Pitt v Holt – English Supreme Court narrows Hastings-Bass rule

First published in Taxation Today, July 2013.

The rule in Hastings-Bass allowed trustees to apply to a court to set aside actions which had unforeseen consequences. The rule has been read down by the English Supreme Court in a recent decision in two joined cases, Pitt v HMRC and Futter v HRMC. In this article we examine the decision and its relevance in the New Zealand context.

Background - the rule in Hastings-Bass

Re Hastings-Bass is a 1975 English Court of Appeal case. It has stood for the proposition that a Court can set aside a trustee’s decision if that decision would not have been made had the trustee taken into account all relevant factors (a common example being the tax consequences of the chosen course of action) or if the trustee had taken into account irrelevant factors. It is often referred to as a “get out of jail free” card for trustees.

The rule was summarised in the English High Court in Sieff v Fox [2005] 1 WLR 3811 as follows:

Where trustees act under a discretion given to them by the terms of the trust, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.

Although there are no New Zealand decisions specifically applying the Hastings-Bass rule, it was noted in the Court of Appeal decision in Kain v Hutton [2007] 3 NZLR 349 and in the High Court decision Wrightson Ltd v Fletcher Challenge Nominees Ltd (1998)1 NZSC 40,388. It was also referred to in the Law Commission’s review of trusts law in New Zealand (Court Jurisdiction, Trading Trusts and Other Issues: Review of the Law of Trusts - Fifth Issues Paper (December 2011)). Given the relatively widespread adoption in other Commonwealth countries, it is likely to have been followed in New Zealand if a case on suitable facts arose.

The facts in Pitt and Futter

The English Supreme Court took the opportunity to revisit the Hastings-Bass rule in the joined decision of two cases, Pitt and Futter. Pitt involved the exercise of a fiduciary power following the receipt of professional advice. Mr Pitt suffered serious head injuries in a traffic accident, leaving him mentally incapacitated. His wife was appointed his receiver and was the sole beneficiary of his estate. Mrs Pitt was advised by her solicitors and financial advisors that the damages awarded to Mr Pitt following the accident should be settled on a discretionary trust.

While income tax and capital gains tax consequences of the settlement were considered, her advisers did not consider inheritance tax. The settlement gave rise to a significant inheritance tax liability. Professional negligence proceedings were commenced as well as proceedings seeking to have the new trust settlement set aside under the rule in Hastings-Bass or on the grounds of mistake.

In Futter, incorrecttax advice was given to trustees by their solicitors in relation to certain settlements. Dispositions were made in the belief that gains in the trust would be absorbed by losses available to beneficiaries, with no tax liability resulting. Capital gains tax was in fact payable. The trustees applied to the court to have the dispositions declared void, on the basis that their decision to proceed was based on incorrect tax advice.

In the lower courts (the cases being heard separately at that point) both applicants were successful in their applications to set aside the relevant dispositions of property, on the basis of the Hastings-Bass rule. The Commissioners of HM Revenue and Customs (the Revenue), who were joined to the proceedings, appealed to the Court of Appeal.

Court of Appeal decision

In early 2011 the Court of Appeal overturned the lower court decisions, agreeing with the Revenue on each of the cases ([2011] 2 All ER 450). The judgment is significant. Interestingly, the Court included Lloyd LJ, the judge in Sieff v Fox (referred to above). Lloyd LJ took the opportunity reconsider the scope of the rule, noting that in Sieff v Fox he was constrained by the rules of judicial precedent as a Judge sitting in the High Court.

In his judgment, Lloyd LJ undertook a comprehensive analysis of the history and application of the Hastings-Bass rule. In short, he held that the rule was not a correct statement of the law. In his concurring judgment, Longmore LJ stated (at 510):

I am entirely persuaded by Lloyd LJ's remarkable judgment that these appeals provide examples of that comparatively rare instance of the law taking a seriously wrong turn, of that wrong turn being not infrequently acted on over a twenty year period but this court being able to reverse that error and put the law back on the right course.

In framing his restatement of the Hastings-Bass principle, Lloyd LJ defined the cases to which he thought the rule could apply as those concerning acts which were within the powers of a trustee but which are said to be vitiated by the failure of the trustee to take into account a relevant factor (which he noted was often the tax consequences of an act) or by taking into account an irrelevant factor. He distinguished cases where a trustee’s act was said to be void because it was not authorised by the power under which the trustee purported to act (the rule was never concerned with the consequences of or remedies for such a breach of trust).

He also clarified that where the rule did apply, the act in question would be voidable, not void from the outset. This has practical importance as any suit of an interested party (usually a beneficiary) to have an act set aside would be subject to equitable defences and to the court's general discretion.

Lloyd LJ’s view was that, correctly applied, the rule would only render a trustee’s act voidable if it could be shown that the act had been done in breach of fiduciary duty on the part of the trustee. He explained that the trustees' duty to take relevant matters into account is a fiduciary duty, so an act done as a result of a breach of that duty is voidable. Tax considerations, he noted, will often be among the relevant matters which ought to be taken into account. He continued (at 487):

However, if the trustees seek advice (in general or in specific terms) from apparently competent advisers as to the implications of the course they are considering taking, and follow the advice so obtained, then, in the absence of any other basis for a challenge, I would hold that the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, in such a case I would not regard the trustees' act, done in reliance on that advice, as being vitiated by the error and therefore voidable.

Lloyd LJ noted that this approach made an act done by a trustee in the absence of advice potentially more vulnerable to challenge than an act done by a trustee on the basis of wrong advice (the point being that from a beneficiary’s perspective the distinction was not significant – in either case the beneficiary was disadvantaged by the error). He noted also that although a claim against the adviser for provision of incorrect advice might not be possible, depending on the circumstances of the beneficiary (“different loss may be suffered by different people, not all of whom may have a claim against the advisers”, at 487). Lloyd LJ continued:

Recognising those points, nevertheless I see no anomaly in the distinction that I have drawn. It arises from the need to find a breach of trust in order to set aside an act of the trustees which is within their powers ...

Not one to shy away from an awkward topic, he noted (at 488):

If the principle had been applied which I have set out above, then it seems likely that a number of the cases decided at first instance would have been decided differently.  ... But it is not a useful exercise for present purposes to re-examine the earlier cases generally, and I will say no more on that subject.

His Lordship noted that the practical consequence of his restatement of the rule would be that (at 488):

One practical consequence, if I am right, is that if in future it is desired to challenge an exercise by trustees of a discretionary power on this basis, it will be necessary for one or more beneficiaries to grasp the nettle of alleging and proving a breach of fiduciary duty on the part of the trustees.

Lloyd LJ noted (at 489) that the presentation of the facts and case in Futter was “entirely orthodox in terms of the Hastings-Bass rule” (at least, before his own restatement of that rule). On the facts before him, he denied relief (and upheld the Revenue’s appeal) on the basis of that the trustees had taken the necessary advice as required of them. “The problem” he stated (at 489) “ was the advice was wrong”. It followed, he noted (at 490) that the acts in questions “are not only not void, because they were within the relevant powers of the trustees, but they are also not voidable, because no breach of fiduciary duty was committed in the process of making them”.

Lloyd LJ noted (at 493) that the facts of Pitt also presented at trial a “straightforward case under the Hastings-Bass rule”. However, he noted that Mrs Pitt (the fiduciary) had sought advice (despite that advice not raising the necessary issue). She had fulfilled her duty as a fiduciary, and on that basis no relief was available under the (restated) Hastings-Bass rule. On that ground, Lloyd LJ allowed the Revenue’s  appeal.

Mrs Pitt had sought to have the disposition in her case set aside on the alternative grounds of the equitable doctrine of mistake. Lloyd LJ considered the history of that doctrine in detail and stated (at 506) that for a disposition to be set aside on the ground of mistake, three things needed to be shown. Firstly, there must be a mistake. Secondly, it must be shown that the mistake was of the relevant type (a mistake to the legal effect of the transaction, or as to an existing fact which is basic to the transaction). Finally, the mistake must be of sufficient gravity to satisfy what he referred to as the “Ogilvie v Littleboy test” - a reference to an 1897 case ((1897) 13 TLR 399) in which the judge had stated, when considering whether a gift could be reversed:

In the absence of all circumstances of suspicion a donor can only obtain back property which he has given away by showing that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him.

Lloyd LJ found that Mrs Pitt was under a mistake, of a sufficient gravity so as to satisfy that test. That said, Lloyd LJ held that it was not a mistake of the relevant type – the fact that the transaction gave rise to an unforeseen tax liabilities was a consequence, not an effect of the transaction. As such, the equitable ground of mistake could not be invoked, and the Revenue’s appeal on this ground was allowed.

On appeal to the Supreme Court

Both cases were appealed to the Supreme Court. The Supreme Court agreed with the Court of Appeal in its reading down of the Hastings-Bass rule. Like the Court of Appeal before it, it took the opportunity to undertake its own substantial review of the Hastings-Bass rule, including various cases in which it had been applied.

The Court largely adopted the reasoning of Lloyd LJ in the Court of Appeal decision in relation to the scope, and limits, of the Hastings-Bass rule itself. It dismissed the Futter appeal and, to the extent that it turned on the rule in Hastings-Bass, the appeal in Pitt also. In agreeing with Lloyd LJ’s analysis, the Court endorsed his comments in relation to trustee expectations. The Court said (at paragraph 69):

It is a striking feature of the development of the Hastings-Bass rule that it has led to trustees asserting and relying on their own failings, or those of their advisers, in seeking the assistance of the court. ... There may be cases in which there is for practical purposes no other suitable person to bring the matter before the court, but I agree with Lloyd LJ’s observation (para 130) that in general it would be inappropriate for trustees to take the initiative in commencing proceedings of this nature. They should not regard them as uncontroversial proceedings in which they can confidently expect to recover their costs out of the trust fund.

Interestingly, the Pitt and Futter cases appeared to be the first English cases applying the Hastings-Bass rule in which the Revenue was joined as a party. Given that it would often be the only party adversely affected by an order declaring a trustee’s act void, and the number of cases applying the rule (as cited in the Court of Appeal and Supreme Court decisions in this case) it is surprising that it had not taken issue with the development of the rule at an earlier stage.

Much of the Supreme Court decision in Pitt and Futter, in relation to the appeal on Hastings-Bass grounds, is focussed on the question of what will, in fact, constitute a breach of trustee duty (particularly important given the restatement of the Hastings-Bass rule in the Court of Appeal). The Court confirmed that trustees may be liable, notwithstanding that they may have obtained competent professional advice, if they act outside the scope of their powers. However the Court noted (at paragraph 80) that:

...  it would be contrary to principle and authority to impose a form of strict liability on trustees who conscientiously obtain and follow, in making a decision which is in the scope of their powers, apparently competent professional advice which turns out to be wrong.

Leaving the analysis somewhat (but necessarily) open, the Court stated (at paragraph 85) that a detailed fact-finding exercise would need to be undertaken by the first instance judge to determine whether a particular act (or omission) amounted to a breach of a trustee’s duty. A trustee’s duty, the Court noted (at paragraph 88) “does not extend to being right ... on every occasion”.

Having disposed of the Hastings-Bass arguments in both cases, the Supreme Court allowed Mrs Pitt’s appeal on the grounds of mistake. The Supreme Court discussed the inconsistencies present in the doctrine, concentrating on the “effect” and “consequence” distinction evident in the Court of Appeal’s decision. The Supreme Court considered this test rendered the law in this area uncertain. It favoured the approach that all that must be shown is a causative mistake of sufficient gravity. Generally, this test will be satisfied only when there is a mistake either to the legal character or nature of the transaction, or as to some matter of fact or law that is basic to the transaction. Consequences, including tax consequences, will be relevant to the gravity of the mistake.

Promoting an “instance-specific evaluation of conduct” the Court noted (at paragraph 126):

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 (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an intense focus ... on the facts of the particular case.

The Court considered that the mistake in Mrs Pitt’s case was sufficiently serious to warrant remedy, and set aside the disposition she had made.

The New Zealand context

As mentioned above, there does not appear to have been any case in New Zealand specifically applying the Hastings-Bass rule, as it stood before the Court of Appeal decision in the Pitt and Futter proceedings. Should the matter come before a New Zealand court, it would most likely be decided in the grounds of the rule as read down by the Court of Appeal and Supreme Court in Pitt and Futter.

This is the approach suggested by the Law Commission in its recent review of trusts. Referring to the Court of Appeal decision, the Law Commission noted (Court Jurisdiction, Trading Trusts and Other Issues: Review of the Law of Trusts - Fifth Issues Paper December 2011, at paragraph 1.19):

In a recent decision the English Court of Appeal undertook a full review of case-law developments from Hastings-Bass. It has clarified that a trustee’s failure to consider relevant factors, or his or her consideration of irrelevant factors, will only provide a basis for interfering with an exercise of powers if it can be shown that the trustee in doing so acted in breach of his or her fiduciary duty. This approach is also likely to now be taken in New Zealand.

Nevertheless, the Supreme Court’s decision in Pitt in relation to mistake may provide an avenue of redress for beneficiaries disadvantaged by a trustee’s actions, at least as an alternative to a potential action against the trustee or (if applicable) professional advisor.