Futter & Anor v Revenue and Customs [2013] UKSC 26

The Supreme Court held that the so-called rule in Hastings-Bass applies only where trustees act in breach of fiduciary duty, rendering the act voidable, not void; trustees who follow apparently competent but wrong professional advice are not in breach. Both appeals failed on that ground, but Mrs Pitt's settlement was set aside for mistake.

Introduction

These conjoined appeals, heard by a seven-member Supreme Court and decided in a single judgment by Lord Walker (with whom Lord Neuberger, Lady Hale, Lord Mance, Lord Clarke, Lord Sumption and Lord Carnwath all agreed), concerned two distinct but overlapping areas of equity: the so-called “rule in Hastings-Bass”, and the court’s jurisdiction to rescind a voluntary disposition on the ground of mistake. They were the first cases on the Hastings-Bass rule in which HM Revenue and Customs had been joined as a party, and the first to reach the Supreme Court.

Lord Walker began by noting that the label is a misnomer. In re Hastings-Bass, decd [1975] Ch 25 was concerned with the scope of a power, not the decision-making process. The rule as commonly applied derives from Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 (Warner J), and “would be more aptly called ‘the rule in Mettoy'”, though the misnomer is “by now so familiar that it is best to continue to use it, inapposite though it is”.

Facts

Futter

Mr Mark Futter made two settlements in 1985, originally with non-resident trustees, which had accumulated “stockpiled” gains. In 2004 Mr Futter and Mr Cutbill (a partner in the solicitors’ firm advising the trustees), both UK resident, became trustees. On the solicitors’ advice, in March and April 2008 the trustees distributed the entire capital of the No 3 settlement to Mr Futter under a power of enlargement, and £36,000 from the No 5 settlement to his three children under a power of advancement. Each transaction was squarely within the scope of the relevant power. The trustees correctly understood that the stockpiled gains would be attributed to the beneficiaries, but incorrectly believed that the attributed gains would be absorbed by allowable personal losses. This overlooked section 2(4) of the Taxation of Chargeable Gains Act 1992 as amended, producing a large capital gains tax liability. The trustees applied to have the deeds declared void; Norris J granted that relief at first instance.

Pitt

Mr Derek Pitt suffered catastrophic head injuries in a 1990 road accident. His wife was appointed his receiver under the Mental Health Act 1983. His damages claim was compromised for £1.2m by a structured settlement. On the advice of Frenkel Topping, specialist financial advisers, and with the authority of the Court of Protection, the damages were settled in 1994 in a discretionary trust (“the SNT”). The advisers’ report made no reference whatsoever to inheritance tax. Had the SNT complied with section 89 of the Inheritance Tax Act 1984 (requiring at least half the property applied in Mr Pitt’s lifetime to be applied for his benefit), there would have been no immediate charge. As executed, there was an immediate liability of about £100,000, with a ten-year anniversary charge, the total with interest and penalties reaching £200,000–£300,000. Mr Pitt died in 2007 with only £6,259 remaining in the trust. His personal representatives sought to set the SNT aside under the Hastings-Bass rule or for mistake. The deputy judge set it aside under the Hastings-Bass rule but rejected the mistake claim.

The Court of Appeal ([2011] EWCA Civ 197, [2012] Ch 132), in a judgment of Lloyd LJ (with concurring judgments by Longmore and Mummery LJJ), allowed the Revenue’s appeals in both cases, restating the Hastings-Bass rule and rejecting the mistake claim in Pitt.

Issues

• Whether the exercise of a fiduciary discretion, within the scope of the power but made without proper consideration of relevant matters, can be impugned only where the inadequate deliberation amounts to a breach of fiduciary duty.
• Whether fault on the part of professional advisers can be attributed to trustees, or whether trustees are subject to a form of strict liability for acting on erroneous advice.
• Whether such a flawed exercise is void or voidable.
• Whether the applicable test is what the trustees “would” or “might” have done.
• In Pitt, the correct test for rescission of a voluntary disposition for mistake, in particular the validity of the “effect”/”consequences” distinction drawn by Millett J in Gibbon v Mitchell [1990] 1 WLR 1304.
• Whether a mistake relating exclusively to tax can ever be relieved, and whether relief should be refused as serving no practical purpose (“equity does not act in vain”).

Arguments

For the appellants, Mr Robert Ham QC (leading on Hastings-Bass) contended that the requirement of a breach of fiduciary duty was a novel requirement introduced by Lightman J in Abacus Trust Co (Isle of Man) v Barr [2003] EWHC 114 (Ch), [2003] Ch 409, and led to arbitrary and unfair distinctions depending on whether the erroneous adviser happened also to be a trustee. His fallback was that breach could be established without personal fault, advanced on four bases: strict liability; attribution of advisers’ fault by agency; the absurdity of the contrary result; and a special meaning of “relevant” considerations, amounting to a duty to reach the correct conclusion. He relied on Kerr v British Leyland (Staff) Trustees Ltd (1986) [2001] WTLR 1071 and on observations of Warner J in Mettoy that the extent of the trustees’ duty “is not affected by the amount or quality of the professional advice they may seek or obtain”. Mr Christopher Nugee QC adopted those submissions, emphasising strict liability, and concentrated on mistake.

For the Revenue, Mr Philip Jones QC resisted relief, arguing (among other things) that a deed transferring property for no consideration should only be set aside for a mistake of the fundamental nature that would render a contract void, building on Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, [2003] QB 679. He raised two new points with permission: that a mistake relating exclusively to tax can never be relieved; and that relief in Pitt would serve no practical purpose beyond saving tax, relying on Racal Group Services Ltd v Ashmore [1995] STC 1151 and the maxim that equity does not act in vain.

Judgment

The Hastings-Bass rule

Lord Walker agreed with Lloyd LJ’s central distinction between “excessive execution” (going beyond the scope of a power) and “inadequate deliberation” (failing to give proper consideration to relevant matters in a decision within the power). Hastings-Bass and In re Abrahams’ Will Trusts [1969] 1 Ch 463 were cases of excessive execution, the advancements infringing the rule against perpetuities; Mettoy was a case of inadequate deliberation. Buckley LJ’s much-cited summary in Hastings-Bass was wider than the true ratio, and “set ajar a door that was pushed wide open in Mettoy Pension Trustees Ltd v Evans” (para 25).

Lightman J in Barr had been right: a fundamental mistake is not required, but the inadequate deliberation must be sufficiently serious as to amount to a breach of fiduciary duty. Lord Walker held:

“Breach of duty is essential (in the full sense of that word) because it is only a breach of duty on the part of the trustees that entitles the court to intervene … Apart from exceptional circumstances (such as an impasse reached by honest and reasonable trustees) only breach of fiduciary duty justifies judicial intervention.” (para 73)

On strict liability, trustees may indeed be liable despite professional advice where they act outside their powers or contrary to the general law (as in Dunn v Flood (1885) 28 Ch D 586, Perrins v Bellamy [1899] 1 Ch 797 and National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373). But Lord Walker held 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” (para 80).

Attribution by agency failed: solicitors act as agents in ministerial functions, but “they do not and may not act as agents in the exercise of fiduciary discretions” (para 85), Lord Walker repeating his own dictum in Scott v National Trust [1998] 2 All ER 705, 717, that “it is for advisers to advise and for trustees to decide”. To the extent that Warner J’s contrary observations in Mettoy could not be confined to their context, Lord Walker held he “was wrong in disregarding the ‘amount or quality’ of professional advice” (para 86). The “last-ditch” submission that trustees must be right on every occasion was rejected as requiring “infallibility of judgment”, contrary to In re Beloved Wilkes’s Charity (1851) 3 Mac & G 440.

On “would or might”, Lord Walker declined to lay down a rigid rule: “there must be a high degree of flexibility in the range of the court’s possible responses” (para 92), and relief may be granted on terms. On void or voidable, he agreed with Lloyd LJ: where the exercise is within the terms of the power but in breach of duty, the act is voidable at the instance of an adversely affected beneficiary, subject to equitable defences and the court’s discretion. Cloutte v Storey [1911] 1 Ch 18, concerning fraud on a power, “may have to be revisited one day” (para 62) and fraudulent appointments may need a separate pigeon-hole.

Applying this, in Futter the trustees did not overlook capital gains tax; the advice was simply wrong, and the documentary evidence indicated that Mr Cutbill should not be treated as personally in breach of fiduciary duty. In Pitt, Mrs Pitt, an unqualified carer acting as receiver, had taken and followed supposedly expert advice: “There is no reason to hold that she personally failed in the exercise of her fiduciary duty” (para 91). Both appeals therefore failed on the Hastings-Bass ground. Lord Walker also endorsed Lloyd LJ’s observation that it is generally inappropriate for trustees themselves to commence such proceedings expecting costs from the fund.

Mistake

Lord Walker departed from the Court of Appeal here. Tracing Ogilvie v Littleboy (1897) 13 TLR 399, affirmed as Ogilvie v Allen (1899) 15 TLR 294, he adopted Lindley LJ’s requirement of a mistake “of so serious a character as to render it unjust on the part of the donee to retain the property”. He held 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 belief or tacit assumption when there is evidence to support such an inference” (para 108). Mistake must also be distinguished from misprediction; In re Griffiths, decd [2009] Ch 162 was questioned.

The Revenue’s contract-based argument was rejected as “heterodox” and “insupportable”. As to the Gibbon v Mitchell “effect”/”consequences” distinction, Lord Walker concluded that confirming it would leave the law uncertain and would be contrary to equity’s disinclination to rigid classification. He stated the test:

“I would provisionally conclude that the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that 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.” (para 122)

Gravity is assessed objectively, by close examination of the facts, with “an intense focus” on the particular case. The court “must consider in the round the existence of a distinct mistake …, its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected” (para 128).

The Revenue’s new point that tax-only mistakes can never be relieved “begs the question”, since setting aside a transaction means it is treated as not having occurred; section 150 of the Inheritance Tax Act 1984 contains no relevant exception. Consequences, including tax consequences, are relevant to gravity. However, Lord Walker observed obiter that in some cases of artificial tax avoidance relief might be refused, either because claimants must be taken to have accepted the risk or on public policy grounds, noting that since WT Ramsay Ltd v IRC [1982] AC 300 “there has been an increasingly strong and general recognition that artificial tax avoidance is a social evil” (para 135). Futter was not an exercise “in good citizenship”, but mistake was not permitted to be raised there for want of an evidential basis.

The “equity does not act in vain” argument failed: following Racal, it suffices that there is a genuine issue capable of being contested, and the test for rescission cannot be stricter than for rectification; moreover the Revenue would have potential proprietary claims against recipients until the SNT was set aside.

Verdict and disposal

The appeal in Futter was dismissed. The appeal in Pitt was dismissed so far as it turned on the Hastings-Bass rule, but succeeded on mistake: the orders below were discharged and the SNT set aside for mistake. There was nothing artificial or abusive in structuring the trust to attract section 89 relief; it was “precisely the sort of trust to which Parliament intended to grant relief”.

Implications

The decision authoritatively curtails what Longmore LJ had described in the Court of Appeal as a “seriously wrong turn” in the law. Three propositions are now settled at the highest level: (i) where trustees act within the scope of their powers, their decision can be impugned for inadequate deliberation only if that inadequacy amounts to a breach of fiduciary duty; (ii) such a flawed exercise is voidable, not void, and relief is discretionary and subject to equitable defences such as laches and acquiescence; and (iii) trustees who obtain and follow apparently competent professional advice which turns out to be wrong are not thereby in breach of duty, and advisers’ errors are not attributed to them by agency.

Practically, trustees and beneficiaries disappointed by failed tax planning will generally have to look to rescission for mistake or to professional negligence claims rather than to the Hastings-Bass rule. Trustees should not expect to initiate such applications as uncontroversial proceedings with costs from the fund, and the Revenue’s participation in these appeals signals that such claims may be actively contested.

On mistake, the court relaxed the narrow Gibbon v Mitchell formulation in favour of a causative mistake of sufficient gravity, judged by whether it would be unconscionable to leave it uncorrected, with legal character or a matter basic to the transaction as normal (but not exhaustive) guidance. Tax consequences count towards gravity. The decision benefits those, like Mrs Pitt, who make genuine, non-artificial dispositions on defective professional advice.

Important limits remain. Mere causative ignorance is insufficient; mistake must be distinguished from misprediction. Whether relief will be refused in cases of artificial tax avoidance was expressly left open, as was the correctness of Cloutte v Storey and the “would or might” question, where flexibility was preferred to a rigid rule. The mistake issue was not determined in Futter for evidential reasons.

Verdict: The appeal in Futter was dismissed. The appeal in Pitt was dismissed so far as it depended on the rule in Hastings-Bass, but allowed on the ground of mistake: the Supreme Court discharged the orders of the courts below and set aside the Derek Pitt Special Needs Trust for mistake.

Source: Futter & Anor v Revenue and Customs [2013] UKSC 26