- Published on
SQE – Equity and Trust – Rescission
Case Scenario
The trustees of the Morgan Family Trust transfer valuable trust assets into a newly created discretionary trust after receiving professional tax advice. The advisers assure the trustees that the arrangement will avoid a substantial inheritance tax liability.
Several years later, the trustees discover that the advice was incorrect. Instead of avoiding tax, the transaction created a very large and unexpected tax charge which significantly reduced the value of the trust fund.
The beneficiaries argue that the trustees entered the transaction based on a serious mistake and apply to court seeking rescission of the transaction.
Separately, one trustee improperly transfers trust property to a third party in breach of trust. The beneficiaries seek to reverse the transfer and restore the property to the trust.
The issue is whether rescission is available.
Rescission
Definition
Rescission is an equitable remedy that sets aside or reverses a transaction.
The aim is to restore the parties to the position they occupied before the transaction occurred.
The transaction is effectively “unwound.”
Purpose of Rescission
Rescission is used where a transaction has occurred in circumstances that are:
Rescission in Trust Law
In trust law, rescission may be used where:
Practical Application
Improper Transfer of Trust Assets
Suppose trustees improperly transfer trust property out of the trust.
The court may rescind the transaction and order the asset returned.
This can sometimes occur even where the property has passed into the hands of a third party, although third-party rights may complicate recovery.
Mistake as a Ground for Rescission
A major ground for rescission is serious mistake.
However, not every mistake is sufficient.
The mistake must be fundamental or sufficiently serious.
Pitt v Holt
Facts
Trustees established a discretionary trust after receiving incorrect tax advice.
The arrangement unintentionally triggered significant tax consequences.
The trustees sought rescission.
Supreme Court Decision
The Supreme Court allowed rescission because the trustees acted under a sufficiently serious mistake.
Lord Walker explained that the mistake must relate to:
“of sufficient gravity.”
Meaning of “Sufficient Gravity”
The mistake must be so serious that it would be unfair or unconscionable to leave the transaction standing.
Minor misunderstandings are not enough.
Examples of Serious Mistakes
Possible grounds include:
Difference Between Rescission and Damages
Rescission
Cancels the transaction itself.
Focuses on reversing the arrangement.
Damages or Compensation
Leaves the transaction intact but awards money for losses.
Difference Between Rescission and Restitution
Rescission
Sets aside the transaction.
Restitution
Returns benefits or property after rescission or unjust enrichment.
Restitution often follows rescission because once the transaction is cancelled, property or money must usually be returned.
Bars to Rescission
Rescission may be refused where:
Practical Solution to the Scenario
Incorrect Tax Advice
The trustees relied on fundamentally mistaken professional advice.
The tax consequences were central to the transaction.
The court would likely consider the mistake sufficiently serious under Pitt v Holt.
The transaction may therefore be rescinded.
Improper Transfer of Trust Property
Where trust assets were transferred improperly, the court may reverse the transfer and restore the property to the trust.
This protects beneficiaries from losses caused by breach of trust.
Key SQE Principles
Rescission:
Further Research
Important Cases
Pitt v Holt
Important for:
Car & Universal Finance Co Ltd v Caldwell
Important for rescission and fraudulent transactions.
Leaf v International Galleries
Important for bars to rescission and lapse of time.
Conclusion
Rescission is an equitable remedy allowing courts to reverse transactions where they were entered into under serious mistake, unconscionable conduct, or breach of fiduciary duty. In trust law, rescission is especially important where trustees improperly transfer assets or act based on fundamentally mistaken assumptions. The remedy aims to restore fairness by unwinding defective transactions and returning parties to their original positions.
Case Scenario
The trustees of the Morgan Family Trust transfer valuable trust assets into a newly created discretionary trust after receiving professional tax advice. The advisers assure the trustees that the arrangement will avoid a substantial inheritance tax liability.
Several years later, the trustees discover that the advice was incorrect. Instead of avoiding tax, the transaction created a very large and unexpected tax charge which significantly reduced the value of the trust fund.
The beneficiaries argue that the trustees entered the transaction based on a serious mistake and apply to court seeking rescission of the transaction.
Separately, one trustee improperly transfers trust property to a third party in breach of trust. The beneficiaries seek to reverse the transfer and restore the property to the trust.
The issue is whether rescission is available.
Rescission
Definition
Rescission is an equitable remedy that sets aside or reverses a transaction.
The aim is to restore the parties to the position they occupied before the transaction occurred.
The transaction is effectively “unwound.”
Purpose of Rescission
Rescission is used where a transaction has occurred in circumstances that are:
- unconscionable;
- fundamentally mistaken;
- induced by wrongdoing;
- morally improper;
- legally defective.
Rescission in Trust Law
In trust law, rescission may be used where:
- trust property was improperly transferred;
- trustees acted under serious mistake;
- fiduciary duties were breached;
- unconscionable conduct occurred.
Practical Application
Improper Transfer of Trust Assets
Suppose trustees improperly transfer trust property out of the trust.
The court may rescind the transaction and order the asset returned.
This can sometimes occur even where the property has passed into the hands of a third party, although third-party rights may complicate recovery.
Mistake as a Ground for Rescission
A major ground for rescission is serious mistake.
However, not every mistake is sufficient.
The mistake must be fundamental or sufficiently serious.
Pitt v Holt
Facts
Trustees established a discretionary trust after receiving incorrect tax advice.
The arrangement unintentionally triggered significant tax consequences.
The trustees sought rescission.
Supreme Court Decision
The Supreme Court allowed rescission because the trustees acted under a sufficiently serious mistake.
Lord Walker explained that the mistake must relate to:
- the legal nature or character of the transaction; or
- an essential matter of fact or law fundamental to the transaction.
“of sufficient gravity.”
Meaning of “Sufficient Gravity”
The mistake must be so serious that it would be unfair or unconscionable to leave the transaction standing.
Minor misunderstandings are not enough.
Examples of Serious Mistakes
Possible grounds include:
- major tax consequences;
- misunderstanding ownership rights;
- misunderstanding legal effect of a trust;
- incorrect assumptions fundamental to the transaction.
Difference Between Rescission and Damages
Rescission
Cancels the transaction itself.
Focuses on reversing the arrangement.
Damages or Compensation
Leaves the transaction intact but awards money for losses.
Difference Between Rescission and Restitution
Rescission
Sets aside the transaction.
Restitution
Returns benefits or property after rescission or unjust enrichment.
Restitution often follows rescission because once the transaction is cancelled, property or money must usually be returned.
Bars to Rescission
Rescission may be refused where:
- restoration is impossible;
- third-party rights intervene;
- excessive delay occurs;
- the transaction has already been affirmed.
Practical Solution to the Scenario
Incorrect Tax Advice
The trustees relied on fundamentally mistaken professional advice.
The tax consequences were central to the transaction.
The court would likely consider the mistake sufficiently serious under Pitt v Holt.
The transaction may therefore be rescinded.
Improper Transfer of Trust Property
Where trust assets were transferred improperly, the court may reverse the transfer and restore the property to the trust.
This protects beneficiaries from losses caused by breach of trust.
Key SQE Principles
Rescission:
- is an equitable remedy;
- reverses transactions;
- restores parties to their original position;
- commonly arises in cases involving mistake, unconscionability, or breach of fiduciary duty.
Further Research
Important Cases
Pitt v Holt
Important for:
- rescission for mistake;
- seriousness of mistake;
- tax consequences and trusts.
Car & Universal Finance Co Ltd v Caldwell
Important for rescission and fraudulent transactions.
Leaf v International Galleries
Important for bars to rescission and lapse of time.
Conclusion
Rescission is an equitable remedy allowing courts to reverse transactions where they were entered into under serious mistake, unconscionable conduct, or breach of fiduciary duty. In trust law, rescission is especially important where trustees improperly transfer assets or act based on fundamentally mistaken assumptions. The remedy aims to restore fairness by unwinding defective transactions and returning parties to their original positions.
0 Comments