A trustee recently applied to the Royal Court asking it to exercise its powers to set aside a deed of amendment, a deed of exclusion and a deed of appointment by reason of mistake, or seeking relief under the Hastings Bass principle. This ruling(1) was in effect the first opportunity the Jersey courts had had to consider the Hastings Bass remedy since the English Court of Appeal decisions in Pitt v Holt and Futter v Futter. The bailiff had directed that in the instant case an amicus be appointed to argue before the Royal Court on the Hastings Bass issue.
The settlement was governed by Jersey law and was set up as a life interest trust for the settlor, and thereafter for his spouse. The settlor's two sons would ultimately benefit. The deeds in question were part of a tax planning initiative undertaken by the trustee. The intended effect was to transfer life interests in two-thirds of the trust to the settlor's sons, free of the life interest held by the settlor and his spouse, thus creating new transitional interests under relevant UK tax legislation. The restructuring would reduce the value of the settlor's estate for the purposes of inheritance tax, but would be fully effective only if the settlor lived for a period of seven years from the date of the restructuring.
Unfortunately the settlor did not survive seven years. Shortly after the deeds were executed in April 2008, he was diagnosed with an aggressive and ultimately fatal form of Alzheimer's disease. The settlor died in September 2011. The mistake, claimed the trustee, was in believing the settlor to be fit and healthy at the time of executing the deeds. Had it known of his condition, it would not have put in the place the planning.
Test for mistake
The deputy bailiff affirmed the test for mistake as set out in Re S.(2) In essence, the court must ask itself the following questions:
- Was there a mistake on the part of the settlor?
- Would the settlor not have entered into the transaction 'but for' the mistake?
- Was the mistake so serious as to render it unjust on the part of the donee to retain the property?
Before making its findings, the court made some interesting obiter comments about whether the customary law of error is relevant in this area. The court concluded that if there were a consideration of the validity of a gift of assets into a trust, then the principles of error may well be relevant. However, as this case revolved around an exercise of trustee discretion, which did not involve a gift being made per se, it was not appropriate to consider the law on error; rather, the court should consider the usual equitable principles which have derived from English law over the years.
The court concluded that as the question of whether life insurance should be put in place had been canvassed with the settlor, this showed that the issue of the settlor's health had been considered. The court did not understand why life insurance was not taken out. Accordingly, it did not consider that the mistake was so serious as to be sufficient to avoid the trustee's exercise of power on the grounds of mistake.
Rule in Hastings Bass
The trustee also sought to set aside the arrangements on the basis that it had failed to take all relevant matters (ie, the true state of the settlor's health) into account.
The court considered the various Jersey cases which had applied the rule in Hastings Bass. The court rejected the trustee's submission that the cases showed that Jersey law had established its own principle which could continue to survive in its pre-Pitt v Holt form. The court held that if Pitt v Holt remained good law after the appeal to the English Supreme Court, a departure from the line of reasoning in the judgments of the Royal Court based on previous authorities was inevitable - either the court must follow the changed approach of the English courts to the Hastings Bass doctrine, or it must adopt some other reasoning based on principle for continuing to follow the pre-Pitt v Holt approach.
As regards Hastings Bass, the court stated that as the settlor's survival for seven years was a key part of the planning, the trustee was under a duty to consider whether the settlor was likely to survive that period. When evaluating whether there was a breach of that duty, the court found that as the settlor's health was considered (it again referred to the possibility of life insurance being taken out), it did not feel that the trustee had failed to consider a matter which it had been under a duty to consider.
Accordingly, the court did not need to consider the third limb of the Hastings Bass test - whether the trustee would have acted differently had it taken relevant matters into account - as it had taken the key matter (the settlor's health) into account.
The court then made a number of obiter remarks concerning the Hastings Bass regime generally. It ruled that loss should lie where it falls. Furthermore, if a professional has been negligent, the loss should fall there. It is not beneficial for trustees to have a failsafe ability to undo decisions that were made if this is not available for an individual in respect of his or her own private affairs.
Accordingly, the court concluded that if it had been required to decide the matter in light of the existing Jersey and English authorities, it would have held that the previous decisions of the Royal Court in connection with applications under Hastings Bass were incorrect. However, if the Supreme Court were to endorse the Hastings Bass approach, then the rationale previously adopted by the Royal Court could not be impeached and one would expect that a court of first instance would follow them.
This is clearly an important ruling. Ultimately, the court affirmed the Jersey approach on mistake, but (through its obiter comments) raised serious doubts as to whether Hastings Bass can survive if the English Supreme Court upholds the Court of Appeal decision in Pitt v Holt. Consideration is being given in Jersey to a possible statutory Hastings Bass test.
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