Written by Steven Barrie

When a trustee makes a mistake in the post Pitt and Futter world

In the past there were three remedies available to trustees when they made a mistake. These were: (i) rectification; (ii) equitable relief for mistaken voluntary transactions; and (iii) relief from decisions which were not a breach of trust under the Hastings-Bass rule.

These were often used together, with claims under the Hastings-Bass rule being run as an alternative to rectification and relief from mistakes as an alternative to Hastings-Bass. This note however focuses on the latter two remedies.

The rule in Hastings-Bass was often used by trustees as a way of undoing transactions where unanticipated tax consequences became apparent. The rule in Hastings-Bass provided that where trustees exercised a discretion and the effect of this exercise differed from their intention, either because they failed to take into account relevant considerations or because they took into account irrelevant considerations, then provided it could be shown that the trustees would not have acted in the way they did had they only taken into account relevant considerations then the court would intervene to set aside the transaction. This meant that where trustees had not considered the tax consequences of the transaction, or had received inaccurate tax advice or implemented the advice erroneously, the transaction would be set aside.

This was viewed by some as a soft option upon which trustees  could rely when they had made a mistake. It was not necessary to show a breach of trust and where the trustee had exercised discretion based upon  a mistake as to a material consideration, the exercise of the discretion was considered a nullity in equity.

This was felt to be affording trustees an unfair advantage since the Hastings-Bass remedy was only available to persons exercising a fiduciary duty and was not available to the ordinary man in relation to his own property when acting on the same advice and suffering the same consequences.  It was perceived that this enabled trustees to take risks in structuring for tax purposes since, if things went wrong, they could simply apply to have the transaction overturned under the Hastings-Bass rule.

The view of many commentators was that the Hastings-Bass rule unfairly protected trustees from making errors and their advisers from giving negligent advice. The fact that it was not necessary to establish a breach of trust in order to invoke the rule meant that most applications were brought by the trustees for the benefit of the beneficiaries, so there was little disagreement as to the aim of the Court Order.  The absence of any adversarial parties meant that the development and application of the Hastings-Bass rule was never tested beyond the High Court in England and Wales.

The decision of the UK Supreme Court in Pitt v Holt and Futter v Futter gave the court a long awaited opportunity to review and clarify the Hastings-Bass rule.

In Pitt and Futter the Court of Appeal and Supreme Court both concluded that the law had taken a wrong turn and resolved to put it back on the right track by significantly circumscribing the Hastings-Bass rule.

The Supreme Court held that the Court should only intervene if the trustees’ mistake constitutes a breach of trust and that such intervention will be discretionary. It is no longer the case that the decision will be treated as void. It will be voidable and setting it aside will be subject to equitable defences and the discretion of the Court. The judgment means that it is now unlikely that applications for relief under the Hastings-Bass rule will be made by trustees as it will be necessary to establish a breach of duty on the part of the trustees before the rule may be invoked and the transaction undone. Where trustees have taken advice, whether or not the advice is effective, the trustees will have discharged their duty and it will be difficult to establish a breach of trust even if the advice is wrong. The fact that the advisors got it wrong will not be enough to establish a breach of trust.

The decision does, however, permit the use of the Hastings-Bass remedy where the trustees have failed to take any tax advice and the trustees’ decisions making is so defective it amounts to a breach of trust.

The Supreme Court also went on to consider the equitable relief available for mistaken voluntary dispositions. This remedy is available for transactions undertaken by fiduciaries and non fiduciaries alike. It is founded upon the principles of equity, which protect parties against fraud, undue influence, unconscionable bargains and related conduct including abuse of confidence.

The Supreme Court in Pitt and Futter widened the scope of mistake by rejecting the “effect/consequences” distinction drawn by Millet J. in Gibbon v. Mitchell whereby relief would be denied upon the basis of mistake if it relates only to the fiscal consequences of the transaction but not to its legal effect. The result of the Supreme Court decision is that the effect/consequences distinction has been discarded and replaced with a new test of unconscionability.

The Supreme Court clarified that if a mistake of law or a mistake of fact is if of sufficient seriousness such that it would be unfair to allow the transaction to stand, it would be sufficient to engage the jurisdiction. The Supreme Court held that the consequences of mistake including the tax consequences are to be taken into account when considering the mistake and whether the Court’s discretion should be exercised.

The seriousness of the mistake must be considered “by a close examination of the facts… including the circumstances of the mistake and its consequences for the person who made the vitiated disposition…, the injustice (or unfairness) or unconscionableness of leaving a mistaken disposition uncorrected must be evaluated objectively but with an intense focus… on the facts of the particular case”.

Whilst mistakes as to tax consequences may be sufficiently serious, Lord Walker warned that the court may nevertheless think it right to refuse relief in cases of artificial tax avoidance on the basis the claimants must be taken to have accepted the risk that the scheme would prove ineffective or on the grounds that relief should be refused on public policy grounds.

Skeptics would say the comments of Lord Walker on the social evils of tax avoidance are unlikely to gain much traction in offshore jurisdictions. The decision of the Supreme Court in Pitt and Sutter, whilst not binding, would ordinarily be regarded as highly persuasive authority and very likely to be followed in most offshore jurisdictions.

Jersey is the first offshore jurisdiction which has considered Pitt and Futter in judicial terms and the jurisdiction has altered its trust law to reinstate the rule in Hastings-Bass. In the Onorati Settlement, the Jersey Court granted relief on the basis of the Hastings-Bass rule as interpreted by the Supreme Court. The Jersey Court found there had been a breach of duty and set the transaction aside but left open the question of whether the broader test under the old rule should continue to be followed. The States of Jersey, only one month after the decision in Onorati, enacted the Trusts (Amendment No. 6) Jersey Law 2013 which enshrined in statute the original principles of Hastings-Bass for trusts governed by Jersey Law.

The position in Cayman is that the “old” rule in Hastings-Bass has been applied in the cases of A V Rothschild Trust (Cayman) Limited and Re Ta-Ming Wang Trust. At present there is no proposal for Cayman to place the “old” rule on a statutory footing as has been done in Jersey.

The Cayman Courts have used their jurisdiction under Sec 48 of the Cayman Trusts Law (2009 Revision) to apply the Hastings-Bass rule. The Chief Justice of the Cayman Islands, speaking at the International Trust and Tax Planning Summit in Miami in November 2013, indicated that the Cayman Courts are unlikely to regard themselves as hamstrung post Futter and Pitt from granting relief from unintended and unforeseen tax consequences arising from erroneous decisions of trustees.

The notion of the Cayman Courts refusing relief on the grounds of public policy based on Lord Walker’s observation that “artificial tax avoidance is generally considered a social evil” must be seen in the context of the socio-political history of the Cayman Islands where there has never been any direct income, capital or inheritance tax.

It remains to be seen how the Cayman Courts will deal with the case of Futter and Pitt. It would be difficult for the Cayman courts to disregard such a closely reasoned judgment and a unanimous decision of the seven justices of the Supreme Court who also sit on the Privy Council which is the final Cayman court of appeal. The effect of the new Hastings-Bass rule is that it no longer protects trustees from making errors without risk. In the context of the services being provided by professional trustees in offshore jurisdictions it is difficult to see how such a protection can be justified.

The decision of the Supreme Court to restrict the use of the Hastings-Bass rule may not be as detrimental as first thought. The widening and clarification by the Supreme Court of the relief available based on an equitable mistake is such that the Courts in Cayman will still have the power to grant relief for mistakes where the requirements to invoke the jurisdiction have been met without being limited to restricting the relief simply because the transaction was primarily designed to mitigate the incidences of tax as such arrangements will not normally be considered to be contrary to the public policy of the Cayman Islands.