Legal Week's Trust and Estates Litigation Forum in February brought some important issues for the sector to light. Delegates Judge Hazel Marshall QC and Constance McDonnell share their thoughts on the Mental Capacity Act and the Hastings-Bass rule

In her opening remarks at this year's Legal Week Trust and Estates Litigation Forum, co-chair Shan Warnock-Smith QC noted that there are a number of recurring themes that seem to surface when talking about trust and estates law.

This year's hot topics were in fact the re-emergence of issues that have been on the agenda in various forms for many years.

In particular, she highlighted capacity issues and questions over section 57 of the trustee act as being active areas this year, which, as she puts it, is "probably the most boring topic to get involved in, yet it has given rise to some of the most interesting cases we have seen in the last year".

Both these areas were discussed in detail at the conference, which, for the fourth year running, took place in Provence, France in February. In the following articles, two practitioners discuss their highlights over the past year.

Judge Hazel Marshall QC

The approach to mental capacity enshrined in the Mental Capacity Act 2005 has thrown a spotlight on the topic, where previously it was regarded as the province of welfare professionals and probate lawyers contesting wills.

Lack of capacity is broadly defined as an inability to make a decision owing to an impairment or disturbance of the mind or brain. An inability to make a decision means an inability to understand, retain or weigh up the information necessary to carry out this mental process, or an inability to communicate it.

Three new policy strands can be discerned in the Act. The first is that mental capacity is to be treated as issue-specific. Thus, a person may have capacity for the purpose of making some decisions, such as where he or she would like to live, but not more complex ones, such as those involved in deciding whether, or how, to settle property.

The second is the objective of empowerment. A person does not lack capacity if he or she is capable of taking the relevant decision with appropriate help and explanations. The third strand, linked with the second, is the Act's emphasis on steps that should be taken to ascertain the person's actual or likely wishes.

The touchstone of the Act is that any decision made on behalf of a person lacking capacity, whether by the court or anyone else, must be made in that person's 'best interests'. This emphasis shows the great weight intended to attach to the person's actual or likely wishes, and that the dignity of having those wishes implemented is a significant aspect of such best interests.

As this new approach works its way into reported authority in areas that have not previously attracted attention, some interesting points and problems are likely to emerge. Two such strike me in particular. The first is just how detailed the question of issue-specific capacity will turn out to be.

A good example is capacity to litigate. This may sound like a sufficiently specific issue in itself, but does a person need to have the capacity to take all the kinds of judgement calls that a client may be asked to take during litigation in order to have the capacity to decide to commence a claim at the outset? The second is a potential gap in jurisdiction that the courts may have to consider in the future.

The sophisticated approach to capacity emphasises that it is not all or nothing. Neither is it black and white; vulnerability may well be a continuum. For example, an apparently bizarre decision by a reclusive old person to give significant assets to a relative may at one extreme be the result of lack of capacity, or, at the other, the product of full capacity and a curmudgeonly disposition.

Between these extremes, however, is the possibility that the person has capacity, but is subject to undue influence or pressure. While the court of protection has jurisdiction to investigate and pronounce on capacity, it has no jurisdiction to go further and pronounce on matters of undue influence; that is the province of the ordinary courts. However, ordinary jurisdictions generally operate only retrospectively by avoiding transactions after the event and not proactively to prevent them taking place at all.

As the Mental Capacity Act 2005 seeks to protect vulnerable people and at the same time respect their autonomy and dignity as far as possible, we can expect to see such problems arising for decision, and probably in anxious and difficult situations.

Hazel Marshall QC is the senior specialist chancery circuit judge at Central London Civil Justice Centre.

Constance McDonnell

In Re Hastings-Bass, the court of appeal upheld the validity of an exercise by trustees of the statutory power of advancement (save to the extent that it was necessarily void for perpetuity) on the basis that the court should not interfere where a trustee is given a discretion as to some matter in which he acts in good faith. This is notwithstanding that his action does not have the full effect that he intended, unless it is clear that he would not have acted as he did: a) had he not taken into account considerations that he should not have taken into account, or b) had he not failed to take into account considerations that he ought to have taken into account.

Justice Warner, in Mettoy Pension Trustees Ltd v Evans and others, re-phrased the second limb into a more positive formulation with his statement that the court will interfere with the exercise by a trustee of his discretion if it is clear that he would not have acted as he did had he not failed to take into account considerations that he ought to have.

In the same judgment, Justice Warner concluded that the application of the rule in Hastings-Bass ('the rule') was a different jurisdiction from that exercised by the court in cases of rectification or where a written instrument is set aside on the basis of mistake. In relation to this latter distinction, the English court has heard argument by HM Revenue & Customs (HMRC) in two recent cases in which the court of appeal may review the principles to be applied.

As noted by HMRC in its critical tax bulletin number 83, there has been an increasing number of firstinstance cases in the 21st century in which trustees have relied upon the rule in order to reverse their own decisions in circumstances where they have failed to take into account a relevant consideration, usually the fiscal consequences of the act in question. Although it declined an invitation to be joined as a party in Sieff v Fox, HMRC took heed of Lord Justice Lloyd's observations in that case and signalled that it would give active consideration to participating in future cases where large amounts of tax are at stake and/or where it was felt that HMRC could make a useful contribution to the elucidation and development of the rule, particularly in cases where there would otherwise be no party in whose interest it would be to argue against the application of the rule.

HMRC accepted invitations to make submissions in two recent High Court cases: Pitt v Holt and Futter v Futter. In both cases, the court applied the rule in favour the trustees, and gave permission to HMRC to appeal. It is likely that the appeals will be heard together, and therefore that HMRC's position (as set out in the summary of submissions in those cases and in tax bulletin number 83) will considered by the court of appeal (and possibly by the Supreme Court) during 2010.

Additionally, HMRC may seek permission to intervene in applications under the rule in other jurisdictions, following success last year in an application for such permission in the Guernsey court of appeal. (That case may proceed to an appeal the Privy Council; HMRC failed in a similar application in Jersey in Re Seaton Trustees.)

In the March 2010 decision Futter v Futter (a classic example of a case where the trustees requested the court to apply the rule where they had been mistaken as to the fiscal effect of the exercise of a discretionary power), HMRC's first argument in opposition to the application was that the rule was but one aspect of the general law of mistake. Counsel relied upon the distinction between 'effect' and 'consequence' drawn in Gibbon v Mitchell in which Justice Millett (as he then was) stated:

"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 that 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."

However, it seems that there is no need for such a distinction to be applied in cases where trustees seek to invoke the rule. Justice Norris, in Futter v Futter, made it clear on a review of the authorities that the rule did not have its foundations in the law of mistake, but in the law of powers.

Where the court is asked to set aside an instrument on the grounds of mistake, the applicant seeks a declaration that what is otherwise a perfectly valid act is (in the circumstances) voidable.

The task of the court on an application under the rule in Re Hastings-Bass has been restated in the recent authorities as determining that the purported exercise by a trustee of a fiduciary power is void if he has failed to take into account all relevant considerations and no irrelevant considerations.

Justice Norris distinguished Gibbon v Mitchell and adopted the approach of Lord Justice Lloyd (sitting as a judge of the chancery division) in Sieff v Fox, in which it was noted that there were two significant differences between cases of mistake and those where the rule is invoked by trustees: (1) trustees are dealing with assets in respect of which they owed duties to beneficiaries, and (2) the fiscal treatment of trust assets is much more complex than that applying to disposals by individuals, so that fiscal consequences of a transaction would almost always be a relevant consideration for trustees.

If HMRC makes similar submissions upon appeal as it did at first instance in Futter v Futter, it is likely that the court of appeal and/or the Supreme Court will have the opportunity to decide whether the rule should be interpreted in the light of the Gibbon v Mitchell distinction between effect and consequence and, if so, what effect that will have on the many cases in which trustees would seek to revoke a transaction as a result of unforeseen tax implications.

Constance McDonnell is a barrister at 3 Stone Buildings.

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