The Supreme Court judgment in the conjoined appeals of Pitt v Holt and Futter v Futter was handed down on 9 May 2013. Lord Walker, with whom Lords Neuberger, Mance, Clarke, Sumption, Carnworth and Lady Hale all agreed, gave the judgment of the court. That judgment confirms the circumstances in which the exercise of discretions by a trustee (or other fiduciary) may be set aside. It also recast the equitable jurisdiction to set aside gifts (made by anyone – not just a fiduciary) on the grounds of mistake.
The Rule in Re Hastings Bass
Over the years since it was decided, Re Hastings Bass has lent its name to an apparent principle that the exercise of a discretionary dispositive power by a trustee (or other fiduciary) could be set aside if in the exercise of the discretion the trustee took into account irrelevant considerations or failed to take into account relevant considerations. Importantly, it could be exercised even where no fault could be attributed to the trustee. Trustees appeared to have a magical power to turn back time. In recent years that magical power had most frequently been deployed to escape unexpected tax bills.
In 2011 Lord Justice Lloyd, giving the unanimous judgment of the Court of Appeal in Pitt and Futter, found the so-called Rule in Re Hastings Bass not to be good law. The Supreme Court has now followed the approach of the Court of Appeal. Where a trustee’s discretionary act is exercised in accordance with the terms of the authorising power and for a proper purpose, the act is effective. However, a discretionary act will be voidable at the instance of a beneficiary if there has been a breach of fiduciary duty to the beneficiaries in the decision making process.
A trustee cannot dispose of trust property as freely as an absolute owner disposing of his own property. In exercising a discretionary dispositive power, trustees have a duty to inform themselves of relevant matters. That will frequently require specialist advice from lawyers, accountants, surveyors et al. Failure to take necessary specialist advice (unless the trustee has the requisite specialist knowledge himself) may well be a breach of fiduciary duty. This applies particularly to tax advice in the context of private family trusts, which Lord Walker recognised are "mostly established by and for wealthy families for whom taxes … are a constant preoccupation".
If the trustee takes appropriate tax advice from a reputable source, but that advice proves to be wrong, there will be no breach of fiduciary duty and the only direct remedy for the beneficiary may be in the equitable mistake jurisdiction (as to which more below). There may be an indirect remedy by a claim for professional negligence against the errant tax adviser.
If the trustee has failed to take advice, in breach of duty, the discretionary act may be set aside. This may not be a complete get out of jail free card for the trustee. In a claim to set aside the act, the beneficiary must plead and prove a breach of fiduciary duty. The trustee may be protected by an exoneration clause from any obligation to pay equitable compensation for the breach, but in those circumstances it is not a given that he will be entitled to his costs of the proceedings to set aside his decision.
The old rule in Re Hastings Bass was considered to be an aspect of the court’s supervisory jurisdiction to intervene in the administration of trusts to protect the interests of the beneficiaries. The curtailment of that power is not good news for beneficiaries (and Mrs Pitt’s and Mr Futter’s claims based on that jurisdiction have now been finally dismissed). However, when one door closes, another opens.
Gibbon v Mitchell, a first instance decision of Millet J in 1990, laid out a troublesome test for the circumstances in which equity will intervene to set aside a gift of property on the grounds of donor mistake. Briefly stated, a gift could be set aside where the donor had been labouring under a mistake, of fact or law, as to the effect of the transaction but not merely its consequences. That has led to much debate as to how one distinguishes an effect from a consequence, particularly where the Oxford English Dictionary considers the words to be synonymous. Gibbon did at least make it plain that tax charges were consequences of a gift and not effects, and so the jurisdiction would not assist regretful donors in escaping unanticipated tax outcomes.
Lord Walker’s judgment is bad news for semantics fans. The effects/consequences test has been abandoned. The new test is whether there has been a causative mistake by the donor of sufficient gravity to make it unconscionable for the recipient to retain the property. A causative mistake will usually be 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.
There is some good news for uncertainty fans. As an equitable jurisdiction, the court is ultimately seeking to determine whether the conscience of the recipient will allow him to retain the property. Lord Walker stresses that what is or is not unconscionable requires an objective assessment. However, "the court cannot decide the issue of what is unconscionable by an elaborate set of rules". It will require "an intense focus on the facts of the particular case" and "the court may and must form a judgment about the justice of the case". Although there are a number of cases that address the question of what exactly a causative mistake might be, Lord Walker seems to be not far off saying that the court will take a close look at the facts and decide whether or not it appears fair to unwind the transaction. If it is then, ipso facto, you have a causative mistake.
In a further major departure from Gibbon, Lord Walker confirmed that the tax outcomes of a transaction are relevant to the gravity of a mistake. After a long battle, that provides a happy outcome to this saga for Mrs Pitt. She established a settlement to hold damages awarded to her husband after a very serious road accident, incurring avoidable IHT charges in the process. The Court of Appeal’s re-writing of Re Hastings Bass, together with the effects/consequences mistake test, had left her without a direct remedy. The settlement has now been set aside on the basis of the new mistake test. Mrs Pitt’s was a case in which the appraisal of fairness on the facts may not have been difficult. Lord Walker notes that where "artificial" tax avoidance schemes go wrong, the court may be less willing to invoke the jurisdiction to set aside. Those engaging in such schemes may be more susceptible to being assumed to have accepted the risk that the scheme would be ineffective.
  UKSC 26   Ch. 75   1 WLR 1304