A couple of years ago the Court of Appeal considered the circumstances in which courts could set aside trustees' exercise of their powers on the basis that the effect of that exercise was different from what the trustee had intended.
Although the rulings did not involve a pension scheme, what the Court of Appeal said was capable of being applied in a pensions context too. In a long-awaited judgment, the Supreme Court has now considered the law in this area.
In the cases of Pitt v Holt and Futter v Futter (neither of which involved a pension scheme), the courts were asked to consider the circumstances in which it might be possible to set aside trustees' exercise of their powers on the basis that the result of that exercise was different from what the trustees had intended.
Both cases involved arrangements which had been designed, at least in part, to minimise tax liabilities. The arrangements did not achieve that objective and the High Court decided these should be set aside under the so-called "rule in Hastings-Bass" ("the HB rule" - explained in more detail below).
The Court of Appeal and Supreme Court were subsequently asked to consider the scope of the HB rule. As the original Court of Appeal decision in Hastings-Bass in 1974 had since been applied in a pension context, what the Court of Appeal and Supreme Court had to say about the scope of the rule was of interest and relevance to pension scheme trustees.
What the Court of Appeal and the Supreme Court said about the HB rule
Since the original decision in 1974, the HB rule has been interpreted widely in a number of cases. These show the courts have been willing to set aside as voidable an exercise of the trustees' powers where it can be shown that the trustees had failed to take into account all relevant considerations (alternatively, had taken into account irrelevant considerations) prior to the exercise of those powers.
In Pitt v Holt and Futter v Futter, the Court of Appeal decided that those subsequent cases had misunderstood (and, therefore, misapplied) the original decision in Hastings-Bass itself.
The Court of Appeal re-formulated the HB rule as follows:
- An exercise of powers by trustees will be void (not merely voidable at the behest of the trustees or the beneficiaries) if (and only if) they acted outside the scope of the power in question (as in the original Hastings-Bass case).
- If the trustees acted within the scope of the relevant power, their exercise of power would not be void but might be voidable by the Court if, in reaching their decision, the trustees acted in breach of fiduciary duty.
- However, trustees who acted on the advice of apparently competent professional advisers will not have been in breach of duty, even if that advice later turns out to have been materially wrong.
Broadly, the Supreme Court agreed with the way in which the Court of Appeal had reformulated the HB rule.
What did the courts say about the law of mistake?
In addition to the HB rule, the Court of Appeal and the Supreme Court looked at the court's equitable jurisdiction to set aside an exercise of the trustees' powers on the basis of mistake. Whereas the effect of an application of the HB rule is that an exercise of the trustees' power is void, when it comes to mistake that exercise is merely voidable (i.e. susceptible to being set aside by an order of the court).
The Court of Appeal had ruled that, before the equitable jurisdiction could be invoked, the mistake the trustees had made had to relate to:
- the legal effect (not merely its consequence, such as unforeseen tax liabilities) of the transaction; or
- a fact which was basic to the transaction and which was so serious as to render it unjust for the court not to intervene.
On this aspect of the case, the Supreme Court took a somewhat wider approach than that which the Court of Appeal had taken. It decided that the court's equitable jurisdiction to set aside on the basis of mistake was capable of being invoked where there had been a mistake as to the consequence of a transaction (i.e. including unintended tax liabilities). In so doing, the court rejected the "effect v consequences" approach which had been taken by the High Court in Gibbon v Mitchell in 1990.
That said, the court also recognised that the relevant mistake must go to either the legal character or nature of the transaction, or some matter of fact or law which was basic to it. As a result, in practice, mistakes as to the consequences of a transaction are less likely to be of sufficient gravity to justify the court's intervention.
The Supreme Court also ruled that it is necessary to show the trustees had made a mistake. Where, for example, the problem had arisen because of forgetfulness, inadvertence or ignorance by the trustees, it will not be possible to set their exercise of power aside.
However, there might be scope for flexibility because the Supreme Court said it might be possible to set the exercise of powers aside where the trustees' "tacit assumption" had been incorrect. It is also worth noting that, as in other areas of the law (for example, seeking restitution of money paid under a mistake), the fact that the mistake arose out of the trustees' carelessness will not preclude the court from exercising its jurisdiction to rescind.
At the end of the day, the Supreme Court said that, "The court may and must form a judgment about the justice of the case" and "make an evaluative judgment whether it would be ... unjust to leave the mistake uncorrected."
In 2007, the High Court in Smithson v Hamilton took a strict approach when considering the HB rule and the court's ability to set aside for mistake. In that case, the court said an application to rectify the "offending" amendment should have been made. If that remedy was not available (because of the stringent evidential requirements), then it was impermissible to seek to achieve the same result "by the back door" by invoking the HB rule or the court's equitable jurisdiction.
However, the approach taken in Pitt v Holt and Futter v Futter appears more flexible because the Court of Appeal and the Supreme Court appeared more willing to countenance trustees seeking the alternative remedies afforded by the HB rule and equity's ability to set aside on the basis of mistake, even in circumstances in which rectification would not have been available.
In practice, the number of cases in which pension trustees are able to rely on the HB rule is likely to be small. If the trustees have identified the relevant issues, and sought and followed professional advice given in relation to them, it will be difficult to establish that they acted in breach of fiduciary duty so as to make the HB rule available.
Further, given that it must be established that trustees had acted in breach of fiduciary duty before the HB rule can be invoked, one questions how many trustees will have the appetite to bring proceedings themselves seeking an order that the exercise of their powers was void (albeit, apparently, the existence of an exoneration clause will not prevent the court from invoking the HB rule).
More likely, trustees will issue proceedings neutrally, seeking directions from the court where a beneficiary had alleged a breach of trust but does not bring his own proceedings. The question of whether trustees could, in those circumstances, expect to recover their costs out of the proceedings from the fund remains undecided.
As a result, it is likely that what the Supreme Court said about the ability of the court to set aside trustees' exercise of their powers on the ground of mistake will prove a more attractive basis for making an application to court where something has gone wrong. Even then, it will be necessary to show that the mistake was sufficiently serious or grave to entitle the court to intervene on the basis that letting the exercise of power stand would be unjust or unconscionable.
In that regard, distinguishing between "tacit assumptions" (which, if they later turn out to be wrong, can form the basis of an application to set aside) and forgetfulness, inadvertence or ignorance (which will not) is likely to prove a difficult line to draw in practice.
To maximise the chances of a successful application to set aside, trustees would be well-advised to document what consequences they intended the transaction to have at the time of exercising their powers. This will improve their prospects of later establishing that the tacit assumption they had been proceeding upon was mistaken.