England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		3 February 2014

1. Judges sitting in the Chancery Division are not infrequently asked to rectify a written deed or contract where all parties to it or beneficiaries thereunder unite in seeking (or not opposing) that relief, the sole purpose of the relief is fiscal^[1], and HMRC, though joined as a party and not consenting to the relief, chooses not to participate in the proceedings, other than reminding the legal representatives of the parties of their obligation to place before the court the reports of two particular relevant cases. I am probably not alone in finding that situation most unsatisfactory, even if - as I must suppose - dictated by budgetary restraints: absence of adversarial argument in this area imposes an invidious burden on the court and is more likely to result in debatable judgments and inconsistent decisions. The present case adds a further, and so far apparently unaddressed, procedural twist which will emerge later in the course of my narrative.
2. The case concerns the estate of the late Raymond Ayres who died intestate in a car accident on 4 June 2008. His widow ((Claire() is the First Defendant. The First Claimant ((Sheila() is his sister. Mr and Mrs Ayres had no children, so that under the intestacy rules the estate would, after receipt by Claire of the personal chattels and the statutory legacy of (200,000, have passed to Sheila and Claire in equal shares. Claire was advised that she would recover more through an application against the estate under the Inheritance (Provision for Family and Dependants) Act 1975. In addition, the devolution on Sheila of her 50% residuary share led to an IHT charge on that sum which could be easily avoided by an appropriately drafted Deed of Variation between the two beneficiaries. Such estate planning is widely used and well-known to probate solicitors. In effect, the saving in IHT can be used to increase (in both relative and absolute terms) the residuary share received by the surviving spouse, while effecting no reduction in the absolute sum received by the other beneficiary.
3. On this basis, Sheila and Claire were minded to reach a compromise, and a deed was drafted in correspondence between Charles Russell LLP and Roythornes, their respective solicitors, resulting in a Deed of Variation dated 22 January 2010 ((the Deed(). By virtue of section 142(1) of the Inheritance Tax Act, 1984, such deeds have the effect that the Act applies as if the variation had been effected by the deceased and thus is treated for IHT purposes as relating back to the date of death.
4. The general concept was that (1) the residuary estate should be divided 30/70 between Sheila and Claire (2) Sheila should receive immediately (312,000, the amount of the nil rate exemption (3) the remainder of her share should be held in trust for a period during which the income would be paid to Claire and only thereafter held as to capital and income for Sheila absolutely.
5. The reason for a provision such as item (3) is that Claire(s interest in possession at the date of death (as a result of the relation back) would entitle the estate to rely on the spouse(s total exemption as regards the capital sum^[2]. Importantly, however, that is qualified by section 142(4) of the Act as follows:

(Where a variation to which subsection (1) above applies results in property being held in trust for a person for a period which ends not more than two years after the death, this Act shall apply as if the disposition of the property that takes effect at the end of the period had had effect from the beginning of the period ......

The key words for present purposes are those which I have underlined.

6. Clause 5 of the Deed reads:

(The balance of Sheila(s Share ... shall be held by Claire and Sheila as Trustees on trust to pay the net income therefrom to Claire for the period of twenty four months from the date of the death of the late Dr Ayres and subject thereto as to both capital and income for Sheila for her own use and benefit absolutely....

I have again underlined the key words, which are to be compared with those in section 142(4).

7. On the basis that a period of twenty-four months is the same as, and therefore not more than, a period of two years, it might be thought that the trust created by Clause 5 was of insufficient length (albeit by 24 hours) to escape the effect of section 142(4), in which case those monies, as part of Sheila(s share from the start, would not benefit from the spouse(s exemption. Such was indeed the position adopted by HMRC when presented with the deed in support of the estate(s claim to that exemption.
8. The riposte, eventually embodied in paragraphs 12 to 14.1 of the Particulars of Claim in this action, to which HMRC was made one of the two defendants, was three-fold, contending that:

(1) section 142(4), properly interpreted, does not require the beneficial interest to extend beyond midnight on the second anniversary of the death; but if that is wrong

(2) Clause 5 of the Deed, properly interpreted, should be read as if the words (the day after... had been included before (the date of death of the late Dr Ayres( (and the court was asked so to declare); or

(3) Clause 5 of the Deed should be rectified by insertion of exactly the same words (and an order to this effect is sought).

9. HMRC adopted the position - in reliance on Autologic Holdings plc v IRC [2006] 1 AC 118 - that items (1) and (2) fell within the exclusive jurisdiction of the tax appeal tribunals, and intimated that it would seek to strike out those claims on that basis. At the same time, it took the view that, because rectification could only be granted, and as a matter of discretion, in the ordinary courts, the High Court was properly seised of item (3). On this basis, and by agreement, the claimant discontinued the proceedings save as regards the claim for rectification, and HMRC intimated that it would await the result of that claim before issuing a notice of determination of the IHT liability, while not intending to take any active part in opposing it. Following its usual practice HMRC requested that the claimant(s counsel should ensure that all relevant materials, countervailing arguments and authorities (including Racal Group Services Ltd v Ashmore [1995] STC 1151 and Allnut v Wilding [2007] EWCA Civ 412) were put before the court. Though that request was loyally complied with by counsel for the claimant, I would still have benefited greatly from hearing any counterargument advanced and elaborated by HMRC itself if and to the extent that it considered it correct^[3].
10. The result is reminiscent of a double Escher staircase.

(a) Though the rectification sought in the High Court (under item (3)) is claimed only if the claimant is incorrect in its construction of section 142(4), adjudication of that question has been abandoned to the tax tribunal, but only to be determined - if ever - after the High Court has ruled on the rectification claim.

(b) The rectification claim presupposes that the words in the Deed did not correctly express the intentions of the parties^[4]. That depends on the meaning and effect of those words, the determination of which has also been abandoned to the tax tribunal but again only to be determined - if ever - after the decision in this action.

11. In truth, as recent developments in the case-law make increasingly clear, the separation of construction (and the implication of terms) from rectification is essentially artificial. The only practical difference in almost all cases is that in the former the court may not have regard to intentions expressed in the course of negotiations, though the frontier with (genesis and purpose... material is rarely clear. In civilian systems, where the search is always for what the parties actually agreed, the fact that the parties have signed a written contract does not affect the content of that enquiry or require it to be implemented by an order changing the wording of the document. In forensic practice, the notionally two-stage English approach generally makes little difference, since claims based on construction and rectification are typically heard together. It is only in an unusual situation such as that facing me that they are pulled, unnaturally, apart.
12. In these circumstances, logic might suggest that if the tax tribunal has exclusive jurisdiction to determine the meaning of a deed or contract for tax purposes the same should be true of its meaning as potentially rectified. HMRC appears to believe that the discretionary nature of rectification precludes this. But in reality there is no discretion in the strict sense: rectification is in practice ordered or not simply according to whether certain preconditions are satisfied. And though the order for rectification may historically have contemplated the physical alteration of the document under court authority, an order to rectify a contract is now typically in effect no more than a declaration as to what the parties truly agreed. If that reality were recognised, one might have thought that, while it cannot formally rectify the wording of a written contract, a tax tribunal should be able to determine the tax consequences of the parties... agreement on the basis of their actual intentions even where these were not accurately expressed in the written document which sought to record them, and be prepared where appropriately satisfied by the evidence to look behind that document to ascertain them.
13. Equally, it is unreal to stipulate that the High Court should deal with the rectification claim while withholding from it the ability to determine the actual meaning of the contractual words. In the present case, it is obvious that the true meaning of both the statute and Clause 5 of the Deed are important in determining whether the words of the Deed were included by mistake and, if so, by mistake of a nature which justifies rectification. Without embarking on a review of the issues, it is obvious that a key question for the court is likely to be whether any (and, if so, what) mistake was made as to the meaning of the words used in Clause 5 and/or as to the requirements of section 142(4)).
14. Uninstructed by any debate, I would have inclined to the view that the court would have power to determine all issues which arise incidentally in the rectification claim and are necessary for its decision, regardless of whether they overlap with matters entrusted to the tax tribunal, and been surprised if that approach were precluded by Autologic. However, Counsel for the claimant was insistent that I should not go down that road, because it would, as he saw it, violate at least the spirit of the compact with HMRC. It would also have been necessary for me to invite submissions from HMRC on that question, and, if matters proceeded further, the substantive points which the court might have to decide as an incident of the rectification claim.
15. When I enquired of counsel how in practice I could decide that the words of Clause 5 did not express the parties... intentions, a precondition for rectification, without determining what, read in context and with the increasingly liberal approach to admissible interpretative material, was the meaning and effect of those words, his first response was that I should proceed on the stated assumption that the words did not create a period beyond the limits imposed by section 142(4) (a regrettably ambiguous assumption, since it might be due to the meaning of the statute rather than that of Clause 5). I suggested that he might search for authority considering whether the court could order rectification without having established, if it was not conceded, that the change in wording was in fact required to express correctly the mistakenly recorded intentions of the parties. In a post-hearing note, he drew my attention to two cases, one in the Privy Council and the other in Australia, where courts have ordered rectification ex abundanti cautela: see Standard Portland Cement Co Pty Ltd v Good [1982] 57 ALJR 151 and Frankins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 (where further Australian authorities are also cited). These are however cases where the court had already determined the meaning of the contract in the claimant(s favour. A court may indicate (on the belt-and-braces principle) that, if it had taken a different view on construction, it would order rectification, from which it is a small (if perhaps not wholly logical) step to making such an order. The present situation is different. The question here is rather whether, when the court has not determined that the words of the written document have failed to express the parties( intentions - and a fortiori where no party is actively submitting that such is the case - it can order that they should be changed. For that proposition counsel for the claimant has failed to find any support in the case-law or elsewhere^[5].
16. It was then proposed by counsel that I should indicate if my view on rectification was negative, in which case the claimant might withdraw the claim. This is an inappropriate role for the court: its task is to give a reasoned judgment on a claim, not a uni-directional indication of what that judgment would or might be.
17. One solution to the jurisdictional split would be to have these related claims determined by the same judge, sitting both in the High Court and simultaneously in the tax tribunal, an arrangement which I understand to be possible by suitable liaison and co-operation in listing. It would however require a notice of determination against which the estate could appeal.
18. The most practical - and possibly cost-efficient - solution might however be agreement by HMRC to the revocation of the discontinuance and the hearing of the action as it was originally structured, in which I would welcome its active participation. Absent this, I may have to decide whether it would be right for me to determine all issues necessary to the resolution of the rectification claim, even if they would also arise in any appeal before the tribunal. If the claimant were to continue to insist that the court cannot or should not do so and therefore presents no argument addressed to these issues, the consequence might then be that the claim for rectification must fail because the claimant has not sought to establish that Clause 5 means something other than was mutually intended.
19. In these circumstances, I propose to adjourn this action to enable the claimant and HMRC to consider how best to proceed in the light of this judgment. The matter may be restored by either on short notice for further directions or argument or with a view to a final judgment, but I hope that this could be done jointly and with an agreed agenda for decision by the court.

Note 1    In reality, most actions are probably brought at the behest of solicitors potentially liable to their clients for the loss of a fiscal advantage (or the creation of an unnecessary fiscal disadvantage) through misdrafting - or, even more realistically, at the behest or insistence of the solicitors( PI insurers.    [Back]

Note 2    At the price of a higher IHT bill on the death of the surviving spouse, if earlier than another 7 years.    [Back]

Note 3    If satisfied by the evidence in favour of rectification, it might be thought that HMRC should positively agree to the relief. Indeed, in such a case, it is not to me apparent why the parties should be required to incur the unnecessary cost of obtaining an order: the assessment to tax could simply be made on what the evidence established to be the content of the real agreement made by the parties.    [Back]

Note 4    In a letter of 16 January 2013 HMRC pointed out that a claim for rectification would require the claimant to first concede that Clause 5 in unrectified form created a trust of insufficient length for the purpose of the statute. The claimant is however neither obliged nor minded to make such a concession.    [Back]

Note 5    Mere clarification of wording might in some cases appear a useful purpose, but is achieved as readily by a declaratory judgment as to meaning as by one cast as an order for rectification.    [Back]