On Monday, I blogged about the recent decision of the Court of Appeal for Ontario in Teixeira v. Markgraf Estate where the Court held that delivery of a cheque for funds to be gifted was not sufficient to constitute delivery of the gift itself. The case also raises the issue of whether equity can step in to perfect a gift that might otherwise fail.
In the final portion of the decision, the Court adverted to the seemingly contradictory principles that “equity will not assist a volunteer” and “equity will not strive officiously to defeat a gift”.
The principle that “equity will not assist a volunteer” captures the notion that where a person receives a benefit for no consideration, equity will not impose an obligation in order to ensure the benefit is received. This leads, in the context of gifts, to the well-accepted principle that “equity will not perfect an imperfect gift”. On its face, this seems to indicate a requirement that all three elements of a valid gift be strictly met. Over time, however, case law has provided exceptions to the sometimes onerous third requirement that gifts be delivered to the recipient of the gift.
Exceptions to this rule can be found in cases such as Re Rose where the requirement of delivery of a gift was relaxed such that the requirement would be satisfied where the donor took all steps that could be expected of him to transfer legal title. In that case, the donor intended to transfer shares to the donee. The donor provided share transfer documents and the share certificates to the donee. However, the transfer of the shares required the corporation to consent to the transfer and register the shares, which occurred only after the donor’s death. The English Court of Appeal held that the shares were gifted at the point at which the shares were given to the donee, despite the fact that the transfer of title had not occurred (and could still be refused by the corporation).
In a more recent decision, Pennington v. Waine, the English Court of Appeal considered the exceptions to the rule that equity will not perfect an imperfect gift. The Court, citing the principle that “equity will not strive officiously to defeat a gift”, greatly expanded the situations in which equity may, in fact, perfect imperfect gifts. In that case, the Court held that equity could intervene to give effect to a gift if it would be unconscionable for the donor to change his or her mind.
The Court of Appeal for Ontario, in Teixeira v. Markgraf Estate, did not foreclose the possibility that in some cases, the principle established in Pennington v. Waine may be applied. Any application of the principle, however, would need to be applied on a principled basis and only where it would not conflict with settled law. Where the gift failed for lack of delivery as the gifted cheque was not cashed before death, the Court refused to intervene given the already settled case law that such a gift would fail.
All told, Teixeira v. Markgraf Estate rejects the wide-sweeping changes to the law on gifts set out in Pennington v Waine and affirms that equity will not, generally, step in to perfect an otherwise imperfect gift.
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Remedies for breach of trust are commonly sought in estate litigation, most notably in the context of a contested passing of accounts application. An executor who mismanages the estate assets, makes a bad investment, or distributes to a stranger rather than a beneficiary can easily be found to be liable for either breach of trust or breach of fiduciary duty or both.
The remedies available to the disappointed beneficiary can, however, be complex. AIB Group (UK) Plc v. Mark Redler & Co. Solicitors, a 2014 decision of the United Kingdom Supreme Court, provides a comprehensive multi-jurisdictional overview of this interesting area of law.
The case considered the remedies available to a bank when the solicitors it engaged to secure a loan against property failed to adequately secure the bank’s interest. The Court noted that, in considering the remedies available for breach of trust, the Court must consider the different obligations of a trustee in order to evaluate the remedies that may be available for a given breach, such as:
(i) a custodial stewardship duty (to preserve the assets of the trust);
(ii) a management stewardship duty (to manage the property with care), and
(iii) a duty of undivided loyalty (prohibiting a trustee from taking advantage of his or her position without fully informed consent of beneficiaries).
What is interesting from the perspective of an estates litigator is the Court’s observation that, “historically, the remedies for such breaches took the form of orders made after a process of accounting. The basis of the accounting would reflect the nature of the obligation. The operation of the process involved the court having a power, where appropriate, to “falsify” and to “surcharge.”
Falsification is another word for “disallow”; the Court will “falsify” the unauthorized breach of the custodial stewardship duty and require the trustee to make good the loss to the trust.
Although the terms are less commonly referenced in modern practice, surcharge and falsification are great examples of how courts provide remedies for breach of trust in the context of a contested passing of accounts.
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It is often the case that a testator may wish to make a significant inter vivos gift to one or more of their children. He or she may intend that such a gift is to be taken as either an advancement or in addition to a later inheritance. If, in preparing a Will and/or estate plan for a testator, a solicitor becomes aware of prior inter vivos gifts to the testator’s children, the solicitor should inquire further into the testator’s intention in this regard in the context of the estate plan.
Sometimes the dynamics in a family are such that any inequality as between siblings can become a serious issue, potentially leading to estate litigation following a testator’s death. If a testator is aware of this possibility, the testator should be alerted to the possible financial consequences of such a dispute. Of course, there is no way to guarantee that estate litigation will be avoided, but there are steps that can be taken in an estate plan to try to make the administration and distribution of an estate as smooth as possible.
One simple way of at least addressing the issue is to include a clear statement of the testator’s intentions in the Will, such as an indication that any gifts given during the testator’s lifetime are to be considered an advance, or should be given in addition to the child’s entitlement under the Will. Unfortunately, this will not necessarily avoid a fight amongst siblings if any of the children who have not received inter vivos gifts are not happy with the outcome, or if the child who did receive a gift expected to also receive an equal share of the parent’s estate.
An option for ensuring a truly equal distribution is a hotchpot clause. This is also an option if the testator does, in fact, intend that inter vivos gifts were to be given as an advancement on the child’s future inheritance, as is often the case.
A “hotchpot” clause will operate to take into account the value of gifts given during the testator’s lifetime in calculating the division of the estate, with any gifts previously given being subtracted from the portion given to the child in question. Effectively, the value of any substantial inter vivos gifts will be clawed back into the estate for the purpose of determining the value of the estate and the ultimate entitlement of the child or children who received such gifts. The end result of a hotchpot calculation will be that each child will receive from their parent, either inter vivos or from the estate, a share of exactly equal value. Hotchpot can be in relation to inter vivos gifts given, or to the forgiveness of outstanding loans given during the testator’s lifetime.
The concept of hotchpot is based on the equitable doctrine of ademption by advancement, also known as the presumption against double portions. This principle presumes that a parent intends equality between his children, such that if he or she leaves the residue to his or her children equally, but also made an inter vivos gift or advancement to one of the children, the rule will apply to bring the gift into hotchpot so that the intention of equality will not be altered.
Hotchpot, or ademption by advancement, also applies in the case of an intestacy. Section 25 of the Estates Administration Act, R.S.O. 1990, c. E.22, provides that if the child on an intestacy has been advanced assets, with such advancement being expressed by the deceased or acknowledged by the child in writing, the value of the advancement will be considered, for the purposes of s. 25, to be part of the estate to be distributed.
Accordingly, the default position when it comes to inter vivos gifts to a testator’s children will likely be equality, and as a consequence, some form of hotchpot calculation. Chances are that parents usually do intend to divide their estate equally amongst their children, so this rule will probably operate in line with the testator’s intentions in most cases. If a testator does wish to treat their children unequally, the estate plan must be carefully prepared with a view towards all possible consequences.
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The power of the Court to rectify any sort of legal instrument is a potent remedy; Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 at paras. 12-15 and 57 (S.C.C.). Ultimately, whether the context is a contract or a Will, the rationale is very much an equitable one – it is unfair to take advantage of an innocent mistake. In the context of rectification of drafting error in Wills, the
re are three requirements:
(1) where there is an accidental slip or omission because of a typographical or clerical error;
(2) where the testator’s instructions have been misunderstood; or
(3) where the testator’s instructions have not been carried out.
A recent example is The Bank of Nova Scotia Trust Company v Haugrud, 2016 ONSC 8150 (Ont. S.C.J.). Here an innocent mistake was manifested on the face of the Will in that there was a mistaken reference to the wrong class of shares in a certain corporation owned by the deceased. The Hon. Justice Mesbur held:
 Here, the lawyer who drafted the will unequivocally admits his mistakes. The context for the mistakes is confirmed by the accountant, who sets out the background of how the mistakes occurred. Essentially, the confusion around the class of shares arose because the accountant was referring to the initial reorganization plan for Davwel, instead of the slightly different plan that was ultimately put in place. Although the deceased clearly and accurately set out the shareholdings in his letter to the accountant, neither the accountant nor the lawyer used the correct information, and instead maintained their reference to the earlier plan regarding the class of shares. I conclude it was an accidental slip or omission that resulted in the mistake regarding the class of shares.
 I also conclude the drafting solicitor misunderstood or failed to carry out the testator’s instructions, in that he failed to refer to either the correct class of Davwel shares or to the correct number of shares that would have to be redeemed in order to carry out the testator’s instructions.
 All three criteria in Robinson have been met…
Here the power to rectify allowed the situation to be corrected. One might note that this equitable power is especially useful in that it provides the Court with a greater power than merely correcting a false description. In such cases the maxim demonstratio non nocet, cum de corpore constat (‘a false or mistaken description does not vitiate’) operates such that non-essential or surplus words which are inaccurate may be ignored provided that the remaining true descriptive words are sufficiently certain; Re Beauchamp (1975), 8 OR (2d) 2 (H.C.J.). It does not, however, allow for the addition of of the words that were in fact intended by the deceased.
Have a nice weekend!