Where trustees have made errors, in some circumstances, they have been able to make use of the "Hastings Bass rule" to make an application to the court to set aside such transactions.  Typically these transactions have been appointments of capital and trust restructuring.  In order for the transaction to be set aside, the trustees' error has needed to involve the trustees taking into account irrelevant considerations or failing to take into account relevant considerations.

1. Hastings - Bass - developments

The line of authorities derived from Hastings-Bass (Deceased), Re [1975] Ch. 25 has, in many cases, relieved trustees of the consequences of errors including significant tax liabilities.  However, this potential remedy has been reviewed recently in two connected English cases, Pitt v Holt and Futter v Futter in which the Court of Appeal restricted the availability of the remedies by requiring the error to have been made in breach of trust.  Where trustees have taken professional advice that itself turns out to be wrong, the relief is unlikely to be available.  The Supreme Court has today handed down its judgment in both cases1 and has upheld the Court of Appeals' decision in Futter and in Pitt so far as it turns on the Hastings-Bass rule.  In Pitt, however, the Supreme Court allowed the appeal on the ground of mistake and set aside the settlement in question.  This was created on the basis that when the settlement was created, no thought had been given to the inheritance tax consequences which could have been avoided had the settlement been a 'disabled trust' rather than a general discretionary trust.  The Court considered that ignorance, although not itself a mistake, can in certain circumstances result in a false assumption that is a mistake in law.

In Futter v Futter the trustees, acting on professional advice, exercised powers of advancement under two discretionary trusts on the misunderstanding that personal losses of the beneficiary could be offset against the trustees' gains.  At first instance, the judge set aside the advancements under the Hastings-Bass rule.  

2. Supreme Court's Decision

That decision was reversed by the Court of Appeal.  The Supreme Court has upheld the Court of Appeal's judgment that the Hastings-Bass rule applies only in limited circumstances:

  • If trustees purport to act in a way that is outside the scope of their discretionary power then that act is void.
  • If trustees breach their duties in exercising a discretionary power then such exercise might be voidable but there are no 'hard and fast' rules as to what trustees should take into account when exercising some such power though fiscal consequences may well be relevant considerations.
  • If trustees act within their powers but where their only failing in duty is not to take into account a matter that they should have taken into account, there will be no breach of trust if they so acted upon appropriate professional advice.  Therefore instead of the Hastings-Bass rule, the correct principle is that trustees' duty to take into account relevant matters is a fiduciary duty so an act in breach of that duty would be voidable but a beneficiary could not rely on this if the trustees had acted upon proper professional advice.
  • A mistake can be set aside where there has been a mistake as to the legal effect of the disposition.   Although ignorance as to a tax liability arising does not of itself amount to a mistake in law, as a consequence it might be sufficiently grave so as to lead to a mistake being established.

3. Other jurisdictions

This case will be closely scrutinised by other jurisdictions.  In Jersey, for example, In the matter of the B Life Interest Settlement [2012] JRC229 the Royal Court's decision (which preceded the English Court of Appeal in Pitt and Futter) did not distinguish between 'effects and consequences'.  The Royal Court confirmed that the Jersey test required there to be a mistake by the donor, that the donor would not have entered into the transaction but for the mistake and for the mistake to be of so serious a character so that it would be unjust for the donee to retain the property.  The Royal Court has therefore continued to favour the wider redress rather than leaving potential redress to the pursuance of professional advisers' in respect of their incorrect advice.

Whether and how Jersey (and indeed other jurisdictions such as Guernsey and the Cayman Islands) will apply the Supreme Court's judgment in the future remains is up for debate. What may be more likely is for such jurisdictions to legislate for the relevant remedies.  That would provide certainty for trusts in such offshore jurisdictions and avoid a conflict of precedents with the English position.

The Supreme Court's decision will have implications for private, commercial and charitable trusts.  Pension trusts will of course also be affected and we have a separate briefing addressing those aspects.