Trustees, mistake, and Hastings-Bass

First published in the Solicitors Journal.

In the recent Supreme Court judgment in the two cases of Pitt v Holt and Re Futter [2013] UKSC 26, Lord Walker clarified both the rule in Hastings-Bass and the law of mistake. The judgment has reduced the ability of trustees to rely on the Hastings-Bass rule.

As a result of the decision the practical consequences of trustees making a mistake are going to be more difficult to resolve easily and open up the possibility against more professional negligence actions.

In Hastings-Bass Lord Justice Brown said the following which has since become known as the Rule in Hastings-Bass: "Where a trustee is given discretion as to some matter under which he acts in good faith, the court should not interfere with his action, notwithstanding that it does not have the full effect which he intended unless 1) what he has achieved is unauthorised by the power conferred on him or Where he has acted outside of the power conferred on him or 2) it is clear that he would not have acted as he did a) had he not taken into account considerations which he should not have taken into account or b) had he not failed to take account considerations which he ought to have taken into account."

This has been the subject of considerable judicial interpretation and review. The high water mark for trustees was probably the case of Burrell v Burrell in which the exercise of power of appointment by the trustees which gave rise to an unexpected tax charge was declared void by the court. Many of these cases were heard without any appearance by Her Majesty's Revenue & Customs (HMRC) with associated losses by them of substantial amounts of tax. As a result HMRC began to appear in Hastings-Bass cases culminating in the cases of Pitt and Futter.

This was a widely anticipated judgement by the Supreme Court given on 9 May 2013 providing an opportunity for the Supreme Court  to provide definitive guidance.

In brief, the Supreme Court declared the principle inherent in Hastings-Basscentres on the failure of trustees to perform their decision-making function and whether this failure is sufficiently serious to amount to a breach of fiduciary duty. It is the trustees' breach of fiduciary duty to deliberate adequately, while acting within the scope of their powers, which entitles the court to intervene. Simply showing the trustees' deliberations fell short of the highest possible standards, is not sufficient.

The rule was established to protect beneficiaries against the improper conduct of trustees. At the same time the court did not wish to impose too stringent a test on trustees' decision-making duties or any form of strict liability on trustees who conscientiously obtained and followed apparently competent advice which turned out to be wrong. To understand how this might work in practice, it is necessary to analyse both cases.

Tax Consequences

In 1985 Mark Futter made two settlements initially with non-resident trustees. The original trustees were then replaced, in 2004. The new trustees, having obtained legal advice, exercised their power of enlargement and made payments out of both settlements. In so doing, they overlooked significant capital gains tax liability resulting from these distributions. The trustees sought a declaration, based on Hastings-Bass that the trustees' decisions should be set aside because they had failed to take into account the full tax consequences of their action and would not have entered into those transactions if they had. The court granted the declaration.

Pitt and another v HMRC dealt with the consequences of a road traffic accident in 1990 following which Mr Pitt was awarded at court the sum of £1.2m in damages. His solicitors sought financial services advice which said damages should be held in a discretionary settlement. No consideration was given to the relevant inheritance tax consequences. When Mr Pitt died in 2007 significant inheritance tax liabilities arose. The personal representatives, (also his trustees), asked to have the settlement set aside, arguing they would not have entered into the settlement if they were aware of the IHT consequences, or for equitable relief for the consequences of their mistake. The judge granted the declaration but refused the alternative claim.

HMRC appealed both decisions. Both appeals were granted principally on the ground that the rule in Hastings-Bass was not applicable in either case. In so ruling, the Court of Appeal held the respective trustees had acted reasonably in reliance on, what they supposed to be, competent professional advice and the mistakes made, were not mistakes grounded in law or sufficiently serious to justify recission. It was pointed out that if the advice given by the professional advisers was negligent there were remedies available to the trustees

Lord Walker gave the unanimous judgement dismissing the appeals in bothFutter and Pitt regarding the application of Hastings-Bass, but allowing the appeal in Pitt on the ground of a mistake.

Lord Walker said the Court of Appeal had been correct in its ruling on Hastings-Bass. The rule in Hastings-Bass depends on trustees breaching their duty when performing within the scope of their powers. Where trustees act on the basis of incorrect professional advice, such as mistaken tax advice, there is no breach of duty unless the trustees act beyond the scope of their powers of outside the law.

Accordingly, trustees are not required to come to the 'right' decision in every case. Even where they do commit a breach of duty, the rule in Hastings-Bassmeans their decision is voidable but not automatically void.

The appeals were dismissed as the trustees, in acting on the professional advice received, had committed no breach of duty and consequently had not satisfied the conditions necessary to invoke the rule in Hastings-Bass.

On the issue of mistake, the judgement held the true requirement for recission is that there must be a 'causative mistake of sufficient gravity', which must be assessed by a close examination of the facts. The court must make a judgement based on the facts of the case, about whether it would be unconscionable or unjust to leave a mistake uncorrected. In Pitt, the trustees assumed or believed the trust would not result in any adverse tax effects. They had incorrectly appreciated the tax consequences and as a result relief was available.

Welcome Clarity

Following this decision, trustees must consider carefully the circumstances surrounding a decision and ask themselves some questions:

  1. Was the purported exercise of discretion by the trustees wholly consistent with the the terms of the trust and general trust law?
  2. If the answer is yes then no grounds for challenge arise under the rule inHastings-Bass. However, if the trustees in exercising their discretion took into account an irrelevant consideration or omitted a relevant consideration then the exercise of their discretion is voidable and a claim under the rule inHastings-Bass is possible. No doubt those advising a potential claimant will be conscious of the fact that if the breach is not considered by the court to be of sufficient seriousness then it may not be voided.
  3. In exercising their discretion did the trustees rely on professional advice? If so, unless the trustees departed from that advice then the Hastings-Bassrule would afford no relief, if for example an unexpected tax charge arose. However, in those circumstances if negligent in their advice the professionals should expect a claim against them.
  4. Rather than looking to Hastings-Bass when addressing actions resulting in adverse tax consequences, trustees instead may look to the doctrine of mistake. The court must decide whether it would be unjust or unconscionable to leave a mistake uncorrected and look at the whole matter. Whether the transaction should be set aside if there has been a mistake will depend on whether there is a 'causative mistake of sufficient gravity'. This will only be satisfied where there is a mistake as to the law or nature of a transaction on some basic matter of law or fact. The judgement made plain; it is not appropriate for courts to grant the remedy in respect of a mistake made in the course of tax avoidance arrangements. Trustees must not allow tax avoidance to prohibit consideration of other equally relevant matters.
  5. Lord Walker also looked at void and voidable transactions, making it clear that if trustees make decisions which are outside their powers, these will be void. They can be set aside by anyone, including the trustees. The court will have discretion as to whether relief will be granted.

Lord Walker has provided welcome clarity on the scope of the Hastings-Bassrule, now restricted.

For trustees provided they act within the limits of their powers the rule will not be available. If they have taken proper professional advice which turns out to be flawed they are regarded as acting within their powers and Hastings-Bass is not available. A negligence claim against their advisers may be available.

For beneficiaries Hastings-Bass will help only where the trustees have acted outside the limit of their powers. An unexpected tax charge of itself does not permit reliance on Hastings-Bass.

The doctrine of mistake is available to offer relief but only for a mistake of "sufficient gravity" time will tell what sorts of errors are covered by this phrase.

Clearly the old "get out of jail" card that Hastings-Bass once appeared to offer has gone for good.

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