The decisions handed down by the Court of Appeal last week in the two cases of Pitt v Holt and Futter v Futter have severely curtailed the scope of the long standing rule in Re Hastings-Bass.
The main practical effect of this is that now if trustees or fiduciaries have mistakenly exercised a discretion with unintended consequences (including tax consequences), in particular when acting with the benefit of professional advice, they will no longer be able to apply to court to have their act rendered void or voidable, but must now look to their professional advisers for redress.
Rule in Re Hastings-Bass
As those involved in the field of trust law will know, the rule in Re Hastings-Bass has been most authoritatively stated in recent years in the case of Sieff v Fox [2005] 1 WLR 3811.
Lloyd LJ (though sitting as a High Court Judge) stated the principle in these terms:
"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 taken into account."
However, in recent years, applications by trustees in relation to this principle have almost exclusively been where the only mistake has been as to the tax consequences of the decision, and not as to the substance of the act. The senior judiciary have been critical in a number of forums (though crucially not previously in any decided case) of the breadth of the rule as now applied. In particular, Lord Neuberger gave a speech to the Chancery Bar Association in January 2009 which was highly critical of the rule, saying (amongst other things) that it was "unsatisfactory both in theory and in practice".
Curtailment of Re Hastings-Bass
On 9 March 2011, Futter v Futter and Pitt v Holt were both heard by the Court of Appeal before Lord Justices Mummery, Longmore and Lloyd. As widely predicted, the scope of the rule has been significantly reduced.
The Court of Appeal stated that the principle known as the rule in Re Hastings-Bass was not a correct statement of the law. The correct principle was set out and although lengthy is worth restating in full:
"... [concerning] acts which are within the powers of the trustees but are said to be vitiated by the failure of the trustees to take into account a relevant factor to which they should have had regard - usually tax consequences - or by their taking into account some irrelevant factor. It seems to me that the principled and correct approach to these cases is, first, that the trustees' act is not void, but that it may be voidable. It will be voidable if, and only if, it can be shown to have been done in breach of fiduciary duties on the part of the trustees. If it is voidable, then it may be capable of being set aside at the suit of a beneficiary, but this would be subject to equitable defences and to the court's discretion. The trustees' duty to take relevant matters into account is a fiduciary duty, so an act done as a result of a breach of that duty is voidable.
Fiscal considerations will often be among the relevant matters which ought to be taken into account. However, if the trustees seek advice (in general or in specific terms) from apparently competent advisors as to the implications of the course they are considering taking, and follow the advice so obtained, then, in the absence of any other basis for a challenge, I would hold that the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, in such a case I would not regard the trustees' act, done in reliance on that advice, as being vitiated by the error and therefore voidable."
Implications of Court of Appeal decision
The moral of this story is, therefore, that it is even more important for trustees to consider properly the full consequences of their proposed exercise of discretion, and in particular the tax consequences.
If they get it wrong in future, they will rarely be able to avoid the consequences of their error by making an application to the court; rather they will be left to bear the consequences of those errors and may face actions from beneficiaries. Where they have made a mistake having taken professional advice, they may have to submit to the far more uncertain arena of professional negligence litigation against their advisers if they are to avoid liabilities to their beneficiaries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.