Contentious Trusts Case Summaries 05/08

AB v CD (Isle of Man)

The High Court of Justice of the Isle of Man was asked to consider whether Call Options granted by trustees should be set aside on the basis of the Hastings-Bass rule, also known as the ‘proper deliberation rule’, or otherwise set aside on the basis of mistake. The Hastings-Bass rule dictates that a court must only interfere with a trustee’s discretion where he has acted outside of his power or has taken into account considerations that he should not have, or failed to take into account considerations that he should have.

The Claimant is the primary beneficiary of 8 discretionary trusts that were established under the laws of the Isle of Man. The Defendant granted Call Options in favour of a company beneficially owned by the Claimant to give the Claimant comfort as most of his assets were held in the trust. The Claimant then moved to the UK and it emerged that the Call Options could have potential adverse consequences for him and other beneficiaries who reside in the UK. The Claimant therefore sought for the Call Options to be declared void through an application of the Hastings-Bass rule or otherwise set aside for mistake.

Firstly, the Deemster (an Isle of Man judge) left open the question as to whether Pitt v Holt [2013] which addressed the proper deliberation rule, is good Manx law but doubted that it was; a future case will be needed to determine this. Notwithstanding, in this case it was held that the result would be the same either way.

In his judgment the Deemster specifically referred to and relied upon an article by Emma Jordan, Head of Contentious Trusts at this firm, which provided comment on the ‘political undertones’ of the judgment of Lord Walker in Pitt v Holt.

It was held that the Defendant had committed a breach of duty in failing to deal with the tax issue properly; he failed to have regard to material tax considerations, as mentioned in The B Life Interest Settlement [2012], he failed to take tax advice and adopted a flawed decision making process, as mentioned in Pitt v Holt [2013]. If the Defendant knew of the possible consequences that the Call Options might have, he would not have granted them and thus they should be set aside. The Deemster noted that the law on whether the rule in Re Hastings-Bass renders transactions void or voidable is uncertain but in this case it was best to grant relief in the terms requested: the Call Options were deemed to have never taken effect.

Deemster Doyle also noted that the issue of mistake may need to be considered by the Appeal Division in the future. This is still clearly an unsettled area of law and so it is likely that further judicial comment will follow.

Herring and Another v Shorts Financial Services LLP [2016] EW Misc B12 (CC)

A solicitor who drafted a will involving two trusts was found to be in breach of his duty of care as he did not make sufficient enquiries of the testator as to how trust monies would devolve on death.

An original will was drafted by a solicitor in 2011. The will included £54,000 of legacies in favour of each of the Claimants in the proceedings. After inheriting money from her sister, having received advice from a financial advisor, the testator established two trusts, the first a discretionary trust with assets of £175,000 and the second a loan trust with assets of £125,000. The testator later instructed the solicitor to increase the amount in the 2011 will to £200,000. He failed adequately to do so and upon the testator’s death, the Claimants only received the original £54,000 and not the full £200,000.

Consequently, proceedings were issued against the financial advisor who had advised the testator to establish the trusts. The financial advisor was accused of negligently explaining the operation of the trust. It was held that the financial advisor owed no duty of care to the claimants as he was not instructed in the will-making process, was not sufficiently proximate to the beneficiaries and did not know their identities or the amount to be left to them.

Even though the claimants had compromised their claim against the relevant law firm, it was ruled that it was difficult to resist the conclusion that the solicitor was in breach of the duty owed by him to the Claimants. The Court concluded that the solicitor did not make sufficient enquiries to determine whether or not the relevant trust monies would pass to the Claimants upon the testator’s death. The solicitor made no attempt to check the terms of the trust documents themselves thus his fundamental mistake was to assume that the Claimants were absolutely entitled to the money based solely on the material of a memoire and a short conversation.

This decision emphasises the importance for anyone involved in the will-making process to make full enquiries into how the testator’s estate will devolve on death in order to fulfil the duty of care owed to both the settlor and his or her intended beneficiaries.