To what extent can a decision made by a trustee, which for all intents and purposes he later regrets, be overturned? That question has recently been clarified by the Supreme Court in the jointly heard cases of Futter v HMRC; Pitt v HMRC [2013] UKSC 26.

Before the recent Supreme Court decision (which followed an appeal by HMRC against the Court of Appeal’s judgment in the cases of Pitt v Holt and Futter v Futter [2011] EWCA Civ 197), the Court was able to overturn the decisions of trustees where those trustees were exercising a discretionary power if:

  • the effect of the exercising the power was different from that which they intended and
  • the trustees would not have acted as they did if they had not
    • failed to take into account considerations that they ought to have taken into account; or
    • taken into account considerations that they ought not to have taken into account.  

This principle is commonly known as the rule in Hastings-Bass following the case of Re Hastings-Bass [1974] EWCA Civ 13 and was not infrequently used by trustees to try to go back to overturn decisions previously made.

The Supreme Court also considered when a decision by a trustee could be set aside on the grounds of mistake because the law in this area was unclear. Was it necessary for the mistake to have been as to the 'effect' of the transaction (ie the transaction did not have the legal effect that it was intended to have) or the 'consequences' (most commonly unforeseen tax consequences)? The more generally accepted view was that a voluntary transaction would be set aside on the grounds of a mistake of either law or fact provided that the mistake was about the effect of the transaction and not just the consequences but the case law was confusing.

Until the recent Supreme Court decision it was arguable that Hastings-Bass had become what some commentators have called a 'get out of jail free card' or 'magical morning-after pill' for trustees who wanted to avoid the consequences of exercising their powers where the outcome of their decision had been disadvantageous.

The Supreme Court has clarified the position on mistake and limited the rule in Hastings-Bass.

Lord Walker gave the single judgment confirming that:

  • When a trustee’s act is outside the scope of the trustee’s powers, it is void.
  • When a trustee’s act is within the scope of the trustee’s powers but the trustee has committed a breach of duty in failing to give proper consideration to the relevant matters, the act is voidable at the discretion of the Court. Therefore, only when a trustee has breached his duty will the Court intervene.

Lord Walker also made it clear that it is for the adversely affected beneficiaries to take action to set aside a disputed exercise of a power not the trustees.

As to mistake, the Supreme Court held that there was no need to draw a distinction between the 'effect' and the 'consequences' of the mistake. The requirement is simply that there must be a 'causative mistake of sufficient gravity'. In that regard, the court must have regard to the existence of the mistake, how central the mistake was to the transaction in question and the seriousness of its consequences. The court should also make an evaluative judgment about whether it would be unjust to leave the mistake uncorrected.

The practical outcome of the Supreme Court’s judgment is that it may now be rare for trustees to make successful Hastings-Bass applications. It may not be appropriate for them to make a claim based on their own breach of duty. Instead, trustees may resort in the future to actions for professional negligence where they have acted on the advice of others which has since shown to be wrong.

Beneficiaries, on the other hand, may be able to make such applications if they can show that the trustees were in breach of fiduciary duty.

Lord Walker’s judgment also emphasises that the remedies available both under the rule in Hastings-Bass and mistake are discretionary. It will be interesting to see how the new, clarified rules are applied by the courts in practice, both here and in foreign jurisdictions.