is even more concerning is that this equitable test of mistake, which was applied in the specific context of rescission of deeds, is starting to be adopted more widely to any case where the claimant has made a gift by mistake.³¹⁶ Whilst the vagueness of the tests which have been adopted for purposes of the equitable jurisdiction are a matter of concern, their potential expansion to restitution of all mistaken gifts is unacceptable.

The real problem with the approach of Lord Walker in Pitt v Holt is the inclusion of a third test involving the ‘unconscionableness’ of the defendant’s receipt. There is no need for such a test. It should be enough that the mistake is sufficiently serious before a voluntary disposition can be rescinded.

• [1] [1909] 1 Ch 476.
• [2] [2013] UKSC 26, [2013] 2 AC 108. See P Davies and G Virgo, ‘Relieving Trustee’s Mistakes’ [2013]RLR 73.
• [3] See p 159, above, for the definition of mistake. In Wright v National Westminster Bank pic [2014]EWHC 3158 (Ch), [11], Norris J confirmed that there was no need to establish that the mistake was induced bymisrepresentation or fraud.
• [4] As Millett J had recognized in Gibbon v Mitchell [1990] 1 WLR 1304.
• [5] Relying on Ogilvie v Littleboy (1897) 13 TLR 399, 400 (Lindley LJ). Affirmed by the House of Lords:Ogilvie v Allen (1899) 15 TLR294.
• [6] Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108, [122]. 307 Ibid, [123]. 308 Ibid, [126].
• [7] 309 Ibid. 310 See also Kennedy v Kennedy [2014] EWHC 4129 (Ch).
• [8] [2014] EWHC 3158 (Ch).
• [9] This point had not been invoked initially and the Supreme Court declined to permit the appellants toraise it on appeal.
• [10] Pitt v Holt [2013] UKSC 26, [2013] 2 AC, [135]. 4 Ibid, [135].
• [11] 315 Kennedy v Kennedy [2014] EWHC 4129 (Ch), [39] (Etherton C). 316 See p 182, above.