#6754 - Pitt V. Holt - Restitution of Unjust Enrichment BCL

Pitt v. Holt

Facts

Mrs Pitt is the widow and personal representative of Mr Derek Pitt, and was at the material time his receiver appointed by the Court of Protection. He was very badly injured in a road accident in 1990. His personal injury claim was compromised in May 1994 on the basis of a structured settlement under which a lump sum was payable as well as monthly payments. With the benefit of professional advice it was decided to put both the lump sum and the annuity into a trust for Mr Pitt's benefit. As his receiver Mrs. Pitt entered into a Deed of Settlement, under which the lump sum was to be held on trust, and she then assigned the annuity to the trustees to be held on the same trusts. The settlement created discretionary trusts of income and capital for the benefit of Mr Pitt, his wife, children and remoter issue during his lifetime. It was to be known as the Derek Pitt Special Needs Trust.

Mr Pitt died in September 2007. Probate of his will was granted to Mrs Pitt and Mr Shores. Mrs Pitt is, in the events which happened, the sole beneficiary of the estate. In the meantime it had been realised in 2003 that the terms of the Special Needs Trust were such that inheritance tax (iht) applies to it as to any ordinary discretionary trust.

It would have been easy to create the settlement in a way which did not have these tax consequences. Section 89 of the Inheritance Tax Act 1984 excludes from this treatment some discretionary trusts for disabled persons. One additional provision would have been needed, namely a clause under which at least half of the trust fund applied during Mr Pitt's lifetime was to be applied for his benefit.

By the present proceedings Mrs Pitt and Mr Shores, as personal representatives of Mr Pitt and in Mrs Pitt's case also personally, claimed a declaration that the settlement by which the Special Needs Trust was created, and the assignment of the annuity, were void or alternatively voidable and ought to be set aside.

Issues

1. Trustees of a settlement exercise a discretionary power intending to change the beneficial ownership of trust property, but the effect of what they do turns out to be different from that which they intended. Can their act be set aside by the court? If so, what is the correct legal test to determine in what circumstances and on what basis the court can intervene?

2. The second question concerns the correct legal test to be applied if a donor seeks to have a voluntary disposition set aside as having been made under a mistake.

Holding

The trust point

The question of whether a declaration that the trust was void must be granted or not depended on the correct interpretation of the hasting-bass rule and whether that rule applied in this case.

The best formulation of the Hastings-Bass rule:

"Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account."

Correct interpretation of the Hastings-bass rule: Trustees considering an advancement by way of sub-settlement must apply their minds to the question whether the sub-settlement as a whole will operate for the benefit of the person to be advanced. If one or more aspects of the provisions intended to be created cannot take effect, it does not follow that those which can take effect should not be regarded as having been brought into being by an exercise of the discretion. That fact, and the misapprehension on the part of the trustees as to the effect that it would have, is not by itself fatal to the effectiveness of the advancement. (That involves the rejection of the Revenue's fourth submission.) If the provisions that can and would take effect cannot reasonably be regarded as being for the benefit of the person to be advanced, then the exercise fails as not being within the scope of the power of advancement. Otherwise it takes effect to the extent that it can.

If the problem to be resolved is what is the effect on an operation such as an advancement of the failure of some of the intended provisions, because of external factors such as perpetuity, it is not useful to ask what the trustees would have thought and done if they had known about the problem. The answer to that question is almost certainly that they would have done something different, which would not have run into the perpetuity or other difficulty. It is for that reason that the test has to be objective, by reference to whether that which was done, with all its defects and consequent limitations, is capable of being regarded as beneficial to the intended object, or not. If it is so capable, then it satisfies the requirement of the power that it should be for that person's benefit. Otherwise it does not satisfy that requirement.

In Re Hastings-Bass the issue was whether what the trustees had done was an exercise of the power of advancement under section 32 at all. If it was not, then it was entirely void. If on the other hand it was within the power, then there was no reason to regard it as ineffective to the extent that the rule against perpetuities permitted, i.e. as regards the life interest in favour of William Hastings-Bass.

By contrast with the types of case to which I have referred at paragraph [96] above, if an exercise by trustees of a discretionary power is within the terms of the power, but the trustees have in some way breached their duties in respect of that exercise, then (unless it is a case of a fraud on the power) the trustees' act is not void but it may be voidable at the instance of a beneficiary who is adversely affected.

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.

Mrs. Pitt did not breach fiduciary duty: It seems to me that Mrs Pitt fulfilled any duty of skill and care she was under by looking for advice to her solicitors acting in the litigation, either to advise her or to see that she got whatever advice she needed from another source, such as from Frenkel Topping. In those circumstances, I cannot accept that, in entering into the two deeds on 1 November 1994, Mrs Pitt can be said to have been acting in breach of her fiduciary duties owed to Mr Pitt.

The mistake point

Two Important cases:

Ogilvie v Littleboy (1897) 13 TLR 399: “In the absence of all 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”

Gibbon v Mitchell [1990] 1 WLR 1304: “wherever there is a voluntary transaction by which one party intends to confer a bounty on another, the deed will be set aside if the court is satisfied that the disponor did not intend the transaction to have the effect which it did. It will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it.”

Distinguishing In Re Griffiths: I wonder whether the judge would have come to the same conclusion on the law (quite apart from the facts) if the case had been argued in a fully adversarial manner. It seems to me that there would have been a strong argument for saying that, having declined to follow the recommendation that he should take out term insurance, Mr Griffiths was taking the risk that his health was, or would come to be, such that he did not survive. If that was the correct view, it seems to me that the answer to theOgilvie v Littleboytest would have been that it was not against conscience for the recipients of the gift to retain it.Ogilvie v Littleboywas cited by the judge, but he did not pose the question derived from that case in terms when he came to state his...