Why Aren’t We Using Rectification in BDBN Matters?

For those not familiar with the superannuation laws, it can seem almost overwhelming the extent to which members must go to ensure that their binding death benefit nominations (BDBNs) are effective. For most people their superannuation entitlements represent one of their largest assets, if not the largest asset. Not having the superannuation entitlements flow the way that was intended, particularly having taken the step of attempting to put in place a BDBN, can seem a harsh outcome.

As with any legal instrument, ambiguities, errors, or unforeseen circumstances may arise, leading to potential challenges and disputes. It is surprising, therefore, that recent cases where courts have held that BDBNs were ineffective because of what might be called “technicalities”, the remedy of equitable rectification has not been considered. This article explores the concept of equitable rectification and whether it can and should be relied upon more frequently in these cases.

Where members get it wrong

The first notable instance where the courts were asked to consider a defective BDBN is that of Munro v Munro. [1] The member in that case (a lawyer) prepared a BDBN (with the assistance of his accountant and financial planner) which nominated the “trustee of deceased estate”. The court held that this nomination did not comply with the fund’s trust deed or the requirements of the Superannuation Industry (Supervision) Regulations 1994 which provided that only dependants (as that term is defined) or the legal personal representative of the deceased could be a beneficiary of the member’s death benefit. Because of the defect in the BDBN, it was not binding on the fund trustee, and the trustee was then conferred with a discretion regarding the payment of the benefit.

In 2017, the South Australian Court of Appeal was asked to decide in the case of Cantor Management Services Pty Ltd v Booth [2] whether a BDBN which was otherwise correctly executed was binding where there was a question about whether the BDBN had been properly served on the corporate trustee. The BDBN was signed by the member and left at his accountant’s office, which also was the registered office of the corporate trustee of the fund. The court decided that is was sufficient to constitute service for the BDBN to be held at the registered office of the company. The validity of the BDBN was upheld.

More recently, the Queensland Supreme Court was asked a similar question to that posed in Cantor Management Services in relation to a BDBN prepared by a fund member. In Williams v Williams [3] the member completed the BDBN. The trust deed for the fund required the trustees of the fund to be given written notice of the nomination. The fund had two individual trustees: the member, and one of the member’s sons. The member as trustee was clearly aware and therefore had notice of the nomination. However, the other trustee was not provided with notice of the BDBN.

The court determined that notice had not properly been given. The court in reaching this conclusion was asked to consider whether provisions in the trust deed which provided that “words importing number include the singular number and the plural number” would assist on the basis that the notice requirement could be read down to only require that one trustee be notified. The court held that the context required that all trustees receive notice. As this did not occur the nomination was held to be invalid.

Arguably in each of these cases the intention of the member was abundantly clear, but was not fulfilled in two cases, and but for the accountant also being the registered office of the trustee in the Cantor Management Services case, might not have been fulfilled in that case.

It begs the question: is there any remedy available to address this, given that it seems such a harsh outcome?

Does this issue arise in the broader estate context?

An obvious corollary is to ask why this issue does not arise more frequently in the broader estate planning context. Specifically, why are there not the same concerns with respect to wills?

Essentially the answer is that the relevant acts governing the interpretation of wills provide a specific mechanism for addressing small deficiencies in execution of a will or the testamentary intention of the testator. For example, in Queensland, section 18 of the Succession Act 1981 allows the court to dispense with the formal requirements for execution of a will, or its alteration or revocation, having regard to evidence of the testator’s execution of the will, or their testamentary intention.

No such mechanism arises formally under the superannuation laws.

The Need for Equitable Rectification

Equitable rectification is designed to address mistakes in the execution of powers of appointment (such as those in BDBNs) by allowing courts to intervene. It aims to ensure that the actual intent of the appointor is realised.

Principles of Equitable Rectification

The principles of equitable rectification revolve around three key elements:

1. Evidence of Intent: Courts will examine extrinsic evidence to discern the true intention of the appointor (in the case of a BDBN, the member). This evidence can include, but is not limited to, communications with legal advisors, prior drafts of the document, and other contemporaneous documents.

2. Common Mistake: Equitable rectification typically requires the presence of a “common mistake.” This means that there was a clear and mutual mistake made by both the appointor and the draftsperson in the creation of the power of appointment. A mistake is only capable of rectification if the effect of the document is different to the intent of the appointor. For example, in Munro it is clearly arguable that the intent of the member was for the benefit to pass to his estate and be dealt with under his will. The mistake was nominating the “trustee of deceased estate” rather than “executor” or “legal personal representative (of deceased estate)”.

Mistake does not extend to other circumstances. For example, say a member prepared a nomination in favour of her adult son, without appreciating that her son may be liable to tax on the death benefit. It might be shown that if the member had been aware of this effect, she might have instead left the benefit to her spouse. Whilst it might be said that a “mistake” arose (e.g. not to obtain proper advice, or not to take into account the tax effect), when the member signed the BDBN, it gave effect to her intention at the time, and therefore could not be said to be a mistake that could be rectified by equity.

3. Clear Rectification: Any changes to the powers of appointment must be evident and directly address the mistake or uncertainty present in the original document. Rectification should align with the appointor's actual intentions and not introduce new ambiguities.

Why is rectification not relied upon more often?

There appear to be no cases (at least none reported) where rectification was considered as a means of addressing the otherwise clear mistake in the way in which the BDBN was executed and effected. Whilst rectification is generally reserved for cases where the error or ambiguity is clear, and the intention of the appointor is beyond doubt, it is nevertheless surprising that it has not been considered more frequently in addressing shortcomings with BDBNs.

The Munro case would appear to have been a prime candidate for rectification to be argued.

It is less clear whether rectification would be available in the Williams case. In that case, it was not the drafting of the nomination that was defective, rather the satisfaction of the requirements of the trust deed with respect to notification of the trustees. It is unclear whether the member thought that it was sufficient that having knowledge himself (as both member and trustee) was sufficient to satisfy the notice requirements. And if the member held that view, would that be sufficient to constitute a mistake that could be rectified by equity.

Arguably the member might have completed the form, but decided not to proceed with it, therefore explaining why he had not provided it to his son as co-trustee. It does, however, appear to be an incongruous outcome compared to that in Cantor Management Services where seemingly through good fortune the BDBN was held at the registered office of the trustee.

[1] Munro v Munro [2015] QSC 61

[2] Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122

[3] Williams v Williams [2023] QSC 90