Oops-An $8Million dollar mistake! Rectification for Unilateral Mistake

It often happens that in preparing a legal document, there is an error in drafting which does not reflect the true intention of the parties. In most cases, the error is not significant, and can be quickly and easily rectified by mutual agreement in a simple document and at little cost. In some cases, there needs to be an application to the courts based on the equitable principles of rectification.

In Benaroon Pty Ltd v Larmar & Ors [2020] QCA, the mistake was a failure to include a beneficiary in a trust deed and the consequences were a potential tax liability of some $8Million dollars. Benaroon was the trustee of a family trust (LFT).

Mr Larmar, an accountant and the director of Benaroon, the trustee appellant had caused a family trust to be created in 1977.

The trust deed contained an error in drafting by the omission of the name of Mr Larmar, the director himself and his then wife as beneficiaries. It followed that neither of his 2 wives could be a “spouse of a beneficiary” but all of them had received distributions from the trust fund.

There was evidence that an incorrect precedent trust deed document had been used, but unfortunately, it omitted the relevant name of the director Mr Larmar as a beneficiary.

Benaroon sought a rectification of the trust deed 40 years after operation of the trust to include a beneficiary (the director and his then wife) on the basis that the trust deed (and its practical effect) did not conform with the actual intention of the directors.
The primary judge dismissed an application for rectification of the trust, finding that the evidence before the Court failed to provide clear and convincing evidence as to the trustee’s intention when the trust was created.

The key difficulty sought to be overcome by seeking rectification was the rather unfortunate fact that the Australian Taxation Office took the view, after an audit, that the second wife would be entitled to a tax refund if not a beneficiary of the LFT, but would have a tax liability of nearly $8 million if she is a beneficiary.

In order that the trust deed be rectified, Benaroon was required to meet the following criteria referred to in Public Trustee v Smith:

“… there must be clear and convincing evidence that at the time the trust deed was executed the trustee and the settlor had an actual intention as to the effect which the deed was intended to create which was different from the effect which the instrument did have in a clearly identified way. It must be demonstrated with clarity that the parties had a sufficiently precise intention that the court can determine both the substance and the detail of the precise variation to be made to the wording of the instrument.”

The Court of Appeal dismissed the appeal, and found no error in the primary judge’s finding that there was insufficient evidence to support the relief sought. In particular that:

• The director, Mr Larmar sought his then wife’s agreement prior to establishing the trust,
• had taken the document home and discussed it with her,
• there was no evidence of any intention based upon discussion as to the beneficiaries
• no clear and convincing evidence about Suzanne Larmar’s intention concerning who would benefit from capital and who would benefit from income, that is, which names should appear in the second and third schedules
• Mr Larmar has not sworn that he realised the deed executed was not the correct precedent trust deed, and intended the parties to be bound by any, and if so which, provisions in the deed actually executed.

Phillippides JA (with whom Morrison JA and Fraser JA agreed) concluded that:
“the function of the rectification jurisdiction, …is to reform the instrument so that it accords with the relevant intention, not to redraft it into a form it might have taken had the parties thought more about it at the time it was executed.”

The decision seems harsh in the circumstances, (and in its consequence) but it does demonstrate the onus lies on a party seeking rectification to present clear and cogent evidence that it was a mistake made at the time which contrary to the true intention of the parties to invoke the jurisdiction of the Court. It also demonstrates the risk associated in using precedent documents without reading them to ensure they accord with intention. Asking a court to “redraft” a document because of an unpleasant consequence (such as a large tax bill) without clear evidence of original intention and true unilateral mistake may result in failure to persuade a court to rectify the document.

If you have any concerns or questions about rectification of any documents, please contact us.

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