Share it

The Appeal

On 12-14 March 2013 the Supreme Court heard the appeal against the judgment of the Court of Appeal in the jointly heard cases of Futter & Anor v The Commissioners for Her Majesty’s Revenue and Customs and Pitt & Anor v Commissioners for Her Majesty’s Revenue and Customs. Appealing against the unanimous decision of the Court of Appeal in favour of the Revenue ([2011] EWCA Civ 197, Mummery, Longmore and Lloyd LLJ). The issues before the Supreme Court were:

  1. the circumstances in which the Court can interfere with the exercise by trustees of their powers and discretion, specifically, whether the Court can declare void or voidable decisions of trustees on the grounds of failure to take into account a relevant matter in circumstances where the trustees have acted on the basis of professional advice (the “Rule in Hastings-Bass”); and
  2. whether mistakes in relation to adverse tax consequences are the kind of mistakes which will invoke the court’s equitable jurisdiction to set aside a voluntary disposition for mistake.

The relevant law and facts are set out in our case preview dated 11 March and at paragraphs 47-57 of the judgment.The Judgment

On 9 May 2013, the Court (comprising Lords Neuberger, Walker, Mance, Clarke, Sumption and Carnwath, and Lady Hale) handed down its judgment.  Lord Walker, in his final sitting in the Supreme Court before he retired on 17 March, gave the Court’s unanimous judgment:

  1. dismissing the appeals to have the actions of the trustees set aside on an application of the Rule in Hastings-Bass; and
  2. allowing the appeal in Pitt v Holt on the basis that the test for setting aside a voluntary disposition on the ground of mistake was satisfied, and accordingly setting aside the trust in question.

The Rationale – Hastings-Bass

A number of the Justices previously had expressed disquiet in respect of the formulation and application of the Rule in Hastings-Bass, therefore the unanimous dismissal of the appeals in Futter and in Pitt in so far as these turned on the Rule in Hastings-Bass comes as no great surprise.  The Supreme Court unanimously held the Court of Appeal’s reformulation of the Rule in Hastings-Bass to be an example of the Court putting the law “back on the right course” and, as a consequence of the ruling, there will be fewer instances in which reliance can be placed on the Rule in Hastings-Bass.  To meet the necessary threshold:

  1. breach of duty by the trustees is essential;
  2. the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty to justify judicial intervention; and
  3. it will not be sufficient to show that the trustees’ deliberations have fallen short of the highest possible standards, or that the court would have acted in a different way.

There is still scope for trustee liability for breach of trust even where the trustees have acted in accordance with skilled professional advice if they act outside the scope of their powers or contrary to general law.  However, the Supreme Court held that it would be “contrary to principle and authority to impose a form of strict liability on trustees who conscientiously obtain and follow, in making a decision which is within the scope of their powers, apparently competent professional advice which turns out to be wrong“.  As Lord Walker put it, “The trustees’ duty does not extend to being right on every occasion“.

The Rationale – Mistake

Prior to the Supreme Court’s judgment, there was considerable uncertainty and controversy as to the necessary characteristics of mistake, particularly in respect of the distinction between “effect” and “consequences” drawing by Millett J in Gibbon v Mitchell [1990] 1 WLR 1304.  Lord Walker “provisionally” concluded as follows in this regard: “…the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, […] the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.”

The finding in Pitt that the real requirement for rescission on the ground of mistake is for there to be a causative mistake of sufficient gravity and the Court’s departure from seemingly arbitrary distinctions of whether the fact that a transaction gives rise to unforeseen fiscal liabilities is a “consequence” or an “effect” for the purposes of the test demonstrates a return to common sense interpretation.  Furthermore, the finding that it is for the Courts to make an evaluative judgment as to whether it would be unconscionable to leave the mistake uncorrected constitutes a reminder that the Court must exercise its equitable jurisdiction in such cases.  There is no place in equity for the Court to rigidly observe such classifications: legal certainty can only go so far and the justice of each case must be duly considered.

Comment

It is fundamental to recognise that the findings in respect of the Rule in Hastings-Bass, whilst significant, will not be unthinkingly applied to cases in which trustees have made decisions without having given proper consideration to relevant matters which ought to have been taken into consideration.  As Lord Walker concluded, “We are in an area in which the court has an equitable jurisdiction of a discretionary nature, although the discretion is not at large, but must be exercised in accordance with well-settled principles.  The working-out of these principles will raise problems which must be deal with on a case by case basis.”

Going forward, the remedy for beneficiaries suffering the unpalatable fiscal consequences of incorrect professional advice may lie “not in the realms of equity but by way of a claim for damages for professional negligence“.  Certainly, the number of trustees found to be in breach of their fiduciary duties pursuant to having unknowingly followed professional advice which later turned out to be wrong is likely to reduce substantially.  The judgment of the Supreme Court has definitely cast an uncertain light on what Lord Neuberger famously described as Doctor Equity’s “magical morning after pill to trustees suffering from post-transaction remorse“.

In respect of rescission for mistake, rigid classifications of the characteristics of mistake are likely to give way to real considerations going forwards, such as the gravity of the mistake in question and whether it would be unconscionable for the Court to leave it uncorrected.  This appears in keeping with the emphasis placed in the judgment on the practical and flexible approach of equity, and “the general disinclination of equity to insist on rigid classifications expressed in abstract terms.”