Trusts Litigation Symposium, London

My post this week comes to you from the posh Millenium Hotel in Knightsbridge, London, where the organizers of IBC’s 3rd annual trust litigation symposium (brochure) have been kind enough to instal their speakers and panelists.

My panel “Caught in the Wrong & Possibly Putting it Right” is on a 2011decision of the UK Court of Appeal in two cases in which that court said the law had taken a “seriously wrong turn” over the last few decades. (My post on this decision – 12 September). The panel’s job is to air views on the likely impact of the decision on trustees in the UK , Guernsey & Jersey and Canada.

Pitt and Futter were standard requests for the application of the “rule” in Hastings-Bass which the courts of first instance found themselves bound to apply. The H-B rule is based on the principle that where a trustee exercises a discretion, she can only do so validly as long as she remains within the authority granted by the deed of trust. If the trustee goes beyond those powers, the action is void. If the trustee acts within her powers but breaches a fiduciary duty while exercising a discretion, the action is voidable.

One such breach is the failure to take into account a relevant factor when exercising the discretion.

In the Futter and Pitt cases, in exercising their discretion the trustees overlooked certain legislative provisions. As a result beneficiaries suffered unintended tax consequences.

Overlooking things that result in harm to the trust is a breach of fiduciary duty. The courts of first instance found the trustees’ action was voidable. The transactions were undone by application of the H-B rule. The taxes were not payable.

One of the judges at first instance had been elevated to the Court of Appeal by the time the HM tax authorities’ appeal arrived there. He was then in a position to say what he really thought. Enter the “seriously wrong turn”.

The appeal court held that because the Pitt and Futter trustees had relied on professional advice in taking their actions, there was no breach of fiduciary duty. Therefore the H-B rule could not be invoked. The trustees should sue their advisers instead.

A frisson rippled into the world of common law trusts litigation. The decision is on its way to the UK Supreme Court but the word on the street here is that it will be upheld.

In Canada we are fairly insulated from the effects. We don’t use H-B to undo trustee action that results in unintended tax consequences. We use the same approach for anyone who finds themselves in this position: rectification. Whether you are an individual, a corporation or a trustee if you can show a continuing intent to lawfully avoid a particular tax , but because of a mistake in executing the transaction that tax is triggered, the court will not permit CRA to get the windfall, but will correct the error nunc pro tunc.

The Guernsey & Jersey courts apparently may not follow the “U turn”. The Privy Council, some here predict, will respect Jersey & Guernsey’s different context.

Ah the beauty of the common law system! What will be left of it when the tides of mandatory mediation have receded?


  1. What is left “when the tides of mandatory mediation have receded?”

    Maybe some barnacle-encrusted bivalves (aka shells) whose inhabitants (trusts) have long since vanished without a trace due to the passage of time, trustee error, unreliable professional advice and the non-application of a rule yielding a bountiful catch of taxing consequences. Why weep ye by the tide?

  2. The comment about mandatory mediation was completely gratuitous. Nothing in the English case involved mediation. The point of litigation is not to refine a century-old rule of trustee liability but to resolve an issue between parties. If the parties can get to a better, cheaper or faster resolution (or one with all of those characteristics), then a justice system that can produce it is doing them a service.

    It is not at all clear that a case about tax liability could be mediated anyway. The parties might allocate responsibility for tax among themselves, but they could not produce a solution that would bind the CRA, and the CRA could not participate in a mediation in a way that would affect the tax liability of non-parties.

    But it is a giant step to say that because a court could (occasionally and unpredictably) make a decision about allocation of risk between the parties that would affect tax consequences for non-parties, one should discourage private resolution by mediation. Legislatures exist to resolve systemic problems of inappropriate liability, and though that ‘mechanism’ is far from guaranteed, it’s clear from the English case and general experience that the judicial ‘mechanism’ is no more reliable, indeed likely far less so.