( Disponible en anglais seulement )
The U.K. Supreme Court (UKSC) judgment in the cases of Pitt v Holt and Re Futter  UKSC 26, has clarified the law of trusts in applying both the rule of Hastings-Bass and the law of mistake.
Pitt v Holt
In 1990, Derek Pitt suffered serious head injuries in an automobile accident, resulting in his mental incapacity. His wife Patricia was appointed as one of his personal representatives, and was successful in obtaining a judgment of £1.2 million for his care. Mrs. Pitt, on the advice of financial advisors, settled the damages into a discretionary trust. However, in settling the trust, the financial advisors had failed to consider U.K. inheritance tax consequences, so that there was an immediate tax liability of £100,000. Had the discretionary trust provided at least half of the settled property be applied for the benefit of Mr. Pitt during his lifetime, there would have been no immediate tax consequence. As a result, Mrs. Pitt applied to have the trust set aside, based on the rule in Hastings-Bass or, alternately, on equitable mistake.
Futter v Futter
In 1985, Mark Futter created two discretionary inter vivos trusts, one for his benefit, and one for the benefit of his children. Mr. Futter and his solicitor were trustees of both trusts. In 2004, on the advice of his solicitors, Mr. Futter made two distributions, one in favour of himself, and one in favour of his children. The distributions resulted in capital gains tax, which the solicitors mistakenly assumed would be offset against capital losses recognized personally. However, the solicitors had failed to consider recent legislative amendments. When the mistake was realized, the trustees applied to have the distributions declared void based on the rule in Hastings-Bass.
The rule in Re Hastings-Bass arose from a 1974 decision of the UKSC, and provided that “Where a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended unless:
- what he has achieved is unauthorized by the power conferred upon him, or
- it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account, or (b) had he not failed to take into account considerations which he ought to have taken into account.”
In analyzing whether the rule in Re Hastings-Bass applied to the two cases before the court in of Pitt v Holt and Re Futter, the UKSC held that the dispositions in both Pitt and Futter could not be set aside under the rule, however, the trust settlement in Pitt could be set aside under the equitable doctrine of mistake.
In Futter and Pitt, the UKSC had two questions to answer: the first was the application of the rule in Re Hastings-Bass, the second, the ground of mistake:
- If a trustee exercises a discretion based on a mistake as to the related tax consequences, is the decision, and the tax consequences thereof, voidable and binding on taxation authorities?
- If a person, whether or not in a fiduciary position, makes a voluntary disposition and the decision was based on a mistaken understanding of the tax consequences, is the disposition and the tax consequences triggered, voidable?
The rule in Re Hastings-Bass
Lord Walker stated that the rule in Re Hastings-Bass set out three cases in which trustees’ dispositions of trust property could be set aside (undone) by the courts:
- where the trustees had no power to dispose of trust assets;
- where the trustees acted fraudulently in disposing of trust assets; and
- where the trustees acted within their powers, did not act fraudulently, but acted without sufficient deliberation.
If either (1) or (2) applies, Lord Walker stated, the disposition of trust property taken by the trustees will be void. If (3) applies, the disposition of trust assets may be voidable.
In both Pitt and Futter, the trustees’ dispositions of trust property were within their power to dispose of trust assets, and there was no fraud involved in doing so. Therefore, the trustees’ disposition of trust assets actions could not be set aside based on either of the first two rules described.
Lord Walker noted the third rule may apply to set aside a disposition of trust assets if « inadequate deliberation on the part of the trustees [was] sufficiently serious as to amount to a breach of . . . fiduciary duty. Breach of duty is essential . . . only a breach of duty on the part of the trustees . . . 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 . . . have acted in a different way (at paragraph 73). If there is inadequate deliberation, the court must have a degree of flexibility in the court’s possible responses (at paragraph 92), and may set aside the disposition of trust assets if it can be shown that the trustees would have, or may have made a different decision had there been sufficient deliberation.
In both cases, the Supreme Court held that the trustees had acted with sufficient deliberation. Their decisions were made with sufficient deliberation, but based on improper legal advice. Therefore, the trustees’ disposition of trust assets could not be set aside.
Although the rule in Re Hastings-Bass could not be applied in either Pitt or Futter, Lord Walker went on to note that the law of equity can be applied to set aside the trustees’ disposition if that decision was affected by a « causative mistake of sufficient gravity (at paragraph 122). A mistake will be causative if the disposition would not have been made but for the mistake. A mistake « must be distinguished from mere ignorance or inadvertence » (at paragraph 104), and « the gravity of the mistake must be assessed by a close examination of the facts . . . including the circumstance of the mistake and the consequences for the [trustee] who made the disposition » (at paragraph 126). If the court finds that the trustees made a mistake as to the legal character of the transaction, or on a fact or law which is basic to the transaction, and that the mistake is serious enough that to leave it in place would be unjust, unfair, or unconscionable, then the a decision of trustees can be set aside.
In Futter, the ground of mistake had not been pleaded, and therefore, this ground could not be applied. However, in Pitt, an alternative claim for setting aside the trustees’ disposition on the ground of mistake had been pleaded, and, as there was nothing artificial or abusive in establishing the inter vivos trust, and had the tax consequences to the trust been identified to Mrs. Pitt, the trust would have been settled differently.
The result of the cases is that, in disposing of trust assets, if a trustee relies on advice which later proves to be inaccurate, the rule in Re Hastings-Bass may not apply to relieve the trustee of the financial consequences to the trust and its beneficiaries for that decision. However, in some cases, the rule of mistake may be applied, at the court’s discretion.
The rule in Re Hastings-Bass has not been applied in Canadian cases for the rectification of trustee errors. In broad terms, in Canada, rectification based on mistaken dispositions is granted by courts where a document or disposition does not reflect the true intention of the parties1. This includes errors which have an adverse income tax effect. The comments by Lord Walker on the equitable relief of mistake may be instructive to trustees making an application before the courts for rectification of errors. As Canadian cases generally consider the trustee’s intention at the time of taking the action, a review of the circumstances leading to the error, and evidence of the intention of the parties at the time the error was made, may be useful.
 For a review of the law of rectification, see Rectification: Taxes and Wealth Management, March 2015, Recent Developments and Notice, by Leslie Askt, Miller Thomson LLP.