Make No Mistake

It is now a little over 11 years since the UK Supreme Court (the Supreme Court) handed down its decision in the conjoined appeals in Pitt v Holt and Futter v Futter.¹ This article looks at the current state of play in the law and practice in Guernsey and Jersey in the areas of 'mistake' and Hastings-Bass applications.

For the purposes of the use of the terms in this article (and by way of broad reminder), the doctrine of mistake has typically been applied by the courts to set aside transfers of property into trust made on a mistaken understanding as to the effect of the transfer. Whereas, the rule in Hastings-Bass gave the court discretion to set aside an exercise of a power if the trustee failed to take into account relevant considerations that it ought to have when exercising the power or if the trustee took into account considerations that should have been disregarded.

Applications that are brought to seek orders to set aside trusts or dispositions into trust, or the exercise of a power within a trust on the grounds of mistake, often have at their core a complaint that advice (typically tax advice) was not obtained or was wrong or incomplete. The doctrines are therefore incredibly helpful in circumstances where the only alternative avenue for relief would be for settlors or trustees to litigate against professional advisors or beneficiaries to sue their trustees. As recognised by the courts on many occasions when noting that as an alternative, settlors and/or beneficiaries are generally not at fault in such circumstances and yet face the risk of loss through avoidable tax charges. To force them to incur further expense, in what may be uncertain litigation when the law allows for the avoidance of a decision made in breach of the trustees' duties or by reason of mistake, seems unnecessary, undesirable and unjust.²

The approach in the Crown Dependencies has been different, with Jersey opting for a legislated regime and Guernsey continuing to consider mistake and Hastings-Bass applications by reference to case law. An update on how those different approaches have been playing out in practice follows.

The position in Jersey: what can amount to a mistake?

The concept of mistake is well established in Jersey law. The original jurisdiction in Jersey law derived from earlier English and Welsh authority (some dating back to the 19th century) and by virtue of customary law.³ There were also relatively frequent applications seen before the Jersey court where trusts had been set aside on the grounds of mistake, pursuant to the provisions in art.11 of the Trusts (Jersey) Law 1984 (as amended) (the Jersey Law). However, in 2013, the Trusts (Amendment No.6) (Jersey) Law 2013 (the Amendment) enshrined into statute the doctrine of mistake as a matter of trust law. The Amendment introduced a suite of provisions into the Jersey Law (at arts.47B to 47J) that addressed the then-potential for uncertainty caused by the growing divergence between Jersey and English case law in respect of the Hastings-Bassjurisdiction. As a result, Jersey has a separate statutory framework for the law of mistake (provided by arts.47E and 47G), within which the ability to bring Hastings-Bass applications (provided by arts.47F and 47H) is preserved.

The test for mistake

The definition of a 'mistake' in the Jersey Law is broad and includes, but is not limited to, a mistake as to the effect of, any consequences of, or any of the advantages to be gained by, a transfer or other disposition of property to a trust, or the exercise of a power over (or in relation to) a trust or trust property.

When considering the court's jurisdiction to set aside a transfer of property onto a trust on the grounds of mistake, one of all of arts.11, 47E and 47G of the Jersey Law may be utilised, although the benefit of the new provisions is that they expressly provide for the ability to apply to set aside dispositions into trust as opposed to setting aside the entire trust. The latter can be the appropriate course where the creation of the trust has caused an unforeseen tax consequence; however, that is not always the case and later contributions of assets to a trust fund could themselves require setting aside (but not the entire structure).⁴

For all practical purposes, the statutory tests are identical to the customary law test and require a:

• mistake (of fact or law) by the settlor;
• finding that the settlor would not have entered into the transaction 'but for' the mistake; and
• finding that the mistake was of so serious a character as to render it unjust on the part of the donee to retain the property.

What constitutes a mistake?

An important point to note when ascertaining whether a mistake has been made is that it is not necessary for the court to determine precisely how the mistake arose. A unilateral, self-induced mistake may be grounds for relief just as much as an externally induced mistake or a shared mistake, provided it is serious and causative. The statutory provisions, like the equitable doctrine of mistake, do not distinguish between these two scenarios. The key issue is whether there was a false belief or assumption.⁵

Accordingly, it is not necessary for the court to ascribe blame for how the mistake arose, still less to determine whether the mistake arose from any breach of a duty of care and skill or a fiduciary duty. Article 47(4) of the Jersey Law expressly provides (in the context of what was a Hastings-Bass application) that:

This is an important feature of Jersey's statutory provisions as there had long been a tension arising where trustees were required to effectively admit to being in breach of duty in order to be able to seek relief. Ultimately, however, the Jersey court will take a careful look at the facts and circumstances of an application when determining if the final limb of the test has been met, namely whether it is just to grant relief.

Those general points aside, the following principles have emerged from recent decisions of the Jersey courts, which demonstrate how the law is being applied in practice:

• A lack of advice taken and, arguably therefore, some degree of ignorance on the part of the settlor does not undermine the fact of the mistake that was made. This situation was considered in In the matter of the K Trust;⁶ Representation of A In the Matter of the G Trust;⁷ and In the Matter of the G Trust.⁸ The circumstances were that settlors had transferred funds from UK-situs bank accounts to offshore trusts on the recommendation of their bankers but on the assumption that tax issues would necessarily have been taken into account or that, if advice were needed, the settlor would have been told. Orders were made, setting aside the trusts and/or transfers to the trusts where, as a consequence of the transfers, avoidable inheritance tax (IHT) liabilities were caused; that was notwithstanding that advice was not sought or was assumed to have been obtained but had not been.
• Where a settlor accepts advice that might have put them on notice that they should seek more detailed advice but ignores it, the court can still find it just to grant relief. In In the Matter of the B Trust,⁹ the settlor had received incomplete advice from a trust company at the time of transferring funds to a trust, which had failed to address the impact of the settlement on the settlor including, specifically, the potential for IHT liabilities to arise as a result of what he was later advised to be his domicile status (namely that he had not obtained a domicile of choice outside the UK at the time he made the gifts). The Royal Court of Jersey (the Jersey Court) declared the transfers by the settlor to the trust to be voidable and of no effect (although, would not go so far as sought by the settlor, refusing to order the return of funds to the settlor's wife, which would have potentially assisted in improving the settlor's tax position).
• A party can be aware of a possible risk but if that party is not aware of the extent of the risk, a mistake may have been made. The position could be different if the party ran a deliberate risk of being wrong. In Representation of Q re The R, S, T and U Trusts, the applicant was the settlor of four Jersey-law-governed trusts.¹⁰ It was submitted that those trusts had been established in 2009, based on advice from the trustees and counsel in respect of the settlor's domicile, which was argued at the time of the application to have been 'seriously deficient' in not advising, or not properly advising, on the nature and level of risk associated with the settlor's claim to be domiciled in Hong Kong or the ramifications of that not being the case. The settlor contended that, in light of the advice received, he was mistaken for the purposes of the Jersey Law. Specifically, the settlor did not recall being advised:
  • that there was a 'real risk' that His Majesty's Revenue and Customs (HMRC) would argue he was UK-domiciled in 2009;
  • of the monetary ramifications; and
  • that there was any real risk that HMRC might argue he had never lost his UK domicile of origin.

The Jersey Court found that the settlor did not believe, and had not been advised, that there was a risk of HMRC declaring that he had never lost his UK domicile. The Jersey Court said that the first part of the test was met on this ground alone. Further, however, the Jersey Court held that the settlor had been advised that there was only a negligible risk that HMRC may declare his domicile had reverted to his UK domicile of origin, whereas in fact the risk was high. It was noted that there was no analysis in Jersey as to whether an operative mistake can exist, notwithstanding that the relevant person was aware of some risk.

The position in Guernsey

Unlike Jersey, Guernsey does not have legislation providing rules and principles that apply to Hastings-Bass and/or mistakes claims. This is not to say such applications cannot be brought without any basis. In Guernsey, the Guernsey Court of Appeal (the Guernsey Court) has explained that Guernsey law should follow the revised approach to the Hastings-Bass jurisdiction as set out in Pitt v Holt.

Hastings-Bass jurisdiction

Dealing first with the Hastings-Bass jurisdiction, the leading authority in Guernsey on this subject is the Guernsey Court case of M v St Anne's Trustees Limited.¹¹

The facts of St Anne's were broadly as follows. M was the beneficiary of a retirement scheme from which he needed to borrow money to fund his making of a payment to his ex-wife under a divorce settlement. Advice was taken by M from his personal tax advisor regarding making repayment of the loan (which had to be done before M could receive any pension payments from the scheme), by transferring the shares in two companies each holding investment properties into the scheme. The advice he received was to the effect that he could do so without any adverse tax consequences. St Anne's Trustees, having neither taken their own tax advice nor enquired whether M had obtained his own, put the transaction into effect, which resulted in a potential UK tax liability for M of GBP1.8 million. At first instance, Lieutenant Bailiff Hazel Marshall KC refused to exercise her discretion to set aside the transfers of the shares in the property holding companies.

The important aspect of the Guernsey Court's decision, however, is its departure from the strict requirement of Pitt v Holt regarding the need for a finding that there has been breach of fiduciary duty for a Hastings-Bass application to be able to be brought.

Rather, in Guernsey law, a finding that a breach of duty (such as in this case, a breach of the duty of adequate deliberation), whether fiduciary or not, will be enough provided it is of sufficient seriousness for the Guernsey Court to exercise its discretion.

Although the Guernsey Court considered that the scope of the rule in Hastings-Bass applies in Guernsey to be of 'like effect' as in England, there remains scope for further development of the rule by the Guernsey Court. The Guernsey Court paid tribute to the first instance decision; however,¹² there were a number of aspects of the judgment that were held to be wrong and were overturned. Some of these were as follows.¹³

• It is necessary for there to be a breach of duty but not one that has a causal connection to damage to any beneficiary; the court will have jurisdiction to grant relief as a matter of discretion but, in the exercise of that discretion, the issue of loss or prejudice to the trust or its beneficiaries will be a material factor.
• The breach of the duty of adequate deliberation by the trustees in this case was sufficiently serious as to amount to a breach of fiduciary duty.
• Upon a finding of breach of duty, the decision in question is voidable and, accordingly, the court then has a discretion to exercise. However, it is not correct that the discretion can only be exercised, and the transaction in question set aside, where it is unconscionable not to do so.
• There are no additional hurdles for the court to exercise its discretion: '...the discretion should be exercised in favour of avoidance when the court feels it just to do so. There is no requirement for an "extreme" case'.
• The fact that, where there is a breach of trust, a beneficiary may be in a better position than an ordinary individual is not a reason for exercising the discretion against setting aside a transaction.
• Trustees are not under a duty to be right on every occasion. Whether there has been a breach of duty sufficient to engage the jurisdiction is dependent on whether it is of sufficient gravity, as once the threshold of seriousness is reached, the jurisdiction to grant relief arises. The seriousness of the breach is not then revisited by the court when deciding whether to exercise its discretion.
• The availability of a claim against professional advisors could potentially be of relevance when considering the exercise of discretion, although the cases will be very rare and the weight given to that factor should be small.

Having found that the lower court had erred in principle, the Guernsey Court considered that it was open to exercising its own discretion, which it did in favour of avoiding the transaction. The Guernsey Court stated that it was not possible to articulate an 'overriding test for the exercise of discretion', as every case will be fact-specific and it 'must be a decision for the court as to the outcome which it considers fair and reasonable', noting the likelihood that, absent relief, the beneficiaries will be left having to bring legal actions against the trustees and/or professional advisors.

Mistake

As regards the doctrine of mistake (generally), the Guernsey Court tends to apply Pitt v Holt. By way of reminder, in Pitt v Holt, the Supreme Court explained that a 'mistake must be distinguished from mere ignorance or inadvertence, and also from what scholars in the field of unjust enrichment refer to as 'misprediction' and that 'forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a false belief or assumption which the law will recognise as a mistake'. Lord Walker, when assessing what type of mistake will trigger the court jurisdiction and exercise of discretion, concluded that:

'the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction'.

Once a mistake has been established, the gravity of the causative mistake also needs to be assessed in terms of injustice or the 'unconscionableness' of leaving the transaction unwound, something that should be considered and assessed objectively.

In Guernsey, the doctrine of mistake continues to provide parties with an effective mechanism by which transactions may be set aside and the inadvertent consequences of that transaction rectified. However, parties must keep in mind that the position is different in Guernsey to other offshore jurisdictions, in that Guernsey appears to be fully in line with the approach in England. According to Lord Walker:

'[the] gravity of the mistake must be assessed by a close examination of the facts, whether or not they are tested by cross-examination, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition'.

The injustice caused by leaving the transaction as is must also be considered objectively, 'but with an intense focus on the facts of a particular case'.

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Footnotes

1. [2013. UKSC 2

2. For example, see the Jersey decisions in In the Matter of the Onorati Settlement [2013 JLR 324. at [44.; In the matter of the E Settlement [2018. JRC 143 at [21(iii)-22.; A and B v C, D and E [2019. JRC 111 at [23-28.

3. For the remainder of this article, instances of 'England and Wales' and 'English and Welsh' will be abbreviated to 'England' and 'English', respectively.

4. See, for example, Representation of G and in the matter of the D Trust E Trust and the F Trust [2016. JRC 166C

5. See Pitt v Holt [2013. 2 AC 108 at [105. and [114. (UKSC)

6. [2017. JRC 177

7. [2018. JRC 159

8. [2019. (1) JLR 175

9. [2019. JRC 035

10. [2021. JRC 166

11. [2018. GLR 234

12. At [22.

13. At [52-53., [64., [70., [74-75.

This article was first published in the STEP Journal Trust Quarterly Review (Volume 24, Issue 3, 25 September 2024).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.