In a decision that will impact on both trustees and beneficiaries, the Supreme Court of England and Wales has given its judgment in the combined cases of Pitt v Holt and Futter v Futter, resolving debate about the rule in re Hastings-Bass and the doctrine of mistake, which have been much debated by both courts and academics alike.
Despite the criticism of many, the Hastings- Bass rule has been used for many years to relieve trustees of the consequences of their errors, being most commonly used for unforeseen tax liabilities. A succession of first instance cases developed a principle that the exercise of a discretionary power by trustees may be declared void and set aside on the basis that the trustees failed to take into account relevant matters when exercising the power. The principle has been adapted and has been applied to circumstances quite different to those in the Hastings-Bass case. The Supreme Court's decision has now reviewed and restricted the use of this rule, narrowing the scope of the Hastings-Bass rule to that which was originally intended. As a result trustees may no longer rely on the Hastings-Bass rule where they have acted within their powers and in accordance with professional advice, even if that advice proves to have been erroneous.
The facts of both Pitt v Holt and Futter v Futter are well known. Pitt v Holt concerned a discretionary trust that was established in accordance with legal advice and intended to be a tax efficient structure. However, the advice had failed to take into consideration inheritance tax consequences and consequently there was a significant tax liability due. The trustees sought to have the trust set aside under the Hastings-Bass rule or on the ground of mistake. Similarly, Futter v Futter again concerned an unforeseen tax consequence, this time capital gains tax, which resulted when powers of advancement were exercised. Again, incorrect legal advice had been given that the advancements would be tax efficient and the trustees sought to rely on Hastings-Bass to have the transactions declared void. Mistake was not pleaded in Futter.
At first instance, both cases were successful in using Hastings-Bass to relieve the trusts of the tax consequences. However, both the Court of Appeal and, now, the Supreme Court held the rule in Hastings-Bass had been incorrectly applied in both of these cases, suggesting that the rule has been misapplied by the lower courts in other cases.
The Supreme Court held that the rule in Hastings-Bass should only apply where the trustees exercise a discretionary power, and act within the terms of that power, but in some way breach their duties in respect of that exercise. In such circumstances the act may be voidable at the instance of the beneficiaries. The act will not be void.
What is important is whether the trustee has failed to consider what he was under a duty to consider. If the Trustee has used proper care and diligence in obtaining information and advice, the Trustee cannot be in breach of its duties merely because that advice was incorrect. This would be contrary to principle, to subject trustees who conscientiously follow advice to a strict form of liability.
In the two cases the Court noted it would be unfair to find that the trustees had breached their duty, when they had taken all relevant considerations into account by obtaining and relying upon professional advice.
The Court did, however, allow Pitt v Holt to succeed on the ground of mistake and in doing so created a simplified test for mistake, removing the effect/consequence distinction. To undo a disposition on the grounds of mistake, there must be a causative mistake of sufficient gravity and it must be unjust to leave the mistake uncorrected. To establish gravity, there must be a mistake as to either the legal character or nature of the transaction or to some matter of fact/law that is basic to the transaction. This could be a mistake relating to the effect of the transaction or to its wider consequences. Ignorance, although not itself a mistake, can in certain circumstances result in a false assumption that is a mistake in law.
Of particular note is that the Supreme Court has shifted the English test for mistake into near alignment with the Jersey test (being that in Re the A Trust), notwithstanding that Lloyd LJ expressly considered and rejected the Jersey test in Pitt v Holt and Futter v Futter at Court of Appeal level. Despite Lloyd LJ's views, the Jersey Court maintained its position after the English Court of Appeal decision, whilst it was pending appeal to the Supreme Court. In the case of Re S Settlement, the Jersey Court gave detailed reasons for preferring its own prior, and more simple, approach. It has now been borne out by the Supreme Court that this was the right approach to take. We wait to see whether the Guernsey Court decides to re-visit its reliance on the effect/consequence distinction, currently adopted in Dervan and MD Events v Concept Fiduciaries Ltd and Others.
How the Hastings-Bass rule will be developed in Guernsey and Jersey will remain to be seen, but the Jersey court has decided obiter in Re B Life Interest Settlement that the new, narrower view of the test is the better one. Furthermore, trustees will benefit from clarity that they will not be liable for breach of duty if they have acted in reliance on apparently competent professional advice.
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