Advocate Richard Wakeham, senior associate, and Adam Marshall, legal assistant at Sinels Advocates, discuss the implications for Jersey following the recent clarification of the English court’s jurisdiction under the supposed rule in Hastings-Bass.

The recent case of In the matter of the S Trust [i] confirms that Jersey law will retain a broad jurisdiction to set aside transactions entered into on the basis of mistake irrespective of whether Jersey follows the recent clarification of the English court’s jurisdiction under the supposed rule in Hastings-Bass (which enables the court to set aside the decision of a trustee because it was either ultra vires or because the trustee had either failed to take into account relevant considerations or had taken into account irrelevant considerations).

The facts of this case may be shortly stated. The settlor, inter alia, applied for leave to set aside a transfer of assets into a discretionary trust on the basis that she had been mistaken as to the fiscal effects of creating the trust. The settlor’s London solicitors advised her that settling the assets on trust would bring certain tax benefits in England. However, she was subjected to an immediate tax of circa £2 million (about $3.2 million)on creating the trust and US-resident beneficiaries faced potential tax charges of up to 100 per cent of accumulated income distributed to them. 

The application gave the Court the opportunity to consider whether it should follow the English ruling in the twinned appeals of Pitt v Holt and Futter v Futter [ii] on this point or whether it should take its own path.

Mistake in English law

In the appeals of Pitt and Futter, the Court of Appeal restated the English rule for setting aside voluntary transactions on the basis of mistake which requires the following:

1.                  There must be a mistake on the part of the donor as to the legal effect of the disposition or as to an existing fact which is basic to the transaction.

2.                  The mistake must not be as to unforeseen fiscal liabilities for this is a consequence and not an effect of the transaction and is insufficient to bring the jurisdiction into play.

3.                  The mistake must be of so serious a character to as to render it unjust for the recipient to retain the benefit of the gift.[iii]

Mistake in Jersey law

In In Re the Lochmore Trust [iv], the test in Jersey was reduced to the following three questions:

“(i)        Was there a mistake on the part of the settlor?

(ii)        Would the settlor not have entered into the transaction ‘but for’ the mistake?

(iii)       Was the mistake of so serious a character as to render it unjust on the part of the donee to retain the property?”[v]

Which analysis was preferred?

The Court noted the disparity between the ease with which a donor could retrieve a gift in England and Jersey. The English approach forsook flexibility for certainty whilst the Jersey approach was opposite. The Court preferred the much more equitable approach that Jersey had adopted previously.

The decision

In applying the pre-existing Jersey principles of law, the Court found that the settlor had clearly made a mistake as to the fiscal consequences of establishing the trust and that she would not have entered the transaction “but for” the mistaken impression she held through the receipt of the incorrect advice from her English solicitors. The Court regarded the consequences of the settlor’s mistake as “nothing short of catastrophic” [vi] and, accordingly, declared that the initial and subsequent declarations of trust were voidable at the instance of the settlor on the ground of mistake.

Conclusions

This judgment is significant because it demonstrates the Jersey Court’s independence and heralds a practical and just approach to the issue of mistake which remains unclouded by artificial distinctions (such as one between consequences and effects) which only serve to benefit the tax authorities.

The confirmed Jersey rules on mistake will not only come to the aid of a mistaken settlor, but also a mistaken trustee who has entered into a transaction on the basis of incorrect tax advice in the ordinary course of the administration of a trust. There is no good legal or policy reason that should lead to an alternative conclusion. Accordingly, even if Jersey does follow the English Court of Appeal’s decision in Pitt and Futter so as to signal the death of the rule in Hastings-Bass, the Royal Court will still enjoy a similar but not identical equitable jurisdiction to set aside transactions on the basis of mistake. 

Where a transaction cannot be set aside in Jersey on the basis of mistake because the trustee did not consider the tax position at all such that it knew exactly what it was doing albeit ignorantly, this will of course entitle those affected to bring proceedings for breach of trust. Ironically, if Pitt and Futter were to be followed in Jersey, it will also be possible for those affected, other than the trustee, to bring a new style Hastings-Bass application to set aside the transaction. Therefore, it seems that the death of Hastings-Bass has been greatly exaggerated and that, in Jersey at least, there will remain scope for setting aside transactions entered into on the basis of mistaken tax advice, irrespective of whether the Royal Court of Jersey follows Pitt and Futter.