STEP Caribbean Conference 2014
Atlantis Paradise Island, Bahamas
12th-14th May 2014
Mistake v. Misdeed
by Edward Hewitt
Barrister
3 Stone Buildings, Lincoln’s Inn, London WC2A 3XL
[email protected]
Tuesday 13th May 2014, 10:55am – 11:45am
Introduction
1.
In its decision in the conjoined appeals in Pitt v Holt and Futter v Futter [2013] UKSC 26
(decided by a 7-member Court on 9th May 2013), the UK Supreme Court dramatically
changed the legal landscape governing the options available to trustees and other
fiduciaries who have committed some sort of ‘blunder’. In particular, the Court:
(a)
affirmed the English Court of Appeal’s decision to the effect that the so-called ‘rule
in Re Hastings-Bass’1 had come to be misunderstood and misapplied and that its
scope should be severely restricted; and
(b)
reversed the Court of Appeal’s decision on the scope of the equitable doctrine of
mistake, broadening its scope by removing the distinction between a mistake as to
the effect and a mistake as to the consequences of a transaction (derived from Millett
J’s decision in Gibbon v Mitchell).2
2.
Where does this leave a trustee who becomes aware of a blunder? Will the trustee still be
able to turn to the Court for help and, if so, how?
1
2
From the English Court of Appeal decision in Re Hastings-Bass [1975] Ch 25.
[1990] 1 WLR 1304.
1
Pitt v Holt: facts and first instance decision
3.
In 1990 Mr Pitt suffered very severe injuries in a road traffic accident, including brain
damage as a result of which he lost mental capacity. His wife was appointed his receiver by
the Court of Protection. Mr Pitt received £1.2m compensation for his injuries in the form of
a lump sum payment and an annuity, which were paid to Mrs Pitt as her husband’s
receiver.
4.
Mrs Pitt sought financial advice as to how to manage the compensation. She was advised
to transfer the lump sum and assign the annuity into a newly created discretionary trust.
She made an application to the Court of Protection, which in September 1994 authorised
her – thereby giving her a discretion – to execute the proposed trust deed and deed of
assignment, which she did in November 1994.
5.
However, her advisers failed to consider the inheritance tax (“IHT”) position and to warn
her that because the newly created discretionary trust did not qualify as a disabled person
trust for UK IHT purposes,3 upon creation of the trust there would be an immediate charge
to c.£100,000 IHT, followed by 10-yearly anniversary charges and exit charges. The total
liability to tax (including interest and penalties) was estimated in 2010 to be in the region
of £200,000 to £300,000. This could have been avoided had Mrs Pitt been advised to create
a disabled person trust instead.
6.
The problem was first spotted in 2003. In 2006 Mr Pitt (by a litigation friend) and the
trustees of the trust issued proceedings against the advisers claiming damages for
professional negligence. Mr Pitt died in 2007 and his personal representatives (including
Mrs Pitt) then applied to set aside the trust pursuant to the rule in Re Hastings-Bass or on
the grounds of mistake. Her Majesty’s Revenue and Customs (“HMRC”) were made a
defendant to the application and actively opposed it.
3
i.e. was not within section 89 of the Inheritance Tax Act 1984.
2
7.
Robert Englehart QC (sitting as a Deputy Chancery Judge) allowed4 the application based
on the rule in Re Hastings-Bass but refused that based on the equitable doctrine of mistake,
on the grounds that Mrs Pitt’s mistake had been as to the (fiscal) consequences of the
transaction, not its effect (following the distinction drawn in Gibbon v Mitchell).5
8.
As to the former, he cited the well-known passage from Buckley LJ’s judgment in Re
Hastings-Bass itself:6
where by the terms of a trust (as under section 32) a trustee is given a discretion as to
some matter under which he acts in good faith, the court should not interfere with his
action notwithstanding that it does not have the full effect which he intended, unless (1)
what he has achieved is unauthorised by the power conferred upon him, or (2) it is clear
that he would not have acted as he did (a) had he not taken into account considerations
which he should not have taken into account, or (b) had he not failed to take into
account considerations which he ought to have taken into account.
9.
He then traced the development of the rule to Sieff v Fox7 and adopted the formulation of
the rule provided by Lloyd LJ (sitting as a first instance judge) in that case:8
The best formulation of the principle seems to me to be this. Where trustees act under a
discretion given to them by the terms of the trust, in circumstances in which they are
free to decide whether or not to exercise that discretion, but the effect of the exercise is
different from that which they intended, the court will interfere with their action if it is
clear that they would not have acted as they did had they not failed to take into account
considerations which they ought to have taken into account, or taken into account
considerations which they ought not to have take into account.
4
[2010] EWHC 45 (Ch).
[1990] 1 WLR 1304.
6
[1975] Ch 25 at 41, cited in Pitt v Holt [2010] EWHC 45 (Ch) at [16].
7
[2005] EWHC 1312, cited Pitt v Holt [2010] EWHC 45 (Ch) at [19].
8
[2005] EWHC 1312 at [119], cited in Futter v Futter [2010] EWHC 449 at [4].
5
3
10.
As it happens, judgment in Pitt v Holt was delivered on the first day of the first instance
hearing in Futter v Futter.
Futter v Futter: facts and first instance decision
11.
In 1985 two family settlements were set up, initially with non-UK resident trustees. In
2004 UK resident trustees were appointed. Both trusts at the time had significant
stockpiled gains.9 On advice from their solicitors, in March and April 2008 the trustees of
both trusts distributed the entire capital of one of the trusts pursuant to a power of
enlargement and distributed £36,000 from the other trust pursuant to a power of
advancement.
12.
The trustees were advised by their solicitors that by doing so the stockpiled gains would be
absorbed by various allowable losses and that as a result no actual capital gains tax
(“CGT”) would be payable. However, the advice failed to take into account a statutory
provision10 which precluded the allowable losses from being used this way in the
circumstances, and as a result a large CGT liability arose.
13.
The trustees therefore made an application to set aside the two deeds effecting the
distributions on the basis of the rule in Re Hastings-Bass. HMRC was made a defendant
and actively opposed the trustees’ application. The application was nonetheless granted by
Norris J,11 who similarly adopted the formulation of the rule in Re Hastings-Bass provided
by Lloyd LJ in Sieff v Fox (above).12
9
Lord Walker described these as “gains realised while the trust was not resident, and not yet distributed to the
beneficiaries or brought in to charge for capital gains tax purposes” ([2013] UKSC 26 at [47]).
10
Section 2(4) of the Taxation of Chargeable Gains Act 1992; see Norris J [2010] EWHC 449 (Ch) at [14] and Lord
Walker [2013] UKSC 26 at [48].
11
[2010] EWHC 449 (Ch).
12
[2005] EWHC 1312 at [119], cited in Futter v Futter [2010] EWHC 449 at [4].
4
14.
Norris J set aside both deeds of appointment, although some of his comments13 suggest that
he was not entirely happy to have to reach that conclusion and he alluded to the possibility
that “the development of the Rule [in Re Hastings-Bass] may have been diverted from its
true course”.14
Conjoined appeals to the Court of Appeal
15.
HMRC appealed both first instance decisions on the rule in Re Hastings-Bass to the Court
of Appeal. Mrs Pitt cross-appealed the dismissal of her claim in so far as it was based on
mistake.
16.
Lloyd LJ (who gave the Court’s substantive judgment, with which Longmore and
Mummery LJJ agreed) identified the two issues under appeal as follows:15
(a)
trustees of a settlement exercise a discretionary power intending to change the
beneficial ownership of trust property, but the effect of what they do turns out to be
different from that which they intended. Can their act be set aside by the court? If so,
what is the correct legal test to determine in what circumstances and on what basis
the court can intervene?
(b)
[what is] the correct legal test to be applied if a donor seeks to have a voluntary
disposition set aside as having been made under a mistake[?]
17.
As regards the rule in Re Hastings-Bass, the Court of Appeal agreed with HMRC’s
argument that the rule in Re Hastings-Bass had been misapplied and had developed in the
wrong way: Longmore LJ described the conjoined appeals as “examples of that
comparatively rare instance of the law taking a seriously wrong turn, of that wrong turn
13
See e.g. “This is another application by trustees who wish to assert that they have acted in an untrustee-like
fashion and so have failed properly to exercise a power vested in them. The trustees wish to take advantage of this
failure to perform their duties in order to enable the beneficiaries to avoid paying the tax liability consequent upon
the trustees' decision.” ([2010] EWHC 449 (Ch) at [2]).
14
[2010] EWHC 449 (Ch) at [2].
15
[2011] EWCA Civ 197 at [1].
5
being not infrequently acted on over a 20-year period but this court being able to reverse
that error and put the law back on the right course.”16
18.
Lloyd LJ drew a distinction between:
(a)
a purported exercise of a discretionary power which is beyond the scope of the
power;17 and
(b)
a situation in which “an exercise by trustees of a discretionary power is within the
terms of the power, but the trustees have in some way breached their duties in
respect of that exercise”.18
19.
He held that when properly understood the decision in Re Hastings-Bass itself was actually
an instance of (a), not (b). Moreover, he held that before the court could intervene in
circumstances in which the trustees had acted within the scope of their discretion (scenario
(b) above), it had to be shown that the trustees’ blunder constituted a breach of trust. As it
could not be said that Mrs Pitt or the trustees in Futter had committed a breach of trust, the
court could not intervene. HMRC’s appeals were therefore allowed, the first instance
decisions set aside and the claims for relief dismissed.
20.
As regards mistake (which was only relevant in Pitt v Holt), Lloyd LJ held that the first
instance judge had been right to follow the distinction between mistakes as to effect and as
to consequences of a transaction and had been right to dismiss Mrs Pitt’s claim based on
mistake because her mistake had been as to the fiscal consequences of the transaction, not
its effect.
Conjoined appeals to the Supreme Court
16
[2011] EWCA Civ 197 at [227].
[2011] EWCA Civ 197 at [96].
18
[2011] EWCA Civ 197 at [99].
17
6
21.
Mrs Pitt and the trustees in Futter appealed the decision on the rule in Re Hastings-Bass
and Mrs Pitt also appealed the decision on mistake. Given the importance of the issues to
be decided, the appeal was heard by a panel of 7 (rather than 5) members of the UK
Supreme Court.
22.
The Court’s unanimous judgment was delivered by Lord Walker. The Court upheld the
Court of Appeal’s decision on the rule in Re Hastings-Bass, but reversed its decision on
mistake. The effect of this was that Mrs Pitt was granted relief on the grounds of mistake
but not on the rule in Re Hastings-Bass (viz. the same outcome as at first instance, but for
the opposite reasons), whereas the trustees’ claim in Futter was dismissed.
Analysis of the Supreme Court’s decision: the rule in Re Hastings-Bass
23.
The Court recognised a tension between the desire to protect beneficiaries from the
consequences of blunders by trustees (which the beneficiaries may have little if any power
to prevent) and the undesirability of allowing trustees and their negligent advisers to get
away scot-free.
24.
Lord Walker also pointed out that although the rule in Re Hastings-Bass and equitable
mistake were two separate doctrines, there is “a degree of overlap…in their practical
application. In some of the first instance cases on the Hastings-Bass rule judges have
drawn attention, with evident surprise, to the absence of any alternative claim for relief by
way of rectification or rescission on the ground of mistake.” 19
25.
In relation to the rule in Re Hastings-Bass, the Court pointed out that “[t]here must be
some suspicion that reliance on the…rule has come to be seen as something of a soft
option, or at any rate as a safer option, at a time when it was supposed, wrongly, that the
19
[2013] UKSC 26 at [7].
7
application of the rule did not require the granting of a remedy which was discretionary in
the sense that it might be withheld because some equitable defence was established”.20
26.
Lord Walker agreed with Lloyd LJ that the reasoning and decision in Mettoy Pension
Trustees Ltd v Evans21 – often seen as the first identification of a ‘rule’ in Re HastingsBass – could not be supported by the reasoning in Re Hastings-Bass itself.22
27.
He also agreed with Lloyd LJ’s “very important distinction”23 between:
(a)
“an error by trustees in going beyond the scope of a power (for which I shall use the
traditional term “excessive execution”)”;24 and
(b)
“an error in failing to give proper consideration to relevant matters in making a
decision which is within the scope of the relevant power (which I shall term
“inadequate deliberation”).”25
28.
Having reviewed the authorities, the Supreme Court upheld Lloyd LJ’s decision that in
“inadequate deliberation” cases it was essential to show that the trustees’ failings
amounted to a breach of trust before the court could intervene:
It is not enough to show that the trustees’ deliberations have fallen short of the highest
possible standards, or that the court would, on a surrender of discretion by trustees,
have acted in a different way. Apart from exceptional circumstances (such as an
impasse reached by honest and reasonable trustees) only breach of fiduciary duty
justifies judicial intervention.26
20
[2013] UKSC 26 at [7].
[2013] UKSC 26 at [32].
22
[2013] UKSC 26 at [32].
23
[2013] UKSC 26 at [60].
24
Ibid.
25
Ibid.
26
[2013] UKSC 26 at [73].
21
8
29.
A practical consequence of this is that Re Hastings-Bass applications will rarely be brought
by the trustees themselves, as both the Court of Appeal and the Supreme Court
acknowledged.27
30.
Whilst indicating that there may be circumstances in which a trustee who has obtained
competent legal advice can nevertheless be found guilty of a breach of trust – in particular
in “excessive execution” cases – “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”.28 The Court also rejected as “quite unrealistic” the
submission that trustees are under a duty to act on advice only if it is correct.29
31.
Although the Supreme Court acknowledged that trustees will rarely be confident of
obtaining a full indemnity for the beneficiaries’ loss and their own costs in a professional
negligence claim against their advisers, this “should have no effect on the operation of the
Hastings-Bass rule”.30
32.
Lord Walker agreed with Lloyd LJ that “fiscal consequences may be relevant
considerations which the trustees ought to take into account”.31 However, because neither
Mrs Pitt nor the Futter trustees could be said to have committed a breach of trust, relief
was refused on Re Hastings-Bass grounds.
33.
Lord Walker recognised that the decision would create a degree of uncertainty:
I would accept that there have been, and no doubt will be in the future, cases in which
small variations in the facts lead to surprisingly different outcomes. That is inevitable in
27
[2011] EWCA Civ 197 at [130] and [2013] UKSC 26 at [69].
[2013] UKSC 26 at [78]-[80].
29
[2013] UKSC 26 at [88].
30
[2013] UKSC 26 at [90].
31
[2013] UKSC 26 at [65].
28
9
an area where the law has to balance the need to protect beneficiaries against aberrant
conduct by trustees (the policy behind the Hastings-Bass rule) with the competing
interests of legal certainty, and of not imposing too stringent a test in judging trustees’
decision-making.32
34.
The new Re Hastings-Bass test has recently been summarised and applied in England in
Roadchef (Employee Benefits Trustees) Ltd v Hill,33 a case involving fraud on a power.
Analysis of the Supreme Court’s decision: mistake in equity
35.
The Supreme Court disagreed with and reversed the Court of Appeal’s decision on
mistake. The Court refused the trustees in Futter permission to argue mistake for the first
time before the Supreme Court itself,34 and mistake was therefore only relevant in the Pitt
v Holt appeal.
36.
Lord Walker concluded that the distinction between a mistake as to the effect and a
mistake as to the consequences of a transaction (identified by Millett J in Gibbon v
Mitchell)35 should be abandoned:36
To confirm the Gibbon v Mitchell test…would in my view leave the law in an
uncertain state, as the first instance decisions mentioned…above tend to
demonstrate. It would also be contrary to the general disinclination of equity to insist
on rigid classifications expressed in abstract terms.
37.
Reverting to the test which had been formulated in Ogilvie v Littleboy,37 the Supreme
Court held that the court must ask itself whether there has been “a causative mistake of
32
[2013] UKSC 26 at [83].
[2014] EWHC 109 (Ch) at [105].
34
[2013] UKSC 26 at [135].
35
[1990] 1 WLR 1304.
36
[2013] UKSC 26 at [123].
33
10
sufficient gravity”,38 a test which will normally only be satisfied 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”.39
38.
The gravity of the mistake and the injustice of leaving a mistaken disposition uncorrected
must be evaluated objectively, but with “an intense focus…on the facts of the particular
case.”40
39.
A further – and difficult – point made by Lord Walker is that “a mistake must be
distinguished from mere ignorance or inadvertence, and also from…[a] misprediction.”41
He acknowledged that these distinctions “tend to get blurred when it comes to the facts of
particular cases”.42
40.
Later in his judgment Lord Walker drew a distinction between “mere causative
ignorance”43 (which is insufficient to warrant relief) and “a mistaken conscious belief or a
tacit assumption”.44 Again, Lord Walker acknowledged that “[i]t may indeed be difficult to
draw the line”45 between these concepts and indicated that “the court, in carrying out its
task of finding the facts, should not shrink from drawing the inference of conscious belief
or tacit assumption when there is evidence to support such an inference”.46 Moreover, he
explained that:
Forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a
false belief or assumption which the law will recognize as a mistake.47
37
(1897) 13 TLR 399 (Court of Appeal) and sub. nom. Ogilvie v Allen (1899) 15 TLR 294 (House of Lords).
[2013] UKSC 26 at [122].
39
Ibid.
40
[2013] UKSC 26 at [126].
41
[2013] UKSC 26 at [104].
42
Ibid.
43
[2013] UKSC 26 at [108].
44
Ibid.
45
Ibid.
46
Ibid.
47
[2013] UKSC 26 at [105].
38
11
41.
As regards the assessment of the merits of the particular case, the Supreme Court explained
that:48
The court cannot decide the issue of what is unconscionable by an elaborate set of
rules. It must consider in the round the existence of a distinct mistake (as compared with
total ignorance or disappointed expectations), its degree of centrality to the transaction
in question and the seriousness of its consequences, and make an evaluative judgment
whether it would be unconscionable, or unjust, to leave the mistake uncorrected. The
court may and must form a judgment about the justice of the case.
42.
The new test for mistake has since been summarised and applied in England in Pagel v
Farman49 (in the commercial context of an alleged mistaken gift by a hedge fund manager
to his partner) and obiter in Roadchef (Employee Benefits Trustees) Ltd v Hill.50
Tax avoidance: a new concept of ‘palatability’ of the mistake?
43.
The Supreme Court explored during the hearing the relevance of the fact that the mistake
in question related to tax consequences (and asked the parties to prepare submission on this
point overnight).
44.
The Court rejected HMRC’s submission that relief should never be granted where the
mistake relates exclusively to tax, which it thought was “much too wide, and unsupported
by principle or authority”.51 However, the Court also went on to make the following
comments about the possibility that a court may be more reluctant to grant relief on the
grounds of mistake where the mistake relates exclusively to tax:52
48
[2013] UKSC 26 at [128].
[2013] EWHC 2210 (Comm) at [39]-[40].
50
[2014] EWHC 109 (Ch) at [132]-[135].
51
[2013] UKSC 26 at [129]-[132].
52
[2013] UKSC 26 at [132] and [135].
49
12
On the test proposed above, consequences (including tax consequences) are relevant to
the gravity of a mistake, whether or not they are (in Lloyd LJ’s phrase) basic to the
transaction.
…
Had mistake been raised in Futter v Futter there would have been an issue of some
importance as to whether the court should assist in extricating claimants from a tax
avoidance scheme which had gone wrong. The scheme adopted by Mr Futter was by no
means at the extreme of artificiality … but it was hardly an exercise in good citizenship.
In some cases of artificial tax avoidance the court might think it right to refuse relief,
either on the ground that such claimants, acting on supposedly expert advice, must be
taken to have accepted the risk that the scheme would prove ineffective, or on the
ground that discretionary relief should be refused on grounds of public policy. Since the
seminal decision of the House of Lords in WT Ramsay Ltd v Inland Revenue Comrs
[1982] AC 300 there has been an increasingly strong and general recognition that
artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of
those who do not adopt such measures. But it is unnecessary to consider that further on
these appeals.
45.
Although strictly obiter, these comments suggest that where in future trustees seek to undo
a fiscal blunder by relying on the broader mistake jurisdiction (rather than the rule in Re
Hastings-Bass), the court may refuse relief:
(a)
where the trustees have consciously taken the risk that a tax avoidance scheme may
not work; or
(b)
where the court considers the overall artificial tax avoidance exercise to be one of
‘bad citizenship’ or a ‘social evil’.
46.
It is suggested that the latter in particular is a problematic criterion. Where is the line to be
drawn between ‘good’ tax avoidance and ‘bad’ tax avoidance? Can it not be argued that
13
both Mrs Pitt and the Futter trustees were trying to arrange assets they held on trust for
someone else in the most tax efficient way? If so, were they not both engaged in
(legitimate) tax avoidance of the type referred to, for example, in IRC v Duke of
Westminster53 or in the rectification case of Re Slocock’s Will Trusts?54
Repercussions in the offshore world
47.
Lord Walker himself made some comments about trusts in the offshore world in his
judgment, highlighting the importance of trustees making their own decisions guided by a
settlor’s letter of wishes (as opposed paying “unquestioning obedience” to letters of
wishes).55
48.
Since the Supreme Court’s judgment there has already been some reaction to it in several
offshore jurisdictions.
49.
On 21st June 2011 (after the Court of Appeal’s but before the Supreme Court’s decision in
Pitt) the Royal Court of Jersey decided In re R,56 which was an application to set aside on
the grounds of mistake a transfer of shares which had had unexpected tax consequences.
The Court refused to follow the English test for mistake as formulated by Lloyd LJ 57 and
instead applied the Jersey test of mistake58 and allowed the application on that basis.
53
[1936] AC 1 at 19-20 “Every man is entitled if he can to arrange his affairs so that the tax attaching under the
appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then,
however unappreciative, the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he
cannot be compelled to pay an increased tax.” (per Lord Tomlin)
54
[1979] 1 All ER 358 at 363 “Parties are entitled to enter into any transaction which is legal, and, in particular,
are entitled to arrange their affairs to avoid payment of tax if they legitimately can. The Finance Acts 1969 and
1975 tell them explicitly how they can do so in the case of estate duty and capital transfer tax. … If a mistake is
made in a document legitimately designed to avoid the payment of tax, there is no reason why it should not be
corrected. The Crown is in no privileged position qua such a document. It would not be a correct exercise of the
discretion in such circumstances to refuse rectification merely because the Crown would thereby be deprived of an
accidental and unexpected windfall.” (per Graham J)
55
[2013] UKSC 26 at [66]-[67].
56
[2011] JRC 117.
57
[2011] JRC 117 at [42]-[43].
58
Set out in Re the Lochmore Trust [2010] JRC 068 at [11]:
…the Court has to ask itself the following questions:
14
50.
It made the following observations regarding Lloyd LJ’s upholding of the
effect/consequences distinction in the context of mistake:59
The second aspect of the [Court of Appeal’s] Pitt v Holt test that troubles us is the
weight given to the interests of the tax authority. We entirely accept that it is open to the
courts of any country to lay down their own judicial policy in relation to the exercise of
an equitable jurisdiction. The preference accorded to the interests of the tax authority in
the UK is not one, however, with which we are sympathetic. In our view, Leviathan can
look after itself. We should not be taken as indicating any sympathy for tax evasion,
which we regard as fraudulent and as entirely undeserving of any favourable
discretionary treatment. But in Jersey it is still open to citizens so to arrange their
affairs, so long as the arrangement is transparent and within the law, as to involve the
lowest possible payment to the tax authority. We see no vice in this approach. We
accordingly see no reason for adopting a judicial policy in this country which favours
the position of the tax authority to the prejudice of the individual citizen, and excludes
from the ambit of discretionary equitable relief mistakes giving rise to unforeseen fiscal
liabilities. We see no fairness in such a policy. If, as we understand it, Mrs Pitt had
arranged her affairs differently, the compensation that her husband received for his
terrible injuries would not have been subject to IHT. We do not think that many people
would have criticised her for making such a different arrangement so long, of course,
that it was transparent and lawful. It was a mistake for Mrs Pitt to enter the
arrangement that she did. It was a mistake of sufficient gravity, as was acknowledged by
Lloyd LJ, to satisfy the Ogilvie v Littleboy test. Yet it was excluded from the possibility
of equitable relief because the policy is to treat unforeseen fiscal liabilities as a
consequence rather than an effect of the mistake.
(i) Was there a mistake on the part of the settlor?
(ii) Would the settlor not have entered the transaction “but for” the mistake?
(iii) Was the mistake of so serious a character as to render it unjust on the part of the donee to retain the property?
59
[2011] JRC 117 at [39]-[40].
15
Justice and fairness seem to us to have been at the heart of the approach adopted by
Lindley LJ in Ogilvie v Littleboy. It is troubling, therefore, that the outcome for Mrs
Pitt seems to have been so unjust and unfair.
51.
The Court also made the following remarks about forcing trustees who have received
negligent advice to sue their advisers (a consequence of the narrowing of the Re HastingsBass jurisdiction):60
The remedy for Mrs Pitt, according to the Court of Appeal, was to sue her legal
advisers. Having been failed by one set of advisers, she was to entrust herself to
another set and to commit herself to the risks, uncertainties and expense of further
litigation.
52.
Then on 12th December 2012 (once again, after the Court of Appeal’s but before the
Supreme Court’s decision in Pitt), the Royal Court of Jersey decided Re B Life Interest
Settlement,61 which involved the restructuring of a discretionary trust to mitigate UK IHT
consequences which failed to achieve its purpose because, unbeknownst to the trustee, the
settlor was suffering from undiagnosed aggressive Alzheimer’s disease and died within 7
years of the restructuring.
53.
As regards mistake, the Royal Court applied the Jersey formulation of the test for mistake62
and held that – by a fine margin – the test was not satisfied on the facts,63 noting in
particular that it was not clear that the settlor’s illness could have been diagnosed at the
time of the restructuring and that advice was given about the possibility of obtaining life
insurance but was not followed up.
60
[2011] JRC 117 at [41].
[2012] JRC 229.
62
The Court once again applied the test set out in Re the Lochmore Trust [2010] JRC 068 at [11] (above): see [2012]
JRC 229 at [30].
63
[2012] JRC 229 at [43].
61
16
54.
As regards Re Hastings-Bass, the Court held that even if the ‘old’ rule in Re Hastings-Bass
still applied in Jersey, it was not satisfied on the facts as the trustee had not failed to
consider anything which it was under a duty to consider.64 It went on to analyse the policy
arguments in favour and against a broad Re Hastings-Bass jurisdiction and tentatively
concluded that the guiding principle for the Court should be “to ensure that the loss lies
where it should”65 and that, had it been necessary to decide the point, the Court would have
followed Lloyd LJ’s judgment in Pitt v Holt and held that previous Jersey decisions
applying the ‘old’ rule in Re Hastings-Bass were “clearly wrong”.66
55.
After the Supreme Court decision in Pitt, the Royal Court of Jersey decided In the matter
of the Onorati Settlement67 (decided on 17th September 2013). It held that on the facts the
trustees’ application succeeded even if the ‘new’ (narrower) rule in Re Hastings-Bass was
adopted because the trustees had committed a breach of trust by failing to have regard to
and to take any advice on the tax consequences of the appointment out of the trust fund.68
Echoing the observations made in In re R (above), the Court indicated that:69
More generally, we are not attracted by the proposition that beneficiaries should be left
to a remedy of bringing litigation against trustees or professional advisers. The
beneficiaries are usually not at fault and have already incurred loss by reason of
unnecessary tax charges. To force them to incur further expense in what may be
uncertain litigation when the law allows for the avoidance of a decision made in breach
of the trustees’ duties seems unnecessary, undesirable and unjust.
56.
In the circumstances it was unnecessary to decide whether Jersey should nevertheless
retain the ‘old’ rule in Re Hastings-Bass and the point was accordingly left open.70
64
[2012] JRC 229 at [87].
[2012] JRC 229 at [95].
66
[2012] JRC 229 at [104].
67
[2013] JRC 182.
68
[2013] JRC 182 at [40].
69
[2013] JRC 182 at [44].
70
[2013] JRC 182 at [17].
65
17
Interestingly, HMRC, who had been notified of the application, declined to actively oppose
it but indicated in a letter to the Court that it reserved the right to contend that any setting
aside of the trustees’ transactions should not be recognised in England in so far as any UK
tax consequences are concerned.71
57.
However, Jersey has since enacted the Trusts (Amendment No. 6) (Jersey) Law 2013,
which came into force on 25th October 2013. This amends the Trusts (Jersey) Law 1984
by, in effect, placing the ‘old’ rule in Re Hastings-Bass on a statutory footing.72
58.
The new provisions were considered (albeit obiter) in the Royal Court’s recent decision in
Boyd v Rozel Trustees (Channel Islands) Ltd73 (decided on 4th March 2014), in which the
Court set aside the creation of a trust on the grounds of mistake where the settlor had failed
to appreciate that he remained deemed domiciled in the UK for UK IHT purposes. The
Court applied the Jersey test for mistake and noted that the English test for mistake set out
by the Supreme Court in Pitt “seems to us broadly to align the approach to be taken by the
English courts in the future with that adopted by the Royal Court”.74
59.
The Court also made the following observations on the comments made by Lord Walker
about the possibility of the court refusing relief where the mistake is part of a tax
avoidance exercise:75
There is clearly more than one approach that one could take to what Lord Walker
describes as an issue of some importance in the United Kingdom, and the arguments
would be further complicated in this jurisdiction by a recognition that the social evil of
artificial tax avoidance which puts an unnecessary burden on the shoulders of those
who do not adopt such measures might receive a different emphasis where it is not our
71
[2013] JRC 182 at [47].
See Articles 47B to 47J as amended.
73
[2014] JRC 056.
74
[2014] JRC 056 at [20].
75
[2014] JRC 056 at [25].
72
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domestic taxation system which is being avoided. The complexity of such arguments,
including the difficulties in establishing what amounts to a social evil where the
relevant jurisdiction’s legislature can be assumed to have taxed everything that it
intended to tax (which makes avoidance, on one analysis, entirely legitimate)
emphasises that in the absence of any contentions to the contrary, it is unnecessary to
consider such an issue further in this case.
60.
Meanwhile, on 11th February 2013 (after the Court of Appeal’s but before the Supreme
Court’s decision in Pitt) the Royal Court of Guernsey had decided Dervan and MD Events
Ltd v Concept Fiduciaries Ltd, an application to set aside transfers into a trust on the
grounds of mistake. Having determined that English law governed the application, the
Court applied Lloyd LJ’s test for mistake.
61.
The Isle of Man had already adopted an Ogilvie v Littleboy-type test for mistake in
Clarkson v Barclays Private Bank & Trust (IoM) Ltd76 and Re Betsam Trust (also known
as McBurney v McBurney)77 and there are rumours it is considering following Jersey by
placing the ‘old’ Re Hastings-Bass jurisdiction on a statutory footing.
62.
In Cayman, Chief Justice Anthony Smellie has indicated78 that although not directly
binding the decision in Pitt will be of “the most highly persuasive value” – not least
because an appeal to the Privy Council may well be heard by some of the same judges who
decided Pitt. He also ventured that after Pitt “the courts of the Cayman Islands will not be
unduly hamstrung in the relief to be granted from unintended and unforeseen tax
consequences arising from erroneous decisions of trustees”. In relation to Lord Walker’s
comments about relief in the context of tax avoidance he said:
76
[2007] WTLR 1703.
[2009] WTLR 1489.
78
In a paper dated 19th November 2013 given at a conference in Miami, which is available at http://judicial.ky/wpcontent/uploads/publications/speeches/2013-11-19-Speech-CJDEALINGWITHMISTAKESOFTRUSTEESORSETTLORS.pdf
77
19
The perspective of the bench from a jurisdiction like the Cayman Islands is that from a
place where there never has been direct income, capital gains or inheritance tax. A
jurisdiction which therefore has never had the need in any sense “artificially” to
structure its laws so as unfairly to arbitrage the tax laws of other jurisdictions.
Accordingly, notions of the refusal of relief by the court, on “grounds of public policy”
from the “general recognition that artificial tax avoidance is a social evil” must be
considered in their proper context. In the socio-political context of the Cayman Islands,
there can be no presumption that an arrangement, which is otherwise within the law not
only of the Cayman Islands, but also of the relevant domiciliary jurisdiction, is to be
deemed “artificial” simply because its primary aim is to mitigate the incidences of tax.
63.
At the same conference, Chief Justice Kawaley is understood to have expressed a similar
view from Bermuda.
Scenarios
64.
To conclude, considering some examples of blunders may help charter these new waters.
Scenario A
65.
Trustees exercise a discretionary power by executing a deed appointing capital to D, not
realising that the class of objects only includes A, B and C, and not D.
66.
This is arguably the paradigm example of a purported execution beyond the scope of the
power (what Lord Walker labelled “excessive execution”). If the purported exercise is
beyond the scope of the power, it is void and of no effect79 (although in some cross-border
situations there may be some interesting and complicated arguments as to the effect of so-
79
See e.g. Pitt v Holt [2011] EWCA Civ 197 at [92], [96] and [161] and [2013] UKSC 26 at [41]; and Re
Abrahams’ Will Trusts [1969] 1 Ch 463.
20
called ‘firewall legislation’). This might now be thought of as the ‘true’ rule in Re
Hastings-Bass.
67.
Lloyd LJ in Pitt also gave the following examples of purported executions which are
beyond the scope of the power:80
There may be a procedural defect, such as the use of the wrong kind of document, or the
failure to obtain a necessary prior consent. There may be a substantive defect, such as
an unauthorised delegation or an appointment to someone who is not within the class of
objects. Cases of a fraud on the power[81] are similar to the latter, since the true
intended beneficiary, who is not an object of the power, is someone other than the
nominal appointee. There may also be a defect under the general law, such as the rule
against perpetuities, whose impact and significance will depend on the extent of the
invalidity.
Scenario B
68.
Trustees decide to exercise their discretion to appoint 40% of capital to A. They instruct
their solicitors to draft a deed of appointment to give effect to their decision. The draft deed
in fact provides that 60% of the capital will be appointed to A. Nobody spots the error and
the trustees execute the deed.82
69.
It is suggested that this sort of situation is likely to satisfy the test for mistake set out in Pitt
v Holt. Indeed, Lord Walker suggested that Abacus v Barr was a case in which “rescission
on the grounds of mistake would seem to have been the natural remedy for the trustees to
80
[2011] EWCA Civ 197 at [96].
Lord Walker recognised that cases involving a fraud on a power are difficult to categorise in the “excessive
execution” vs. “inadequate deliberation” dichotomy, at least in part as a result of Cloutte v Storey [1911] 1 Ch 18,
which he indicated “may have to be revisited one day” ([2013] UKSC 26 at [62]).
82
This example is loosely based on the facts of Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409.
81
21
seek”.83 Quite separately, this may well also be a case for rectification of the deed of
appointment. However, it seems unlikely to be a case falling within the new, narrower Re
Hastings-Bass jurisdiction, because it is hard to see that the trustees have committed any
breach of trust.84
Scenario C
70.
As part of a tax planning exercise, trustees resolve to exercise their discretion to terminate
A’s life interest in a trust so as to accelerate B and C’s interests and at the same time
trigger a potentially exempt transfer by A for UK IHT purposes. Everyone assumes A is
healthy and will survive 7 years and therefore no IHT liability will arise. The trustees
obtain correct advice as to the tax consequences of the exercise. However, six months after
the relevant deed has been executed, A is diagnosed with terminal cancer, from which he
dies nine months later, triggering an IHT liability which would not have arisen had the
trust been left as it was.85
71.
The difficulty in this sort of case is determining whether there has been a mistake. On
broadly similar facts, the English High Court in In re Griffiths86 held that there had been a
mistake, whereas the Royal Court of Jersey in Re B Life Interest Settlement87 held that
there had not. The difficulty consists in deciding whether (in Lord Walker’s language)
there has been a “distinct mistake (as compared with total ignorance or disappointed
expectations)”;88 or (again in Lord Walker’s language) “mere causative ignorance”89 as
83
[2013] UKSC 26 at [7]; see also at [83].
Although perhaps quaere whether failing to double-check the draft deed before executing it constitutes a breach
by the trustees of their duty to exercise reasonable care and skill.
85
This example is loosely based on the facts of In re Griffiths [2009] Ch 162 and Re B Life Interest Settlement
[2012] JRC 229.
86
[2009] Ch 162.
87
[2012] JRC 229.
88
[2013] UKSC 26 at [128].
89
[2013] UKSC 26 at [108].
84
22
opposed to “a mistaken conscious belief or a tacit assumption”;90 or perhaps also an
assumption of risk by the trustees if no enquiries are made as to A’s health.
72.
Of course, borderline cases like this are likely to turn on a detailed examination of the
particular facts. However, the court might be encouraged to conclude that a relevant
mistake has been made by Lord Walker’s indication that “the court, in carrying out its task
of finding the facts, should not shrink from drawing the inference of conscious belief or
tacit assumption when there is evidence to support such an inference”.91
Scenario D
73.
The facts are the same as those in Scenario C above, save that the cause of the settlor’s
death is a road traffic accident.
74.
In this case, it is hard to see that there is anything the trustees can do. Lord Walker
indicated that a failure to predict a fatal road traffic accident was an example of a
misprediction for which no relief was available.92 The Royal Court of Jersey has also
suggested that in these circumstances the trustee could not argue that the arrangements had
been made as a result of a mistake.93
Scenario E
75.
The facts are as in Futter v Futter itself.
76.
We know that on those facts the trustees are not entitled to relief pursuant to the ‘new’ rule
in Re Hasting-Bass. What about mistake?
90
Ibid.
Ibid.
92
[2013] UKSC 26 at [113].
93
Re B Life Interest Settlement [2012] JRC 229 at [43].
91
23
77.
It is suggested that the facts should satisfy the new, broader test for a “causative mistake of
sufficient gravity”. The facts illustrate a potential difficulty in semantics in this area: in a
sense, it could be said that the Futter trustees were ‘ignorant’ about section 2(4) TCGA
1992 in that they were unaware of its existence because their advisers had failed to mention
it. Indeed, this was the sort of language used by the High Court of the Isle of Man in Re
Betsam Trust, where the settlors had not been advised that they remained deemed
domiciled in the UK at the date of the creation of the trust:94
[the settlors’] mistake was solely as to the tax consequences of the document which they
were signing. As explained above, the trust was simply created too early as a result of
ignorance of the application of the relevant UK tax legislation.
78.
However, it is suggested that this is an example of what Lord Walker was alluding to when
he said “[f]orgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can
lead to a false belief or assumption which the law will recognize as a mistake.”95 Ignorance
about a particular tax provision can lead to a false belief or assumption that no tax will be
payable, which the law may recognize as a mistake.
79.
Furthermore, the interesting and problematic question is whether in a case like this an
English court is likely to conclude that relief should nonetheless be denied on public policy
grounds on the basis that the mistaken transaction formed part of a tax avoidance exercise
which should be seen as a “social evil”.
Conclusion
80.
Although in England trustees have now been deprived of a helpful ‘morning-after pill’ in
the form of the rule in Re Hastings-Bass, the harshness of this is likely to be
counterbalanced to some extent by the removal of the effect/consequences distinction in
94
95
[2009] WTLR 1489 at [24].
Pitt v Holt [2013] UKSC 26 at [105].
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relation to equitable mistake, and thus the broadening of that doctrine. Abroad, some
offshore jurisdictions have reacted by creating, in effect, a statutory rule in Re HastingsBass. Moreover, it should not be forgotten that in appropriate cases rectification may be
available.
81.
Overall, it is suggested that the message for trustees is that the courts are still ready to help
resolve ‘blunders’, although the ways in which they might do so have changed as a result
of Pitt.
82.
An area to watch for future developments is the extent to which HMRC will wish to
explore the limits of a new ‘palatability’ test by resisting claims brought by trustees
relating to fiscal ‘blunders’, and perhaps by resisting the enforcement of offshore
judgments in England where UK tax is at stake (particularly if HMRC’s recentlydiscovered enthusiasm for resisting ‘old-style’ Re Hastings-Bass applications is any
indication of HMRC’s likely future conduct).
© Edward Hewitt
3 Stone Buildings
Lincoln’s Inn
London WC2A 3XL
[email protected]
24th April 2014
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