Previously published on June 2011.
The English Court of Appeal judgment in Pitt v Holt; Futter v Futter  EWCA Civ 197, in which the "Hastings-Bass rule" was reviewed and restated, was handed down on 9 March 2011, Lord Justice Lloyd giving the leading judgment. There is an interesting Isle of Man aspect to the judgment in relation to equitable relief for mistake.
In Pitt v Holt, Derek Pitt was very badly injured in a road accident and his wife was his receiver appointed by the Court of Protection. His personal injury claim was settled by the payment of a lump sum and an annuity. As his receiver, Mrs. Pitt settled a discretionary trust to hold lump sum and the annuity (which Mrs Pitt, as receiver, assigned to the trustees). The trustees were Mrs Pitt and two others. Mrs. Pitt was advised by solicitors and by a firm described in the judgment of Lloyd LJ as financial advisors with specialist experience of structured settlements. The question of inheritance tax was not, however, addressed by any of the advisers to Mrs Pitt and therefore not by Mrs Pitt herself. Since the trust was not (as it could have been) established as a discretionary trust for a disabled person, unintended IhT was payable. The claim by Mrs Pitt and the trustees was for a declaration that the trust, and the assignment of the annuity, were void or alternatively voidable on the basis of the Hastings-Bass rule or on the ground of mistake.
The High Court had decided that the Hastings-Bass rule applied to Mrs. Pitt when acting as her husband's receiver because, although not a trustee, as receiver she was a fiduciary. HMRC did not challenge that on appeal, and the Court of Appeal was prepared to assume that the rule applied. Lloyd LJ restated the Hastings-Bass rule as follows (paragraph 127):
The cases which I am now considering concern acts which are within the powers of the trustees but are said to be vitiated by the failure of the trustees to take into account a relevant factor to which they should have had regard - usually tax consequences or by their taking into account some irrelevant matter. It seems to me that the principled and correct approach to these cases is, first, that the trustees' act is not void, but that it may be voidable. It will be voidable if, and only if, it can be shown to have been done in breach of fiduciary duty on the part of the trustees. If it is voidable, then it may be capable of being set aside at the suit of a beneficiary, but this would be subject to equitable defences and to the court's discretion. The trustees' duty to take relevant matters into account is a fiduciary duty, so an act done as a result of a breach of that duty is voidable. Fiscal considerations will often be among the relevant matters which ought to be taken into account. However, if the trustees seek advice (in general or in specific terms) from apparently competent advisers as to the implications of the course they are considering taking, and follow the advice so obtained, then, in the absence of any other basis for a challenge, I would hold that the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, in such a case I would not regard the trustees' act, done in reliance on that advice, as being vitiated by the error and therefore voidable.
The High Court had decided the case in favour of the taxpayers on the Hastings-Bass rule. The Court of Appeal however, allowing HMRC's appeal on this point, decided that because Mrs. Pitt had retained appropriate professional advisers, there was no breach of fiduciary duty allowing the Hastings-Bass rule to be invoked. Although the Hastings-Bass rule has been applied by the Isle of Man courts, it has not been the subject of argument or reported judgments here. It is accordingly likely that the Isle of Man High Court will follow the Court of Appeal's restatement of the rule.
Mrs Pitt also sought equitable relief on the grounds of mistake. This relief is to be distinguished from the common law remedies for mistake, which were not invoked in the case. In Gibbon v Mitchell  1WLR 1304, the English High Court drew a distinction between the effects of a transaction and the consequences of the transaction; thus, it was held that equity will set aside a transaction for mistake (of fact or law) so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences. From subsequent cases (e.g. Anker-Petersen v Christensen (2002) WTLR 313 at 330H), the tax outcome of a transaction was considered to be a "consequence" rather than an "effect".
The case of Ogilvy v Littleboy 13 TLR 399 was not cited in Gibbon v Mitchell, indeed it appears did not come to be cited in England until 2005, when it was cited in Sieff v Fox1. In Ogilvy, Lord Justice Lindley said:
The object of this action is to set aside two deeds founding two charities... Gifts cannot be revoked, nor can deeds of gift be set aside simply because the donors wish they had not made them and would like to have back the property given. Where there is no fraud, no undue influence, no fiduciary relation between donor and donee, no mistake induced by those who derive any benefit by it, a gift whether by mere delivery or by deed, is binding on the donor... In the absence of all such circumstances of suspicion a donor can only obtain back property which he has given away by showing that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him
On this, Lloyd J (as he then was) in Sieff v Fox (2005) 1 WLR 3811 said:
According to Ogilvie v Littleboy 13 TLR 399 the test is more general, namely whether the donor or settler "was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him." That formula might allow fiscal consequences to be taken into account, if they were sufficiently serious.
There was therefore a tension between the decision in Gibbon v Mitchell, which drew a distinction between the effect of a transaction and its consequences, and the decision in Ogilvie v Littleboy in which the test appeared to relate to the seriousness of the mistake (whether as to effect or consequences)
Before Pitt v Holt, there had been two recent cases in the Isle of Man High Court on the point: Clarkson v Barclays Private Bank and Trust (Isle of Man) Limited 2005 - 06 MLR 493 (CLD) and McBurney v McBurney (re Betsam Trust) (unreported judgment 5 June 2008). In Clarkson, the Plaintiff acting on advice from his English solicitor had created a discretionary trust and transferred about Â£1m to it, triggering unintended IhT because of the deemed domicile rules in IhTA 1984. The plaintiff claimed that the sums transferred were recoverable on the grounds that they were paid under a mistake of fact and/or law, based on either common law restitution or in the alternative in exercise of the equitable jurisdiction. The late Deemster Kerruish found for the plaintiff in relation to the common law remedy, however went on to consider equitable relief. Finding for the plaintiff on this ground also, the Deemster said (paragraph 29):
I accept that there is no rational basis for restricting recovery to where there has been a mistake as to the operative effect of a transaction. Ogilvie is authority for a wider test based upon the mistake being so serious as to render it unjust for the donee to retain the property irrespective of the precise nature of the mistake. Both AMP (UK) plc v. Baker and what Lloyd, L.J. said in Sieff v. Fox lend support to a test based on the seriousness of the mistake. By way of analogy with the approach of the courts to a common law claim in restitution, the best measure as to whether the mistake was so serious as to render it unjust for the volunteer donee to retain the moneys is if the payment would not have been made "but for" the mistake. In other words the mistake was the cause of the payment.
This was followed by Deputy Deemster Corlett (as he then was) in re Betsam2. Here, again, unintended IhT had been triggered by a gift to a discretionary trust falling foul of the deemed domicile rules. The petitioner sought an order that the trust be set aside in exercise of the Court's equitable jurisdiction to set aside a voluntary transaction on the ground of mistake of law or fact. The Deputy Deemster said at paragraphs 34 and 37:
34 In light of these observations of Lewison J., those of Davis J. in Anker-Peterson,Mann J at paragraph 25 of Wolff v Wolff (2004) EWHC 2110 (Ch) and also of Deemster Kerruish in Clarkson, I am satisfied that the test set out in Gibbon v Mitchell requiring the court to distinguish between the effect of a transaction and its consequences or advantages is one which poses a real difficulty in cases such as this and may be said in the light of experience to be unworkable. Accordingly, I agree with Mr. Bridson that the court does have a broad equitable jurisdiction to set aside a voluntary transaction on the ground of mistake, a jurisdiction established by Ogilvie v Littleboy, a decision which it appears was not brought to the attention of the court in some subsequent cases on the basis that it does not appear to have been reported in the established Law Reports at the time.
37 As to the debate referred to by Lewison J., in my judgment the creation of the Betsam Trust was at least partly motivated by tax planning considerations and the UK tax advantages which might arise in the future, but the question I must ask is not that posed by Millett J. in Gibbon v Mitchell relating to effects or advantages but is instead whether the mistake as to the taxation consequences is sufficiently serious to enable relief to be granted in accordance with the Ogilvie v Allen/Littleboy formula (see the quote from Lloyd L. J. in Sieff v Fox at Paragraph 21 of this judgment). In my view it clearly is.
The Isle of Man High Court had therefore come down in favour of equitable relief for mistake being granted if the mistake was sufficiently serious to render it unjust on the part of the recipient to retain the property, irrespective of whether the mistake was as to the effect of the transaction or its consequences.
The Court of Appeal was to hold differently in Pitt v Holt. Lloyd LJ said at paragraph 210:
I would therefore hold that, for the equitable jurisdiction to set aside a voluntary disposition for mistake to be invoked, there must be a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact which is basic to the transaction. ... Moreover the mistake must be of sufficient gravity as to satisfy the Ogilvie v Littleboy test, which provides protection to the recipient against too ready an ability of the donor to seek to recall his gift. The fact that the transaction gives rise to unforeseen fiscal liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.
And at paragraph 219:
Accordingly, I would hold that, even though Mrs Pitt was under a mistaken belief at the time of the disposition, and it was a mistake of sufficient gravity to satisfy the Ogilvie v Littleboy test, nevertheless it was not a mistake as to the legal effect of the disposition, and it therefore does not qualify as a basis for invoking the jurisdiction of equity to set aside a voluntary disposition for mistake.
Lloyd LJ commented that the "but for" test adopted by Deemster Kerruish the Clarkson decision "misinterprets and misapplies what Lindley LJ said in Ogilvie v Littleboy and poses a test which is a great deal too relaxed for the donor who seeks to recover his gift"; and of both Isle of Man decisions that they "ignore the distinction drawn by Millett J between effect and consequences" and do not accord with English law.
However, despite the Court of Appeal decision in Pitt v Holt, the decisions in Clarkson and re Betsam represent the law in the Isle of Man at present. It therefore appears, at least on the present state of the law in England and the Isle of Man, that a settlor seeking equitable relief from a gift into trust which has triggered unintended tax may find the Isle of Man courts more accommodating than in the English courts. This seems right, because "applying the principle of unconsionability"3 it is either conscionable or unconscionable for the donee to retain the gift, and if it is unconscionable then surely equity should intervene? Lloyd LJ in Pitt v Holt accepted4 that Mrs Pitt's mistake was of sufficient gravity to satisfy the Ogilvie v Littleboy test (that is, the mistake was of sufficient gravity to render it unjust on the part of the trustees to retain the lump sum and the annuity), but denied relief on the grounds that the mistake was the wrong type of mistake.
If this seems harsh, a reason given5 is to "restrict the setting aside of dispositions within reasonable bounds, so as not to undermine the certainty of transactions and so as not to allow persons to reverse the effect of a transaction merely because they were mistaken about the fiscal or commercial consequences of the transaction as opposed to the direct or indirect effect of the transaction". But if there has been an operative mistake, the transaction is voidable and can be set aside on terms; also, the remedy is discretionary so that account can be taken of delay, acquiescence, change of position and the protection of bona fide purchasers for value6. It may be considered that these factors are sufficient to keep the remedy within reasonable bounds, and that the Isle of Man courts should not follow the Court of Appeal in Pitt v Holt on this point.
1. Paragraph 185 of the judgment of Lloyd LJ
2. Which was in turn followed in Jersey in re The A Trust 2009 JLR 447
3. Re Betsam, at paragraph 36.
4. Paragraph 219.
5. See Underhill & Hayton, Law of Trust and Trustees, 18th ed. at 15.33
6. Underhill & Hayton, 15.35.
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