Deeds of Variation and Deeds of Rectification: what is the difference and which should I use?

Varying a legal document such as a trust deed because it contains incorrect or outdated details, requires a decision about what type of document to use to make the change.

If a document contains a mistake, then it can be ‘rectified’ using a Deed of Rectification: this seeks to correct the mistake as if it had never been made. Rectification is an equitable remedy which allows parties to correct an error which occurred due to common mistake, as if it had never been made.

If a document has information that is out of date or no longer relevant, then it can be varied using a Deed of Variation, which involves amending it from the time a new document or deed of variation is executed. In contrast to rectification, variation relies on general principles of contract law which allow parties to agree to amend the terms of the document.

This article explains how to determine whether rectification or variation depending on what is being fixed in a legal document.  It also summarises important legal principles which underpin rectification and variation of documents.

What is required: rectification or variation?

Legal documents commonly contain details which are incorrect or out of date, and need to be updated. Examples include party details (such as the name or address of an individual) or the name of a trust or company listed in the document.

When deciding whether to amend or rectify, the parties should consider:

1. Are the details which need to be changed incorrect because they were mistakenly recorded when the document was prepared; or
2. Are they incorrect because the relevant details have changed since the time at which the document was prepared?

If the answer to question 1 is ‘yes’ then rectification may be available, however it is also important to consider other factors (such as evidence available to support the conclusion a common mistake occurred) as set out below. If the circumstances in question 2 apply, then variation of the document will be appropriate.

Requirements for Deed of Rectification

The High Court of Australia has held that the purpose of the equitable remedy of rectification is to ensure that a written instrument conforms with ‘the true agreement of the parties’ where it ‘by common mistake fails to express that agreement accurately’[1].

As noted above, adopting the approach of ‘rectification’ can be appropriate where the details which were entered in a document when it was prepared were not correct or were recorded incorrectly as a result of a mistake. Such a mistake – where the mistake is made by both parties - may arise where:

• The party preparing the deed was given instructions to prepare the deed using correct details but mistakenly entered incorrect details.
• The persons on whose behalf the document is being prepared, provided instructions which included incorrect spelling of the name of a party or entity.
• The parties to the document incorrectly stated factual details in the original document.
• The parties wrote an incorrect date on the signed original document.

However, parties must be careful about using rectification, and will likely need legal advice. The law states that certain conditions must be met for rectification to be available. They are as follows:

• Intention: First, the parties need to show they held a common intention when forming the agreement to enter the document, which continued until the time the document was executed.
• Mistake: Second, they must establish that a mistake occurred which has resulted in the document not reflecting the parties’ common intention.
• Correction: Third, they must be able to prove that when the document is rectified, the error or mistake would be corrected and the document would properly reflect the parties’ common intentions.

The parties’ common intention at the relevant time will usually be determined by reference to their correspondence or statements at the time of the agreement.

It is important to consider each of the elements set out above and ensure that the evidence available supports the conclusion that each of the required conditions for rectification is present, before proceeding with entering into a Deed of Rectification.

Requirements for Deed of Variation

In contrast to circumstances which require rectification, ‘variation’ is required where the details of a document need to be amended because they have changed (or the parties have agreed to change them) after the date on which the document was entered into.

Such variations may relate to:

• agreements to change operative provisions of a document;
• updating a document such as a trust deed where the details of a party (such as the name or address of a trustee or beneficiary) have changed; or
• amending a trust deed to change features of the trust such as the identity of a trustee or beneficiary or the name of the trust itself.

Generally speaking, the principles of contract law apply in respect of an agreement to vary and must be satisfied in order for the variation to be effective.

The parties also need to understand the variation clauses in the document. While some types of legal documents can be amended simply by agreement between all the original parties to the document, some documents, such as trust deeds, will often impose additional requirements (such as consent of the trust’s appointor). Parties seeking to vary a document must therefore ensure that they read the relevant variation clause carefully and comply with all of its requirements in order to ensure that the variation is effective.

In the context of varying trust deeds to change key features of the trust, it is also important to consider the issue of ‘resettlement’ which arises if the proposed changes are so fundamental that it could be held to give rise to an entirely new trust. In such circumstances, if the trust holds dutiable property, this may give rise to duty being payable upon ‘settlement’. As such, any parties considering variations to trust deed which may result in resettlement should obtain legal advice to ensure they properly understand the potential implications of the variations.

Who should the parties be?

When rectifying a document, because the rectification is to address a ‘common mistake’, as a general rule all the parties to the original document will need to sign the document and attest to their common intention and common mistake, and to how it will be rectified. Best practice is also to effect the rectification in accordance with any additional requirements of the document’s variation provisions.

 In relation to varying documents other than for the purpose of rectification, the first task is to identify the document’s variation clause(s), which person or persons have the power to vary and, or alternatively, which persons need to agree to the variation. Again, as a general rule, all the original parties to the document will need to agree to the variation. Best practice will involve obtaining legal advice because many forms of documents – such as estate planning documents, company law documents and trust documents – have special rules governing their execution and amendment.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

• What is the appropriate governing law jurisdiction for my trust deed?
• Be careful when varying a trust deed for a trust that holds property! A change in ‘beneficial ownership’ may result in transfer duty
• E-signing? Time for a refresher on electronic execution
• Re Pickering: Court rescues a trust deed without a variation power!
  
  

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[1]Simic v New South Wales Land and Housing Corporation [2016] HCA 47 citing Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350; [1973] HCA 23.