Summary and implications
The rule in Hastings-Bass had been settled law for many years. Trustees and other fiduciaries were able to apply to the court to set aside as void a decision arising from an exercise of their discretionary power which later turned out to have unforeseen or unintended consequences.
Now, in the joint appeals of Pitt v Holt and Futter v Futter, the Court of Appeal has overturned this rule. All trustees and fiduciaries will be affected.
- In the future, beneficiaries will have to make claims against trustees by claiming a breach of a fiduciary duty.
- Consideration of the tax consequences of a transaction is almost certainly part of this fiduciary duty.
- Seeking and acting on professional advice from competent advisors, which later turns out to be incorrect, does not amount to a breach of trust.
Since 1975, the rule in Hastings-Bass has allowed trustees and other fiduciaries to apply to the court to set aside as void a decision they have made. Trustees argued that in exercising their discretionary power, the action later turned out to have unforeseen or unintended consequences. Often trustees used the rule where incorrect tax advice had been given and trustees were trying to escape an unexpected tax liability.
The Court of Appeal decision – restating the law
- A trustee’s act will only be void if it is outside the scope of their powers. Transactions simply with unexpected tax consequences would not fall outside the scope of the trustee’s powers.
- A trustee’s act performed in breach of their fiduciary duty will be voidable. One part of their fiduciary duty would be to consider "relevant matters". Tax consequences are usually relevant matters.
- If a trustee acts on legal or tax advice, it is unlikely that they will be in breach of their fiduciary duty. In fact, it is part of their duty to take and act on expert advice.
If the advice turns out to be wrong, a claim in negligence against the professional advisor may well arise.
There has been a growing trend for a dissatisfied beneficiary to use the old principle to try and rewrite history, particularly where unexpected consequences had arisen. Unsurprisingly, HMRC were keen to challenge such attempts.
The Court of Appeal’s decision
The original case, Re Hastings-Bass, was a 1974 Court of Appeal decision, the judgment of which has been cited by the lower courts in many subsequent cases. Now, in the joint appeals of Futter v Futter and Pitt v Holt, the Court of Appeal has had its first opportunity to reconsider its earlier judgment.
Lord Justice Lloyd, delivering the lead judgment in the Court of Appeal, suggests that the judgment in Hastings-Bass has been misapplied by the lower courts. As the case law has developed, the lower courts have repeatedly applied an incorrect interpretation of the law to very different facts. Lord Justice Lloyd even noted that in a lower court he too had been bound by the Court of Appeal’s earlier decision under the doctrine of precedent. It is only now that the Court of Appeal has had the opportunity to restate the law.
What was the old rule in Hastings-Bass?
If a trustee acting under a discretion, embarks on a transaction or decision which in effect is different from that intended, the court will interfere with the trustee's action if it is clear that he would not have acted as he did if
- he had taken into account matters which he ought to have considered; or
- he had not taken into account matters, which he ought not to have considered.
A consequence of this case is that a challenge to the exercise by trustees of a discretionary power, brought by a beneficiary, may need to allege a breach of fiduciary duty. Cases will be unlikely to succeed where trustees have taken expert advice before exercising their discretion. It might in rare cases be appropriate for the trustees to take the initiative in the proceedings, for example, where they need to seek directions from the court if a beneficiary alleges breach of trust but does not bring his own proceedings. The case may also lead to an increase in negligence cases against professional advisers.