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Jersey Delivers Landmark Trust Ruling

Tuesday, July 12, 2011

Carey Olsen has commented on a significant judgment delivered by the Jersey Royal Court on June 21, 2011, where Jersey chose not to apply the same methods of an English court in its decision on an important part of trust law.

According to Carey Olsen, the landmark ruling could, in circumstances where a case could be brought either in Jersey or England, attract a number of similar cases to the Jersey court.

The Jersey Royal Court ruling is of particular interest to trust practitioners as it sets a precedent for Jersey on the application of the Hastings-Bass principle following the English Court of Appeal's decisions in Futter v. Futter and Pitt v. Holt.

The Hastings-Bass principle sets out when a court may intervene in cases where a trustee acts under his or her own discretion, particularly in cases involving tax, where such decision unintentionally brings about adverse financial (usually tax) consequences on the client.

In Futter v. Futter, the trustees failed to account for Section 2(4) of the Taxation of Capital Gains Act, 1992, which prevented the client, Futter, from being able to offset personal portfolio losses against the trust’s significant stockpiled gains. The trustee in this case successfully sought a declaration that the advancements were void and of no effect, based on the rule in Hastings-Bass. As part of the judgement, the Court agreed that the effect of the trustees’ actions, when exercising a discretion, were contrary to the trustees' intention. The trustees' actions were therefore allowed to be rolled back.

The second case, Pitt v. Holt, ended with a ruling that the receiver, appointed under the Mental Health Act, held the key roles of a trustee, and was exercising his role on a discretionary basis - on the basis that the receiver was not under the instructions of the beneficiary of the trust. The unintentionally incurred additional tax liability was therefore considered in this case also.

The Royal Court was considering whether a gift should be set aside on the grounds of a donor’s mistake and ruled that it would not follow the recent English Court of Appeal decision in Pitt v Holt 2011.

In the Matter of the S Trust, Carey Olsen partner Robert MacRae, acting for the applicant, R, explained that R was seeking to have set aside, on the ground of mistake, a gift of shares to a Jersey resident trustee and the subsequent transfer of those shares to three US trusts.

The Royal Court decided it would follow the course charted in the previous Jersey case of In Re the A Trust 2009.

In that case, the Royal Court concluded that the right test was whether the donor 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, and would not have entered into the transaction but for the mistake. Such a “mistake” could include mistakes with financial consequences.

In reaching this decision the Royal Court rejected the distinction drawn by certain English cases between the effects of a transaction and consequences of a transaction mistakenly entered into, which had held that only mistakes as to effects could be set aside.

The A Trust decision was then followed by other judges in the Royal Court in subsequent cases.

However, the distinction between effects and consequences was recently upheld by the English Court of Appeal in Pitt v Holt where the Court of Appeal said that: 'the mistake must be of sufficient gravity as to satisfy the test, which provides protection to the recipient against too ready an ability of the donor to seek to recall his gift. The fact that the transaction gives rise to unforeseen fiscal liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.'

Cary Olsen points out that under English law, a donor would have to show that there was a mistake – that it was the right type of mistake (i.e. one as to effect, not consequence) and that it was sufficiently serious.

In its judgment in the Matter of the S Trust, the Royal Court stated that there were two competing principles. On the one hand it should not be too easy for a donor to retrieve a gift when things did not turn out precisely as he had anticipated, because legal certainty was important. On the other hand, parties should not be held to transactions into which they would not have entered had they known what the outcome would be.

The Royal Court said the English Court of Appeal’s approach leaned toward the first principle while the Royal Court's approach tended towards the second.

The English Court of Appeal in Pitt v Holt had criticised the Jersey Court for “ignoring the distinction between effects and consequences” and applying a test which is “a great deal too relaxed for the donor who seeks to recover his gift” and gives “wholly inadequate effect to the gravity of the test posed” (in the English case of Ogilvie v Littleboy 1897).

The Royal Court said that, in its view, these criticisms were misplaced. In Re the A Trust, the Royal Court “plainly had the distinction (between effects and consequences) very much in mind” but preferred to formulate its own test, which did indeed give effect to the need for the mistake to be a serious one.

Carey Olsen partner Robert MacRae, explained: “It is now clear that the test to be applied in Jersey, in considering whether a gift into trust should be set aside on the grounds of a donor’s mistake, is fundamentally different from the test applied in England."

“There may now be an advantage, in certain cases where either court has jurisdiction, for a donor to choose to bring his or her application in Jersey rather than in England."

“The Royal Court has once again shown that it is prepared not to follow English jurisprudence where it is satisfied that it is either wrong or conflicts with existing Jersey authority.”