THE device that had become known as “the rule (or principle) in Hastings-Bass” has now been withdrawn from service by the Court of Appeal, in its decision in the combined appeals in Pitt v. Holt and Futter v. Futter [2011] EWCA Civ 197, and replaced with a more rational regime for reviewing decisions made by fiduciaries.
Under the erstwhile rule in Hastings-Bass, an exercise of a dispositive power held in a fiduciary capacity could be upset if the power-holder had considered irrelevant considerations or failed to consider relevant considerations: e.g., Sieff v. Fox [2005] EWHC 1312 (Ch) at [119]; [2005] 1 W.L.R. 3811. Decisions which were flawed in that way could be attacked by the beneficiaries, but also by the trustees. This was particularly useful to trustees who had exercised powers in a way that attracted adverse, unforeseen tax consequences, as the transaction could be undone and the power then re-exercised in a more tax-effective manner. Thus, in one fell swoop, adverse tax consequences were avoided but so were any potential liability of the trustees for having acted imprudently and any potential liability that professional advisers to the trustees might have faced.
In both Pitt v. Holt and Futter v. Futter, powers were exercised by fiduciaries (a Court of Protection receiver in the former; trustees in the latter) in ways that attracted considerable tax liabilities. In each case, the fiduciaries had taken professional advice which had failed accurately to identify the relevant tax liability: in Pitt v. Holt, a simple mechanism for avoiding the liability was overlooked, and in Futter the advisers overlooked a statutory provision which meant the scheme of advancement was not tax-effective in the way they had hoped. In both cases the professional advisers were sued, but the fiduciaries in each case also sought to have their exercises of power avoided under the rule in Hastings-Bass, on the basis that they would not have acted as they did had they realised the tax implications.
In each case, the High Court overturned the fiduciary's exercise of power: Pitt v. Holt [2010] EWHC 45 (Ch), [2010] 1 W.L.R. 1199; Futter v. Futter [2010] EWHC 449 (Ch), [2010] S.T.C. 982. The Court of Appeal unanimously allowed HMRC's appeals against both decisions. Mummery and Longmore L.JJ. delivered short concurring judgments, but both agreed with the detailed analysis of Lloyd L.J.
Lloyd L.J. conducted a thorough-going review of the case-law development of the Hastings-Bass jurisdiction and confirmed the view, earlier advanced by several commentators (e.g., Nugee, [2003] P.C.B. 173, 181–183; Molloy, (2009) 15 T. & T. 200), that the Court of Appeal's decision in Re Hastings-Bass [1975] Ch. 25 itself was not authority for the so-called “rule” regarding relevant and irrelevant considerations that later (first instance) courts had seen in it. Bound only by Court of Appeal authority, Lloyd L.J. was able to place the jurisdiction on a more rationally justifiable foundation.
He drew (as have others: e.g., Nolan & Conaglen, [2006] C.L.J. 15, 17–18; Nolan, [2009] C.L.J. 293, 306), an important distinction between a fiduciary acting beyond the scope of his power and acting within the scope of the power but doing so in breach of duty, as did Mummery L.J. A power does not authorise a fiduciary (i) to act beyond its literal scope, or (ii) to commit a fraud on the power, and so any such decision is void (at [96]). In contrast, when the fiduciary acts within the scope of his power but does so in a way which constitutes a breach of duty, the exercise of power is not void but may be voidable. A fiduciary's failure to consider relevant factors, or consideration of irrelevant factors, will only provide a basis for interfering with an exercise of power if the fiduciary thereby acted in breach of his duty; see also Abacus Trust Co (Isle of Man) v. Barr [2003] EWHC 114 (Ch), [2003] Ch. 409).
Lloyd L.J. accepted that fiscal consequences would often be relevant considerations. Failure to consider them could, therefore, constitute a breach of duty by the fiduciary, such as might render an exercise of power voidable. However, he said that if the fiduciary had taken and acted on professional advice regarding the fiscal consequences which turned out to be incorrect, as in each of the cases at hand, the fiduciary would have complied with its duty to take account of relevant factors before reaching a decision. In such cases, the fiduciary's exercise of power cannot be impugned, and so the appeals were allowed. The fiduciaries were left to pursue contract and tort claims against their professional advisers.
This is a sensible rationalisation of the doctrine. What had always been puzzling about the rule in Hastings-Bass was why an exercise of power by a fiduciary could be undone for failure to anticipate accurately its adverse (tax) consequences, whereas a similar decision by a person regarding his own property could not. The justification normally offered rested on the fact that a fiduciary acts on behalf of someone else, and owes duties to act in that other person's best interests. That is indeed so, but that indicates that the courts should only upset an exercise of power if the fiduciary has failed to comply with those duties. If it has, the fiduciary's principal(s) can seek to impugn the decision, or sue the fiduciary for breach of duty. If, however, the fiduciary acted properly, then any loss should be irrecoverable unless it can be laid at the door of the professional advisers (or, more accurately, their insurers), just as would be so if the principal had made the decision in his own right.
In Pitt v. Holt, the fiduciary's decision was also challenged on the ground of mistake, equally unsuccessfully. Lloyd L.J. held that a serious mistake had been made as to the tax consequences of the transaction, but that it was a mistake neither as to an existing fact that was basic to the transaction, nor as to the effect of the transaction: the mistake related merely to the (fiscal) consequences of the transaction. This seems accurately to reflect the requirements of equitable mistake in voluntary transactions, which Lloyd L.J. differentiated from common law remedies for mistake. These constraints on equitable intervention are justifiable, in the interests of the stability of voluntary transactions, although in other contexts the intersection between equitable and common law mistake may require deeper consideration than was necessary in this case.
