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Jersey & Guernsey Law Review – October 2007

HASTINGS-BASS AND BENEFICIARIES OF FAMILY TRUSTS

Nancy Chien

Introduction

1       A court will not ordinarily interfere with, or review, the prudence or correctness of a trustee’s discretion unless there is evidence that the trustee has acted in bad faith.[1] However, the principle in Hastings-Bass tests this by allowing a court to review a trustee’s decision-making process and to determine whether a trustee has taken irrelevant considerations into account, or ignored relevant considerations, in the exercise of his or her discretion. Where it is found that the trustee has not taken proper considerations into account, the Court can set the trustee's decision aside.

2       A number of recent cases show that trustees of both family trusts and pension trusts have realised the scope and potential of the principle in Hastings-Bass and have relied on it as a means to unwind their decisions that have led to undesired consequences. In the pensions area, the principle has also been relied on by beneficiaries of pension schemes and employers to challenge trustees’ decisions.[2] However, the reported cases show that beneficiaries of family trusts have yet to invoke the principle as the basis for attacking trustees’ decisions.

3       This paper will examine whether beneficiaries of family trusts are able to challenge trustees' decisions under the principle in Hastings-Bass. The paper is set out in three parts. Part I will focus on the judgment of the Court of Appeal that has given rise to what is now known as the principle in Hastings-Bass. Part II will consider whether beneficiaries of family trusts can challenge trustees' decisions under the principle in Hastings-Bass. If so, should the beneficiaries be required to satisfy either the "would" test or the "might" test for their claims to be successful? Part III will consider whether trustees of family trusts should be required to record reasons for their decisions so as to ensure that the Courts have reliable evidence to resolve applications made under the rule in Hastings-Bass.

PART I: THE PRINCIPLE IN HASTINGS-BASS

4       The principle in Hastings-Bass refers to the principle articulated by the court of appeal in the case re Hastings-Bass (deceased); Hastings and others v Inland Revenue Commissioners.[3] It is worthwhile setting out the facts of the case in detail.  Captain Hastings-Bass was a life tenant of a settlement made in 1947 (the "1947 settlement"). Under this settlement, Captain Hastings-Bass had the power to appoint trust property held on trust for such of his sons or remoter male issue once he had died and in default of, and subject to, any such appointment, the trust property was to be held on trust for such son of Captain Hastings-Bass as should first attain the age of 25 years before the expiration of 21 years after the death of Captain Hastings-Bass. If there should be no such son, the property would be held on trust for such son of Captain Hastings-Bass as should first attain the age of 21 years. (There were other default provisions in the trust instrument which have been omitted for the purposes of this paper.)

5       On 2 January 1958, Captain Hastings-Bass exercised his power of appointment in the 1947 Settlement by appointing that, after his death, the trustees would stand possessed of the trust fund of the 1947 Settlement for his eldest son, William, if and when he should attain the age of 25 years absolutely.

6       Under a separate settlement created in 1957 by Captain Hasting-Bass’s sister (the "1957 Settlement"), William was granted a life interest in the property held on that settlement. After William’s death, the trust property would be held for such of his issue as he may appoint, provided that such appointment did not infringe the rule against perpetuities. (Again, the default provisions of the settlement have been omitted for the purposes of this paper.)

7       In order to reduce the amount of estate duty payable on the death of Captain Hastings-Bass, the trustees of the 1947 Settlement, upon receiving legal advice, decided to exercise the statutory power of advancement (section 32 of Trustee Act 1925) to appoint £50,000 to the trustee of the 1957 Settlement. The solicitor who advised on this arrangement considered, erroneously, that the transfer of funds out of the 1947 Settlement would not infringe the rule against perpetuity. The correct legal position was that the trusts and powers created in respect of the appointed fund, other than the life interest in favour of William, were void for perpetuities. As a result of this defective advancement, the Inland Revenue Commissioners took the view that the whole of the advanced fund remained subject to the trusts of the 1947 Settlement. Therefore, estate duty was payable on the entire amount of the advanced fund upon the death of Captain Hastings-Bass.

8       Against this background, the trustee of the 1947 Settlement asked the Court to determine whether estate duty did or did not become payable upon the death of Captain Hastings-Bass in respect of the advanced fund. The Inland Revenue was the only defendant to the proceedings and it opposed the trustees' application.

Decision in Hastings-Bass

9       Plowman J in the Chancery Division held that the actual consequence of the purported advancement was substantially or essentially different from the intentions of the trustees when they made it. The advancement was therefore held void, the advanced fund remained subject to the trusts of the 1947 Settlement, and estate duty was payable in respect of that amount on the death of Captain Hastings-Bass.[4]

10     The trustees appealed. The Court of Appeal allowed the appeal and declared that estate duty did not become payable on the death of Captain Hastings-Bass. In reaching this decision, the Court considered whether it could be said that the trustees did not exercise their discretion under section 32 of the Trustee Act because the ulterior trusts that they intended to create were void for perpetuity.  The Court observed that a primary consideration in the minds of the trustees when they exercised the power of advancement was to save estate duty.[5] This saving in estate duty was directly for the benefit of William, whom Captain Hastings-Bass had appointed to benefit from the 1947 Settlement after he had died. Therefore, if the trustees of the 1947 Settlement had not made the advancement to the 1957 Settlement, William would have been worse off by £36,500, being the amount of estate duty that would have been payable on the property held on the 1947 Settlement. Further, the fact the trustees did not consider nor appreciate that the ulterior trusts created by the appointment would fail for perpetuity, did not undermine the benefit that they intended to confer on William. To put it another way, the relevant issue for the trustees’ consideration was the saving in estate duty they wished to confer on William and not the matter concerning perpetuities. Therefore, it could not be said that their action should be regarded as something other than an exercise of their discretion under the statutory power of advancement.

11     In summary, the Court enunciated the following principle -

"[W]here by the terms of a trust (as under s32) a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended, unless (1) what he has achieved is unauthorised by the power conferred on him, or (2) 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."[6]

12     Point (1) of the above quote is concerned with situations where the trustee has acted for an improper purpose. Subsequent cases have often omitted this point because failure by a trustee to exercise his power for a proper purpose is a separate ground on which a beneficiary can challenge a trustee’s decision. The principle in Hastings-Bass as it is referred to today does not encompass point (1). 

13     A positive formulation of this principle is said to be set out in the case Mettoy Pension Trustees Limited v Evans[7] as follows -

"…where a trustee acts under a discretion given to him by the terms of the trust, but the effect of the exercise is different from that which he intended, 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, or taken into account considerations which he ought not to have taken into account".[8]

14     Doubts have been raised as to whether this positive formulation of the rule follows from the decision in Hastings-Bass because "the premise that the court should not interfere unless certain conditions are fulfilled does not lead to the conclusion that the court should, or even may, interfere if those conditions are fulfilled".[9] Subsequent cases appear to proceed on the basis that the Court at least may interfere in the circumstances identified in Mettoy.[10] 

Application of the principle in Hastings-Bass in Jersey

15     In the case Re Green GLG Trust,[11] the Royal Court accepted that the principle in Hastings-Bass applies in Jersey. Birt, Deputy Bailiff, said in the judgment -

"We consider that the Hastings-Bass principle is entirely consistent with precedent and principle. The Trusts (Jersey) Law 1984 draws substantially on general principles of English trust law and we see nothing in the decisions that we have described which is inconsistent with Jersey law. On the contrary they seem entirely consistent and, accordingly, we hold that what is described as the Hastings-Bass principle is equally a principle of Jersey law".[12]

16     It has been suggested that the principle in Hastings-Bass was again considered in the case of In Re Toland Trust, the Pennywise Trust and the Sequential Trust.[13] Although in this case the principle was not expressly referred to by the Court, the Court’s reasoning was reminiscent of the Hastings-Bass principle. The Court declared that certain appointments made by the trustees were in excess of the trustees' powers and ultra vires, and ruled that the associated exclusion of certain persons as beneficiaries of the trusts be set aside on the basis that "the trustees would not have taken action to exclude these persons had they been aware that the appointments were invalid as being in excess of their powers".[14]

PART II: CAN THE RULE IN HASTINGS-BASS BE RELIED UPON BY BENEFICIARIES OF FAMILY TRUSTS AS THE BASIS FOR CHALLENGING TRUSTEES' DECISIONS?

Recent trends

17     Since the judgment in Re Hastings-Bass, the reported cases involving family trusts show that the principle has so far only been relied on by trustees, and only to impugn their own decisions. The author has found no reported English or Jersey cases where beneficiaries of a family trust have sought to impugn a trustee’s decision under this principle.

18     As discussed above, the Hastings-Bass case itself was initiated by the trustees of the 1947 Settlement. Similarly, in Green v Cobham,[15] the trustees brought an application under the rule in Hastings-Bass to set aside an appointment they had made on the basis that they had given no thought to the capital gains tax implications of the appointment. In that case, the trustees of a will trust settled property on two accumulation and maintenance trusts. The will trust and the accumulation and maintenance trusts were treated as a composite settlement for capital gains tax purposes. A trustee of one of the accumulation and maintenance trusts retired, which meant that the majority of the trustees of the composite settlement were no longer deemed non-resident for UK capital gains tax purposes. Capital gains tax was chargeable on the resident trustees in respect of disposals made by the will trust as well as the company which originally settled property on the will trust. The Court held that this was a clear case for the application of the Hastings-Bass principle and declared the appointments to be an invalid exercise of the trustees' power.

19     A similar decision was reached by the court in Abacus Trust Company (Isle of Man) Limited v NSPCC.[16] In that case, the trustees of a discretionary family trust applied to the Court to have their decision set aside on the basis that, had they appreciated the fiscal consequences of their actions, they would not have taken the steps they did. The trustees were advised as to a scheme which enabled them to avoid a substantial capital gains tax charge on the trust assets. This scheme required the trustees to take certain steps at the end of one financial year and other steps in the next. The trustees took all the steps in the first financial year. The Court held that, if the trustees had been aware of the fiscal consequences of their actions, they would not have made one of the appointments before the end of the financial year, and therefore that appointment was invalid.  The consequence of the declaration made by the Court was that the beneficiary (NSPCC) was deprived of the benefit of the appointment. 

20     Most recently, in Sieff and others v Fox and others[17] the trustees of a family trust applied to the Court for an order setting aside an appointment of trust assets. The Court allowed the application on the basis that the trustees would not have made the appointment had they not failed to take into account UK capital gains tax which the Court regarded as a material consideration in this case. (This case will be discussed in further detail below.)

21     In the pensions area, non-trustee claimants have successfully relied on the rule in Hastings-Bass to challenge trustees’ decisions. Stannard v Fisons Pension Trusts Limited[18] involved an application brought by a member of a pension scheme set up by Fisons plc. The pension scheme in question was transferred by Fisons plc to Norsk Hydro Fertilizers Limited as a result of a sale agreement entered into between the two companies on 19 April 1982. The plaintiff submitted that the trustee of the pension scheme had failed to consider the transfer amount properly. The Court at first instance upheld the member’s claim and found that the trustee had failed to give proper consideration as to the transfer value of the pension fund before it effected the transfer of the fund from Fisons to Norsk. The decision was upheld by the Court of Appeal.[19]

22     Another case initiated by a member of a pension fund is Kerr v British Leyland (Staff) Trustees Limited.[20] In this case, a member of a pension scheme claimed that the trustee of the scheme had exercised its discretion wrongly by rejecting the member’s claim for incapacity benefit under the terms of the Scheme. Lloyd LJ commented on the Kerr case in his judgment in Sieff v Fox -

"… the beneficiaries here are not volunteers. Their rights derive from contractual and commercial origins. They have purchased their rights as part of their terms of employment. Consistent with that, the power of the trustee to decline acceptance of the claim cannot be simply an uncontrolled discretion. It seems to me that the duty of the trustee was to give properly informed consideration to the application."[21]

23     The member in the Kerr case made a claim for a disability benefit from the trustee of the scheme. The Court of Appeal found that the trustee had failed to give the medical report which set out the member's conditions due consideration. Therefore, its decision to not provide disability benefit to the plaintiff should be set aside. Although the Court in Kerr did not say that it relied on the Hastings-Bass principle in reaching this decision, it is generally accepted that the reasoning is based on that rule. Therefore, the decision is regarded as sound authority for discussions of the rule in Hastings-Bass.[22]

24     As illustrated above, in the family trust context, it has been trustees who have challenged their own decisions under the principle in Hastings-Bass, whereas in the pensions area, beneficiaries (and employers) have also had success in challenging trustees' decisions under this principle. It is unclear whether this distinction has arisen for the simple practical reason that beneficiaries of family trusts are not generally provided with as much trust information as beneficiaries of pension schemes. It is therefore uncertain from the cases whether a court would entertain an application brought by a beneficiary of a family trust to challenge trustees’ decisions under the Hastings-Bass principle.   

25     Although the answer to this question might seem obvious (there seems no reason why a beneficiary of a family trust should not be able to bring such an application), it is remarkable that in the 32 years since the decision in Hastings-Bass, there is no reported instance of a beneficiary of a family trust challenging a trustee’s decision under this principle.  This is perhaps explained not by any legal disability, but instead by the difficulties faced by beneficiaries trying to discover the reasons for decisions made by trustees.[23] 

26     The author considers it important to establish the availability to a beneficiary of a family trust of an application under the rule in Hastings-Bass.  Once this is accepted, the author argues that it follows that trustees should be required to record the reasons for their decisions (although disclosure of such reasons should not be required prior to commencement of legal proceedings), so that a contemporaneous record of the reasons will be available to the Court when the application falls to be considered.[24]

27     If a beneficiary of a family trust can establish a prima facie case that the trustee of that trust has taken irrelevant considerations into account or ignored relevant considerations, then subject to qualifications to be expressed later in this paper, it is submitted that a court should entertain that beneficiary’s application for the following reasons:

(i)      a beneficiary of a family trust should be afforded the same rights to challenge trustees’ decisions under the principle in Hastings-Bass as the trustees themselves;

(ii)      a beneficiary of a family trust should have the same rights as a beneficiary of a pension trust to challenge trustees’ decisions;

(iii)     such a right would be analogous to the beneficiary’s right to challenge a trustee’s decision on the ground that such decision has been made unreasonably or capriciously.

Each reason will be considered in more detail below.

Same rights as trustees

28     It is submitted that beneficiaries of family trusts should have the same rights as their trustee counterpart to challenge trustees' decisions under the principle in Hastings-Bass. Trustees should not be afforded a special status denied to beneficiaries, enabling the former to unwind their decisions. If a beneficiary can show the same defect in a trustee's decision-making process and that the defect has led to a different outcome, the beneficiary should equally be able to bring an application to challenge that trustee's decision under the rule in Hastings-Bass.

29     To hold otherwise would mean that any relief under the rule would depend on the fortuitous circumstance of whether the trustee is agreeable to making an application to challenge his own decision. This would be unsatisfactory as there may be instances (having nothing to do with the merits of the challenge) where trustees would be reluctant to challenge their own decisions. For example, if the trustee is a regulated entity or a professional individual, it may be concerned that the Court would criticise its conduct in an application under Hastings-Bass and therefore harm its reputation or ability to conduct trust company business. Similarly, if the trustee is concerned that it may have acted in breach of trust, it may be reluctant to bring a claim which brings this to the fore. In these circumstances, an application under Hastings-Bass is inherently risky for a trustee: if the application is successful it will largely resolve the trustee's potential liability for breach of trust or negligence (aside from the costs of the application), but if unsuccessful the trustee will have admitted its error and may face liability as well as reputational damage. It is therefore important to ensure that a beneficiary has the right to bring a Hastings-Bass type application to provide for the event that the trustee is unwilling to co-operate.

30     The point can be illustrated by looking at one of the decided cases. In the case of Abacus Trust Company (IOM) Limited v NSPCC,[25] the trustee made an application to set aside an appointment that it had made contrary to tax advice. In this case, it might have been arguable that the trustee acted negligently because it failed to implement the tax advice it received that the appointments should have been made over two financial years. If the trustee in that case had been concerned about its own reputation and liability and had therefore been unwilling to initiate the application under the Hastings-Bass rule, should the beneficiaries not have had the right to initiate the application to have the appointment unwound? It is only logical that if the beneficiaries could show that the trustee had acted contrary to the tax advice, and that the trustee would have acted differently had it realised the consequences of the appointment, the beneficiaries should have the right to apply to Court to have the appointment set aside under the rule in Hastings-Bass.

Same rights as beneficiaries of pension trusts

31     Another argument in favour of affording beneficiaries of family trusts the right to challenge trustees' decisions under the rule in Hastings-Bass, is that such a right would be consistent with the rights of beneficiaries of pension trusts (which the author submits cannot be distinguished from family trusts for the purposes of this question) to do so. Lord Justice Fox in Kerr v British Leyland, in holding that trustees of pension schemes have a duty to give properly informed consideration to members’ applications, relied on the fact that beneficiaries of pension schemes are not volunteers.[26] Fox LJ considered that beneficiaries of pension schemes have purchased their rights as a part of their terms of employment and as a result, the commercial and contractual origins of these rights mean that the trustees have a duty to give properly informed consideration to the beneficiary's application. 

32     Although most beneficiaries of family trusts are volunteers and their rights are not derived from a commercial origin, it is submitted that the duty referred to by Fox LJ applies equally in a private trust context.  Fox LJ did not have to decide what the duty to give informed consideration to a beneficiary's claim required in the context of family trusts.  It is submitted that a trustee’s duty to inform himself or herself before making a decision as to any relevant or irrelevant matters arises as a function of the fiduciary nature of the powers held by the trustee, whether they are administrative or dispositive powers, and not because the trustee has received consideration from a beneficiary. As Birt, Deputy Bailiff commented in Re Green GLG Trust, "the principle in Hastings-Bass, as it has been described, is but a manifestation of the general principle that a trustee must act in good faith, responsibly and reasonably".[27]  It is not suggested that this duty should only arise where the beneficiaries have provided consideration to the trust.

33     Robert Walker J (as he then was) made the following observation in relation to discretionary trust powers generally in Scott v National Trust[28]-

"Certain points are clear beyond argument. Trustees must act in good faith, responsibly and reasonably. They must inform themselves, before making a decision, of matters which are relevant to the decision. These matters may not be limited to simple matters of fact but will, on occasion (indeed, quite often) include taking advice from appropriate experts, whether the experts are lawyers, accountants, actuaries, surveyors, scientists or whomsoever."[29]

34     In a discretionary family trust context, trustees have a duty to survey the class of beneficiaries and make diligent and careful enquiries.[30] This survey and enquiry should form the basis of the trustees’ decision as to whether to exercise their powers and discretion, and if so, how such powers and discretion should be exercised. The precise manner in which a trustee would be expected to carry out this process of inquiry will vary from case to case.[31]  Where, after making the relevant enquiries, trustees decide to exercise their powers, beneficiaries should be entitled to expect the trustees to base their decisions on all proper and relevant considerations (and not on irrelevant considerations). Where there is evidence that a trustee has failed to do so, his or her decision should be open to challenge by a beneficiary. If beneficiaries of family trusts were denied the right to challenge trustees’ decisions under the Hastings-Bass rule, trustees of family trusts would be seen to hold a lesser duty to make informed decisions than their counterparts in the pensions context. This conclusion would be contrary to the way fiduciary duties are understood.

35     If the provision of consideration by a beneficiary does not change the fundamental nature of the duty of trustees to make reasonable enquiries prior to the exercise of their discretions, does it have any relevance at all to the application of the Hastings-Bass principle? It is submitted that a possible answer is that the provision of consideration, as in the case of a pensions trust, may mean that the beneficiary has a higher expectation as to how his or her interest in the trust should be considered and dealt with by the trustee.  It was observed by Robert Walker J in Scott v National Trust[32] that "legitimate expectation may have some part to play in trust law as well as in judicial review cases".[33]  The judge gave the following example which illustrates that although a beneficiary may have no legal or equitable interest in a trust fund, he or she may still have an expectation as to how the trustee exercises its discretion -

"[Where] (for instance) trustees (whether of a charity, or a pension fund, or a private family trust) have over the last ten years paid £1,000 per quarter to an elderly, impoverished beneficiary of the trust it seems at least arguable that no reasonable body of trustees would discontinue the payment, without any warning, and without giving the beneficiary the opportunity of trying to persuade the trustees to continue the payment, at least temporarily. The beneficiary has no legal or equitable right to continued payment, but he or she has an expectation."[34]

36     Although this example is not concerned with a beneficiary’s expectation as to the decision-making process adopted by a trustee, it demonstrates that a beneficiary of a family trust could legitimately expect trustees to behave in a certain way. This expectation may arise from the trustee’s past conduct and the consideration provided by the beneficiaries to the trust as shown in the pensions cases, or from other circumstances peculiar to the trust or to the particular beneficiary.

Analogy to challenge on ground of unreasonableness

37     Another basis for supporting a beneficiary's claim under the Hastings-Bass rule is that the beneficiary's right can be viewed as analogous to his or her right to challenge trustees’ decisions on the ground of unreasonableness. It is settled law that a court will intervene and review a trustee’s decision where the exercise of a power or discretion is capricious or "so utterly unreasonable and absurd that no reasonable man would so act".[35]  In the case of Re Chapman,[36] Lord Herschell made the following comments -

"The appellant contends that the trustee is the only judge of what is reasonable, and that he is entitled to be satisfied in such a way as he considers proper. I most entirely dissent from that proposition. The appellant asked how the Court could decide whether a trustee had been acting reasonably, and suggested that this point must be left to the trustee himself. But the Courts have every day in a variety of cases to determine whether men are acting reasonably; and I can see no ground why they should not determine what is reasonable in the case of a trustee, just as in any other case … I do not believe that he acted dishonestly, or that he had any personal ends to serve. I think that it was sheer unreasonableness on his part. Sometimes a man gets an idea into his head, and nothing will shake him."

38     In some instances, it is difficult to distinguish between conduct which is regarded as unreasonable and a failure to take into account extraneous considerations. Therefore, it has been suggested that the duty to give properly informed consideration is an aspect of the duty not to act capriciously.[37] For example, as illustrated by Thomas, if a trustee were to exercise a power of appointment in favour of certain objects on the ground that they had red hair or blue eyes, he could be said to be placing undue weight to a totally irrelevant consideration.[38] It should be possible to challenge the trustee’s decision in that case as the trustee’s decision could be said to have been based upon capricious or unreasonable considerations. Unless one looks into the factors that the trustee had taken into account in reaching his or her decision, it would be impossible to determine whether the decision is sound, as the trustee may prima facie have the power to favour one beneficiary over another. 

39     It is submitted that the rule in Hastings-Bass can be seen as analogous to the above principle.  In both cases the Court looks at the potential flaws in a trustee’s decision-making process and determines whether such flaws have led to an unsound decision. In the case of challenges on the ground of unreasonableness, the Court would need to be satisfied that the factors on which the trustees have based their decision are so unreasonable and capricious that no reasonable decision-maker would have done the same. On the other hand, in an application under the Hastings-Bass rule, the Court would consider whether the relevant factor that has been omitted (or the irrelevant factor that has been taken into account) was sufficiently material so as to justify the Court’s intervention. This is in spite of the fact that the failure to consider the relevant factor or the consideration of the irrelevant factor might not be regarded as unreasonable on the test expressed above.

40     There is therefore a difference in the degree of review between an application under the rule in Hastings-Bass and an application made on the ground of unreasonableness or capriciousness.  The author's question is whether a beneficiary should be required to show that the trustee's decision making process was capricious or wholly unreasonable before relief can be granted, or should it be sufficient to show that the relevant/irrelevant factor which was omitted/considered was material to the decision and has led to the unintended outcome.  Ultimately, which approach is preferable will depend upon the value judgment by the Courts as to whether finality of trustees’ decisions should have more weight than ensuring that trustees make informed and reasoned decisions or vice versa.

41     Traditionally, courts have placed significant emphasis on preserving finality of trustees’ decisions because it was perceived that trustees of family trusts were often individuals, sometimes friends of the family, who accepted trusteeship because of their personal relationship with the family. Therefore, the law aimed to protect them from undue scrutiny which would have discouraged people from becoming trustees. This orthodox view was summarised by McGarvie J in an Australian case, Karger v Paul[39]-

"It is open to the court to examine the evidence to decide whether there has been a failure by the trustees to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. As part of the process of, and solely for the purpose of, ascertaining whether there has been any such failure, it is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. Nor is it open to the Court to look at the factual situation established by the evidence, for the independent purpose of impugning the exercise of the discretion on the grounds the trustees were wrong in their appreciation of the facts or made an unwise or unjustified exercise of the discretion in the circumstances. The issues which are examinable by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the Court examines whether the discretion was exercised but does not examine how it was exercised.”[40]

42     It is submitted that the rationale underlying this traditional view should be reviewed by the courts in light of the developments in the way private trusts are used. In the current trust climate, what would previously have been private family trusts are often used for wider purposes, such purposes being investment or tax related. In those situations it would be common for professional trustees rather than family friends to be appointed as trustees. The terms of such professional trustees’ engagement will be agreed between the settlor and the trustee, and such terms will usually allow trustees to take healthy remuneration for their services and require the inclusion of very broad exemption clauses in the trust instrument. Given the commercial terms on which the professional trustees are appointed, it is submitted that the relationship between such trustee and the beneficiaries is more akin to a commercial than a personal relationship. Therefore, one of the reasons for protecting the trustees against closer scrutiny falls away; on this basis, it would not seem unreasonable to require greater accountability for the decisions of a professional trustee.

43     Support for this view can be drawn from the pensions cases, where the courts have placed weight on the commercial origin of the relationship between trustees and beneficiaries as a basis for greater scrutiny of the decision-making process of pension trustees.[41] Professional trustees of private trusts should be subject to a similar level of scrutiny as professional pension trustees, and therefore where trustees have based a decision on irrelevant considerations which have affected the outcome, the Court should not be reluctant to interfere with that decision.

44     It must be emphasised that it is not proposed that the rule in Hastings-Bass be used to challenge trustees' decisions where there is merely a defect in the decision-making process, without more. For a claim under Hastings-Bass to be successful, the beneficiary must be able to show that the trustee's decision would/might have been substantially or essentially different if the process that it adopted had not been flawed.[42] For example, it has been suggested that if trustees make a decision on wholly erroneous grounds, and yet it subsequently appears, from a matter which they did not refer to, that there are in fact good and sufficient reasons for supporting their decision, then that decision may stand.[43]

Any other classes of claimants?

45     In certain circumstances, it may be difficult to determine whether a claimant has standing to challenge a trustee's decision under the Hastings-Bass rule. In the case of a beneficiary claimant, it is easy to conclude that he/she should have standing to challenge the trustees’ decisions because the trustees have a duty to consider the beneficiary’s interest in the exercise of their powers. In some cases, the existence of a duty owed to the claimant may not be necessary to trigger the right to bring a claim under Hastings-Bass. In an obvious case, trustees have the right to apply under the principle in Hastings-Bass to have their own decisions set aside, even though they do not owe a duty to themselves. The justification for allowing the trustees to make such applications could be that it would be in the interest of the beneficiaries for the trustees to challenge their own decisions, so that bad decisions or decisions which affect the trust fund detrimentally could be overturned.

46     There will inevitably be grey areas where it would be necessary for the court to consider separately the question of whether a claimant who brings an application under the Hastings-Bass rule to challenge a trustee’s decision actually has sufficient standing. It would be interesting to see whether parties such as protectors of family trusts and the HMRC would have standing to challenge a trustee's decision under the rule in Hastings-Bass.

Elements for a Hastings-Bass application: should the “would” test or “might” test apply?

47     If it is accepted that beneficiaries of family trusts can rely on the rule in Hastings-Bass to challenge a trustee's decision, should the beneficiaries be required to prove that the trustees "would" have acted differently had they not failed to consider what was relevant or had not considered that which was irrelevant)? Alternatively, should it be sufficient for the beneficiaries to prove that the trustees "might" have acted differently had they taken/not taken the relevant/irrelevant considerations into account? This section of the paper will examine which of these elements a beneficiary of a family trust will need to show to support his or her application under the rule in Hastings-Bass.

48     The principle in Hastings-Bass and what is often referred to as a positive formulation of the principle as set out in Mettoy Pension Trustees Limited v Evans[44] incorporate the "would" test. For this test to be satisfied, it is not sufficient to show that the trustees did not have a proper understanding of the effect of their act; the claimant must also show that, if the trustees had a proper understanding of their act, they “would” have acted differently.  By contrast, the "might" test refers to a variation of the Hastings-Bass principle as set out in Kerr v British Leyland (Staff) Trustees and followed in Stannard v Fisons Pensions Trust Ltd. This test provides that "if the trustees had appreciated the particular aspect of the case which they had failed to take into account, it "might" materially have affected their decision".[45]  Although in the cases using the “would” test, there is no specific reference to the word "materially", in substance this word adds nothing more to the test. Under either test, the court would only interfere if it can be shown that there is a material difference between the actual consequences of the trustee’s act and those which would have been intended had the trustee taken/not taken the relevant/irrelevant factor into account (para 86 of Sieff v Fox). Therefore, the sole difference in the two tests comes down to whether the trustees “would” or “might” have acted differently.

49     The "would" test and the "might" test were considered in some depth in the judgment of Lloyd LJ in Sieff v Fox. The distinction which he identified was as follows -

"… for the purposes of a case where the trustees are not under a duty to act, the relevant test is still stated in Re Hastings-Bass, namely whether, if they had not misunderstood the effect that their actual exercise of the discretionary power would have, they would have acted differently … only in a case where the beneficiary is entitled to require the trustees to act, such as Kerr or Stannard, should it suffice to vitiate the trustees' decision to show that they might have acted differently. The word "might" has been used, as a matter of decision, only in those two cases. In two cases it has been said (not as a matter of decision) that the "might" test applies to a voluntary exercise of a power: AMP(UK) Ltd v Barker and Hearn v Younger. I respectfully disagree with those observations … If an act by trustees is set aside, where trustees have acted under an obligation, then the beneficiaries can require the trustees to start again, on the correct basis. It seems to me that the lower test of "might" is appropriate in such cases … If the trustees' act was voluntary, so that they cannot be compelled to act again if the act is set aside, the more demanding test of "would" is justified in order to decide whether the trustees' act can be set aside."[46]

50     This judgment therefore states that whether the “would” or the “might” test applies can be determined by whether the act was mandatory or voluntary.

What is the nature of a trustee’s obligations in a family trust context?

51     In a discretionary family trust context, trustees generally hold two forms of dispositive powers: (i) powers in respect of which the trustee has a discretion as to whether he will actually exercise them or not (referred to by Thomas as "fiduciary mere powers"); and (ii) powers which are coupled with a duty to exercise them, where the trustee has no discretion whether or not to carry out the duty, but he has a discretion as to which of the objects are to benefit, or the manner in which or the time at which the duty will be performed (referred to by Thomas as "discretionary trusts", but for the purposes of this paper they will be referred to as "mandatory power" so as to avoid confusion with references to discretionary family trusts in the practical sense).[47]

52     Applying the test set out by the Court in Sieff v Fox, where the power under consideration falls within category (i), the beneficiary would need to prove that the trustee “would” not have acted as it did if it had taken a relevant consideration into account (or not taken an irrelevant consideration into account) and that the consequence of the action is materially different from that which the trustee intended. On the other hand, if the power subject to challenge falls within category (ii), the beneficiary would need to establish that the trustee "might" not have acted as it did if it had taken a relevant consideration into account (or not taken an irrelevant consideration into account), and the consequence of the action is materially different from that which the trustee intended.

53     The distinction between the "would" test and the "might" test has led to much criticism and debate.[48] The prevailing view is that the "might" test would allow trustees’ decisions to be annulled too lightly because all that the claimant would be required to show, is that it is possible that the trustees might have acted differently. It would therefore be too easy for trustees to say with the benefit of hindsight that they might have acted differently had they known, or appreciated the significance of, a relevant consideration.

54     It is submitted that while the explanation provided by Lloyd LJ for the distinction in the "would" test and “might” test is soundly based on the authorities available, it is difficult to justify on a conceptual level why it should be easier to challenge the exercise of a mandatory duty. The existence of a mandatory power does not mean that the trustee is necessarily subject to a higher level of duty in its exercise so as to render his or her action easier to challenge. As Templeman J said in Re Manisty’s Settlement -

"the conduct and duties of trustees of an intermediate power, and the rights and remedies of any person who wishes the power to be exercised in his favour, are precisely similar to the conduct and duties of trustees of special powers and the rights and remedies of any person who wishes a special power to be exercised in his favour. In practice, the considerations will be no different from the considerations which weigh with the trustees of a wide special power. In both cases reasonable trustees will endeavour, no doubt, to give effect to the intention of the settlor in making the settlement and will derive that intention not from the terms of the power necessarily or exclusively, but from all the terms of the settlement, the surrounding circumstances and their individual knowledge acquired or inherited".[49]

55     Geraint Thomas has suggested a "more workable test"[50] to replace the “would” test and “might” test. Thomas suggests that a court should only intervene and reverse decisions which, had they been made with full knowledge and understanding of the significantly relevant consideration, would have been capricious, absurd or such that no reasonable trustee with such knowledge and understanding would ever have done. Under this proposed test, the trustee is not alleged to actually have acted capriciously, absurdly or unreasonably, because he could not be said to have the requisite state of mind to have done so.

56     It is submitted that this alternative test proposed by Thomas would unduly limit the availability of relief under the Hastings-Bass rule, as Thomas’s test would require similar elements as those for a challenge under the ground of unreasonableness and capriciousness to be proved by a beneficiary. Applying Thomas’s test, the Court would only interfere with a decision of a trustee if the decision would have been one that no reasonable trustee with full knowledge and understanding would have reached. The effect of this test is very similar to the principle laid out in Re Chapman,[51] as set out above, namely a court would set aside a decision of a trustee on the ground that it is so unreasonable that no reasonable decision-maker would have reached the same conclusion. If it is already possible to overturn a trustee’s decision by simply looking at the unreasonableness of the outcome, without consideration of the process adopted in reaching its decision, what would be the merit in applying the rule in Hastings-Bass, which is partially concerned with the trustee’s decision-making process? It is submitted that Thomas’s test is unworkable, if the rule in Hastings-Bass is to be retained as a separate ground on which a trustee’s decisions can be challenged.

Solutions?

57     There is a tension between the desirability of finality of trustees' decisions and providing sufficient checks on the trustees' decision-making powers to ensure that their decisions are sound. Given that it may be difficult for a beneficiary of a family trust to obtain information on the decision-making process of the trustees, any test which requires a high level of proof would make it more difficult for a beneficiary to challenge the trustee's decisions. This could result in lower quality decisions, as it would be difficult for the court to intervene.  It is submitted that the "would" test provides an appropriate balance between the desire for finality of trustees’ decisions and ensuring that trustees make their decisions on a properly informed basis. Adopting the "would" test, a beneficiary claimant would need to show on the balance of probabilities (rather than a mere possibility) that the trustee would have reached a different decision had the trustee taken into account relevant considerations, or not taken irrelevant considerations into account. This would limit the number of decisions that could be challenged significantly. As Professor Hayton commented in his article "Pension Trust and Traditional Trusts: Drastically Different Species of Trusts"[52] -

"'would' makes perfect sense in the family trust context where the patriarchal settlor would not wish his discretionary beneficiaries to be able to whine from time to time that the trustees "might" have done this, that or the other, and so put the trustees to the trouble and expense of proving that they would not have made a different decision".[53]

58     In the same vein, in order for the rule in Hastings-Bass to have any teeth, the hurdle that needs to be proved cannot be set so high that the rule is only available in exceptional circumstances. In any event, it is likely that in such exceptional circumstances the beneficiary would be able to rely on his or her right to challenge the trustee’s decision on the ground of unreasonableness or capriciousness.

Remedies

59     If a beneficiary is successful in challenging a trustee's decision under the principle in Hastings-Bass, should the trustee’s act be rendered wholly void or merely voidable? An exposition of the relevant arguments can be found in Underhill and Hayton, Law of Trusts and Trustees,[54] and in Professor Thomas’s article "Challenging the exercise of a trustee's discretion".[55] This paper does not intend to traverse the same ground. The author prefers the view that the trustee’s decision remains valid until such time as the Court holds it invalid and sets it aside.

60     The range of remedies a Court will have to consider will inevitably expand once beneficiaries of family trusts start challenging trustees' decisions under the principle in Hastings-Bass. The Court may need to look to the law of restitution/unjust enrichment to provide principled and just outcomes. The consequence of setting aside an appointment would vary, depending on whether the beneficiary who has received the assets remains "enriched", or has since changed his position in good faith and honestly believing in the security of his receipt. For example, if a beneficiary of a family trust successfully challenges an appointment of assets that the trustee has made in favour of another beneficiary, the current discussion on available remedies in this area would indicate that the appointment should be set aside. This means that the beneficiary who has received the assets would be required to pay them back to the trustees. However, to require the beneficiary to do this would be unfair if he or she has spent the money leaving no identifiable proceeds (for example, on a holiday he or she would not otherwise have taken) in good faith believing that he or she was entitled to do so, and therefore is no longer in a position to pay it back. Under the law of unjust enrichment, the analysis would be that the beneficiary who has received the assets from the trustees was initially unjustly enriched because the distribution made to him or her has subsequently been set aside under the principle in Hastings-Bass. However, the recipient beneficiary could rely on the defence that he or she has changed his or her position by spending the money on the holiday. Therefore, that beneficiary would no longer be enriched, and would not be required to replay the money. In this case the claimant beneficiary may miss out on a remedy more substantial than a declaration.

61     The reason we have not yet seen these types of considerations being taken into account by the Court may be because in the pensions area the non-claimant beneficiaries will not be affected in a significant way if the Court orders relief in favour of the claimant beneficiary. Benefits conferred on a pensioner tend to represent such a small portion of the trust fund that the Court should not generally be required to consider the other pensioners' interests before providing relief. Further, any shortfall in pension funds will usually be met by the participating employers.

PART III: EVIDENTIAL ISSUES

62     One of the concerns raised in relation to the development of the principle in Hastings-Bass is that in cases where applications are made by trustees to challenge their own decision, trustees may provide "convenient" evidence supporting their contention that they omitted to take a relevant consideration into account (or took an irrelevant consideration into account), so as to enable their decision to be set aside.[56] In other words, there is the risk that the trustee may not fully and faithfully recount the factors it took into account, instead tailoring the evidence with the benefit of hindsight so as to support its application to unwind a decision that it has come to regret.[57] A factor contributing to this concern may be that trustees are not obliged to record the reasons for the exercise of their discretion at the time the discretion is exercised.

63     It is well established in the private trust area that trustees are not required to disclose their reasons or their reasoning process for the exercise of their distributive discretions. The courts have accepted that trustees are entitled to keep their reasons confidential as otherwise embitterment and embarrassment could arise between the trustees and the beneficiaries, deterring people from acting as trustees.[58] A further reason why trustees are not required to give reasons for their decisions is because courts are reluctant to challenge the merits of the trustee’s decision unless there is evidence of bad faith. Therefore, the reasons for the trustees’ decisions are said to be immaterial.[59] Salmon J commented in Re Londonderry’s Settlement[60]-

"Another ground for this rule is that it would not be for the good of the beneficiaries as a whole, and yet another that it might make the lives of trustees intolerable should such an obligation rest upon them … Nothing would be more likely to embitter family feelings and the relationship between the trustees and members of the family, were trustees obliged to state their reasons for the exercise of the powers entrusted to them. It might indeed well be difficult to persuade any persons to act as trustees were a duty to disclose their reasons, with all the embarrassments, arguments and quarrels that might ensue, added to their present not inconsiderable burdens."[61]

64     Given that trustees are not obliged to give reasons for their decisions, it may be difficult for a court to ascertain whether the factors the trustees (or another party) put forward as having been omitted or considered had in fact been omitted or considered. For example, in Scott v National Trust, Robert Walker J commented that, although the minutes of the trustees’ meeting on 10 April 1997 recorded that there was a long discussion by the council, there were no details. It was concluded that the decision the trustees reached on 10 April 1997 seemed to have been rushed and it was recommended that the trustees should hold another council meeting to reconsider the question.[62]

65     If a beneficiary were to bring the application under the Hastings-Bass rule, it would be difficult for that beneficiary to put forward, without adequate records, the factors that the trustees actually had taken into account on the date of their decision. While finality of trustees' decisions should be encouraged, this should not be done at the expense of a legitimate claim of a beneficiary. Equity has the ability, through laches and the discretionary nature of relief, to ensure that challenges are made without undue delay or to the detriment of third parties.  The law in this area would give rise to inequality if relief under the rule is determined by the fortuitous circumstance of whether the trustee co-operates or not.

66     It is submitted that there should be a requirement for trustees to record the reasons for their decisions in contemporaneous minutes, including all the major factors that they took into account in reaching their decision. This requirement would ensure that contemporaneous evidence is available for the Court to provide relief in legitimate cases (and not deny a beneficiary relief merely because a trustee is unco-operative in providing relevant evidence), and not provide relief where the trustees have simply changed their mind on a transaction. In the event that the trustees in question suffer from fading memories, are dead or cannot be found, a Court would still be able to entertain a legitimate claim of the beneficiary.

67     It is acknowledged that this requirement would present a qualification on the orthodox view that trustees are not required to give the reasons for their decisions. However, it is submitted that the orthodox view was driven by the existence of personal relationships between trustees and beneficiaries commonly found in traditional family trusts. People who acted as trustees of such traditional family trusts were often family friends, solicitors, accountants or some other trusted adviser of the family. Therefore, it would have been onerous for these trustees to provide detailed reasons for their decisions: if the documents recording the reasons fell into the hands of the beneficiaries, the personal relationship between the trustees and the beneficiaries could break down. It is now common for private trusts to be used for commercial purposes and for professional trustees to be appointed as trustees of such trusts. While disclosure of trustees' reasons to beneficiaries remains undesirable in the ordinary course, it is submitted that there should be no objection to a requirement that those reasons are recorded.  The current law on disclosure of trust information (further discussed below) is sufficiently robust to ensure that documentation containing reasons for trustees' decisions is not disclosable to beneficiaries outside of civil litigation.  The risk that trustees' reasons may unintentionally fall into the beneficiaries' hands must be weighed against the desirability of facilitating challenges by beneficiaries in deserving cases where trustees are unable or unwilling to bring the application. 

68     In the context of pension trusts, trustees are now required (since a decision of the Pensions Ombudsman) to provide reasons for their decisions to members.[63] It is not proposed that trustees of private trusts be required to provide their reasons to the beneficiaries. However, given the increasingly professional nature of the relationship between the trustees and beneficiaries in a private trust context, as described above, it is submitted that trustees of private trusts should be more accountable for their actions as in the case of pension trustees.  Requiring contemporaneous records of reasons would be a step in this direction.

Fishing expeditions?

69     It is submitted that a requirement to record reasons will not jeopardise or undermine the current law on disclosure of information. In Schmidt v Rosewood,[64] the Privy Council made it clear that trust documents containing trustees’ reasoning need not be disclosed to beneficiaries.  Under the proposed requirement, documents containing the trustees' reasons would continue to be kept confidential to the trustees until they are required to disclose such documents during litigation. Where a document contains trustees’ reasoning but also information that is confidential and not material to the proceedings or otherwise not disclosable, the document can be redacted before it is disclosed to the beneficiaries.

70     Finally, it is observed that it is unlikely that the Court will impose a higher level of scrutiny over trustees’ decisions because their reasons have been recorded in the minutes of their meeting. As Lord Normand commented in Dundee General Hospitals Board v Walker[65]-

"It was said for the appellants that the Courts have greater liberty to examine and correct a decision committed by a testator to his trustees, if they choose to give reasons, than if they do not. In my opinion, that is erroneous. The principles on which the Courts must proceed are the same whether the reasons for the trustees' decision are disclosed or not, but, of course, it becomes easier to examine a decision if the reasons for it have been disclosed."[66]

71     For these reasons, if the proposed requirement is accepted, the circumstances in which beneficiaries can challenge a trustee’s decision should not be any more favourable than what the current law offers. However, the advantage of having the reasons recorded is that if the beneficiary can establish a prima facie case that the trustees failed to take relevant considerations into account or took irrelevant considerations into account (such that the beneficiary can survive a strike out or reverse summary judgment application), reliable evidence can be obtained through the mandatory discovery/disclosure processes of the Court to support that beneficiary’s claim without the co-operation of the trustee.

72     In the event that the trustee fails to record and disclose the reasons for their decisions in accordance with the proposed requirement, the Court could draw a negative inference against the trustees in an application made under Hastings-Bass and in some cases, removal of the trustee may be an acceptable sanction. Further, if the trustee is a member of a professional body or operates in a regulated jurisdiction such as Jersey, the trustee could face disciplinary actions from such professional bodies or regulators.

Conclusion

73     The principle in Hastings-Bass challenges the orthodox principle that a court will not examine how a discretion has been exercised by a trustee unless there is evidence that the trustee has acted in bad faith. The recent cases show that trustees have successfully relied on the rule to unwind their decisions, particularly where such decisions have led to undesired consequences.  In the pensions area, beneficiaries have also successfully relied on the rule in Hastings-Bass as a means of challenging trustees' decisions where such decisions have affected their entitlements in the pension schemes. However, the report cases do not show beneficiaries of family trusts to have brought similar claims as their pensions counterparts.

74     Beneficiaries of family trusts should have the right to challenge trustees' decisions under the rule in Hastings-Bass. Applications under the rule in Hastings-Bass should not be restricted to trustees only, as to so hold would mean that relief under the rule would be dependent upon whether trustees are willing to make an application. Where trustees are motivated by self-interest not to make an application, beneficiaries who have legitimate claims under the rule would be denied a valuable remedy.

75     A further reason that the rule in Hastings-Bass should be available to beneficiaries of family trusts is because such beneficiaries should have the same rights as their counterparts under pension trusts. The existence of a trustee's duty to consider a beneficiary's interests does not stem from the provision of valuable consideration by the beneficiary as suggested by the courts in the pensions context. The duty arises as a function of the fiduciary nature of the discretionary powers held by trustees. Therefore, the rule is equally applicable to beneficiaries of family trusts; where such duty is not satisfied in the exercise of a decision, beneficiaries should have the right to challenge the decision.

76     The rule in Hastings-Bass can be seen as analogous to a beneficiary's right to challenge a trustee's decision on the ground that such decision has been made unreasonably or capriciously. There is a difference in the degree of review between those grounds and the further grounds available under the rule in Hastings-Bass. It is submitted that courts should entertain applications for relief where there is evidence that the trustees' decision-making process was flawed, but where the flaw is short of unreasonableness or capriciousness. The modern paradigm of family trusts, which includes the use of family trusts for commercial purposes and the appointment of professional trustees, means that trustees of family trusts should be subjected to a higher level of scrutiny, in the same way as their pensions counterparts.

77     Under current law, there is no requirement on trustees of family trusts to record the reasons for their decisions. In order for beneficiaries of family trusts to be able properly to rely on the rule in Hastings-Bass to challenge trustees' decisions, there should be a requirement for trustees to record the reasons for their decisions in their minutes. This requirement would enable beneficiaries who have a legitimate claim under the rule to rely on that independent evidence, as trustees may not wish to support beneficiaries in such applications, for selfish or other reasons. Further, the minutes containing the trustees' reasons would constitute contemporaneous evidence in cases where the trustees in question suffer from fading memories, are dead or cannot be found.

78     The requirement for trustees to record the reasons for their decisions should be distinguished from any requirement to disclose their reasons to the beneficiaries. The current law is sufficiently robust to ensure that the reasons recorded in the trustees' minutes will not be disclosed to beneficiaries until litigation is commenced. Therefore, the requirement to record reasons would not allow beneficiaries to obtain trust information to which they would otherwise not be entitled.

Nancy Chien is a New Zealand qualified barrister and solicitor. She is an associate in the Pensions Department of Ashurst and was formerly an associate in a leading Channel Islands law firm.

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