Setting aside voluntary dispositions: where are we now?

Background

In Pitt v Holt, Futter v Futter [2013] UKSC 26, the Supreme Court significantly curtailed the hitherto wide application of what had become known as the Rule in Hastings-Bass and also set out authoritively the circumstances in which the Court may grant relief (in terms of rescission) for mistake in relation to a non-contractual voluntary disposition.

The result of the decision is that when the exercise of trustees’ discretionary powers have unforeseen effects or consequences (such as in relation to tax), beneficiaries (or perhaps the trustees themselves) are more likely, circumstances permitting, to seek relief for mistake, their alternatively remedy under the old Rule in Hasting-Bass no longer being available to them (see the comments of Lord Walker below). Relief for mistake may also be granted to settlors and beneficiaries in a wide variety of circumstances where there has simply been a causative mistake of sufficient gravity. Claims against professional advisers for negligence are another option, although they are not addressed in this article.

Before considering the Supreme Court’s decision in relation to mistake, the changes (or rather corrections) to the Rule in Hastings-Bass made by the Supreme Court ought to be commented upon.

The Rule in Hastings-Bass

The Rule in Hastings-Bass (hereafter “the Rule”), as previously understood, had enabled trustees to have the exercise of their discretionary powers set aside in circumstances where, despite having taken professional advice, the exercise had given rise to unforeseen (predominantly in the cases tax) consequences. That is no longer possible. Lord Walker (who gave the judgment of the seven member panel of the Supreme Court) agreed with the judgment of Lloyd LJ in the Court of Appeal in same the cases (which were heard together) that a trustee must have been in breach of fiduciary duty for the Rule to be engaged and that a trustee who has sought professional advice on the (tax) consequences will not have been in breach of fiduciary duty merely because the advice turns out to be wrong.

Specifically, Lord Walker quoted from the decision of Lightman J in Abacus Trust Co (Isle of Man) v Barr, re Barr’s Settlement Trusts [2013] EWHC 144 (Ch), where Lightman J held that a breach of duty on the part of the trustee is essential to the application of the Rule, saying:

“What has to be established is that the trustee in making his decision has… failed to consider what he was under a duty to consider. If the trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the trustee can be in no breach of duty and its decision cannot be impugned merely because, in fact, that information turned out to be partial or incorrect.”

“Thatis in my view a correct statement of the law,” said Lord Walker “and an important step towards correcting the tendency of some of the earlier first-instance decisions.”

Lord Walker went on “If in exercising a fiduciary power trustees have given, and have acted on, information or advice from an apparently trustworthy source, and what the trustees purport to do is within the scope of their power, the only direct remedy available (either to the trustees themselves, or to a disadvantaged beneficiary) must be based on the mistake (there may be an indirect remedy in the form of a claim against one or more advisers for damages for breach of professional duties of care).”

Lord Walker then repeated what Lloyd LJ had enunciated as the “principled and correct approach” to the Rule which was as follows:

Where trustees exercise a discretionary power, but in doing so fail to take into account a relevant factor to which they should have had regard or take into account some irrelevant factor, the trustees act is not void, but it may be voidable.

“It will be voidable if, and only if, it can be shown to have been done in breach of fiduciary duty on the part of trustees.  If it is voidable, then it may be capable of being set aside at the suit of the 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 advisers 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… 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 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.”

The decision on the Rule does give rise to some interesting points though. For example, Lloyd LJ accepted that “the point of the principle [of the Rule] is to protect beneficiaries rather than trustees”. Yet, denying recourse to the Rule in circumstances where trustees have obtained professional advice potentially leaves beneficiaries without any means of redress if they incur tax liabilities that were not foreseen because of the negligence of the professional advisers giving the advice.

Whilst in his judgment, as already mentioned, Lord Walker stated that “there may be an indirect remedy in the form of a claim against one or more advisers for damages for breach of professional duties of care” and whilst it is well established that a trustee can sue in the contract and recover damages for loss suffered by the beneficial owner, at any rate, if the other party to the contract knew that the first party was a trustee (Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1988] 2 Lloyds Rep 505, affirmed [1989] Lloyds Rep 586 and Shell UK Limited and Ors v Total UK Limited [2010] EWCA Civ 180), the beneficiaries cannot force the trustees to sue. The trustees themselves may be protected from claims against them by beneficiaries for equitable compensation under the terms of their exoneration clause. For example, in Futter, the settlements contained exoneration clauses in conventional terms, stating that “In the professed execution of the trusts and powers hereof no trustee shall be liable for a breach of trust arising from a mistake or omission made by him in good faith”. Even if the trustees did choose to sue, as Lord Walker held “in practice, it will be rare for trustees to have so strong a claim that they can be confident of obtaining a full indemnity for their beneficiaries’ loss and their own costs”. If the trustees chose not to sue, the beneficiaries may be able to bring a derivative action. To do so is far from straightforward. Alternatively, the beneficiaries may seek to sue the professional advisers in tort, on the basis that the professional advisers have assumed responsibility to them. However, again that is by no means straightforward. The Courts have been reluctant hitherto to fill a lacuna such as was identified in White v Jones [1995] 1 ER 691. Even if the beneficiaries did sue, the comments of Lord Walker as regards trustees suing ought to be equally applicable to them (i.e. it will be rare for them to have so strong a claim that they can be confident of obtaining a full indemnity for their loss and their own costs). Is causing the beneficiaries to have to contemplate and pursue these various means of redress protecting them rather than their trustees? Even if the trustees or beneficiaries do successfully sue their professional advisers, almost certainly the beneficiaries will not end up in as good a position as if the regretted exercise of the trustees’ discretionary power had been set aside (as it invariably was by the application of the Rule as previously applied).

Since the decision of the Supreme Court in Pitt and Futter, there has, understandably, been a dearth of cases concerning the Rule. However, it was raised as an issue in Roadchef (Employee Benefits Trustees) Limited v Hill and Others [2014] EWHC 109 (Ch).  That case concerned the transfer of shares in Roadchef Plc between two employee benefit trusts, “EBT1” and “EBT2”. The transfer was found to be void because it was outside the scope of the power of the trustees of “EBT1”. However, Mrs. Justice Proudman held that if the transfer was not void, it was voidable under the Rule as the trustees had not considered any of the relevant criteria for the transfer at all, nor did they receive any advice about the matter.  Furthermore, although Lord Walker had said in Pitt and Futter that “in general it would be inappropriate for trustees to take the initiative in commencing proceedings of this nature [i.e. seeking to apply the Rule]. They should not regard them as uncontroversial proceedings in which they can confidently expect to recover their costs out of the trust fund”, Mrs. Justice Proudman found in Roadchef that it was appropriate for the trustees in that case to bring the proceedings. The situation was far removed from that which Lord Walker had in mind (namely where trustees wish to have their own decisions reversed for fiscal reasons) when he said that it would generally be inappropriate for trustees to commence the proceedings and the action contained claims for breach of duty which could not be brought by the beneficiaries. Therefore, it was appropriate for the trustees to bring the proceedings themselves.

In Top Brands Limited v Sharma and Others [2014] EWHC 2753 (Ch), His Honour Judge Simon Parker QC, sitting as a Judge of the High Court, quoted from the judgment of Lightman J in Abacus (cited in Pitt and Futter and quoted above) and also quoted a footnote in McPherson’s Law of Company Liquidation, which provided “a liquidator who exercised his power in good faith after taking proper advice is not open to challenge: Burnells Pty Ltd (in liq) Ex p. Brown and Burns, Re (1979) 4 ACLR 213”. He then held:

“Applying the above proposition from Pitt v Holt [i.e. the quote from Lightman J’s judgment in Abacus] to the footnote in McPherson citing Burnells Pty (in liq), a liquidator will not have taken proper advice where the instructions to the adviser were flawed (partial or incorrect) by reason of a failure on the part of the liquidator to identify relevant considerations, or a failure to use all proper care and diligence in obtaining information relevant to the instructions given, or a failure to use all proper care and diligence in obtaining information relevant to the advice obtained”.

Applying the above to the facts, he found that the liquidator had not taken proper advice and accordingly was “open to challenge” and was in breach of fiduciary duty.

In Jersey, Re the Onorati Settlement [2013] JRC 182 was the first case to be heard after the Supreme Court handed down its judgment in Pitt and Futter.  In that case, the Court had “no hesitation” in concluding that the trustee was in breach of fiduciary by failing to have regard to the tax consequences of the appointment of the trust fund to UK resident and domiciled beneficiaries. The trustees at no stage took any professional advice on the tax consequences of the appointment. They had been told by the recipient beneficiaries’ mother (who was also a beneficiary) that she had taken advice and the court held that, in some cases, provision of written advice obtained by a beneficiary will be sufficient for a trustee to act on the basis of that advice. However, Sir Michael Birt (Bailiff) held that “the trustee will always need to see the advice in order to satisfy itself that the advice is appropriate and is based upon a correct understanding of the facts.” That had not occurred in this case. Sir Michael noted that Jersey law had hitherto followed the Rule as it had stood prior to the decisions of the Court of Appeal and Supreme Court in Pitt and Futter (i.e. a breach of fiduciary duty did not need to be established). In Onorati, given that a breach of fiduciary duty was established, the court did not have to decide whether Jersey law should now follow English law as set out by the Supreme Court in Pitt and Futter and thus it did not do so, albeit saying “We propose to say nothing further on the topic therefore other than to say that the position remains open, although any party wishing to submit that Jersey law should continue to plough its own furrow will have to explain why the closely reasoned judgments of Lord Walker and Lloyd LJ should not be applied.”

Sir Michael thus concluded that the appointment was voidable and could be set aside at the Court’s discretion. He held that the discretion should be exercised, stating “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.” Quite so.

Subsequent to the decision in Onorati, the Rule as it had existed prior to the Supreme Court’s decision in Pitt and Futter has been placed on a statutory footing by the addition of new Articles 47B-47J to the Trusts (Jersey) Law 1984 by the Trusts (Amendment No.6) (Jersey) Law 2013 and consequently, litigants now have the option of relying upon the statute as opposed to putting to the test whether the traditional case law remains unchanged in Jersey or whether the Jersey Courts will now follow English law as set out in Pitt and Futter.

Observation

Before Pitt and Futter, the Rule as it was then understood was not without its critics. It was frequently applied where the exercise of a discretionary power by trustees had given rise to “unforeseen” tax consequences of the exercise of their power, even in circumstances where they had taken expert tax advice as to such tax consequences. People were said to be “engaging in speculative tax schemes in the knowledge that the schemes could later be set aside if they failed”. This was a practice which, among others, Lord Neuberger and Lord Walker were understandably keen to stamp out, and by their judgment in Pitt and Futter they have stamped it out.

A flavour of Lord Walker’s views on the private client world of trusts and offshore trustees, in particular, can be gleaned from some of his comments in his judgment, where he says, for example: “Lloyd LJ reaffirmed the view that “fiscal consequences may be relevant considerations which the trustees ought to take into account”. I agree.  In the private client world trusts are mostly established by and for wealthy families for whom taxes (whether on capital, capital gains, or income) are a constant pre-occupation. It might be said especially by those who still regard family trusts as potentially beneficial to society as a whole, the greater danger is not of trustees thinking too little about tax, but of tax and tax avoidance driving out consideration of other relevant matters.

This is particularly true of offshore trusts. They are usually run by corporate trustees whose offices and staff (especially if they change with any frequency) may know relatively little about the settlor and even less about the settlor’s family. The settlor’s wishes are always a material consideration in the exercise of fiduciary discretions. But if they were to displace all independent judgment on the part of the trustees themselves the decision-making process would be open to serious question… it may be that some offshore trustees come close to seeing their essential duty as unquestioning obedience to the settlor’s wishes”.

Yet, going back to basic principles, the Rule has always been a rule of equity. It has been made clear that if the Rule applies, the transaction is voidable as opposed to void, and whether it should be avoided is at the court’s discretion.  Whilst the stamping out of the hitherto suspected practice of engaging in speculative tax schemes, in the knowledge that the schemes could later be set aside if they failed, is something which the courts should do, is that not something that the court could achieve under a rule similarly worded to that originally set down by Buckley LJ in Re Hastings-Bass [1975] CH 25, such as a rule simply stating:

“Where trustees exercise a discretionary power and, in doing so, fail to take properly into account a relevant matter or take into account some irrelevant matter, the exercise is voidable and may be capable of being set aside, subject to equitable defences and the court’s discretion. As to whether the trustees failed to take matters properly into account or took irrelevant matters into account will depend upon the circumstances of the case. The purpose of the exercise of the power and the extent to which suitable professional advice was obtained will be relevant factors for the court to consider in the exercise of its discretion.”?

A rule so phrased may not just stamp out the practice of engaging in speculative tax schemes in the knowledge that the schemes could later be set aside if they failed, but also: (i) enable a beneficiary to have a means of redress, where otherwise one may not exist or be difficult to pursue; and (ii) perhaps even prevent the injustice that some thought had been done to Mrs. Pitt, who was not engaging in any speculative tax scheme, had not even considered inheritance tax and could have achieved what was sought relatively simply without any adverse tax consequences arising. (Injustice to Mrs. Pitt was ultimately prevented by the Supreme Court reversing the Court of Appeal’s decision as regards “mistake”, the Supreme Court setting aside the transaction for mistake – see below).

The equitable jurisdiction to set aside a voluntary transaction for mistake

In Pitt, the respondents, in addition to relying upon the Rule also sought to rely upon the equitable jurisdiction to set aside a voluntary transaction for mistake. HMRC intervened, seeking to block off a potential route by which individuals who have made voluntary dispositions which turned out to have unforeseen adverse tax consequences might have those dispositions set aside, thus avoiding the adverse tax consequences.

In his judgment in the Court of Appeal, Lloyd LJ enunciated what he described as “the correct test” as regards this equitable jurisdiction as follows:

“…for the equitable jurisdiction to set aside a voluntary disposition for mistake to be invoked, there must be a mistake on behalf of the donor either as to the legal effect of the disposition or to an existing fact which is basic to the transaction…moreover the mistake must be of sufficient gravity to satisfy the Ogilvie v Littleboy test, which provides protection to the recipient against too ready an ability of the donor to seek to recall his gift. The fact that the transaction gives rise to unforeseen fiscal liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.”

Lloyd LJ defined “the Ogilvie v Littleboy test” by citing Lindley LJ who, giving the judgment of the Court of Appeal in Ogilvie v Littleboy 1897 13 TLR 399, said:

“In the absence of all circumstances of suspicion a donor can only obtain back property which he has given away by showing that he was under some mistake of so serious a character as to render it unjust on behalf of the donee to retain the property given to him.”

The issue which Lloyd LJ had to grapple with was how to reconcile the Ogilvie v Littleboy test, Lindley LJ’s judgment having been approved by the House of Lords in that case (Ogilvie v Allen [1899] 15 TLR 294), with the judgment in Gibbon v Mitchell [1990] 3 ER 338 where, having cited a number of authorities on what he described as the circumstances in which a voluntary disposition can be rectified, reformed or set aside where it had been entered into under a mistake, contrary to the intentions of the disponor, or in excess of his instructions, Millett J said:

“In my judgment, these cases show that, wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantage is to be gained by entering into it.”

In Lloyd LJ’s judgment, the dicta in these two decisions could be reconciled because Lindley LJ in Ogilvie was describing the gravity of the mistake that was required to invoke the jurisdiction, whereas Millett J in Gibbon was addressing the type of mistake that was required. However, nowhere in the judgments of the Court of Appeal or the House of Lords in Ogilvie is it suggested that, when considering the invoking of the jurisdiction, there even existed different types of mistake (such as those as to “effect” as opposed to those as to “consequences”), one type enabling the jurisdiction to be invoked and another not.

Thus in Pitt Lloyd LJ did not set aside the special needs trust established to receive the damages Mr. Pitt had been awarded for injuries he had sustained. The fact that the settling of the damages in it gave rise to unforeseen tax liabilities was a mistake as to the consequence, not the legal effect of the disposition.

Thankfully, the Supreme Court overturned Lloyd LJ on this point and found that the requirement for recission for mistake is simply for there to be a causative mistake of sufficient gravity.  The test will normally be satisfied only where 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.  It must be unconscionable or unjust on the facts to leave a mistaken disposition uncorrected.  The Court cannot decide what is unconscionable by an elaborate set of rules but must consider in the round the existence of a mistake (as opposed to total ignorance or disappointed expectations), its degree of centrality to the transaction and the seriousness of the consequences. There is no general rule that a mistake relating to tax cannot be relieved.  There may however be some mistakes as to the tax consequences of a decision which should not attract relief.

As to this last point, Lord Walker again had in mind cases where artificial tax avoidance had been attempted but had failed.  As to this, he said as follows:

“Had mistake been raised in 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 (compare for instance, that in Abacus Trust Co (Isle of Man) Ltd v NSPCC (2001) 3 ITELR 846, [2001] STC 1334) 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 the grounds of public policy. Since the seminal decision of the House of Lords in WT Ramsay Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] STC 174, [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.”

Leaving aside for the moment the issue of “artificial tax avoidance”, the wideness of the test (i.e. the need simply for a causative mistake of sufficient gravity) is to be welcomed and it is perhaps not surprising that there have been far more cases on mistake than on the Rule following the Supreme Court’s decision.

Thus in Pagel and another v Farman [2013] EWHC 2210 (Cmm), Judge Mackie QC, sitting as a Judge of the High Court, quoted the following distillation of the law in relation to mistake and gifts as set out in Pitt.

“The principles governing the recovery of a gift made under a unilateral mistake are as follows: the gift may be recovered by the donor from the donee where there is a causative mistake of such gravity as to the legal character or nature of a transaction or as to some other matter of fact or law which is basic to the transaction and where retention of the gift would be unconscionable. As regards the mistake pursuant to which the gift was made, it is irrelevant that the mistake was known to, still less induced by, the donee or that the mistake was due to carelessness on behalf of the donor.”

In fact, what Lord Walker said as regards carelessness was:

“It does not matter if the mistake is due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he deliberately ran the risk, or must be taken to have run the risk, of being wrong.”

However, a mistake must be distinguished from mere ignorance or inadvertence, Lord Walker saying: “Forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a false belief or assumption which the law will recognise as a mistake.  The Court of Appeal of Victoria has held that mistake certainly comprehends “a mistaken belief arising from inadvertence to or ignorance of a specific fact or legal requirement”: Ormiston JA in Hookway v Racing Victoria Ltd [2005] VSCA 3110 at 21.”

Lord Walker then went on in Pitt to discuss the interrelationship between conscious beliefs, tacit assumptions, and causative ignorance (causative in the sense that but for his ignorance the person in question would not have acted as he did). He noted that the editors of Goff & Jones are, on balance, in favour of treating mere causative ignorance as sufficient to ground a claim in mistake, their stating “…denying the relief for mere causative ignorance produces a boundary line which may be difficult to draw in practice, and which is susceptible to judicial manipulation, according to whether it is felt that the relief should be afforded – with the Court’s finding or declining to find incorrect conscious believes or tacit assumptions according to the Court’s perceptions of the merits of the claim”.

As to this, Lord Walker said:

“It may indeed be difficult to draw the line between the mere causative ignorance and a mistaken conscious belief or a mistaken tacit assumption. I would hold that mere ignorance, even if causative, is insufficient, but that the Court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious believe or tacit assumption where there is evidence to support such an inference”.

As to the editors of Goff & Jones’ reference to “judicial manipulation”, Lord Walker said:

“There is some force in this, although the term “manipulation” is a bit harsh. The fact that a unilateral mistake is sufficient means that the Court may have to make findings as to the state of mind, at some time in the past, of a claimant with a lively personal interest in establishing that there was a serious causative mistake. This will often be a difficult task.”

Returning to the cases post-Pitt, in Pagel (referred to above), JudgeMackieQC found on the facts that the gift sought to be set aside had not been made by mistake and the claim failed.

However, the following year, in Kennedy and Others -v- Kennedy and Others [2014] EWHC 4129 (Ch), Sir Terence Etherton, applying the principles set out in Pitt, set aside a clause in a Deed of Appointment made by trustees on the grounds of mistake.

The Appointment concerned arose as a result of the introduction of a new tax regime for settled property by the Finance Act 2006 and the ability of trustees and beneficiaries, during a transitional period, to reorganise existing trusts in order to mitigate adverse tax consequences. The settlor, Mr. Kennedy, wished to reorganise the settlement, by making some appointments without generating a significant CGT liability. In fact, clause 2.1(c) of the Deed of Appointment included shares that did not qualify for holdover relief for CGT purposes, and consequently a CGT liability of approximately £650,000 was generated.

Sir Terence Etherton recited the principles applicable to recission of a non-contractual voluntary disposition for mistake, as set out by Lord Walker in Pitt and held:

“Those elements are satisfied in the present case. Each of the trustees of the Settlement executed the 2008 October Appointment under a distinct mistake. Mr. Kennedy mistakenly believed that it gave effect to his instructions for the TSI planning, under which the relevant shares would not be transferred. For that reason, he mistakenly believed that the October 2008 Appointment did not transfer to him the relevant shares. Mrs. Kennedy (a co-trustee) mistakenly believed that the October 2008 Appointment was a tax-efficient method of benefitting her children and was in accordance with the instructions given by Mr. Kennedy to his legal advisers. Mr. Sturrock (a co-trustee and Mr. Kennedy’s solicitor) was mistaken in believing that the October 2008 Appointment was in accordance with Mr. Kennedy’s instructions for the TSI planning. He was also mistaken in thinking that there were considerable tax losses within the Settlement that would preclude any charge to CGT arising as a result of the transfer of the relevant shares.  [In fact, those tax losses had, unbeknown to Mr. Sturrock who had been in hospital, been utilised in the previous tax year following advice from Mr. Kennedy’s accountant.]

“The mistakes made by the trustees were causative and very serious. It was a fundamental feature of the TSI planning, as instructed by Mr. Kennedy and understood by his professional advisers, that the October 2008 Appointment should not give rise to a charge to CGT. Had the trustees not been mistaken they would not have executed the 2008 Appointment with the terms it contained, in particular, they would not have executed it with clause 2.1 (c) included. The effect of the inclusion of clause 2.1 (c) was to deprive the other beneficiaries of the settlement, namely (subject to any future appointment) Mr. and Mr. Kennedy’s children, of the relevant assets and to diminish the value of the remaining assets in the Settlement by the amounts of the substantial charge to CGT payable by the trustees of the Settlement…

“Lord Walker observed in Pitt -v- Holt that 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 the grounds of public policy. The October 2008 Appointment was not an artificial tax avoidance arrangement or part of one. It was executed as a perfectly legitimate way of conferring benefit on Mr. and Mrs. Kennedy’s children and grandchildren in a tax-efficient manner and was contemplated by express provisions in the Finance Act 2006. All those matters, taken in the round, make it unconscionable in principle to leave the October 2008 Appointment uncorrected.”

It should be noted that although the Revenue did not take part in the proceedings, they had written denying that if all three trustees of the Settlement were mistaken only as to the fiscal consequences of the October 2008 Appointment, that mistake related to the true effect or went to the root of that disposition. They put Mr. and Mrs. Kennedy to proof that in all the circumstances it would be unjust or unconscionable for Mr. Kennedy to retain the disposition effected by clause 2.1 (c) of the appointment and denied that Mr. and Mrs. Kennedy were entitled to the relief claimed. Notwithstanding those submissions, Sir Terrence Etherton, as stated, ruled that the mistakes by the three trustees were causative and very serious and the elements of the principles applicable to recission for equitable mistake, as set out in Pitt, where met.

In Wright and another v National Westminster Bank PLC [2014] EWHC 3158 (Ch), Mr. Justice Norris was asked to set aside a discretionary trust established by Mr. Wright, in conjunction with his wife, as part of their inheritance tax planning. Although the terms of the trust and correspondence from the Bank (who advised as to its establishment) provided that Mrs. Wright could not benefit from the income of the trust during Mr. Wright’s lifetime, Mr. Wright said that he was told, during meetings with the Bank, that Mrs. Wright could benefit from income from the trust during his lifetime, that he had made it quite clear to the Bank that income would be required from the trust until he drew his pension and that he did not understand the documentation.

Mr. Norris said that “the exercise of the jurisdiction involves the court making several discreet value judgments as to seriousness, causative effect, and unconscionability. These are matters for judgment of the court and not judgment of the parties.” Mr. Wright’s evidence, notwithstanding the wording of the documents he received, was that he understood from his oral discussions with the Bank that Mrs. Wright could benefit from income from the trust during his lifetime.  As to this, Mr. Justice Norris stated “as was indicated in Pitt -v- Holt, such a unilateral mistake may prompt the court to take a fairly stringent approach to such evidence.” However, there was independent evidence from a financial adviser that lead Mr. Justice Norris to be satisfied as to the genuineness and truth of Mr. Wright’s evidence on the issue. He determined that it would be unconscionable to insist that, notwithstanding Mr. Wright’s mistake, the £325,000 which had been settled in the trust should remain in it, thus depriving Mr. and Mrs. Wright collectively of access to it when they were dependent upon access to it for income and would not have established the trust but for Mr. Wright’s mistaken belief that his wife would be able to access the funds in the trust for income during his lifetime.  Accordingly, the trust was set aside.

Moving on to this year, in Lobler -v- Revenue and Customs Commissioners [2015] UKUT 01522 (TCC) Mrs. Justice Proudman, sitting as the tribunal in the Upper Tribunal (Tax and Chancery Chamber) was asked to rectify a form by which a taxpayer surrendered his life policies in a manner that incurred a tax liability at an effective rate of 779% when ticking a different box and thus choosing a different option on the form would have resulted in significantly lower tax charges.

In Lobler, Mr. Lobler had made several withdrawals from life policies he held with Zurich Life, selecting option C on the claim form provided by Zurich to do so. The selection of this option gave rise to considerable deemed gains and tax liabilities. Mr. Lobler sought to have the claim form rectified to the effect that he selected a different option, with the consequence that the withdrawals would be effected, but a mere fraction of the tax payable.

In making his partial surrenders, Mr. Lobler filled out the Zurichforms without the benefit of any legal or other advice.  As a consequence, HMRC submitted that the court below (the First-Tier Tribunal of the Tax Chamber (“FTT”)) had made a finding that Mr. Lobler had been careless in not taking advice as he should have done as to the tax consequences of his choice when completing the forms. However, Mrs. Justice Proudman held that the FTT had found that Mr. Lobler had made a mistake which was misguided (in the sense of wrong) rather than careless, but that in any event, although carelessness was relevant to the exercise of the court’s discretion as regards certain remedies, per Pitt it was not relevant to an analysis as to whether a mistake had been made. Mrs. Justice Proudman went on to reaffirm that the relevant test, post-Pitt, was the test of causative mistake of sufficient gravity and said “It is clear from Pitt -v- Holt that a mistake as to the tax consequences of a transaction may, in an appropriate case, be sufficiently serious to warrant rescission and thus rectification. There is no justification for a different approach to mistakes about tax and other types of mistake.”

Having held that the mistake by Mr. Lobler was of a sufficiently serious nature within the Pitt -v- Holt test, Mrs. Justice Proudman then said:

“However the question remains as to whether (as per Lloyd LJ in the Court of Appeal in
Pitt -v- Holt) the fundamental or root element of the transaction was affected by the error on Mr. Lobler’s part. On one argument the root of the transaction was the withdrawal of the funds and Mr. Lobler has indeed been successful in withdrawing the funds, error or not. On another, the withdrawal was so affected by the tax consequences that the effect of the withdrawal was entirely different from that which Mr. Lobler believed it to be. It is not in my judgment realistic to say that the former was the case, as it is akin to saying that the issue arises out of an unforeseen result of the transaction, rather than the root of it. This brings in by the back door the old distinction, disapproved in Pitt -v- Holt, between the effect and the consequences of a transaction…

“Moreover, I do not shrink (per Lord Walker in Pitt -v- Holt) from drawing the inference of conscious belief or tacit assumption by Mr. Lobler that tax would not be payable on the withdrawals.”

Accordingly, Mrs. Justice Proudman rectified the forms to the effect that Mr. Lobler had chosen a different (and far less punitive in terms of tax) option.

Moving to Jersey, the issue of equitable mistake has arisen in a number of cases. We mention just two, both of which occurred after the placing of the old Rule and the law as to equitable mistake as set out by the Supreme Court in Pitt on a statutory footing by the addition of articles 47B to 47J to the Trusts (Jersey) Law 1984 by the Trusts (Amendment No.6) (Jersey) Law 2013, which came into force on 25 October 2013.

On 4 March 2014, the Deputy Bailiff, William Bailhache QC, handed down his judgment in In the matter of the Strathmullan Trust [2014] JRC 056.

In that case, the representor, Mr. Boyd, received advice from Grant Thornton and accountants in Jersey that if he moved to the Isle of Man and established a trust in Jersey, into which he put the proceeds of the sale of his business, no inheritance tax would be payable in relation to the sale proceeds as there was no inheritance tax in the Channel Islands or the Isle of Man. Thus, Mr. Boyd moved to the Isle of Man and then established the Strathmullan Trust in Jersey.  However, his advisers had overlooked section 267(1) Inheritance Tax Act 1984, which provided that Mr. Boyd continued to be treated as domiciled in the UK for inheritance tax purposes for three years after his move to the Isle of Man. Thus, the establishment of the trust and the payment of the sale proceeds into it gave rise to a very large (amounting to some 25% of the trust fund) inheritance tax liability.

The court considered the interrelationship between article 11 of the Trusts (Jersey) Law 1984, which provides that “a trust shall be invalid… to the extent that the court declares that… the trust was established by… mistake” and the recently added article 47E, which sets out the court’s power to set aside a transfer or disposition of property to a trust due to mistake.

As the Deputy Bailiff put it “the question immediately posed is whether Articles 47B to 47H inclusive are intended to be additional provisions to those contained in Article 11 or by contrast are intended to govern the construction of the article 11 provisions”. He held that”the structure of the amending legislation is such that in our view the application of the provisions under Article 11 fall to be considered separately from the application of the court’s power under [Articles 47B to 47H]”.

As the application was to set aside the trust for mistake, it proceeded under article 11, in relation to which there was established case law (summarised in In the matter of Lochmore Trust [2010] JRC 068) as to how the court should approach an application, namely:

“It follows that the court has to ask itself the following questions:-

1. Was there a mistake on the part of the settlor?
2. Would the settlor not have entered into the transaction “but for” the mistake?
3. Was a mistake of so serious a character as to render it unjust on the part of the donee to retain the property?”

Having answered those three questions “yes”, “no” and “yes” respectively, the Deputy Bailiff set aside the trust. In reaching his decision, he made two interesting comments relevant to the approach of the courts in Jersey to the question of granting relief for mistake in relation to tax.

Having quoted Lord Walker in Pitt, where he said “had mistake been raised in 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…” which is quoted in full above, the Deputy Bailiff said this:

“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 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.”

Also, when considering whether the mistake was of so serious a character as to render it in unjust on the part of the trustee to retain the trust property, he said this:

“Furthermore, we accept that he [i.e. the settlor who was a beneficiary] would in practice be required to accept such a loss and be driven to litigate against his former tax advisers who appear to have overlooked this obvious problem of making a trust at a time when, by relevant UK legislation, the deemed domicile provisions continued to apply to him. If the court were approaching this case upon the basis that the loss should lie where equitably appears to be appropriate, one could take the view that the tax advisers should bear the loss, and that the Trust should remain undisturbed. However, that would require the present Trustee, who has no contractual relationship with the tax advisers in question to take the necessary litigation steps. Indeed it is not obvious that the Trust itself will have sustained an enforceable loss. The enforceable loss has been sustained by the settlor/beneficiary and by his estate.  In those circumstances, the focus of theRoyal Courtis on protecting the settlor/beneficiary because to do otherwise would require him to pursue litigation against his former advisers. We accept that the settlor/beneficiary was not at fault, and may have already incurred some losses. In that context, it would therefore be seriously unjust to require him to bring litigation against his former professional advisers, the outcome of which, whether on limitation or other grounds, might be uncertain.”

Then, in June 2014, Sir Michael Birt, the Bailiff, handed down his judgment in In the matter of the Robinson Annuity Investment Trust [2014] JRC 133, which again concerned an application to set aside a trust on the grounds of mistake.  Again a UK taxpayer, Mr. Robinson, established a Jersey trust and put assets into it following professional advice that by doing so the funds would not be liable to UK inheritance tax. Again, the advice was wrong and again the court looked at the relationship between Article 11 and Article 47E of the Trusts (Jersey) Law 1984.

So far as is relevant, Article 43E provided that:

“The court may… declare that a transfer or other disposition of property to a trust… is voidable and… is of no effect from the time of its exercise… where the settlor or person exercising a power

(a) made a mistake in relation to the transfer or other disposition of property to a trust; and
(b) would not have made that transfer or other disposition but for that mistake; and
(c) the mistake is of so serious a character as to render it just for the court to make a declaration under this Article.”

Sir Michael said that, like the Deputy Bailiff in the Strathmullan case, he did not find the question of the relationship between Article 11 and Article 47E very easy.

Sir Michael said this:

“Article 47E appears to be dealing only with the dispositions to a trust whereas Article 11 is dealing with the trust itself; but in many cases, the two are inextricably linked, because without any trust property there can be no trust. Furthermore, in many if not most cases, the transfer of property will occur at much the same time as the creation of the trust and the same mistake will be operating on the mind of the settlor both in relation to the creation of the trust and the transfer of the property to it. It is therefore somewhat surprising to find the legislature dealing with the creation of a trust and the transfer of property to a trust in completely separate parts of the Law.

“What is clear, however, is that the test to be applied by the court is identical whether the matter is considered under Article 11 or Article 47E. Thus the statutory test enunciated in article 47E is for all practicable purposes identical to the test established by the Court [when applying Article 11] which was summarised in Re Lochmore Trust …”, which test is quoted above.

As can be seen from the two tests, they are for all practical purposes identical. The only difference is that the wording concerning the seriousness of the mistake is inverted, but that, in the words of Sir Michael “appears to us to be a distinction without a difference”. Thus, again, the court set aside the trust for mistake.

Turning to Guernsey, the first reported case dealing with the issue of mistake following Pitt was that of Nourse -v- Heritage Corporate Trustees Limited and another (otherwise known as In the matter of the BiGDUG Limited Remuneration Trust) 01/2015. In that case, the court was asked to set aside the transfer of shares into a Guernsey trust on the grounds of mistake. Although the case involved a good number of the same people, and had many similarities, to a previous case recently decided in Guernsey (Dervan -v- Concept Fiduciaries Limited (unreported, 11 February 2013)), Richard McMahon, Deputy Bailiff, who gave the judgment of the court said “However, the factual situation is not the same so it does not necessarily follow that the outcome will be identical. Each case of this type, alleging that a transaction be set aside on the grounds of mistake, is fact-specific and each case involves the court considering whether to exercise its discretion to grant the relief sought.”

The court considered all the facts concerning the transaction and asked itself “whether there was a positive mistake (as distinct from “forgetfulness, inadvertence or ignorance”) that was causative of the transaction and is of sufficient gravity to justify setting aside the transaction”.

The court noted what Lord Walker had said about tax avoidance being a social evil and that a court might decline to exercise its jurisdiction in cases concerning transactions involving tax avoidance schemes that had gone wrong on the basis of public policy. As to that, the court quoted the commentary made by the Royal Court of Jersey in Boyd (quoted above) as regards, inter alia, it not being (in that case) Jersey’s domestic tax system which was being avoided and held that a question of public policy “was more about the way [the court] might choose to exercise their discretion and was not a matter of pure law… [the court] could take it into consideration, if they considered it relevant, before reaching a decision, but noted that the transaction in question did not avoid payment of any tax due in the states of Guernsey.”

The court held that Mr. Nourse had assigned the shares to the trust “as a result of inaccurate legal advice.  The inaccuracy of that advice is such that it constitutes a positive mistake of the type that can justify the court considering whether to exercise its discretion to set aside the transaction.  [The court was] satisfied that this was not anything like forgetfulness, inadvertence or ignorance.”

The court found that the mistake was one that went to the heart of the transaction.  They accepted Mr Nourse’s evidence that, had he known the true position about the tax implications of the gift of his shares to the trust, he would not have made the assignment.  Therefore, the court held that the mistake was one of sufficient gravity to justify their considering whether or not to exercise their discretion to set the transaction aside.

In considering that the transaction was intended to mitigate tax and whether they should refuse relief on the basis of some public policy reason of the type referred to by Lord Walker, the court recognised that a jurisdiction is entitled to tax those who are obliged to pay its taxes and to deal with its taxpayers as it sees fit. The same applies in Guernsey. There was no suggestion that the transaction suffered from being tainted with any illegality. Accordingly, the court was satisfied that it would be unconscionable, or unjust, to leave Mr. Nourse’s mistake uncorrected and ordered that the assignment of the shares be set aside.

Finally, moving to the Cayman Islands, the Grand Court of the Cayman Islands has for the first time had an opportunity to consider the law regarding the setting aside of transactions on the basis of mistake, as enunciated in Pitt, in the case of Schroder Cayman Bank and Trust Company Limited -v- Schroder Trust A.G., FSD 122/2014, Grand Court, 9 March 2015.

In that case trustees of a Cayman Employee Benefit Trust (“EBT”) transferred its assets, on the advice of English lawyers, to three Employee Retirement Benefit Fund Schemes (“ERBFS”) governed by Jersey law. In doing so, and as a result of erroneous professional advice and drafting, they proceeded under three mistakes, namely (1) that the appointments would benefit a class of beneficiaries under the ERBFS identical to those under the Cayman EBT (the trustee was not empowered to benefit a wider class); (2) the appointments would avoid a UK inheritance tax charge; and (3) that the appointments were revocable.

Both the Cayman Islands and Jersey had “firewall” provisions in their laws which provided for the exclusive jurisdiction of their respective courts (in the Cayman Islands in respect of the exercise of discretion by the trustees and in Jersey in relation to the transfer into a Jersey law trust). Given the conflict, the Cayman court applied ordinary private international law principles and held that the system of law most closely connected with the transactions was clearlyCayman Islands law.

UnderCayman Islands law, the transactions were void as the trustees had made appointments to a class of beneficiaries wider than had originally existed, which was something they did not have the power, under the trust deed, to do.  Accordingly, they had exceeded their powers and the effect of an excessive execution of a power is that it does not amount to an execution at all, it is void ab initio, and of no effect.

Although that dealt with the matter, the court also addressed the alternative claim brought that the transactions be set aside on the grounds of mistake and held that the mistakes in terms of tax and revocability caused severe consequences to the trusts which were never intended. The trustee would not have made the transactions but for those mistakes. Accordingly, the mistakes were of sufficient gravity to enable the court to exercise its discretion to set them aside on the grounds of mistake and the court held that it would exercise its discretion and set them aside as it would be unconscionable and unjust to do otherwise.

Conclusion

If one wishes to set aside a voluntary disposition because it has given rise to unforeseen (and undesirable) consequences, including tax consequences, one’s first port of call ought to be the doctrine of mistake and to consider whether there has been a causative mistake of sufficient gravity to persuade the Court to exercise its discretion to set the disposition aside. The applicable test is a wide one but a careful examination of the facts and consideration of the dicta in the various cases cited above will be required. The most important decision is that of Lord Walker in Pitt v Holt, Futter v Futter, but consideration of cases subsequent to it illustrate how it is to be applied. The old Rule in Hastings-Bass may still be relied upon in jurisdictions where it has been placed on a statutory footing, such as Jersey (and Bermuda). However, it must be doubted whether the old Rule would still be followed, post Pitt v Holt, Futter v Futter, in other overseas jurisdictions.

If the new (or corrected) Rule in Hastings-Bass is now to be invoked, with its requirement for there to have been a breach of fiduciary duty, then it would appear that the most likely route to its application is through establishing that the trustee/fiduciary did not take any advice at all or if it did take advice, it did not take proper advice (per HHJ Simon Parker QC in Top Brands).  To establish that will again require a careful examination of the facts and the dicta of Lord Walker and Lloyd LJ in Pitt v Holt, Futter v Futter, Lightman J in Abacus, and HHJ Simon Parker QC in Top Brands.

Postscript

Since writing this article, a settlement was set aside on the grounds of equitable mistake concerning tax on 15 May 2015 in Freedman v Freedman [2015] EWHC 1457 (Ch). In that case, HMRC intervened and opposed the application to set aside, submitting, inter alia, that “it would be strange if, while restricting the test in Hastings-Bass, the Supreme Court in Pitt v Holt intended to allow tax mistakes (similar to those which were previously relieved by Hastings-Bass) to be corrected through a simple application of the law of equitable mistake.” The Revenue failed.  It appears that that is, within limits, precisely what the Supreme Court has done.