This article first appeared in a slightly different form in New Law Journal, 29 April 2011

On 9 March 2011 the Court of Appeal handed down a landmark decision on the scope of the so-called rule in Hastings-Bass[1] and took the opportunity to put right what Longmore LJ described as an example of "that comparatively rare instance of the law taking a seriously wrong turn".

The consolidated appeals in Pitt v. Holt and Futter v. Futter[2] are the first occasion on which the Court of Appeal has comprehensively examined the scope and effect of the Hastings-Bass decision since the original judgment in that case was reported in 1975.

The Hastings-Bass rule gained momentum in Mettoy Pension Trustees Ltd v. Evans[3] and subsequent cases, including Sieff v. Fox[4] where Lloyd LJ (sitting as a High Court judge) formulated it in the following terms:

    Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.

Accordingly, it was thought to give trustees a "powerful weapon" enabling them effectively to unwind decisions which later turned out to have unforeseen and undesirable consequences. This is illustrated by Pitt and Futter, both of which arose in the context of fiduciaries making decisions which created tax liabilities that neither they nor their advisers had expected. It is hardly surprising that HMRC, the appellant in both cases, was keen to put an end to Hastings-Bass being used to turn the clock back, so trustees could take new decisions which did not have the same consequences.

Following a detailed examination of the caselaw, Lloyd LJ concluded that Hasting-Bass had been misinterpreted in subsequent cases. In doing so, he effectively overturned a series of first instances decisions, including his own decision in Sieff v. Fox. An important part of Lloyd LJ's analysis was whether the passage towards the end of the Hasting-Bass judgment starting with the words "to sum up the preceding observations" – which has been though of as encapsulating the "rule" - accurately summarised the ratio of the case. He found that it did not. It omitted the Court's rejection of the proposition that if trustees exercise their powers without a full understanding of the effects, there is no valid exercise of those powers at all, i.e. the exercise is void. Once this point is brought back into to view, the rule is much narrower in scope.

The key points arising from the section of the Court of Appeal's judgment which considers Hasting-Bass are as follows:

  • The first consideration is whether the trustees have acted outside the scope of their powers? If so, the purported exercise of the power will be void.
  • If not, it can only be voidable (rather than void) where the trustees have acted in breach of their duties.  Lloyd LJ noted that those duties include the duty to take into account relevant matters and not to take into account irrelevant matters. So, at first blush, the flawed decision-making that would engage the old Hasting-Bass test would also establish a breach of duty when applying the new test.
  • However, this is subject to the crucial qualification that the trustees will not normally be in breach of duty – and the exercise of the power not voidable – where they have acted on appropriate professional advice. Lloyd LJ added that it is sufficient to discharge the duty that the trustees have retained appropriate advisers, either to advise on the specific matter at hand or whose remit extends to pointing out where advice may be needed from elsewhere.
  • This major restriction in the availability of Hastings-Bass relief means that where trustees act on incorrect or incomplete advice, they will have to look to their advisers for redress (assuming that rectification is not a solution). However, it must be recognised that claims against advisers are by no means straightforward, it does not follow that there will always be a good claim, nor that damages will be an adequate substitute for the ability to revisit the underlying decision.
  • Assuming the exercise of the discretion is voidable, Lloyd LJ concluded that it will normally be for the beneficiaries – rather than the trustees - to seek to have the decision set aside, by proving the trustees acted in breach of trust. It may nonetheless be appropriate for trustees to take the initiative, for example to seek a declaration where beneficiaries allege breach of trust but do not then bring their own proceedings. It is not uncommon for pension scheme trustees to seek a ruling on issues raised by members - often a more convenient route than leaving members to bring separate Ombudsman claims.
  • Finally, as the exercise of the discretion (within the trustees' powers) is at most only voidable rather than void, it will be a matter for the court's discretion (and the usual range of equitable defences) whether it should be set aside in a given case and, if so, on what terms.

Although Pitt and Futter concerned private trusts, the principles seem to be of general application. There is currently a pensions case before the High Court which raises Hastings-Bass type issues, which should provide useful guidance on how the new "rule" applies in that context.