Make No Mistake: Examining The Hastings-Bass Rule On Fiduciaries' Mistakes Under Cayman Islands Law

• Law Firm: Conyers
• Subject Matter: Corporate/Commercial Law, Directors and Officers, Trusts
• Author: Mr Robert Lindley and Tonicia Williams
• Published date: 04 May 2023

This article was originally published in STEP Journal, Issue 2, 2023.

The Cayman Islands reformed its trust laws to provide a statutory mechanism by which flawed decisions of trustees and other fiduciaries can be set aside on application to the court. The codification of the Hastings-Bass rule (the Rule) provides a clear statutory framework for all fiduciaries, not only trustees. This departs from the position under English and Welsh¹: law following the UK Supreme Court's decision in Pitt v Holt ² where the Rule was significantly tightened in relation to trustees' inadequate deliberations, which must be sufficiently serious to amount to a breach of fiduciary duty.

Where a trustee makes a mistake in the exercise of their powers, innocent beneficiaries should have relief from the consequences of that mistake. Traditionally, common-law courts had recognised wide powers in this regard, relying on the Rule,³ which concerns the validity or otherwise of a trustee's exercise of their powers in reaching a fiduciary decision.

In reliance on this principle, common-law courts had held that trustees' exercise of their power was invalid not only where the power was exercised in bad faith or excessively but also where the trustees, in exercising their powers, had taken into account irrelevant matters or failed to take into account relevant matters. If the UK authority of Pitt v Holt was followed (and before codification of the Rule in 2019, it had found some favour in the Cayman Islands),⁴ it would require the applicant to prove a breach of fiduciary duty for a court to set aside a mistaken decision. This had the potential to set an unreasonably high threshold and deny relief in circumstances where the trustee made their decision based on incorrect professional advice.

Fortunately, the Cayman Islands' legislative reforms in 2019 inserted a new s.64A in the Trusts (Amendment) Law 2019 (the Act) to provide a statutory framework for the setting aside of mistaken decisions by trustees and other fiduciaries. As a result of s.64A(4), it is not necessary to prove that the person who exercised the power (or their advisor) acted in breach of trust or duty.

The Grand Court of the Cayman Islands (the Court) is empowered to set aside such 'mistaken' decisions, with the relevant exercise of power treated 'as never having occurred'. It can also make such consequential orders as necessary. However, protection is granted to ensure that orders do not prejudice a bona fide purchaser for...