#6755 - Pitt V. Holt Sc - Restitution of Unjust Enrichment BCL

Pitt v. Holt (Supreme Court)

Facts

The claim was made by the personal representatives of Mr Derek Pitt, who died in 2007 aged 74. In 1990 he had suffered very serious head injuries in a road traffic accident, resulting in his mental incapacity. His wife, Mrs Patricia Pitt, was appointed as his receiver under the Mental Health Act 1983, and on his death she became one of his personal representatives, and the only beneficiary interested in his estate. Mr Pitt’s claim for damages for his injuries was compromised by a structured settlement, approved by the court, in the sum of 1.2m. Mrs Pitt’s solicitors sought advice from Frenkel Topping, a firm of financial advisers said to have specialist experience of structured settlements. They advised that the damages should be settled in a discretionary settlement, and this was done, with the authority of the Court of Protection, in 1994. The trust was referred to as the Derek Pitt Special Needs Trust (“the SNT”).

Frenkel Topping gave their advice in a written report to Mrs Pitt (as receiver) which was made available to the Official Solicitor, who represented her husband in the application to the Court of Protection. The report referred to various advantages which the SNT was expected to secure, and it mentioned income tax and capital gains tax in its illustrative forecasts. But the report made no reference whatsoever to inheritance tax.

The SNT could have been established without any immediate inheritance tax liability if (i) it had been an interest in possession trust or (ii) it had been a discretionary trust complying with section 89 of the Inheritance Tax Act 1984. In order to comply with section 89 its terms should have provided that at least half of the settled property applied during Mr Pitt’s lifetime was applied for his benefit. But the SNT as drafted and executed contained no such restriction. The consequence was an immediate liability to inheritance tax of the order of 100,000, with the prospect of a further tax charge on the tenth anniversary in 2004. The deputy judge (Mr Robert Englehart QC) observed that by 2010 the total tax, together with interest and penalties (if exacted) must have amounted to between 200,000 and 300,000.

Mrs Pitt and her advisers became aware of the inheritance tax liabilities in 2003. In 2006 Mr Pitt (by a litigation friend) and the trustees of the SNT commenced proceedings against Frenkel Topping claiming damages for professional negligence. Mr Pitt died in 2007. After taking further advice his personal representatives (who were also two of the trustees of the SNT) commenced proceedings seeking to have the SNT set aside either under the Hastings-Bass rule, or on the ground of mistake.

Holding

Lord Walker

Causative Ignorance and Mistake

For present purposes a mistake must be distinguished from mere ignorance or inadvertence, and also from what scholars in the field of unjust enrichment refer to as misprediction. Forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a false belief or assumption which the law will recognise as a mistake.

The fullest academic treatment of this topic is in Goff & Jones at paras 9-32 to 9-42. The editors distinguish between incorrect conscious beliefs, incorrect tacit assumptions, and true cases of mere causative ignorance (“causative” in the sense that but for his ignorance the person in question would not have acted as he did). The deputy judge’s first-instance decision in Pitt [2010] 1 WLR 1190, para 50 is suggested as an example of mere causative ignorance: “If someone does not apply his mind to a point at all, it is difficult to say that there has been some real mistake about it”. The Court of Appeal adopted a different view of the facts, treating the case (para 216) as one of an incorrect conscious belief on the part of Mrs Pitt that the SNT had no adverse tax consequences. The editors of Goff & Jones are, on balance, in favour of treating mere causative ignorance as sufficient. They comment (at para 9-41, in answering a “floodgates” objection):

“. . . denying relief for mere causative ignorance produces a boundary line which may be difficult to draw in practice, and which is susceptible to judicial manipulation, according to whether it is felt that relief should be afforded – with the court’s finding or declining to find incorrect conscious beliefs or tacit assumptions according to the court’s perception of the merits of the claim.”

It may indeed be difficult to draw the line between mere causative ignorance and a mistaken conscious belief or a mistaken tacit assumption. I would hold that mere ignorance, even if causative, is insufficient, but that the court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious belief or tacit assumption when there is evidence to support such an inference.

Unilateral Mistake is Sufficient

Nor need the mistake be known to (still less induced by) the person or persons taking a benefit under the disposition. The fact that a unilateral mistake is sufficient (without the additional ingredient of misrepresentation or fraud) to make a gift voidable has been attributed to gifts being outside the law’s special concern for the sanctity of contracts.

Conversely, the fact that a purely unilateral mistake may be sufficient to found relief is arguably a good reason for the court to apply a more stringent test as to the seriousness of the mistake before granting relief.

Nature of the Mistake

Citing Millet J in Gibbons v. Mitchell:

“In my judgment, these cases show that, 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 a 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.”

It will be observed that this formulation does not include the Ogilvie v Littleboy requirement of seriousness, except so far as it might be argued that any mistake as to the effect of a disposition is likely to be relatively serious…. But the source from which Millett J’s statement of principle is derived is far from clear and it has been the subject of some criticism, both from legal scholars and in more recent decisions of the court.

Lawrence Collins J went further in AMP (UK) plc v Barker [2001] WTLR 1237, para 70, saying of the distinction:

“If anything, it is simply a formula designed to ensure that the policy involved in equitable relief is effectuated to keep it within reasonable bounds and to ensure that it is not used simply when parties are mistaken about the commercial effects of their transactions or have second thoughts about them.”

On that view it comes close to Lindley LJ’s more general requirement for the mistake to be serious.

Extension of “consequences and effects” by Lloyd LJ in Court of Appeal:

“. . . 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.”

The Test

This approach has been criticised by the editors of Goff & Jones, paras 9101 to 9-106. I do not agree with all these criticisms of what the editors refer to as the Court of Appeal’s “stricter, hybrid approach.” But I can see no reason why a mistake of law which is basic to the transaction (but is not a mistake as to the transaction’s legal character or nature) should not also be included, even though such cases would probably be rare. If the Gibbon v Mitchell test is further widened in that way it is questionable whether it adds anything significant to the Ogilvie v Littleboy test. I would provisionally conclude that the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.

To confirm the Gibbon v Mitchell test as formulated by Millett J would in my view leave the law in an uncertain state, as the first-instance decisions mentioned in para 119 above tend to demonstrate. It would also be contrary to the general disinclination of equity to insist on rigid classifications expressed in abstract terms. Equity, unlike many continental systems, has not adopted Roman law’s classification of mistakes: error in negotio (the nature of the intended transaction), error in corpore (the subject-matter of the transaction), error in persona (the identity of the other party to the transaction) and error in substantia (the quality of the subject-matter). The Gibbon v Mitchell test, at any rate if applied narrowly, would cover only the first of these categories. But in some situations errors in other categories may be just as basic and just as serious in their consequences.

Unconscionability

Lindley LJ’s test in Ogilvie v Littleboy, quoted at para 101 above, requires the gravity of the causative mistake to be assessed in terms of injustice – or, to use equity’s cumbersome but familiar term, unconscionableness…. The evaluation of what is or would be...