LIABILITY OF PROFESSIONALS RETAINED BY SETTLORS AND TRUSTEES FOLLOWING PITT v HOLT/FUTTER v FUTTER [2011] EWCA Civ 197

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1 LIABILITY OF PROFESSIONALS RETAINED BY SETTLORS AND TRUSTEES FOLLOWING PITT v HOLT/FUTTER v FUTTER [2011] EWCA Civ This paper addresses claims in professional negligence against advisers to settlors and trustees for loss other than the costs of remedial action for rescission, following the decision in Pitt v Holt; Futter v Futter [2011] EWCA Civ (hereinafter referred to as Pitt v Holt). In that case, the Court of Appeal sharply curtailed the availability to trustees of the remedy of rescission, by which unexpected and unwanted fiscal consequences of dispositions of trust property (or property into trust) could be undone, by setting aside the dispositions under (what was called) the rule in Hastings- Bass or under the equitable doctrine of mistake. 2. This is not to say that professionals who negligently advised settlors or trustees were not liable to them in damages for loss suffered within the scope of their duties of care before Pitt v Holt. However, prior to the Court of Appeal s decision (certainly in the last 20 years), the remedy of rescission, where available, had the desirable practical effect of obviating the need for the parties to the negligence claim to grapple with difficult questions about who was entitled to recover damages against the advisers, and for what loss. The prospect of undoing the undesirable consequences of dispositions by settlors or trustees was attractive to those affected by them (other than HMRC), who could expect the advisers insurers to pay the costs of the exercise. 3. But the practical effect of the decision Court of Appeal in Pitt v Holt is to throw into sharp relief a specific type of claim in professional negligence advice to trustees and settlors relating to the tax consequences of proposed dispositions of trust property, or of property into trust - by deciding that such 1 Permission to appeal to the Supreme Court was granted on 1 August This paper does not concern the correctness of the Court of Appeal decision, but instead focuses on the nature of claims against advisers by settlors and trustees where a remedy under the rule in Hastings-Bass is not available. 1

2 claims will (in most cases) no longer be remediable by an application to set the dispositions aside. The result is the need for renewed consideration of how such claims, for pure economic loss, fall to be determined in the context of established law and the decision in Pitt v Holt. That is the subject of this paper. 4. In basic form, the two cases considered by the Court of Appeal in Pitt v Holt represented two distinct categories of claims in professional negligence relating to trusts. The first one, Pitt v Holt, essentially involved a claim by a settlor (and the trustees) against financial advisers (and possibly solicitors) for negligence in relation to the creation of a trust The second case concerned the Futter family settlements, and a claim by the Futter trustees against solicitors who advised them in relation to the operation of established trusts, more specifically as to the tax consequences of the exercise by the trustees of a dispositive fiduciary power in favour of beneficiaries. 6. In this paper, I will summarise the decision of the Court of Appeal in Pitt v Holt, and the discussion in the leading judgment of Lloyd LJ of the duties of those seeking, and those giving, professional advice as to trusts. I will then consider the two categories of claims against advisers represented by the Pitt and Futter cases, one by a settlor and the other by trustees. 7. In the first type of case, the client is the settlor but the loss (or some of it) is suffered by the trust, or trustees (e.g.; in the form of unforeseen tax burdens). This raises questions about who should be the proper claimant the settlor, the trustee, or the beneficiaries (or any combination of those parties). I will say that, on established principle, beneficiaries are never (or almost never 3 ) proper 2 In order to attract relief under the rule in Hastings-Bass, the transactions effected by Mrs Pitt (as receiver for her husband) were characterised as the exercise of a discretionary power by Mrs Pitt acting in a fiduciary capacity as her husband s receiver. But in relation to the claim in mistake, the applicants sought relief from a voluntary disposition by a settlor. 3 In Yudt v Leonard Ross & Craig (1998/99) ITELR 53 Ferris J upheld a claim by beneficiaries (et al) against the trustees solicitors for negligence in the preparation of appointments under the trust, but the 2

3 claimants. Whether the trustees are owed a duty of care, or alternatively the settlor is entitled to recover loss suffered as a result of defects in the settlement, is not a matter of settled law. The legal route to recovery will depend on facts, such as (i) whether the trust is in the nature of an investment or tax planning vehicle, on the one hand, or a gift on the other; and (ii) who the trustees are and the extent of their involvement in the creation of the trust. Thus, the surrounding circumstances, and the terms of the retainer, will determine the scope of the duty of care and the kind of loss that the advisers will have assumed a duty to prevent. 8. In the second type of case, the client trustees sue for loss to the trust, or on behalf of the beneficiaries (unless there are special circumstances enabling beneficiaries to sue on behalf of the trust and join the trustees as defendants). The trustees claim against advisers, when they are instructed by trustees qua trustees, is an asset of the trust. This justifies the trustees entitlement to sue for loss which was not, strictly, suffered by them, but it also limits the kind of loss that is recoverable, to loss to the trust fund as such, or loss to beneficiaries qua beneficiaries. In many cases, this means that the tax consequences of dispositions by trustees would not be recoverable, because they will be personal to the beneficiary (even if paid by the trustees) and/or because recovery of tax paid in the circumstances could not put the trustees in the position they would have been in had the advisers not breached their duty of care. The Decision in Pitt v Holt 9. In Pitt v Holt; Futter v Futter [2011] EWCA Civ 197 the Court of Appeal decided that a. The exercise by a trustee (or other fiduciary) of a discretionary power, intra vires and otherwise than in breach of trust, cannot be set aside on the ground that the disposition had unintended consequences, in particular tax consequences; and beneficiaries losses would have been recoverable in any event against the trustees, who could have claimed an indemnity from the solicitors. 3

4 b. Such dispositions will not have been made in breach of trust where trustees (or fiduciaries) obtained and acted upon pertinent professional advice, even if such advice was (negligently) wrong. 10. The Court also held that a voluntary disposition will not be set aside in equity for mistake unless at the time of the disposition there was a mistake as to the legal effect (and not merely the consequences) of the transaction, or as to an existing fact which was basic to the transaction, and in either case, the mistake was of sufficient gravity to make it unjust for the property disposed of to be retained. Further, the Court held that the fact that the transaction gives rise to unforeseen tax liabilities is a consequence, not an effect, of the transaction, and it is not sufficient to bring the jurisdiction into play. 11. As to the effect of reliance by trustees on professional advice, Lloyd LJ said this (at [127] 4 ): The trustees duty to take relevant matters into account is a fiduciary duty, so an act done as a result of a breach of that duty is voidable. Fiscal considerations will often be among the relevant matters which ought to be taken into account. However if the trustees seek advice (in general or specific terms) from apparently competent advisers as to the implications of the course they are considering taking, and follow the advice so obtained, then, in the absence of any other basis for a challenge the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, the Court held that in such a case, the trustees act in reliance on that advice would not be vitiated by the error so as to render it voidable. 12. Lloyd LJ went on to consider whether the fact that (as in the Futter case) one of the trustees was himself a solicitor and partner in the firm on whose advice the trustees had relied affected the position of the trustees vis-à-vis the beneficiaries, and held that it did not. No distinction of substance was to be drawn between lay and professional trustees for the purpose of determining whether the trustees had committed a breach of trust: the trustees together are to be treated as having relied on the advice of the firm instructed by them. The 4 Paragraphs in the judgment of Lloyd LJ in Pitt v Holt will be referred to by square brackets. 4

5 solicitor/trustee, then, could no more be charged with breach of trust than the lay trustee, for having acted on the advice so given ([142]). 13. An important consequence of Pitt v Holt, then, for those concerned with claims against professional advisers is the need to find a breach of trust in order to set aside an act of trustees which is within their powers and the impossibility to use the words of Lloyd LJ (at [128]) of holding trustees to be in breach of their duties in a situation where they have, in accordance with their duty, identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations It follows from the Court of Appeal s decision in Pitt v Holt that professionals advising trustees or settlors will remain liable to their clients for negligent flaws in their advice in the circumstances addressed in that case, although the trustees claim will not now be founded upon their own (potential or actual) liability to their beneficiaries for breach of trust. Nor, in cases where a disposition is made on the basis of such flawed advice, will the advisers exposure be limited to the costs of an application to set the disposition aside under what was the rule in Hastings-Bass, or for mistake. 15. The result, as between trustees and their beneficiaries, is the same even if the advice obtained is (negligently) wrong, whether or not one of the trustees is a solicitor in the advisers firm and, it seems, even where the professionals are not specifically asked to advise on tax matters, which turn out to be material, and important, to the decision of the trustee - see the discussion of the position of Mrs Pitt and her advisers (at [162]-[163] of the judgment of Lloyd LJ). 16. By contrast, an act by trustees that is not within the terms of the trust, or the scope of the relevant power, remains void. Further, an act by trustees which is within their power but is performed in breach of trust remains voidable (subject to equitable defences). Thus, the liability of professional advisers to 5 This is the situation posed by Lightman J in paragraph 23 of his judgment in Abacus v Barr [2003] EWHC 114 (Ch), to which Lloyd LJ refers at [128] of Pitt v Holt and quotes at [85]. 5

6 trustees in such circumstances (such as it may be) will continue to include (where appropriate) the costs of remedial action, including an application to declare the act to be void, or to set it aside (as the case may be). 17. In this context, it is important to note potential complexities arising from duties to mitigate loss and claims to recover costs of Beddoe s (or other) applications to determine the position of the trustees vis-à-vis their beneficiaries and whether dispositions are void, voidable or unchallengeable. Pitt v Holt on The Duties of Trustees to Seek Advice 18. In his leading judgment, Lloyd LJ canvassed principles relating to the duties of trustees in exercising discretionary powers, including the duty to obtain professional advice, and commented on what such advice could reasonably be expected to contain. The learned Judge s remarks will no doubt loom large in the discussion in subequent professional negligence cases. 19. In paragraphs of his judgment, Lloyd LJ reviewed the general principles, established by statute and authority, governing the duties of trustees in the exercise of a discretionary dispositive power conferred upon them. The points that emerged were that a. A fiduciary power (say, of advancement) cannot be exercised capriciously, but only for some good reason which must be beneficial to the person to be advanced, the decision being taken only after weighing the benefit to the proposed advancee against the rights of the other existing and future beneficiaries under the terms of the trust: Re Pauling s Settlement Trusts [1964] Ch 303 (and Lloyd LJ at [104]); b. Trustees also owe a duty of care, under section 1 of the Trustee Act 2000 (where applicable) and under the principle of Speight v Gaunt (1883) 22 Ch D 727, (1883) 9 App Cas 1 ([107]); c. Trustees must act without improper motive, in good faith, responsibly and reasonably, giving honest and fair consideration to the matters relevant to the exercise of their discretion: Re Beloved Wilkes Charity 6

7 (1851) 3 Mac & G 440 ([108]); Edge v Pensions Ombudsman [2000] Ch 602 ([106]); Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896 ([111]); Re Pilkington s Will Trusts [1964] AC 612 ([112]); Scott v National Trust [1998] 2 All ER 705; d. Further, trustees must inform themselves, before making a decision, of matters that are relevant to the decision, not limited to simple matters of fact, but including advice from appropriate experts, whether they be lawyers, accountants, actuaries, surveyors, or scientists, but always bearing in mind that It is however for advisers to advise and for trustees to decide; trustees may not (except in so far as they are authorised to do so) delegate the exercise of their discretions, even to experts : Scott v National Trust [1998] 2 All ER 705, 717 per Robert Walker J (Lloyd LJ at [119]). 20. On the question of what specific matters trustees ought to take into account when considering the exercise of a dispositive power, Lloyd LJ acknowledged (at [118]) that there is no single rule: Circumstances will differ a great deal from one trust to another, and even within one trust they may change from time to time or according to the nature of the particular exercise which is under consideration. 21. Nevertheless, on the crucial question whether trustees ought to consider the tax consequences of the exercise of their dispositive powers, Lloyd LJ was more forthright, and his remarks were expressly referable to the issue of tax considerations on the creation, as well as the operation, of settlements. He said (at [115]) that Although it is often said that decisions as regards the creation and operation of trusts ought not to be dictated by considerations of tax, the structure and development of personal taxation in the UK over the past decades, the use of trusts in order to deflect or defer the impact of taxation, and in turn the development of taxation as it applies to property held by trustees, have been such that there can be few instances in which trustees of a private discretionary trust with assets, trustees or beneficiaries in England and Wales could properly conclude that it was not relevant for them to address the impact of taxation that would or might result from a positive exercise of their discretionary dispositive powers. 7

8 22. Lloyd LJ said (at [119]) that where tax matters are relevant - as they often will be it is likely to be the duty of the trustees, under their duty of skill and care, to take proper advice as to those matters, citing a passage from the judgment of Robert Walker J in Scott v National Trust [[1998] 2 All ER 705, In summary, then, Lloyd LJ held that a. Trustees must inform themselves, before making a decision, of matters that are relevant to the decision; b. The use of trusts for tax planning, and the development of tax law applicable to trusts, mean that the impact of taxation will (most likely) be a relevant consideration for trustees of a private discretionary trust with assets, trustees or beneficiaries in England and Wales; and c. Where tax matters are relevant - as they often will be trustees are likely to be under a duty to take proper tax advice from appropriate experts. Pitt v Holt on The Duties of the Advisers 24. Lloyd LJ did not venture into the general realm of the scope of the duty of care of professional advisers to settlors and trustees. However, his discussion of the position of Mrs Pitt, as receiver for her disabled husband, and the duties of those advising her, was indicative of his approach to the matter, and thus relevant to future professional negligence claims. 25. The facts giving rise to the claim by Mrs Pitt (and others) to set aside the settlement (and assignment) entered into on behalf of her husband are described by Lloyd LJ (at [7]-[12] and [147]-[159]) and by Robert Englehart QC at first instance (at paras 5-12). The position as between Mrs Pitt and her professional advisers is also outlined by Lloyd LJ (at [150], [152]-[154], [162]-[163]) and Englehart QC (at paras 7-9 and 14). 26. Mrs Pitt, as receiver, was advised by solicitors and financial advisers (the latter, Lloyd LJ notes, (at [150]) having been instructed by the former, who 8

9 were the solicitors acting in the litigation). Robert Englehart QC states (in para 7 of his judgment) that the financial advisers were concerned to assist Mrs Pitt with devising financially prudent arrangements for dealing with the proceeds of the compromise [of Mr Pitt s personal injuries claim]. Proposals for different forms of discretionary trusts were advanced by the financial advisers, one of which was adopted by Mrs Pitt, approved by the Court of Protection, and subsequently executed, but was later discovered to attract substantial inheritance tax charges that could easily have been avoided by adopting a similar form which was exempt from IHT by the relevant tax legislation Both judges indicated in the Pitt case that issues of income tax and capital gains tax were considered by the experts, but neither Mrs Pitt, her advisers, nor even the Official Solicitor who represented Mr Pitt before the Court of Protection 7, gave any thought to the need to consider, or advise on, the incidence of inheritance tax upon the transfer of assets into discretionary trust. 28. Mrs Pitt and the trustees of the settlement brought proceedings in negligence against the financial advisers, who deny liability on the ground (inter alia) that they were not retained to advise on inheritance tax (Englehart QC para 14). 29. In addressing the issue whether the Mr Pitt s discretionary trust could be set aside on the basis of Mrs Pitt s breach of fiduciary duty in failing to consider, or seek advice on, the consequences for inheritance tax in creating the settlement, Lloyd LJ had this to say about the relationship between Mrs Pitt and her advisers (at [162]): a. He assumed that fiduciaries (such as Mrs Pitt) owed the same duties as trustees to consider all relevant matters in deciding whether to exercise the powers vested in them, including a duty of care requiring the taking of appropriate professional advice; 6 It is interesting to note, as Lloyd LJ, did (at [152]) that a precedent settlement proposed by Mrs Pitt s financial advisers but not in the event adopted by Mrs Pitt would have had the desirable tax saving. 7 Judgment of Robert Englehart QC at para 9. 9

10 b. Although Mrs Pitt, as fiduciary, did not have in mind, and thus did not take into account, the prospect of a charge to IHT, she did seek proper professional advice, and acted on it; c. As between the various advisers acting for and advising Mrs Pitt it must have been the duty of one or other of them, at least, either to advise her about any risk as to IHT, or to point out that she might need such advice and see that she got it ; d. Not all trustees or persons in a fiduciary position will be aware of the fiscal risks that their actions may give rise to, but It must be a sufficient discharge of the duty of skill and care of such person to retain appropriate professional advisers ; and e. It will be the duty of such advisers to either give the necessary advice or to point out areas on which advice may be needed which should be sought from another adviser. 30. There seems to be, from the context of his remarks, no doubt that Lloyd LJ was referring in that passage to both the solicitors as well as the financial advisers for Mrs Pitt. This is clear from the next paragraph, ([163]) in which Lloyd LJ held that Mrs Pitt fulfilled her duty of skill and care by looking for advice to her solicitors in the litigation, either to advise her to see that she got whatever advice she needed from another source, such as from [the financial advisers]. 31. Lloyd LJ s judgment accords with established principle as to the scope of the duty of care of professional advisers, particularly where pertinent advice is not expressly sought. His remarks also highlight two common issues in professional negligence cases: that of the lay client who may not know exactly what risks he needs an adviser to address, and that of a client who has available to him advice from different professional sources. The principles surveyed below principally concern solicitors, but will be equally applicable to other relevant professionals advising settlors and/or trustees. The Scope of the Advisers Duty of Care 10

11 32. The starting point is the basic and oft-repeated proposition that A solicitor's duty to his client is primarily contractual and its scope depends on the express and implied terms of his retainer: see, e.g.; Hilton v Barker Booth & Eastwood [2005] UKHL 8 (at [28]) per Lord Walker. 33. The key implied term of any solicitor's retainer is the duty to exercise reasonable care and skill. The scope of the duty of care depends on the terms of the retainer in the particular circumstances of the case and the client. As Lord Scott explained in his opinion for the Privy Council in Pickersgill v Riley [2004] UKPC 14 (at [7]): It is plain that when a solicitor is instructed by a client to act in a transaction, a duty of care arises. But it is also plain that the scope of that duty of care is variable. It will therefore depend, first and foremost, upon the content of the instructions given to the solicitor by the client. It will depend also on the particular circumstances of the case. It is a duty that it is not helpful to try to describe in the abstract. The scope of the duty may vary depending on the characteristics of the client, in so far as they are apparent to the solicitor. A youthful client, unversed in business affairs, might need explanation and advice from his solicitor before entering into a commercial transaction that it would be pointless, or even sometimes an impertinence, for the solicitor to offer to an obviously experienced businessman. 34. Thus one of the relevant circumstances in determining the extent of the duty is the client s apparent need for advice: Carradine Properties v D J Freeman (1982) [1999] Lloyd s Rep PN 483. Even in the case of an intelligent layman, it cannot be assumed that he will spot points that which would be obvious to a lawyer, as Rimer J pointed out in Summit Financial Group Ltd v Slaughter & May (unreported, 12 March 1999) at p It is the solicitor's responsibility to resolve any doubts or uncertainties as to the details or extent of his retainer: It must, surely, be up to the solicitor to take the appropriate steps to clarify precisely the extent of his retainer per Rougier J in Gray v Buss Murton [1999] PNLR 882, at Even where the terms of the retainer are clear, there can be circumstances in which the solicitor's duty will extend to advising upon matters beyond his client s express instructions. Lawton LJ in Boyce v Rendells [1983] 2 EGLR 146 at 149H said: 11

12 if, in the course of taking instructions, a professional man like a land agent or a solicitor learns of facts which reveal to him as a professional man the existence of obvious risks, then he should do more than merely advise within the strict limits of his retainer. He should call attention to and advise upon the risks. 37. In Credit Lyonnais v Russell Jones & Walker [2002] EWHC 1310 Credit Lyonnais wished to exercise a break option in the lease, which required six months written notice of termination and payment of a fixed sum to be given to the lessor on or before the termination date. Credit Lyonnais retained the defendant solicitors to serve the requisite notice, which they did, but the exercise of the break option failed for non-payment of the necessary sum in time. Laddie J held that (1) any uncertainty as to what the client asked the solicitor to do would usually be resolved in the client s favour; and (2) although in general there was no duty to go beyond the instructions by proffering unsought advice, a solicitor who came across something potentially significant in the course of his work was under a duty to pass it on. 38. Referring to Boyce and other authorities, Laddie J concluded in Credit Lyonnais that: A solicitor is not a general insurer against his client's legal problems. His duties are defined by the terms of the agreed retainer. This is the normal case although White v Jones [1995] 2 AC 207 suggests that obligations may occasionally arise outside the terms of the retainer or where there is no retainer at all. Ignoring such exceptions, the solicitor only has to expend time and effort in what he has been engaged to do and for which the client has agreed to pay. He is under no general obligation to expend time and effort on issues outside the retainer. However if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing extra work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him. 39. In the recent case of Hoskins v EMW Law [2010] EWHC 479, Floyd J the passage from the judgment of Laddie J in Credit Lyonnais SA v Russell Jones & Walker quoted was cited with approval by Floyd J (at paragraph 92 of his judgment). 12

13 40. The points made in Boyce v Rendells and Credit Lyonnais arose in Hurlingham Estates Ltd v Wilde & Partners [1997] STC 627, specifically in relation to the duty to give relevant tax advice, where Lightman J said (at 634): The test to be derived from the authorities is whether, having regard to the terms of the retainer in all the circumstances which were known or should reasonably have been known by [the solicitor], [the solicitor] should reasonably have appreciated that [the client] needed his advice and guidance in respect of the tax liabilities which entry into the transaction would expose it. 41. Mrs Pitt s case reflects a common situation, in which solicitors advise on the need to engage specialist financial advisers. The financial advisers are specifically instructed to assist with devising financially prudent arrangements. It is then arguable that the solicitor is not under a duty to advise his client on matters which he reasonably believes the client is to receive advice from others. Lightman J said in Hurlingham (at 634) that: A solicitor retained on a transaction may not be under a duty to advise on some legal aspect of the transaction, e.g. taxation, because it may be reasonably apparent to him that advice on that aspect is not needed by the client and accordingly is not within his remit, but within the remit of someone else, e.g. a substantial client's expert tax department (see e.g. Virgin Management Ltd v De Morgan Group plc [1996] E.G. 16 (C.S.); [1996] N.P.C. 8 (24 January 1996, unreported) CA). 42. Where there is more than one adviser, questions arise as to whose duty it was to give the relevant advice. Société Internationale de Télécommunications Aéronautiques SC v The Wyatt Co (UK) Ltd [2002] EWHC 2025 concerned an employee share scheme established by SITA on the advice of a consultant, who negligently advised on French social security law. The consultant compromised a claim by SITA, and sought contribution from SITA s solicitors, for negligence in drafting the scheme documents. Park J found that the solicitors had been instructed to draft a discretionary trust by a sophisticated client who had the benefit of both in-house professional and outside specialist advice, and were under no duty to scrutinise the consultant s proposed scheme or SITA s commercial objectives. 13

14 43. Park J distinguished Credit Lyonnais SA v Russell Jones & Walker, which he said (at [102]) established that If solicitors know what their client wants to achieve, and also know that if they do what they are instructed to do that will not, or will not by itself, achieve the client s objective, it is obvious that they ought to point that out to the client. 44. I would go further, and suggest that on the authorities, including the comments of Lloyd LJ in Pitt v Holt, the correct proposition should be that solicitors (or other advisers) who know what their client wants to achieve, and also know, or ought reasonably to know, that what they are instructed to do will not, or may not by itself, achieve the client s objective, then the discharge of their duty of care requires them to point that out to the client and advise the client as to the further advice or steps that are needed. 45. Further, in a case such as Pitt v Holt, the scope of the duty of care may be determined on the basis of the distinction drawn by Lord Hoffman in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (at 214E) between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong. (additional emphasis supplied). 46. Thus, an adviser who acts with other professionals in the creation of a trust may come within Société Internationale de Télécommunications Aéronautiques SC v The Wyatt Co (UK) Ltd andß escape liability, or at the other end of the spectrum, may be found to have recommended the form of trust and a fortiori the course of action to be taken by the client, and be held to be under a duty to take reasonable care to consider all the potential consequences of that course of action. 14

15 47. To summarise (again), the general principles on the scope of the adviser s duty of care, in light of Lloyd LJ s remarks in Pitt v Holt, are as follows: a. Trustees duty of care extends to a duty to consider all relevant matters in deciding whether to exercise the powers vested in them, and to take appropriate professional advice, usually to include proper tax advice; b. Where trustees seek professional advice, the scope of the adviser s duty of care will be determined by the content of his instructions, although it will be the adviser s responsibility to clarify the extent of his retainer; c. The adviser s duty will depend also on the circumstances in which he is instructed to advise, including the client s apparent need for advice; d. If the adviser to a settlor or trustees becomes aware of a problem or risk which the client may not appreciate, including the need for advice on the tax consequences of a disposition, then the adviser is under a duty to raise the matter and either advise the client, or point out the need to obtain such advice and (in the words of Lloyd LJ) see that [the client] got it ; e. An adviser is not under a duty to advise on matters such as tax in so far as he has arranged, and reasonably believes, that the client will receive appropriate advice from another adviser, although professional advisers (such as solicitors) who have advised on the engagement of specialist financial (or tax) advisers, will be responsible for the adequacy and appropriateness of the specialist s instructions, to ensure that the advice obtained extends to the relevant problems and risks, so that as between the advisers one or other of them, at least will advise about relevant risks as to tax, or point out the need for such advice and see that client gets it 8 ; f. Specialist advisers who are instructed to assist with devising financially prudent arrangements may consequently be under a duty to take reasonable care to consider all the potential consequences of that course of action and be be responsible for all the foreseeable 8 This was a point well made by the Court of Appeal in the case about a tax-saving scheme involving multiple advisers of Mathew v Maughold Life Assurance Co Ltd [ ] PNLR

16 loss which is a consequence of that course of action having been taken, including the tax consequences thereof. Liability for Negligent Advice: The Duty of Care 48. The claim illustrated by Mrs Pitt (and others) against her advisers is an example of a claim in negligence against solicitors (or other advisers) for damages representing avoidable tax charges accruing on a settlement created by the client in reliance on the professional s advice. Although Mrs Pitt s claim concerned the tax implications of the settlement, a settlor s claim may well extend to any losses relating to defects in form, including ambiguities or mistakes in drafting necessitating construction summonses or applications for rectification or under the Variation of Trusts Act The existence of a duty of care owed by advisers to a settlor, pursuant to their retainer, is indisputable. What is less obvious, however, is the precise basis on which substantial damages would be recoverable where a settlor, in reliance on negligent advice, creates a settlement with, for instance, fiscal disadvantages or other costly defects which do not constitute losses suffered by the settlor, under the law governing the recovery of pure economic loss. 50. In a case of advisers to trustees in relation to the operation of a trust, such as that illustrated by the problems with the Futter settlements, the question is not so much to whom the advisers owe a duty of care (the answer to which is the trustees and not the beneficiaries), but rather the kind of loss for which the advisers will be liable. 51. Thus, the two classic questions arise following the decision in Pitt v Holt: to whom is the duty of care owed by, say, solicitors who act for a settlor on the creation of a voluntary inter vivos settlement, and what kind of damage will fall within the scope of the duty of care owed by advisers to trustees? 16

17 52. The closest decided case on the facts underlying Mrs Pitt s position is Estill v Cowling Swift & Kitchin [2000] All ER (D) 69; [2000] Lloyd's Rep PN There a settlor (through her executors) and the trustees of a voluntary settlement of shares created by the settlor in favour of her nieces and nephews sued solicitors (and counsel) who advised and assisted in the creation of a discretionary trust, which had adverse inheritance tax consequences. Arden J found on the facts that a. Tax considerations played a significant (but not a prominent) part in the execution of the settlor s instructions (para [15] of the judgment); and b. The settlor s intentions could have been achieved by an interest in possession settlement instead of a discretionary trust, thereby avoiding IHT charges on the creation of the trust, exit charges and 10 yearly charges (para [65]). 53. Damages in Estill were claimed by both the settlor and the trustees respectively, the quantum of which had been agreed between the parties. The agreed damages represented the initial and periodic charges to IHT on the creation of the discretionary trust, the loss of the proceeds of an insurance policy on the settlor s life (to cover contingent IHT liability on the settlor s estate if she had made a potentially exempt transfer but failed to survive for seven years), additional professional fees and statutory interest (at [71]). Arden J readily accepted that part of the claimed loss was suffered, and recoverable, by the trustees. 54. The defendant advisers never questioned the duty of care owed by them to the settlor, but argued (at [74]) that trustees accept the terms of their trusteeship as they find them, and were fully indemnified out of the trust assets and thus suffered no loss. Further, as the interests of the trustees might conflict with those of the settlor, no duty was owed to them. Arden J held (at [75]) that 9 The decision of Arden J is most often cited, along with the 1987 decision of the Court of Appeal in Mathew v Maughold Life Assurance Co Ltd [ ] PNLR 309, on the issue of liability as between solicitors and counsel. 17

18 a. There was no overlap between the claims of the settlor and the trustees; b. It was foreseeable that if the settlor was negligently advised and the trustees became liable to pay tax, that the trustees would suffer loss; c. The settlor s instructions expressly sought advice for the benefit of the trustees as well as [the settlor] ; and d. Accordingly, the defendants owed duties of care to the trustees the defendants clients included the trustees. 55. Arden J s decision that the trustees should be treated as a client of the defendants along with the settlor can be seen to be based, in large part, on particular findings of fact in that case. Indeed, the trustees appointed under the trust were the settlor herself and two other co-directors and shareholders known to and associated with her, including her accountant who participated in taking and acting on the defendants advice. In her decision on the duty of care, Arden J makes specific reference (at [75]) to questions contained in the solicitors instructions to counsel, which she said sought advice for the benefit of the trustees as well as [the settlor]. 56. Other judges have been attracted by the common retainer approach to deciding who is owed a duty of care. In White v Jones itself ([1995] 2 AC 207 at 294H- 295A) Lord Nolan suggested that the solicitors instructed by the testator were acting in the role of family solicitors. In Hughes v Colin E G Richards [2004] EWCA Civ 266 (discussed in more detail below), parents settled property for the benefit of their children under a disastrous scheme devised by the defendant accountant, and on an application to strike out the children s claim Jacob LJ said (at [34]) that the Defendant should be regarded as acting not only for the parents, but also directly for the children viewing the transaction as a whole, the defendant was advising both donors and donees. 57. There are, however, considerable analytical difficulties for the multiple-client approach as a principle of law, whereby solicitors instructed by a settlor to advise and act on the creation of a voluntary settlement should be seen as 18

19 having been retained by both the settlor and the proposed trustees of the intended settlement. 58. In the first place, there are legitimate concerns in principle about conflicts of interests between the settlor and prospective (or designated) trustees, for instance in relation to advice and assistance concerning the terms of trustee charging and exoneration provisions, which make it inappropriate to describe the retainer as generally undertaken with the settlor and the trustees jointly. 59. The issue of conflict is a paramount reason why the House of Lords decision in White v Jones does not apply to inter vivos transactions 10, save possibly in an exceptional case like Gorham v British Telecommunications Plc [2000] 1 WLR 2129 CA, where the duty owed by an insurance company to its customer was held to extend to the members of the customer s family for whom pension provision was intended to be made by direct analogy with the position of the intended beneficiaries in White v Jones. Even there, however, the Court of Appeal grappled with the problem of conflicts of interest between the customer and the proposed recipients. Pill LJ (at p 10) limited the duty owed to the dependants as one not to give negligent advice to the customer which adversely affects their interests as [the customer] intends them to be, and Sir Murray Stuart-Smith acknowledged (on p 15) that the existence of a conflict would exclude the possibility of a duty to anyone other than the customer, but found on the facts that there was no such conflict in this case. 60. In Woodward v. Wolferstans (unrep., 20 March 1997) 11, Martin Mann QC held that solicitors retained by a father in the purchase of property for his daughter owed a duty of care to the daughter to explain her obligations under the mortgage, but the relevant duty of care was limited in scope precisely because there would otherwise be a conflict of interest which would make it inappropriate that any duty should exist 12. Similarly, in Dean v Allin & Watts [2001] EWCA Civ 758 solicitors acting for a borrower were held liable to the 10 See Clarke v Bruce Lance & Co [1988] 1 WLR 881 CA (May and Balcombe L.JJ). 11 Jane Woodward v Wolferstans (a firm) CHD (Mr Martin Mann QC) LTL TLR In the result, the daughter s claim failed on causation. 19

20 lender for failing to arrange effective security for a loan, but Lightman J (sitting in the Court of Appeal) was not prepared to hold that there was a dual retainer in circumstances where the individual had no personal liability for the solicitor's fees, and where no contractual relationship between the individual and the solicitor had previously existed (see paragraphs [22]-[24]). Lightman J concluded that a conflict precluded a duty of care to a non-client save where "special circumstances of a particular case" require a different conclusion (see para [33]). 61. Secondly, the joint retainer analysis fuels an argument by analogy in White v Jones cases, that solicitors instructed by a testator to prepare a Will and/or give estate-planning advice (especially as to inheritance tax saving on death) owe a duty of care arising from that retainer to their client s personal representatives, which proposition was rejected (albeit obiter) by the Court of Appeal in Daniels v Thompson [2004] All ER (D) 357), and which I argued 13, and still maintain, was correctly decided on this point Thirdly, the joint retainer approach is often simply artificial and contrary to the facts. Even trustees who are known to the settlor and are involved in the exercise of creating the trust will generally do so passively, will not give consideration for the advisers engagement or rely on their advice. 63. The decision by Arden J in Estill, that the settlor s solicitors owed a duty of care to the trustees for tax payable by them, is probably best seen as an example of a common retainer arising on the facts and not, I suggest, as authority for any general legal proposition that advisers retained by settlors will also be held to have been retained by prospective trustees, and will 13 In The remedy in White v Jones cases: smoothing the analytical wrinkles Professional Negligence 2008, 24(3), On the question whether tax charges payable by trustees or personal representatives amounts to loss, the obiter remarks about personal representatives, in Daniels (of Dyson LJ at para [47], Carnwath LJ ay [61] and Gray J at [74]) appear to contradict those of Park J in Macaulay and Farley v Premium Life Assurance Co Ltd [1999] All ER (D) 439 and Arden J in Estill. The resolution of the inconsistency may lie in the nature of the different claims, for tax payable from trust property and from an estate in the course of administration, as well as fundamental differences between trustees and personal representatives, and the very different relationships between settlors and trustees on the one hand, and testators (or intestates) and personal representatives on the other. These interesting and important issues are outside the scope of this article. 20

21 accordingly be liable for losses to the trust which were not suffered by the settlor. 64. A rationale for the outcome in Estill, whereby the settlor and trustees seek to recover their respective losses against advisers to the settlor whose negligence results in a disadvantageous or defective trust, not based on a (fictitious) common retainer by settlor and trustees, might be found in tort. A duty of care in tort may arguably be owed by the settlor s advisers to the trustees for losses suffered by the trust, by analogy with the bank who took an assignment of insurance arranged by a customer, in the Court of Appeal case of Punjab National Bank v DeBoinville [1992] 1 WLR In Punjab, a customer of the bank arranged to sell commodities to Sudan in return for letters of credit to be opened by a Sudanese bank, but Sudanese exchange control issues led the customer to ask the claimant bank to confirm the credits. The bank required additional security, which the customer provided by arranging insurance through London brokers. When the bank claimed on the policies, in its own name and as assignee of its customer, the underwriters declined liability on the basis of misrepresentation and nondisclosure. The bank sued the brokers for breaches of duty to it and its customer. 66. Hobhouse J. held, on the trial of preliminary issues, that the bank could sue in respect of any failure by the brokers to exercise reasonable skill and care in placing the policies. The Court of Appeal, applying Caparo Industries Plc v Dickman [1990] 2 AC 605, dismissed the brokers' appeal, deciding that the brokers owed a duty of care in tort to the bank, even in so far as the bank was not the assured under a policy, on the ground that the bank was a specific party whom the brokers knew was to become an assignee of the policy, at all events where (as there) that party actively participated in giving instructions for the insurance to the brokers. 67. Applying Punjab, a duty of care under an adviser s retainer by a settlor would be said to be owed (in tort) to the trustees, for losses suffered under the trust as 21

22 a result of the advisers negligence in the creation of the settlement. Such an analysis would also avoid the problem, should it arise, of the settlor s inability or unwillingness to sue. 68. The problem, however, is that Punjab National Bank v DeBoinville is a reliance case, and although Estill may be as well, many other trust cases are not 15. Trustees could not in general be said to be owed a duty of care by a settlors advisers for pure economic loss in the absence of (any realistic) reliance. The House of Lords in Williams v Natural Life Health Foods Ltd [1989] 1 WLR 830, 834D-H, per Lord Steyn, made this plain: In this case the identification of the applicable principles is straightforward the governing principles are stated in the leading speech of Lord Goff of Chieveley in Henerson v Merrett Syndicates Ltd [1995] 2 AC 145. First, in Henderson it was settled that the assumption of responsibility principle enunciated in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 is not confined to statements but may apply to any assumption of responsibility for the provision of services. The extended Hedley Byrne principle is the rationalisation or technique adopted by English law to provide a remedy for the recovery of damages in respect of economic loss caused by the negligent performance of services. Secondly, it was established that once a case is identified as falling within the extended Hedley Byrne principle, there is no need to embark on any further inquiry whether it is fair, just and reasonable to impose liability for economic loss. Thirdly, and applying Hedley Bryne, it was made clear that reliance upon [the assumption of responsibility] by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect). 69. Where the tortious route, based on reliance, is unavailable on the facts, there ought to be a contractual basis for recovery of trust losses without distorting the facts to assert that a retainer by a settlor extended to the prospective trustees. Under this route the settlor is entitled to recover losses to the trust. Negligent advisers to the settlor would be held liable to the settlor for loss caused to the trust, in the form of tax charges on trust assets, the loss of the assets themselves (or their value), or the cost of remedying defective terms of the trust, and would be accountable to the trustees so far as may be appropriate for the damages recovered in the action against the advisers. 15 The negligence claim underlying Pitt v Holt might also, on the facts, be a reliance case, legitimately founded on a decision such as Punjab National Bank v DeBoinville. 22