Bermuda is well known as one of the most stable jurisdictions in the world: a reputation built very much on the islands' established and durable legal system. But stability does not mean stagnation, as Bermuda's legislators have demonstrated this year, with some important and welcome amendments to the Trustee Act 1975. In this article, we consider one of these changes: the Trustee Amendment Act 2014, which gives statutory effect to 'the rule in Re Hastings-Bass'.

THE DEATH OF THE RULE

Following the decision of the UK Supreme Court in Pitt v Holt; Futter v Futter,1 it seemed that what had become known as 'the rule in Re Hastings-Bass' was dead. In giving the sole judgment of the Court, Lord Walker cited the words of Longmore LJ, who said that the appeals in the case were 'examples of that comparatively rare instance of the law taking a seriously wrong turn, of that wrong turn being not infrequently acted on over a 20-year period but this court being able to reverse that error and put the law back on the right course'.

It is difficult to argue with this analysis. The rule in Re Hastings-Bass in fact emerged in 1990, in the judgment of Warner J in Mettoy Pension Trustees Ltd v Evans.2 What the learned judge did in that case was to extract a principle from certain remarks of Buckley LJ in Re Hastings-Bass (Deceased) to the effect that the court should not interfere with the exercise of a trustee's discretion unless 'it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account, or (b) had he not failed to take into account considerations which he ought to have taken into account'.3

These remarks were strictly obiter – they were made in the context of a case relating to the effect of the perpetuity principle on the validity of a power of advancement – and they were couched in purely negative terms, but from them Warner J drew what he described as 'the principle in Re Hastings-Bass': 'Where a trustee acts under a discretion given to him by the terms of a trust, the court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account.'

It is clear the 'principle' that Warner J identified was in fact a new principle that was not drawn from the Hastings-Bass case at all. However, this new jurisdiction was taken up at first instance, not only in England and Wales but also in common-law jurisdictions worldwide. Over 20 years, the rule in Re Hastings-Bass was developed into a flexible jurisdiction permitting the court to undo the consequences of decisions made by trustees based on incomplete or flawed information.

At the same time as it was being deployed in common-law courts the world over, the rule in Re Hastings-Bass came in for trenchant criticism, most famously in an article by Lord Neuberger in which he compared an application of the rule to 'Doctor Equity' administering a 'magical morning-after pill to trustees suffering from post-transaction remorse, but not to anyone else'.4

Following criticisms of this nature, it is perhaps no surprise that, in the conjoined Pitt and Futter appeals, the UK Supreme Court decided to return to the orthodox principle that, while powers exercised in breach of fiduciary duty may be susceptible to challenge by beneficiaries, there is no wider common-law principle enabling the court to reverse the flawed exercise of a fiduciary power.

THE RULE RECALLED TO LIFE

The decision in Pitt v Holt may have been a triumph for legal orthodoxy, but, from a practical perspective, it was arguably a more unfortunate development. For over two decades following the decision in Mettoy, courts had been able to deploy the Hastings-Bass jurisdiction as a simple, cost-effective means of avoiding the damaging consequences of a defective exercise of power by trustees or other fiduciaries.

Put simply, the rule in Re Hastings-Bass was a superior method of undoing trustee errors based on defective decision-making. With the jurisdiction, a trustee could apply to court and, on satisfactory evidence that the exercise of a power had gone wrong and that, had the trustee been properly informed, the power would not have been exercised in that way, the court could step in to restore the status quo. Without the jurisdiction, the remedy for a flawed exercise of a power could only be a hostile application – most probably by beneficiaries – to set aside the exercise due to a breach of trust or fiduciary duty, or alternatively a claim for compensation against the trustee. Such an application would be fraught with difficulty, with modern trust companies relying on exculpation clauses in the trust instrument, and with the defence to any negligence action under the control of professional indemnity insurers. It would also be potentially toxic to the whole trust relationship, as the beneficiaries would be forced to sue trustees for their past mistakes in the exercise of their powers.

Practically speaking, then, the Hastings-Bass jurisdiction represented a positive development: a pragmatic replacement of hostile litigation with a jurisdiction that enabled trustee errors to be corrected simply and consensually.

For this reason, many common-law jurisdictions – particularly those with well-developed and sophisticated trust industries – have been unwilling to see the rule in Re Hastings-Bass consigned to history, and instead have taken the policy decision that it would be better to preserve the rule by placing it on a statutory footing. The first jurisdiction to do this was Jersey, and now Bermuda, by the Trustee Amendment Act 2014 (TAA 2014), is also reintroducing the Hastings-Bass jurisdiction in statutory form.

ANALYSIS OF THE ACT

The TAA 2014 gives the court a new statutory jurisdiction that is intended to replicate the court's jurisdiction under what might now be called the 'classic rule in Re Hastings-Bass'.

The jurisdiction is triggered when two conditions are met:

  • First, 'in the exercise of a power, the person who holds the power did not take into account one or more considerations (whether of fact, law or a combination of fact and law) that were relevant to the exercise of the power, or took into account one or more considerations that were irrelevant to the exercise of the power'.
  • Second, 'but for his failure to take into account one or more such relevant considerations or his having taken into account one or more such irrelevant considerations, the person who holds the power' would not have exercised the power, or would have exercised it but on a different occasion or in a different manner.6

If these conditions are met, then the court has a discretion to set aside the exercise of the power in whole or in part, and either unconditionally or on terms.7 While the jurisdiction will not be exercised where to do so would prejudice a bona fide purchaser for value of trust property,8 and is otherwise intended to be subject to the usual rules regarding the grant of equitable relief,9 the jurisdiction is extremely flexible, allowing the court to undo the exercise of fiduciary powers based on fl awed or incomplete information.

Importantly, the new legislation does not force the court to act: it merely confers a jurisdiction to exercise a discretion to act where something has gone wrong in the exercise of a fiduciary power.

While the purpose of both the Jersey and the Bermuda laws is the same – to enshrine the Hastings-Bass jurisdiction in statute – the new Bermudian legislation has some interesting and distinctive features. To give just two examples:

  • The Bermudian Act gives the court jurisdiction to set aside the exercise of 'fiduciary powers', a term that is defined in the Act. Thus, the new statutory jurisdiction in Bermuda would be available in relation to powers exercised by non-trustee fiduciaries. The jurisdiction would appear to be wider than its Jersey counterpart, which applies only to the acts of trustees and those exercising a power 'over or in relation to a trust or trust property'.10 Considering that one of the most notable cases on Hastings-Bass – Pitt v Holt itself – concerned a power exercised by a non-trustee fiduciary (a receiver under mental-health legislation), this broader scope arguably replicates the Hastings-Bass jurisdiction more accurately.
  • Under the Bermudian legislation, the court is given the discretion to 'set aside' the exercise of a power. To the extent that the exercise of a power is set aside, 'the exercise of the power shall be treated as never having occurred'.11 By contrast, the Jersey court is empowered to 'declare that the exercise of a power... is voidable and... has such effect as the court may determine or... is of no effect from the time of its exercise'.12 The relief available under the Jersey law is potentially very wide: if the exercise of a power can have 'such effect as the court may determine', is it possible that the court could decree that the fl awed exercise of a power may have some different effect, perhaps even the effect that the trustees originally intended? By contrast, the relief available in Bermuda is potentially narrower but more straightforward: if a power is set aside, then, to that extent, it is treated as never having been exercised.13

The precise nuances of this new jurisdiction will be revealed only when it is analysed and applied by Bermuda's Supreme Court. The court is being given a new discretion; while it will doubtless be exercised judicially, and only where it is just in all the circumstances to do so, the discretionary nature of the jurisdiction makes it impossible to say when and how it will be applied in practice. What is certain, however, is that Bermuda's courts have just been given a flexible new tool for those instances where something has gone awry in the exercise of a fiduciary power.

Footnotes

1 [2013] 2 AC 108

2 [1990] 1 WLR 1587

3 [1975] Ch 25 at 41G

4 'Aspects of the law of mistake: Re Hastings-Bass', Trusts & Trustees, 15 (4), (2009), 189

5 TAA 2014, s2

6 Ibid

7 Ibid

8 Ibid

9 See the explanatory memorandum

10 Trusts (Amendment No.6) (Jersey) Law 2013, s1

11 TAA 2014, s2

12 Trusts (Amendment No.6) (Jersey) Law 2013, s1

13 Again, this mirrors the classic rule in Re Hastings-Bass: see Breadner v Granville-Grossman [2001] Ch 523

Originally published in STEP Journal Bermuda Supplement

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