Disputed Wills: Supreme Court’s New Commercial Contract Approach to Rectification

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In a recent landmark decision by the Supreme Court (the UK former House of Lords) the Law Lords unanimously rectified Mirror Wills on the grounds of clerical error.
They overturned the rulings of the High Court and Court of Appeal, where a stricter interpretation had applied historically. The new approach, including where relevant, applying Commercial Contract Law principles to interpretation has been welcomed as a victory for common sense and flexibility, giving effect to the clear intention of the Testators.
Facts
Mr and Mrs Rawlings were husband and wife who had made “Mirror Wills” in 1999, each leaving their estates to the other, with the survivor leaving their estate to Terry Marley, whom they treated as their adopted son. They had chosen to exclude from the Wills their two biological sons, Terry and Michael Rawlings.
Unfortunately, they had each signed the wrong Will. This meant that neither Will was valid. This wasn’t spotted when Mrs Rawlings died in 2003. After Mr Rawlings’ death in 2006 the discrepancy came to light.
The adopted son applied to the High Court for Mr Rawlings’ Will to be rectified. He claimed the couple clearly intended to leave their estates to him. The High Court ruled against him, deciding that the Wills were invalid. It was impossible to go behind that, therefore Mr and Mrs Rawlings’ estates passed to their estranged sons under the Intestacy Rules.
On a strict traditional approach, their “Wills” could not be rectified by the Court, because neither document satisfied the strict minimum criteria to qualify as a “Will” under s9 of the Wills Act 1837. The document didn’t have Mr Rawlings’ knowledge and approval, accordingly the law on rectification was not applicable. The Judge also held that even if the document could be construed as a “Will”, she was not able to rectify it under s20 of the Administration of Justice Act 1982, which permits rectification where there is a ‘clerical error’, as this was usually limited to typing errors.
Terry Marley’s appeal to the Court of Appeal failed. The Appeal Judges regretted that they had no choice and upheld Proudman J’s decision. In a highly anticipated judgment, the Supreme Court has now reversed the lower Courts’ decision and granted the appeal. Accordingly, the couple’s “adopted” son, Terry Marley, inherits as the couple intended
The Court held that a document does not have to be a valid “Will” within the legal definition, nor have the Testator’s knowledge and approval for it to be treated as a “Will” and subject to rectification.

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Supreme Court Decision
In a much wider interpretation than had tied the lower Courts’ hands, the Supreme Court found that the couple signing the other’s Will by mistake did constitute a “clerical error” under s.20 of the Administration of Justice Act 1982. It would be artificially restrictive to perpetuate a narrow interpretation. The Court held that the Will should be rectified to contain the true wording of the Will Mr Rawlings ought to have signed.
Whilst not decisive in this case, the judgment includes an important development to the law on interpretation of Wills, likely to have far-reaching implications for future cases. The Supreme Court held that if part of a Will is ambiguous and the true meaning has to be decided, the same approach can be adopted as when interpreting a commercial contract. This is to give effect to the intention of the parties (or party) involved. This comparison between Wills and construction of commercial contracts is a new development in the Law, where (except if s21 of the AJA 1982 applied), the intention is identified by interpreting the words used in the light of:

• their ordinary and natural meaning;
• the overall purpose of the document;
• any other provisions of the document;
• the facts known or assumed by the parties when the Will was executed; and
• common sense
• but, discounting subjective evidence of any party’s intentions

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Comment
Although Mr Rawlings’ remaining Estate amounted to approximately £70,000, the ramifications of the judgment are wide ranging. The scope for the Courts to rectify wills and codicils on the basis of clerical error has been extended. The decision adopts a common sense approach to implement the true wishes of the Testators, although it obviously also underlines the importance of adhering to the strict execution formalities under the Act, which may be questionable with the popularity of DIY Wills.
It remains to be seen to what extent this widening of ‘clerical error’ and the Contract Law innovation placing importance on the ‘intention’ of the Testator will impact interpretation of Wills in future.
Although there are concerns that broadening the scope of ‘clerical error’ could “open the floodgates” of litigation, the judgment was highly fact-specific regarding Mirror Wills. The Courts are experienced in resolving borderline cases and justice demanded that the previous artificially narrow interpretations should be relaxed. There was compelling evidence of the deceased’s’ intentions and future cases are likely to be decided on the individual facts. The courts endeavour to carry out Testators’ clear wishes and the decision in Lord Neuberger’s judgment is in line with that principle where everyone is entitled to dispose of their estate as they choose. It is to be hoped that this liberalizing of interpretation and rectification will throw off the restrictive shackles that led to Terry Marley having to pursue two appeals before Mr and Mrs Rawlings’ wishes were realised.

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HASTINGS BASS: PROTECTION FOR TRUSTEES REDUCED

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The Court of Appeal handed down two decisions in July 2011 in favour of HMRC. The decisions substantially restrict protection for Trustees under the longstanding Rule in Re: Hastings Bass [1974] EWCA Civ 13.
The Court of Appeal heard both cases together, commenting that some of the case law evolving from Hastings Bass had been incorrect. HMRC’s Appeals against the application of the Rule was allowed in both Pitt v Holt and Futter v Futter [2011] EWCA Civ 197.

In both cases, the action taken by the Trustees/Fiduciaries had been as a result of professional advice, but there had been unexpected adverse tax consequences. Previously it was thought that where a Trustee or Fiduciary had exercised a discretion mistakenly which resulted in unintended consequences, especially where acting with professional advice the court would exercise discretion and interfere with the Trustees’ decision. This would arise by applying to the court to have their decision or act rendered void or voidable.

The Judiciary have over recent years expressed disapproval of the way that the Rule in re Hastings Bass was being so widely applied.

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The outcome is that it is less likely in future that Trustees will be able to avoid adverse consequences of the exercise of discretion by applying to the court for such problematic decisions to be set aside. Instead Trustees are more likely to be at risk of facing claims from Beneficiaries. In turn, the Trustees may have to face the more difficult prospect of considering a claim for professional negligence against their professional advisors.

The rationale is that in relying upon professional advice, Trustees are not in breach of their fiduciary duty if it turns out that the advice given to them was materially wrong. The Court of Appeal held that in such circumstances the Trustees’ decision taken in reliance on that advice is not void or voidable and cannot be interfered with or “corrected” by the court. As such, Trustees who follow advice in particular on tax from apparently competent advisors would not be regarded as being in breach of their duties.

Consideration was also given to the alternative ground of mistake, but it was held that the tests to qualify for the equitable remedy of mistake had not been fulfilled.

The result is that the Rule in Hastings Bass is restricted to pure Trust principles. Rather than Trustees applying to the court on an uncontested basis, in future it is likely to be for the Beneficiaries to challenge the Trustees’ actions if they wish to have them set aside.

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Trustees and professional advisors will note that in the leading Judgment of Lloyd LJ ( paragraph 220) he suggested that the Beneficiaries remedies

“….. lie not in the realms of equity, but by way of a claim for damages for professional negligence ….”.

It is understood that whilst the Court of Appeal refused the Trustees in Futter v Futter permission to appeal, permission may be sought from the Supreme Court.

J Paul Sykes LLB LLM
First Published July 2011

WHEN DIRECTORS FALL OUT

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BREAKING THE DEADLOCK

Managing Director exceeded his powers
Smith –v- Butler [2012] EWCA Civ 314
The Court of Appeal Civil Division on 15 March 2012 decided that the Managing Director had exceeded his authority in taking action against the Company Chairman by suspending him and excluding him from the premises.

Background
The Managing Director, Mr Butler was the minority shareholder. The only other shareholder was Mr Smith who held the majority and was Company Chairman. Both were Directors and the Board was completed by a third, the Group Finance Director. There was no Shareholders Agreement.

Mr Smith was intending to appoint a Chief Executive Officer to the Board and there were cross allegations between the shareholders of financial impropriety. The two other Directors then suspended Mr Smith, requiring him to leave the company premises and he was excluded from the business.

 

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HHJ Behrens sitting at the Chancery Division, Leeds District Registry held that this was in breach of the Articles of Association which required a quorum of two Directors, one of whom had to be Mr Smith. A quorum of two was also required for Shareholder meetings. Mr Smith had attempted to call a Shareholders meeting. However there was deadlock, because Mr Butler refused to attend.

Decision
The Court of Appeal upheld the Judge’s decision that the suspension of Mr Smith was invalid. The Chairman’s entitlement to an order under Section 306 of the Companies Act 2006 was also upheld. This permits the court to require a General Meeting to take place where it has become impractical to hold a meeting. There was no implied or actual authority for the Managing Director to suspend the Chairman. To resolve the log jam, under Section 306 (4) the court was entitled to deem that a single member at the meeting constituted a quorum. Because Mr Butler had no authority to direct the company to actively defend Mr Smith’s applications, Mr Butler was held liable to pay the company’s costs on an indemnity basis. This was because proceedings had been brought in the company’s name without authority.
The company could have avoided significant expense by filing a simple Defence confirming it would abide by the order made by the court.

Action Points
The decision helps clarify the powers of Managing Directors on which there is surprisingly little case law. The court was prepared to protect the balance of power as provided for in the Articles, which were unusual in that they specifically provided that Mr Smith as majority shareholder had to be one of a quorum of two. His entitlement to exercise his ordinary voting rights on a point and remove Directors was upheld.

This perhaps underlines the importance of also having a properly drawn up Shareholders Agreement in small companies/quasi partnerships. This would usually govern the relationship between the majority and minority shareholders.

Instead of taking the steps held to be unlawful, the route of redress for Mr Butler would have been by way of an unfair prejudice claim or a derivative action. Mr Butler had the right to seek relief from allegedly unfairly prejudicial conduct by the majority shareholder under Section 994 of the 2006 Act by presenting a Petition for an order that either he or the company purchase Mr Smith’s shares at fair value. Alternatively, Mr Butler could have brought a statutory derivative action against Mr Smith in accordance with Part 11 of the 2006 Act.

J Paul Sykes LLB LLM
First published 15 March 2012