Update
LEGAL
News and Views
from 4 New Square
May 2013
Shurely shome mishtake?
The Supreme Court’s decision on mistake and the flawed exercise
of discretion by trustees, and the impact of the decision on
professional advisers and their insurers.
David Halpern QC
d.halpern@4newsquare.com
the Supreme Court gave judgment in Futter v. HMRC and
O nPitt9thv. May
HMRC [2013] UKSC 26. This decision, by a panel of seven judges,
is of enormous importance to trust lawyers but also has considerable significance
in the field of professional liability.
The issues
T
he appeals concerned two
hotly-contested rules or
alleged rules. One is the rule relating
to rescission of a gift or trust for
unilateral mistake. The other is the
so-called rule in Re Hastings-Bass
[1975] Ch 25 (in fact formulated in
Mettoy Pension Trustees Ltd v. Evans
[1990] 1 WLR 1587). This said that
where a trustee exercised a discretion
after taking into account irrelevant
considerations or failing to take into
account relevant ones, the exercise of
discretion was voidable (or, possibly,
void). It did not matter that the error
was the fault of the trustees’ legal
advisers.
These alleged rules had an obvious
practical application in failed
tax-planning schemes. They have
been described by Lord Neuberger
as a “get out of jail free” card for
trustees, advisers and their insurers.
If a voluntary disposition which had
adverse tax consequences could be
set aside, in practice the negligent
adviser or his insurer would not have
to pay damages, save for the cost of
setting aside.
The facts
I
n Futter v. Futter, the trustees
exercised their power of
advancement in a way that created a
liability to Capital Gains Tax. They did
so in reliance on their solicitor’s advice.
The transaction could have been
structured differently so as to avoid tax.
In Pitt v. Holt, the victim of a serious
road injury received a structured
settlement award. His wife, acting as
his receiver under the Mental Health
Act, created a discretionary settlement
with the money. Unfortunately it was
drafted so as to give rise to a liability
to Inheritance Tax. Once again the
deed was executed in reliance on
professional advice, this time from an
IFA; the transaction could have been
structured differently so as to avoid tax.
In both cases it was argued that the
exercise of discretion was flawed and
was therefore void or voidable and
could be exercised afresh. In addition,
it was argued in Pitt that the voluntary
disposition should be set aside on the
ground of mistake. (Mistake was not
pleaded in Futter.) Not surprisingly,
the Revenue was joined in the appeals
as being the only party who had a real
interest in arguing the contrary.
David
Halpern QC
Hastings-Bass
Walker gave the only
L ord
judgment in the Supreme Court.
He agreed with Lloyd LJ in the Court
of Appeal ([2012] Ch 132) that the law
had taken a wrong turning in HastingsBass and Mettoy. He confirmed that
the key distinction is between excessive
execution of a power and inadequate
deliberation.
Excessive execution arises where a
trustee or other fiduciary purports to
exercise a power in a way that goes
beyond its proper scope. This is similar
to a company or local authority acting
ultra vires; the excessive execution is
void. Examples include a purported
exercise of the power by appointing
assets to a stranger who is not a
beneficiary, or a purported
appointment which is contrary to a
rule of law (e.g. the rule against
perpetuities). A trustee who acts ultra
vires commits a breach of trust,
whether or not he acts on professional
advice.
By contrast, inadequate deliberation is
where the trustee makes a decision
which is within the scope of the
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relevant power (i.e. intra vires) but he
fails to give proper consideration to
relevant matters.
This is the area with which the rule in
Hastings-Bass is concerned. In Mettoy
the principle was formulated in similar
terms to Wednesbury unreasonableness
in public law. Lloyd LJ held that this
was a dangerous analogy, and Lord
Walker agreed.
The true principle is that, apart from
the law of mistake, an exercise of a
power by a trustee or other fiduciary
may be set aside only if it is
unauthorised. It will be unauthorised
only if it amounts to a breach of
fiduciary duty. But it will not be
unauthorised merely because a
different exercise of the power
might have been more beneficial
(paragraph 73).
Lord Walker accepted that fiscal
consequences may be a relevant
consideration to be taken into account
by the trustees. However, if the trustees
seek advice from an apparently
competent professional who gives
them incorrect tax advice on which
they rely, they have not thereby
committed any breach of fiduciary
duty merely because the advice turns
out to be wrong.
In some cases, one of the trustees is
himself the professional adviser; in
others the trustees leave it to their
advisers to draft all necessary
documents and simply rubber-stamp
whatever they are asked to sign. In all
such cases it is important to distinguish
between the roles of adviser and
trustee. It is for advisers to advise and
for trustees to decide. The decision
may not be impugned merely because
the advice turns out to be wrong.
If the trustee has acted honestly and
reasonably in seeking apparently
competent advice, the court is likely to
relieve him from personal liability for
breach of trust under section 61 of the
Trustee Act 1925. That does not, of
course, relieve him from liability for
negligence if he also happens to be the
trustees’ legal adviser. However, Lord
Walker added that “in practice it will
be rare for trustees to have so strong a
claim [against their professional
advisers] that they can be confident of
obtaining a full indemnity for their
beneficiaries’ loss and their own costs”
(paragraph 90).
Mistake
sought to argue that the
H MRC
kind of mistake which is
necessary to set aside a voluntary
settlement is the same as that required
to set aside a contract (i.e. the test in
Great Peace [2003] QB 679). This
argument was rejected. The Supreme
Court held that mistake in voluntary
settlements is different from mistake in
contracts. The mistake need only be a
unilateral mistake by the donor or
trustee. It does not matter whether it is
due to carelessness on his part, nor
does it matter whether it is known to
the donee.
There must, of course, be a mistake.
Forgetfulness and ignorance do not
themselves amount to mistake but may,
depending on the facts, justify the
inference of a conscious false belief or
assumption amounting to a mistake.
The true principle is that the
transaction may be set aside if the
donor or trustee was under “some
mistake of so serious a character as to
render it unjust on the part of the
donee to retain the property given to
him” (Ogilvie v. Littleboy (1897) 13
TLR 399).
In Gibbon v. Mitchell [1990] 1 WLR
1304 Millett J sought to draw a
distinction between a mistake as to
effect and a mistake as to
consequences. He said that a mistake
would be operative if the donor did
not intend the transaction to have the
effect which it had. By “effect” he
meant its purpose or object. However,
if the transaction had its intended
effect, it could not be set aside merely
because it had unintended
consequences.
The Court of Appeal in Pitt applied
Millett J’s distinction and refused to
grant relief for mistake, but the
Supreme Court rejected this distinction
and set aside the settlement for
mistake. Lord Walker said: “I would
provisionally conclude that the true
requirement is simply for there to be a
causative mistake of sufficient gravity;
… 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” (paragraph 122).
The doctrine of mistake in voluntary
dispositions is an equitable one.
Ultimately it depends on whether it
would be unconscionable in all the
circumstances to refuse relief. The
court’s task is therefore “to 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”
(paragraph 128).
If the court is satisfied that the mistake
was basic to the transaction, it may
take account of the tax consequences
in concluding that the mistake was of
sufficient gravity. Relief should not be
denied merely because the mistake has
serious tax consequences. But if the
disposition is an egregious example of
artificial tax-avoidance, this might be
relevant to the court’s exercise of its
discretion.
Conclusion
The decision of the Supreme Court
has clarified the law and removed
some anomalies. Whilst it will be a
disappointment to professional
advisers and their insurers that the
rule in Hastings-Bass is more limited
than previous first-instance decisions
had indicated, there is the
consolation prize of a wider basis
than had previously been thought
for setting aside gifts and trusts for
mistake, including mistake as to the
tax consequences. The Supreme
Court has restated at a high level
the law of mistake in relation to
trusts and gifts, but the way the law
will apply in individual transactions
is likely to be fact-sensitive.
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