Amendment to Jersey Trust Law to give legislative effect to the principles of the Hastings - Bass case

30 August 2013

Jersey is seeking to preserve the "Hastings Bass Rule" by passing an amendment to its trust law which now awaits Privy Council consent.

 

A recent judgement by the Supreme Court of England and Wales clarified the application in England and Wales of the Hastings-Bass Rule relating to mistakes made when trustees/fiduciaries had acted in good faith and within their discretionary powers, but their actions had unforeseen, detrimental consequences, including giving rise to a tax liability.  Previously, the Court had been able to set aside actions that resulted in such consequences, if it was shown that irrelevant considerations had been taken into account or there had been a failure to take into account relevant considerations, even though professional advice had been taken prior to making those decisions.  The intention of the Rule was to protect the interests of beneficiaries, but HMRC took the view that relying on the Rule to overcome unexpected tax bills was unacceptable, particularly where the original actions had been motivated by tax avoidance.

 

The Court of Appeal in the 2011 cases of Pitt v Holt and Futter v Futter had rejected requests to apply the Rule to set aside decisions that appeared to have been made in precisely the conditions envisaged by the Rule.  These judgements were appealed to the Supreme Court, which upheld them based on the finding that there had been no breach of fiduciary duty to the beneficiaries and there was therefore no justification for the Court to intervene so as to set aside the actions of the trustees even though the interests of the beneficiaries had been disadvantaged. Thus, the Court’s power to apply the Rule has been curtailed and the circumstances in which it can be used clarified; there must have been a breach of duty, for example, a failure to obtain professional advice.  If professional advice has been taken but it turns out to be incorrect, then the Rule will not be applied as the trustees/fiduciaries will not have committed a breach of their duty.

 

The decision does not affect the power of the Court to set aside decisions made by trustees/fiduciaries based upon a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law on which the transaction is based, if not to correct the mistake would result in an injustice to the beneficiary or donee of property.  The Court has flexibility in this area, since each case must be considered on its own particular facts and the seriousness of the consequences of the mistake taken into account.  It is therefore likely that in future, trustees and beneficiaries will rely on the doctrine of mistake rather than on the Hastings-Bass Rule.

 

While the judgement does not directly apply to offshore jurisdictions, it is still relevant, as the Rule has in the past influenced court decisions in some of these offshore jurisdictions.  In Jersey, the Royal Court has held that the Rule, being “a manifestation of the general principal that a trustee must act in good faith, responsibly and reasonably”, is part of Jersey law and that where trustees have so acted, the Court can set aside their actions.  Given this, it was open to question whether the Royal Court will recognise the revised interpretation of the Rule and the assertion of the Supreme Court that previous applications of the Rule in England and Wales were wrong.

 

An amendment to the Trusts (Jersey) Law 1984 was passed on 16 July 2013 that, subject to Privy Council consent, will give statutory force to interpretations of the Rule and to the doctrine of mistake (as applicable to Jersey law trusts). The intention is to avoid costly litigation and provide certainty by specifying the circumstances in which various mistakes may be remedied, whether or not there has been a breach of fiduciary duty by the trustees.  The amendment rejects the narrowing of the Rule by the Supreme Court and gives the Royal Court wide remedial powers, while also containing protection for bona fide purchasers of trust property.  It is anticipated that Privy Council assent to the amendment will be given later in 2013 and that it will have retrospective effect.

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