Supreme Court ruling on trustee mistakes "likely to create uncertainty", says expert

Out-Law News | 10 May 2013 | 4:49 pm | 3 min. read

A Supreme Court ruling on the circumstances in which courts can set aside decisions made wrongly by trustees is "likely to create uncertainty" due to the subjective nature of the test, an expert has said.

Tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the UK's highest court ruled that it could overturn mistakes of "sufficient gravity" in cases where trustees held an incorrect belief or made an incorrect assumption about the tax implications of their decision. Courts could do so in these circumstances even where the trustees were following professional advice, the Supreme Court said.

In a related case, the Supreme Court said that trustees could not generally rely on the 'Hastings-Bass' principle to have a decision set aside where that decision had been based on professional advice - even if that advice later turned out to have been wrong. The Hastings-Bass principle allows a court to set aside decisions taken by trustees who have not properly considered all the relevant matters which they should have taken into account, putting them in breach of their fiduciary duties.

Thomas said that the court's decision on the general application of the Hastings-Bass principle was "not a surprise" given the earlier conclusions of the Court of Appeal, which had refused both applications. In cases where trustees had taken a decision based on incorrect professional advice, the correct remedy would be a negligence claim against those advisers, he said.

"Many advisers had always viewed the Hastings-Bass principle as something of an anomaly and felt that it was difficult to justify why trustees should effectively have a 'get out of jail free' card which is denied to other taxpayers in similar circumstances," he said.

"What is more surprising is the wide interpretation of the 'mistake' doctrine. The test of 'sufficient gravity' applied by the court, and the reference to whether it is 'unconscionable or unjust' to leave a mistake uncorrected looks like a case of the court deciding what it thinks seems fair and then working backwards to achieve that," he said.

He added that although the verdict could seem "equitable" and would likely be welcomed by trustees, it was also "very subjective" and "likely to create a lot of uncertainty as to when relief might actually apply".

The Hastings-Bass rule, named for a 1974 case, is based on the idea that trustees are constrained in their decisions by their duties to the people they are holding funds, pensions or other assets on behalf of. This principle overlaps slightly with the general rule that a voluntary disposition, such as a gift or settlement, can be set aside on the ground of mistake. In his leading judgment, Lord Walker said that since about the year 2000, the principle had increasingly been relied upon to set aside the decisions of trustees in cases where tax planning arrangements involving trusts had gone wrong.

The Supreme Court's decision related to two cases: one, Futter, was concerned with incorrect advice given by solicitors on the effect of capital gains rules where the gains were realised by non-resident trustees while the other, Pitt, involved the inheritance tax treatment of a damages settlement received by a man who had suffered serious head injuries in a road traffic accent and later died.

In his ruling, Lord Walker said that there should be a "high degree of flexibility" in how courts treated Hastings-Bass claims, particularly given the many different uses for trusts. Laying down a "rigid rule" would "inhibit the court in seeking the best practical solution in the application of the Hastings-Bass rule in a variety of different factual situations", he said. However, in neither case had trustees "personally failed in the exercise of [their] fiduciary duties" by following incorrect advice, he said.

The test for whether a decision could be set on the grounds of mistake was more ambiguous, he said; although the requirements were particularly strict. The only "true requirement" was that there was a "causative mistake of sufficient gravity", he said.

"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," he said.

"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," he said.