What is the meaning and effect of the Deed of Rectification?
54 But who, for the purposes of the MJH Fixed Trust, is the "Second Absolute Beneficiary"?
55 Hayes approached the answering of this question in its submissions by reference to cases concerning the construction of commercial contracts. That there is an affinity as between the rules for the construction of contracts and those governing trusts, notwithstanding the distinction between contract and trusts may be accepted: Byrnes v Kendle (2011) 243 CLR 253, at 275, [59] and 286, [102], a case to which I was helpfully referred by the Commissioner.
56 The Commissioner submitted that there was no ambiguity present in the MJH Fixed Trust Deed. His submission was that the Second Absolute Beneficiary (cl 1.8) means the person described as such in Part 6 of the Schedule and that description is "GRAWLEX PTY LTD ACN 080 401 092 as trustee of the MJH Superannuation Fund". I agree that there is no patent ambiguity present but there is another category of ambiguity, latent ambiguity, long recognised in trust law.
57 In the current (19th, 2015) edition of Lewin on Trusts, the authors offer, at p 248, [6-013], this pithy and accurate description of a latent ambiguity in a trust instrument, "These are ambiguities or equivocations that are not apparent from a reading of the settlement, but appear only when the words of the settlement come to be applied to the circumstances that exist." That is this case.
58 The Commissioner submitted that regard might be had to surrounding circumstances only if there were an ambiguity present but, with consummate fairness, acknowledged that there was intermediate appellate authority to the effect that ambiguity might be found by reference to surrounding circumstances. The authority concerned is Cherry v Steele-Park (2017) 96 NSWLR 548, which was a contract, not a trust, case but is nonetheless presently instructive. In that case, at 566, [76], Leeming JA (Gleeson JA agreeing) stated:
There is now a deal of authority for the proposition that whether there is in truth a constructional choice available to a written contract cannot be determined without first at least considering evidence of surrounding circumstances.
This statement is followed by a comprehensive survey of authority which, in my respectful view, does indeed support the statement made by Leeming JA.
59 The relevant circumstances surrounding the execution of the MJH Fixed Trust Deed were events already recited but now desirably collated:
(a) the MJH Fixed Trust Deed was executed on 24 February 2010 between Mr John Ioannou as settlor and Hayes;
(b) on that same day, 24 February 2010, two further trusts were established:
(i) the MJH Trading Trust, of which MJH Trading Pty Ltd was trustee; and
(ii) the MJH Rural Unit Trust, of which Hayes is trustee.
60 Also as at 24 February 2010, there was a superannuation fund known as the "MJH Superannuation Fund" constituted, but its trustee, once Grawlex, no longer acted in that capacity, another corporation, Ragem then so acted.
61 Against this background, Hayes submitted that "the commercial purpose and object of the business structure was to ensure that the MJH Trading Trust would be a public trading trust, which required the MJH Superannuation Fund to hold an interest in the MJH Trading Trust through the MJH Fixed Trust". Better put, in my view, is that the events of 24 February 2010 were not coincidental and the surrounding circumstances mentioned disclose an ambiguity in the MJH Fixed Trust Deed and the existence of a related "constructional choice". Is it the reference to Grawlex or the capacity as trustee of the Superfund which is to be preferred? For the reason submitted by Hayes, the reference in the MJH Fixed Trust Deed to Grawlex as "Second Absolute Beneficiary" made no sense, unless it did indeed, as at 24 February 2010, act in the capacity as trustee of the Superfund. At the time of execution it was that capacity which was critical. The meaning to give to the nomination in Part 6 of the Schedule to the MJH Fixed Trust Deed as to who is the "Second Absolute Beneficiary" is therefore "the trustee for the time being of the MJH Superannuation Fund".
62 I reach that conclusion with some diffidence. That diffidence flows from Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 (Simic v New South Wales Land and Housing Corporation). The pertinent background facts of that case are accurately recited in the headnote:
A statutory corporation entered into a construction contract with a builder. A term of the contract required the builder to provide the corporation with instruments issued by a bank in the form of an unconditional promise to pay the corporation, as security for the purpose of ensuring the due and proper performance of the contract. The builder obtained two such instruments from a bank and provided them to the corporation. Both the builder and the bank had misstated the corporation's name and other information such that the amount in each instrument was expressed to be payable in favour of a named "Principal" that did not exist. The corporation made a demand for payment under each instrument. The bank refused to pay on the basis that the corporation was not the Principal named as payee in each instrument.
63 Against this background and reversing the New South Wales Court of Appeal, the High Court held that the Principal named in each instrument could not be construed as referring to the corporation instead of the named non-existent entity. The High Court's conclusion was that the demand did not comply with the instrument, and the discrepancies and errors were not minor or merely typographical. It followed that, consistent with the principle of strict compliance, it was not possible for the bank to accept a demand from the corporation. Instead, the Court ordered that the instruments should be rectified so that each referred to the corporation. That was on the basis that the actual common intention of the builder and the bank was that the instruments should operate in favour of the builder's counterparty to the construction contract, to provide security for the purpose of ensuring the builder's compliance with the construction contract.
64 The High Court's refusal in Simic v New South Wales Land and Housing Corporation to countenance the approach to and outcome of the construction of the instrument in question was heavily dependent on the principle of strict compliance, flowing from their commercial purpose (virtually equivalent to cash), which governs the legal effect and operation of performance bonds. That same feature does not attend the deed of trust in question here.
65 Simic v New South Wales Land and Housing Corporation is, in any event, of relevance for the observations made by French CJ as to the distinction, albeit not unrelated in practical operation, between permissible construction of a contract (or, one might add, deed of trust) and rectification of the same. French CJ stated, at 95-96, [18] and [20]:
18. At a conceptual level, construction and rectification of a contract are different processes. The first involves determination of the meaning of the words of the contract defined by reference to its text, context and purpose. Resort to extrinsic circumstances and things external to the contract may be necessary to identify its purpose and in determining the proper construction where there is a constructional choice. The question for constructional purposes is not about the real intentions of the parties, not what the parties meant to say, but what they actually said.
…
20. There is a conceptual distinction between construction and rectification but that does not mean that there is not a close connection in their practical operation. Professor Carter has pointed to the close relationship between construction and rectification and the pragmatic view that the fundamental difference between them lies in the ability to use the prior negotiations of the parties. However, he has properly acknowledged the difference of principle between mistakes which can be corrected by construction and those for which a formal order is required, commenting that:
The fact that rectification is a remedy informed by matters such as the prevention of unconscionable conduct must still have some relevance. (Footnote omitted.)
As to that, it may be added that the relevance is considerable given the historical and doctrinal bases upon which rectification is granted.
[Footnote references omitted]
66 Assuming, though, that resort to the surrounding circumstances is not permissible to reach the foregoing conclusion as a matter of construction, what is the effect of the Deed of Rectification?
67 On its face, the Deed of Rectification states (cl 1.2.3) that "the "Second Absolute Beneficiary" as described in Item 6 of the schedule of the [MJH Fixed Trust Deed] was described incorrectly". The Deed of Rectification at least purports to rectify the trust deed, as and from the establishment of the MJH Fixed Trust such that the reference in the schedule is to Ragem as trustee for the Superfund (cl 1.1.3 and cl 2.1).
68 Hayes did not seek the rectification of the MJH Fixed Trust Deed by a State Supreme Court in the exercise of a general jurisdiction in equity. Neither did it make any application to this Court for such an order as an incident of the allowing of its taxation appeal. That was first and foremost because of its primary contention, which I have upheld, as to the true construction the MJH Fixed Trust Deed. It was also because it submitted, contrary to the submission made by the Commissioner, that an order for rectification was unnecessary. Hayes submitted that the result for which it contended was achieved by the Deed of Rectification.
69 Support for Hayes' position is, it submitted, to be found in observations made by Hill J in Davis v Commissioner of Taxation (2000) 171 ALR 654 at [57] (Davis v Commissioner of Taxation). These must, necessarily, be read in the context of his Honour's preceding observations, at [55] - [56]:
55 Counsel for Mr McLeod submitted that the sales tax law had to be seen against the background of the general law: cf MacFarlane v FCT (1986) 86 ATC 4477 at 4486 and Zobory v FCT (1995) 129 ALR 484 at 486-7. So much may be accepted. But that does not mean that the Commissioner is bound by the legal position "as accepted by the parties" as was then submitted. The parties to an agreement can not effect a change to an agreement retrospectively so that the agreement between them is altered as against the rest of the world. The parties can, no doubt, enter into an agreement, binding as between them, that a prior agreement they have entered into will be construed in a particular way from the moment the prior agreement was entered into. But the original agreement will, so far as the Commissioner is concerned, govern their relationship until the time of its amendment. For example A and B may enter into an agreement which provides, inter alia, that certain income will, for the term of the agreement, be held by A in trust for B. Later the parties may as between them agree to alter the arrangement ab initio to provide that that income will not be held in trust for B, but will always be treated as belonging to A beneficially. The agreement will be binding inter partes, but for income tax purposes the income will, until the date of the agreement, still be treated as beneficially the income of B.
56 The example above noted should be distinguished from the case where parties have entered into an agreement under the mutual mistake that the document they have executed records the terms of their bargain when it does not. In such a case an application could be made to a court for rectification of the written document. But even where an order of a court is obtained to rectify the written agreement, the court order does not operate to alter the past. The order of the court merely recognises what has always been the case, namely that the true agreement between the parties was not that which they have mistakenly executed, but what they in truth agreed upon.
57 As an alternative to an order of rectification the parties could execute a deed rectifying their prior writing. That deed, if truly operating to record that the parties were under a mutual mistake, and also setting out what the parties acknowledge to be the true agreement between them would not, any more than a court order, actually alter the position as between the parties. It would merely record that agreement as it always was. Whether by court order or by deed, rectification requires that there be a mutual mistake, that is to say what is required is that there be a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had: cf Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd 95 ATC 4620. Mistake as to the revenue consequences of the agreement would not bring about the same result: Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384.
70 The points made by Hill J in Davis v Commissioner of Taxation, at [55] - [56], exactly correspond with some earlier observations made at trial and expressly approved on the later appeal to the Court of Appeal by Peter Gibson LJ (with whom Kennedy LJ and Sir Iain Glidewell agreed) in Racal Group Services Ltd v Ashmore [1995] STC 1151, at 1157 (Racal Group Services v Ashmore):
In my judgement, the principle…is that the court will make an order for rectification of a document if satisfied that it does not give effect to the true agreement or arrangement between the parties, or to the true intention of a grantor or covenantor and if satisfied that there is an issue, capable of being contested, between the parties or between the covenantor or a grantor and the person he intended to benefit, it being irrelevant first that rectification of the document is sought or consented to by them all, and second that rectification is desired because it has beneficial fiscal consequences. On the other hand, the court will not order rectification of a document as between the parties or as between a grantor or covenantor and an intended beneficiary, if their rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit.
71 I take the position to be as follows.
72 Rectification will only be ordered by a court of there is evidence of a mistaken expression of the true agreement between the parties. If there is such evidence, rectification will be ordered so as to bring that deed into conformity with the intention of the parties at the time it was executed: Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374, at 384-385 (Baird v BCE Holdings); Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 (Commissioner of Stamp Duties (NSW) v Carlenka); Simic v New South Wales Land and Housing Corporation, at 117, [103]. To be persuasive, the evidence would have to be sufficiently precise and specific to displace the hypothesis arising from execution of the document that it expressed the true intention: Simic v New South Wales Land and Housing Corporation, at 102, [41].
73 Simic v New South Wales Land and Housing Corporation, which was a New South Wales case, was decided against the background of an exercise of original jurisdiction in which a like evidentiary provision to s 140 of the Evidence Act 1995 (Cth) (Evidence Act) was applicable. As did its State equivalent in Simic v New South Wales Land and Housing Corporation, s 140(1) of that Act dictates that it is the civil standard of proof which is applicable in this proceeding. The observations made in Simic v New South Wales Land and Housing Corporation as to the clarity of proof required in order to order rectification, which draw upon authorities which preceded such statutory provision in respect of the applicable standard of proof, must be regarded as exemplifying the need, now flowing from s 140(2)(a) of the Evidence Act, to take into account the nature of the cause of action and the presumption that the written terms of a contract or settlement are the repository of what the parties thereto intended.
74 A mutual mistake by the parties as to revenue law consequences of the terms of a document which they had executed would not provide a basis upon which to order rectification: Baird v BCE Holdings; Davis v Commissioner of Taxation; Racal Group Services v Ashmore and, to like effect on this point, Baxter v Commissioner of Taxation (2002) 196 ALR 519 at [25]-[26]. It is not though a bar to rectification otherwise warranted on the evidence that a fiscal benefit will attend the legal consequence that a document as rectified will have effect from the date execution.
75 Neither of the cases cited by Hill J in Davis v Commissioner of Taxation, Baird v BCE Holdings and Commissioner of Stamp Duties (NSW) v Carlenka, was concerned with the effectiveness, without an order by a court for rectification, of a deed such as the Deed of Rectification. Yet it is plain enough from his Honour's observation that Hill J did not regard the practice of rectification by deed as uncommon. That the practice is not uncommon is confirmed not just by Baxter v Commissioner of Taxation but also by reference to the passage quoted from Racal Group Services Ltd v Ashmore and to a discussion in that case, at 1155-1157, by Peter Gibson LJ of earlier English authorities.
76 In relation to that practice, it seems to me that the position is that, if a deed of rectification has quelled any doubt or contest about an earlier instrument's intended meaning, there is no occasion for a court of equity to exercise its jurisdiction to order rectification. The requisite doubt or controversy need not be raised by a party to or person taking under the earlier instrument. The requisite doubt or controversy can be raised via a third party such as the Commissioner or HMRC. The Commissioner's disposition to regard the deed of Rectification as inefficacious is not an Australian idiosyncrasy.
77 A later United Kingdom case, Ashcroft v Barnsdale [2010] STC 2544; [2010] EWHC 1948 (Ashcroft v Barnsdale) offers assistance in relation to the practice exemplified by the Deed of Rectification and whether an order of rectification is both possible and appropriate.
78 The facts in Ashcroft v Barnsdale were as follows.
79 Charlotte Ashcroft (the deceased) died on 14 April 2006 leaving a Will under which she appointed her husband, David, and her brother, Andrew Barnsdale, as her executors and trustees. By cl 3 of her Will she left David "free of all duty and taxes payable at my death (a) the sum of TEN THOUSAND POUNDS and (b) All my freehold property situated in Surrey or Hampshire and occupied or farmed by me or me and my husband." By cl 4 and cl 5, the deceased gave the residue of her estate on trust for her two children (Helen and Richard) absolutely. Clause 6 contained an extended power of investment.
80 Charlotte's estate was worth approximately £1.7 million. The principal assets were farmland in Surrey worth about £585,000; shares and other investments worth about £995,000 and a share in a farming business worth about £80,000.
81 The Will was not efficient for tax purposes as the agricultural property was passing to the surviving spouse and the chargeable assets were falling into residue for the chargeable beneficiaries thus wasting Agricultural Property Relief at 100%. The estate's accountants suggested that a Deed of Variation be prepared in which David exchanged the farmland for part of the share portfolio. A Deed of Variation was prepared by the estate's solicitors on 24 August 2006 which provided that cl 3, 4 and 6 of the Will be deleted and the following clause be inserted:
2.1(a) I GIVE the sum of £410,000 FOUR HUNDRED AND TEN THOUSAND DOLLARS to such of my children as shall be living at the date of my death and if more than one in equal shares.
2.1(b) I GIVE to my children as shall be living at the date of my death my agricultural farmland known as Great Holt Farm Dockenfield Farnham Surrey and if more than one in equal share.
3 I GIVE DEVISE and BEQUEATH all my estate both realty and personalty whatsoever and wheresoever not otherwise disposed of by this my said will to my husband David Arnold Ashcroft.
82 There was no cl 3 in the Deed but by cl 4, which was headed "Executor's Undertaking", the executors undertook to administer the estate in accordance with the variation made by the Deed. Clause 5 of the Deed included the notices to Her Majesty's Revenue and Customs (HMRC) under s 142 of the Inheritance Tax Act 1984 (UK) and s 62 of the Taxation of Chargeable Gains Act 1992 (UK).
83 The Deed of Variation was mistaken in a number of ways:
(a) there was no cl 3 - the draftsman having apparently confused the new cl 3 of the Will with cl 3 of the Deed;
(b) the deletion of cl 3, 4 and 6 was wrong because the residuary gift to the children was actually contained in cl 5 of the original Will;
(c) the Deed left a sum of £410,000 to the children although the letter from the estate's accountant had suggested the sum should be £410,772; and
(d) on submission of the Inheritance Tax Account (Form IHT 200) to HMRC, it became apparent that the gift to the children had to be treated as 'free of tax' since there was no indication to the contrary and therefore had to be grossed up causing a further £33,000 of inheritance tax to be due, which reduced the residuary estate.
84 Initially, the parties sought to correct the mistake by executing a deed of rectification dated 20 September 2007 which was submitted to HMRC under cover of a letter dated the same date. In that letter, the estate's solicitors asked HMRC to revise the inheritance tax position. HMRC refused to do this, stating that the parties would need to apply to the court for rectification. HMRC said they would not seek to be joined as a party to the application and would be bound by the court's decision.
85 Against this background, an application was made to the Chancery Division of the High Court of England and Wales for rectification. It was heard and determined by his Honour Judge Hodge QC, sitting as a judge of that court. His Honour offered, at 2552, [15], what, in my respectful view is an attractive and accurate summary of what is and is not the function of rectification. It is, "to enable the court to put the record straight by correcting a mistake in the way in which the parties have chosen to record their transaction; it does not empower the court to change the substance of that transaction or to correct an error in the transaction itself". If a rectification order is made, the instrument as rectified takes effect from the time of its execution. There is no "taxable fact" which is altered. The effect of rectification is to confirm that the instrument as rectified has been ever thus.
86 In Ashcroft v Barnsdale, none of the parties to the deed of variation which was the subject of the later deed of rectification contested the application for rectification. The deed of rectification was in evidence, as is its equivalent in the present case. As to the deed of rectification, Judge Hodge QC observed, at 2553, [19], "the recitals to the 2007 deed of rectification afford hearsay evidence of the parties' true intentions".
87 It being in evidence, I consider that, were rectification sought and necessary, I could and should make like use of the Deed of Rectification in this case. Even though Mr Hayes has not given evidence on this point and Mr Ioannou has given neither oral nor affidavit evidence, each has subscribed to the Deed of Rectification. Considered against the background of the other instruments executed on 24 February 2010 and the original and then identity of the trustee of the Superfund, the statements in the Deed of Rectification as to "error" (background, cl C), "should have been, from the date the Trust was established, [Ragem as trustee for the Superfund]" (cl 1.1.3) and "described incorrectly" (cl 1.2.3) are, applying the requisite standard of proof, consistent only with a conclusion that the reference in the MJH Fixed Trust Deed to Grawlex was the result of a mutual mistake as to the identity of the trustee of the Superfund as at 24 February 2010. I do not accept the Commissioner's submission to the contrary.
88 As to the granting of relief by way of an order for rectification, in Ashcroft v Barnsdale Judge Hodge QC was satisfied, at 2554, [22], that the existence of the deed of rectification was not a bar to making of such an order, "there still remains an issue, capable of being contested between the parties, which will be addressed by an order for rectification. HMRC's letter of 19 October 2007 makes it clear that HMRC cannot accept the deed of rectification as having any effect for inheritance tax purposes unless the parties obtain a court order rectifying the deed of rectification" (it is apparent, elsewhere in [22] that the latter reference to the "deed of rectification" was inadvertent and ought to have been to the deed of variation).
89 Thus, in this case, the existence of the Deed of Rectification would not offer an obstacle to rectification. Utility in the making of an order would be demonstrated by the stance of the Commissioner. Further, as in Ashcroft v Barnsdale but unlike in Baird v BCE Holdings; Davis v Commissioner of Taxation and Baxter v Commissioner of Taxation, the mistake was not as to fiscal consequences. To the contrary, the existence of fiscal consequences serves in this case to confirm that the mistake was only ever as to identity. The present case is not, in my view, amenable to the criticisms recently voiced by Dr Simon Douglas of Jesus College, Oxford University in his article, "Misuse of Rectification in the Law of Trusts" (2018) 134 LQR 138, of some recent English cases where rectification has been ordered, seemingly in relation to what is in form and substance nothing more than a tax planning error.
90 Thus, were my conclusion as to the permissible construction of the MJH Fixed Trust Deed in error, I would have been prepared to order rectification as to correct the erroneous reference to Grawlex. In the circumstances prevailing in Simic v New South Wales Land and Housing Corporation, such an order was made as a sequel to the conclusion reached as to the impermissibility of the construction adopted in the judgment under appeal.
91 For completeness, I add that, in my view, the subject of rectification of the MJH Fixed Trust Deed was, for the purposes of s 32 of the Federal Court of Australia Act 1976 (Cth), associated with the jurisdiction invoked by the filing of the taxation appeal. The Court would possess jurisdiction to order rectification. In my respectful view, the references made by Hill J in Davis v Commissioner of Taxation at [57] in relation to the alternative of a deed of rectification refer to the efficacy inter partes of such a deed. Where the fiscal efficacy of rectification said to have been effected by deed is questioned, as for example by a revenue authority, it is necessary to apply for and prove an entitlement to an order for rectification. In that proceeding, the revenue authority should be joined, unless, as in Ashcroft v Barnsdale, it has signified that it will abide the order of the court. If the revenue authority chooses actively to contest rectification but rectification is ordered, one might expect that, in the ordinary course, costs would be awarded against it. Alternatively, as in in Ashcroft v Barnsdale, a revenue authority might choose to abide the order of the court in which rectification is sought, thereby not exposing itself to the prospect of an adverse costs order.
92 Thus, under the MJH Fixed Trust Deed, as a matter of construction, the "Second Absolute Beneficiary" is Ragem. If that construction is not permissible, that same result would permissibly (and should) be achieved by an order for the rectification of the MJH Fixed Trust Deed.
93 What follows from this is that, under cl 20 of the MJH Fixed Trust Deed, Ragem as trustee of the Superfund, had an option to acquire any asset forming part of the Trust Fund of the MJH Fixed Trust. That Trust Fund includes 20 units in the MJH Trading Trust, which constitutes 20% of the beneficial interest in its income and capital. Therefore, in each of the Relevant Years, Ragem, as trustee of the Superfund, had a right to acquire units in the MJH Trading Trust entitling it to 20% of the beneficial interests in the income and capital of the MJH Trading Trust.