English Supreme Court rules on Mistake and Hastings Bass - Pitt v Holt and Futter v Futter…

English Supreme Court rules on Mistake and Hastings Bass - Pitt v Holt and Futter v Futter [2013] UKSC 26

On 9 May 2013 the English Supreme Court handed down a unanimous judgment on the seminal cases of Pitt-v- Holt and Futter -v- Futter , with Lord Walker's valedictory judgment conclusively resolving the English position on the rule in Hastings Bass and rescission on the ground of mistake.

In respect of the rule in Hastings Bass, the Supreme Court held that there must be an inadequate deliberation on the part of the trustee which was sufficiently serious to amount to a breach of fiduciary duty.

In respect of rescission for mistake, the Supreme Court has done away with the "effect/consequence distinction" which has vexed so many judges and legal practitioners down the years, and arrived at a simple test: there must be a causative mistake of sufficient gravity to render it unjust for the transaction to stand.  The Supreme Court specifically held that mistakes as to tax consequences of a transaction can, depending on the facts, fall within the test, although in the case of "artificial tax avoidance" the Supreme Court suggested that a court might think it appropriate to refuse relief on the grounds of public policy. 

The Decisions

The facts of the cases under consideration are well known.  Extracts of the Supreme Court's published summaries of the reasons for the judgment follow below.

Rule in Hastings-Bass

"The rule in Hastings-Bass, properly understood, depends on breach of duty in the performance of something that is within the scope of the trustees’ powers, not in the trustees doing something that they had no power to do at all. The rule is centred on the failure of trustees to perform their decision-making function. It is that which founds the court’s jurisdiction to intervene if it thinks fit to do so. As a matter of principle there must be a high degree of flexibility in the range of the court’s possible responses. To lay down a rigid rule would inhibit the court in seeking the best practical solution in the application of the rule in Hastings-Bass in a variety of different factual situations.

For the rule in Hastings-Bass to apply, the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty. It is generally only a breach of duty on the part of the trustees that entitles the court to 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 the 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. However, where trustees have been in breach of duty by exercising a discretion with inadequate deliberation, setting aside their decision may not be the only course open to the court.

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. Such a result cannot be achieved by the route of attributing any fault on the part of professional advisers to the trustees as their supposed principals. 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 an area where the law has to balance the need to protect beneficiaries against aberrant conduct by trustees (the policy behind the rule in Hastings-Bass) with the competing interests of legal certainty, and of not imposing too stringent a test in judging trustees’ decision-making.

Rescission on the ground of mistake

The true requirement for rescission on the ground of mistake 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. Consequences (including tax consequences) are relevant to the gravity of a mistake.

A mistake must be distinguished from mere ignorance, inadvertence, and misprediction. 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. Mere ignorance, even if causative, is insufficient. However, the distinctions may not be clear on the facts of a particular case.

In order to satisfy the test for setting aside a voluntary disposition on the ground of mistake, the gravity of the mistake must be assessed by a close examination of the facts. The injustice of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an intense focus on the facts of the particular case. The court must make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected, and form a judgment about the justice of the case.

Mrs Pitt had an incorrect conscious belief, or made an incorrect tacit assumption, that the proposed arrangement had no adverse tax effects. The SNT could have complied with statutory requirements without any artificiality or abuse of statutory relief. It was precisely the sort of trust to which Parliament intended to grant relief."

Jersey law

From a Jersey perspective, it will remain to be seen how the law relating to the rule in Hastings Bass will develop in light of this English law decision, particularly given the comments of the Deputy Bailiff in his decision in the B Life Settlement that the Jersey law on the scope and application of this rule and the lines of Royal Court authority on this subject might need to be revisited following the Supreme Court's decision.  It would therefore appear that, as matters currently stand, the Royal Court will revisit this in due course.

The Supreme Court's findings on the English law test that is to be applied for the law of mistake are very much aligned with the approach the Jersey Court has developed over time (including since the Court of Appeal's decision in this case).   That test involves 3 questions:  was there a mistake (which can be of law or fact), would the settlor/donor have entered into the transaction but for the mistake; and was the mistake of sufficiently serious a character to render it unjust for the donee to retain the property.  The Supreme Court's approach to assessing "gravity" of the mistake by close scrutiny of the facts and reaching a judgment on the justice of leaving the mistake uncorrected, appears to be on all fours with Jersey law as it stands.

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