Case digest: Scarfe v Matthews

Following the death of Bernard Matthews, the famous turkey farmer, a dispute arose in relation to his estate that, perhaps unsurprisingly, was reported in the national newspapers.

The focus of those reports was on the fact that Mr Matthews’ children had chosen to thwart his intention that his villa in the south of France called Villa Bolinha be left to his partner of twenty years, Odile Marteyn (Odile). Despite the popular interest, this was not of legal significance. It merely involved the exercise of forced heirship rights under French law.

Having exercised these rights, a question arose as to how the French tax payable in respect of Villa Bolinha was to borne. The answer to that question, which came before Mr Nicholas Strauss QC (sitting as a deputy High Court judge), turned on the construction of Mr Matthews’ will and on whether one could read an implied term into that will.

FACTS:

Mr Matthews was survived by his wife (from whom he had been separated for nearly thirty years) and their three adopted children. He was also survived by George, who was his natural son from another relationship.

The issue before the court was between Odile and the adopted children. It arose as follows. Mr Matthews left three wills. By one French will, he left Villa Bolinha to Odile. By another French will he left his movable property in France to her as well.

By his English will, he left a legacy of £1m to Odile and the residue of his estate (valued at about £40m) to George. The English will provided that any tax of whatever nature or wherever arising that should become payable ‘in any part of the world (including France) as a consequence of my death’ should be paid out of his residuary estate.

In addition to his three wills, Mr Matthews also left a letter addressed to his wife ‘and all members of my family’. The letter explained his thinking in relation to the bequest of the villa and the exclusion of his adopted children from benefit under any of the wills.

In particular, it explained that he had provided financially for each of the adopted children over many years and that all of them were housed with at least one property. He wished that Odile, who had supported him unfailingly for many years, should continue to occupy and enjoy Villa Bolinha.

In making his wills and expressing his wishes in this way, Mr Matthews was aware that, under French law, his children were entitled to 75 per cent of Villa Bolinha and that, accordingly, the most he could leave to Odile was 25 per cent. He nevertheless hoped that they would not enforce these rights and the letter to his family expressed that wish.

George respected his father’s wishes but the adopted children asserted their rights under French law. The effect of this was that Odile could inherit only 43.75 per cent of the villa. She accepted that she could not challenge the exercise by the adopted children of their French rights.

However, in addition to claiming their proportion of the villa, the adopted children asserted that their liability to French inheritance tax arising out of the enforcement of their rights should be discharged by the executors out of the English estate. The adopted children’s liability to French tax amounted to approximately 2.6m Euros. The executors sought the directions of the court.

Odile contended that the equitable doctrine of election applied. The doctrine operates where a will contains two gifts, one of the testator’s property to A and one of A’s property to B. The doctrine prevents A from taking the benefit but avoiding the burden: if he elects to receive the testator’s property he must give away his own property to, or otherwise compensate, B.

Odile argued that she was entitled to be compensated by the adopted children, as a result of their accepting benefits under French law contrary to the French will, by an amount equal to the amount payable by the executors to cover the tax payable by the adopted children under French law.

The adopted children argued that the doctrine of election did not apply. George was neutral: he agreed to pay an amount equal to the tax on the adopted children’s share of the villa, either to them if the doctrine did not apply, or to Odile if it did.

Given their respective positions in relation to the doctrine of election, it was in the interests of the competing parties to treat the relevant provision of the English will as a legacy of the tax payable by the adopted children. This had to be the adopted children’s position because otherwise they would have no entitlement to be paid the tax for which they were liable.

It suited Odile too, because it allowed her to claim an amount equal to the tax by way of compensation under the doctrine of election, whereas otherwise it would fall into residue for the benefit of George. It was George who had an interest in arguing to the contrary but he chose not to do so.

Nevertheless, from the outset, the judge had concerns about the construction of the relevant provision of the will and proceeded to decide the case on a construction point rather than on the basis of the arguments advanced by the parties on the doctrine of election.

HELD:

1. It was questionable whether the relevant words in the English will (“tax payable... in consequence of my death”) were to be read literally, so as to include tax which was payable neither by the executors nor by any beneficiary under that will, but rather by parties who were exercising their rights under French law contrary to the testator’s wishes.

This literal reading was unlikely to be what Mr Matthews had intended. To the judge’s mind, the issue was whether after the words “payable... in consequence of my death” there should be included “by the executors or by any beneficiary under my wills”.

2. In deciding this issue, the essential question, as always in matters of construction, was: what did the testator say, expressly or by necessary implication? In this regard, the principles governing the construction of contracts (for which see Lord Hoffmann’s speech in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 at 912-3) applied equally to the construction of wills.

In the present case, two points were worth emphasising. First, just as evidence of the negotiations between parties to a contract was admissible for the purpose of establishing what was known to the parties when they entered into the contract, so too were communications between a testator and his lawyers prior to the execution of his will admissible for the purpose of proving what he knew at the time the will was executed. In Mr Matthews’ case, this correspondence showed that he knew there were French inheritance rights that he could not overcome.

Second, as a matter of contract law, a term would be implied into a contract as a matter of construction if that was what the reasonable observer, with knowledge of the relevant background, would understand the contract to mean. The test was whether the suggested implied term was one which, read against the express terms of the contract and its background, constituted the one and only answer consistent with the rest of the agreement, i.e. a term would be implied if the court were sure that this was what the parties would have provided expressly had they thought through the issue. In the judge’s view, the same approach would apply to the construction of a will.

3. The judge considered that the application of this approach in Mr Matthews’ case was straightforward. It was clear from the terms of the will that he wanted to ensure, as far as he could, that Odile should inherit Villa Bolinha free of tax. The judge accepted the submission (made in the course of argument on the issue of election) that it was inconceivable that Mr Matthews could have intended that, if his children should act contrary to his wishes in relation to the French property, they should also be paid the tax, for which they alone were liable, out of his estate.

It was clear to the judge that Mr Matthews had not thought through the position that would arise under the will in relation to French tax in respect of the villa in the event that his children disregarded his wishes. Had he done so, the only possible answer to which he could have come was that the relevant clause should not apply to tax payable by the children.

In the judge’s view, that was what the reasonable observer would take him to have meant and, accordingly, that was how the relevant clause should be construed.

4. For that reason, the judge held that the adopted children had no right to be indemnified out of the English estate in relation to their French tax liability. Given that conclusion, there was no need to consider the issue of election. Nevertheless, since the conclusion on the issue of construction had been reached without any argument being advanced in its favour by any party, he did, in fact, go on to consider the issue of election, which he also decided in favour of Odile.

The concept of an ‘implied term’ in a will is one that might be surprising to a private client practitioner. It is true that the principles for construing wills are very similar in many respects to those for construing contracts (as acknowledged by the Court of Appeal in RSPCA v Sharp [2011] 1 WLR 980) but, as Patten LJ warned in the RSPCA case, it is dangerous to approach the assessment of a testator’s intentions other than through the language of his will.

It will be interesting to see if the case of Bernard Matthews’ will heralds a move towards assessing a testator’s intention on the basis of what he would have said in his will had he thought about the point.

Joseph Goldsmith is a barrister at 5 Stone Buildings www.5sblaw.com/home/home.asp. He can be contacted at clerks@5sblaw.com.