NEW ZEALAND COURT OF APPEAL PROVIDES GUIDANCE FOR THE TEST OF RECTIFICATION OF A VOLUNTARY SETTLEMENT AND FINDS THE USE OF THE “BACKDOOR” METHOD TO BE AN ABUSE OF PROCESS

In the two cases set out below, the New Zealand Court of Appeal considered the circumstances in which there may be rectification of a deed entered into as part of a voluntary settlement and considered where reliance on one legal argument in order to get another issue before the court may amount to an abuse of process. These cases are of general application to other jurisdictions, therefore should be borne in mind when dealing with similar issues.Rectification

In Mahendra Singh, Geoffrey Hugh Bourchier and Darsan Singh as Trustees of the Shean Singh Family Trust v Gabriel Sebastian Ash CA726/2017 [2018] NZCA 310, the New Zealand Court of Appeal set aside an order for summary judgment on the basis that difficulty in proving a deceased’s intention did not make the rectification of a deed untenable.

Background

The Shean Singh Family Trust (the “Trust“) was established by Shean Singh (“Shean“) by a deed dated 23 December 1993. The Trust was established for Shean and his children with a vesting date of 23 December 2019. The “final beneficiaries” were Gabriel, Olivia (both children from Shean’s first marriage) and any other children of Shean born before the vesting date. The deed made no provision for any wife of Shean and there was no express provision for beneficiaries to be added or removed. Shean remarried in 1994 and had two children with his second wife, Darsan.

On 23 August 1996, the settlor and the trustees executed a deed varying the Trust by deleting the definition of “final beneficiaries” and inserted another defining them as Shean, Darsan, any children born to Shean and Darsan before the vesting date, Gabriel and Olivia. Darsan was also made a discretionary beneficiary. The vesting clause was also deleted and replaced with one providing that the Trust was to be held for Shean and in the event of his death for one half of the funds to go to Darsan and the other half to go to the final beneficiaries in equal shares, resulting in Darsan taking 60% of the trust’s assets, and Shean’s children only taking 10% each. Shean died in 2015.

The respondent, Gabriel, brought proceedings to challenge the validity of the 1996 variation. The trustees accepted that on its face the variation was invalid however sought rectification to provide for a power of variation for the original deed. The High Court granted Gabriel’s application for summary judgment in relation to the invalidity of the variation. The trustees appealed that finding.

Judgment

The Court of Appeal held that the test for summary judgment is well settled, with the onus being on the applicant to satisfy the court that there is no arguable defence to the claim. The Court of Appeal accepted the High Court’s analysis of a rectification in relation to a voluntary settlement; attention is placed on the settlor’s intention (Shean’s intention in 1996 when he initiated the variation of the deed).

The Court of Appeal therefore found that the evidence was sufficient to resist Gabriel’s application for summary judgment. This was so because the inference could be drawn that Shean wrongly believed the Trust deed had a power to vary and the independent trustee who was involved from the outset had sworn that Shean was of this belief. It could not be assumed because Shean was a lawyer that he was not capable of making a mistake and although there were deficiencies in the wording of the proposed clause, these were capable of correction.

It was accepted that it was difficult to prove Shean’s intentions; however it was not impossible, therefore there was an arguable basis for the rectification of the deed. Gabriel focused on the high hurdle the trustees would face with the rectification claim and said that the trustees lacked “clear and unambiguous” evidence of Shean’s intention. The Court of Appeal found this was not an appropriate matter for them to comment on at the summary judgment stage and allowed the matter to proceed to trial.

Comment

This case demonstrates that where it is difficult, but not impossible, to provide the necessary evidence to support the rectification of a deed, there still may be an arguably basis for rectification, allowing the argument to proceed to trial rather than being defeated by a summary judgment.

“Backdoor” proceedings

In James John Duncan Macfarlane v Perpetual Trust Limited CA316/2018 [2018] NZCA 311, the Court of Appeal found the appellant Mr Macfarlane’s argument that he had a right to lodge a caveat over trust property was a “backdoor” method of getting his concerns about the trustees before the Court rather than taking the correct legal avenues, which was found to be an abuse of process and warranted increased costs.

Background

In his will, Mr Macfarlane’s father had directed the family home (the “Property“) to be held on trust for his widow. In the event of her death or remarriage, the trustees were given unfettered discretion to wind up the trust and pay the capital to each of their seven children in such proportions as the trustees thought fit.

The terms of the trust were varied in 1965 by Court order. The trustees’ unfettered discretion was removed and the capital was notionally divided up into equal shares and apportioned between the children. Perpetual was appointed as sole trustee in 1992 by a further Court order, which provided that the assets of the estate were vested in Perpetual as trustee.

Mr Macfarlane lived with his widowed mother in the Property until she died in 2016, despite the fact the Property was badly damaged in an earthquake. Perpetual lodged an insurance claim for the earthquake damage however decided to sell the property in its damaged state. It entered into an agreement for sale and purchase, with a settlement date of 14 March 2018. Perpetual served Mr Macfarlane with a notice to vacate the property by 22 February 2018. On 9 February 2018, Mr Macfarlane registered a caveat over the title to the Property, preventing Perpetual from selling. Mr Macfarlane then applied to the High Court for an order that his caveat not lapse. Perpetual sought an order for the removal of the caveat together with an application for vacant possession and summary judgment. The High Court granted the applications made by Perpetual and Mr Macfarlane appealed.

Judgment

The Court of Appeal noted that the division of capital into notional shares in 1965 did not confer on any beneficiary a gift of any particular property, just a fixed proportionate interest in the residue. Mr Macfarlane accepted that, as a general rule, residual beneficiaries of an estate do not have a proprietary interest in any particular estate asset sufficient to support a caveat.  Instead, they just have a personal right to compel the administration of the estate, as established in Guardian Trust and Executors Co of New Zealand Ltd v Hall.  He argued however that this did not apply to this case for two reasons. First, that Perpetual had been acting as trustee not executor; therefore he had an equitable beneficial interest in the property sufficient to support the caveat. It was found in order for this to be the case the beneficiary must have more than a general interest in the proceeds from the sale of the property. Mr Macfarlane also conceded that Perpetual was able to sell the Property, he just objected to this particular sale.

Secondly, Mr Macfarlane argued that there had been impropriety on the part of Perpetual in relation to financial irregularities, its handling of the earthquake insurance claim, inadequate disclosure of information and its conduct in relation to the sale of the Property. He relied on an 1894 decision Re Bielfeld, Deceased, to argue that impropriety on the part of a trustee including a collusive or improper sale could or might of itself confer a caveatable interest in a beneficiary where one might not otherwise exist. The Court found the allegations of impropriety to be irrelevant to the issue of whether Mr Macfarlane had a caveatable interest and Re Bielfeld was distinguished because the caveator in that case was entitled to more than a mere share of residue.

The Court found Mr Macfarlane, and all the other residuary beneficiaries who supported the sale, were adequately protected without a caveat.

In relation to the application for vacant possession, Mr Macfarlane accepted that he did not have a legal entitlement to occupy the property however argued the notice was invalid as it was issued in bad faith.  However, the Court found there was no evidential foundation for such claims.

The Court held that Mr Macfarlane was essentially using the caveat procedure as a “backdoor” method of getting his concerns about Perpetual before the Court rather the more direct and correct legal avenues, which he considered too expensive. This was found to be an abuse of process which warranted a 20% uplift on costs.

Comment

Courts will find that the “backdoor” method of reliance on a legal argument with little or no footing to get a different issue in front of the Court is an abuse of process and may warrant an uplift in costs. The correct legal avenues to pursue a claim should be used, even where those avenues may be more expensive.

Richard Norridge
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