#5027 - Kleinwort Benson V. Glasgow City Council - Conflict of Laws BCL

Kleinwort Benson v. Glasgow City Council (1997)

Facts

In the wake of the decision of your Lordships' House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1. In that case, the House held that an interest rate swap agreement to which a local authority was a party was ultra vires the local authority and so void ab initio. Between 7 and 15 September 1982 the appellant defendants, the City of Glasgow Council, then the City of Glasgow District Council, entered into seven interest rate swap agreements with the respondent plaintiffs, Kleinwort Benson Ltd. ("Kleinwort"). Pursuant to the agreements, on various dates between 9 March 1983 and 10 September 1987 Kleinwort made payments to Glasgow totalling 807,230.31, and Glasgow made payments to Kleinwort totalling 79,152.41. Following the Hazell case, Kleinwort on 6 September 1991 commenced proceedings in the English High Court claiming restitution of the sums so paid by it to Glasgow. On 16 October 1991 Glasgow issued a summons claiming a declaration that the English High Court had no jurisdiction over the claim, over which the Scottish courts alone had jurisdiction.

Holding

Lord Goff (Majority)

That question is whether the claim of Kleinwort to restitution of the sums paid by it to Glasgow under a contract accepted to be void ab initio falls within article 5(1).

I have to confess that I find it very difficult to see how such a claim can fall within article 5(1). It can only do so if it can properly be said to be based upon a particular contractual obligation, the place of performance of which is within the jurisdiction of the court. Where however, as here, the claim is for the recovery of money paid under a supposed contract which in law never existed, it seems impossible to say that the claim for the recovery of the money is based upon a particular contractual obligation.

We know from the de Bloos case that the reference in article 5(1) to the "obligation in question" is to "the contractual obligation forming the basis of the legal proceedings" (p. 1508, para. 11), and is that obligation "which corresponds to the contractual right on which the plaintiff's action is based….” in no case cited to the Appellate Committee, either from the European Court of Justice or from the courts of this country, has the "obligation in question" been construed to mean anything other than the particular contractual obligation upon which the plaintiff's claim is based, the performance or non-performance of which is relied upon to support the plaintiff's claim. It is in my opinion plain that this principle can have no application in a case where the supposed contract in question is void ab initio and so has never had any legal existence.

In truth, the claim in the present case is simply a claim to restitution, which in English law is based upon the principle of unjust enrichment; and claims of this kind do not per se fall within article 5(1). It is not necessary for the purposes of the present case to hold that a claim to restitution can never fall within article 5(1). Very exceptionally, there may be particular circumstances in which it can properly be said, at least in casesarising under the Convention, that the claim in question, although a claim to restitution, is nevertheless based on a contractual obligation and so falls within the article. This is a point to which I will return at a later stage. But no such circumstances arise in the vast majority of claims to restitution, which are founded simply upon the principle of unjust enrichment. Such is, in my opinion, the present case. No express provision is made in article 5 in respect of claims for unjust enrichment as such; and it is legitimate to infer that this omission is due to the absence of any close connecting factor consistently linking such claims to any jurisdiction other than the defendant's domicile. Article 2 therefore provides the appropriate jurisdiction for such claims.

Claim also does not fall under Art. 5(3)

Before the Appellate Committee, Mr. Pollock for Kleinwort advanced a brief argument to the effect that article 5(3), which is concerned with "matters relating to tort, delict or quasi-delict" and places jurisdiction in the courts for the place "where the harmful event occurred or in the case of a threatened wrong is likely to occur," applied in cases of unjust enrichment, and was therefore applicable in the present case. This argument is impossible to reconcile with the words of article 5(3), if only because a claim based on unjust enrichment does not, apart from exceptional circumstances, presuppose either a harmful event or a threatened wrong.

Lord Nicholls (minority)

Not surprisingly, the European Court has rejected the narrowest interpretation of article 5(1). Article 5(1) is not confined to the determination of disputes relating strictly to a performance obligation. The jurisdiction is wider than this, because the jurisdiction under article 5(1) is not ousted by a dispute between the parties over the existence of the contract sought to be enforced: see Effer S.p.A. v.Kantner (Case 38/81) [1982] E.C.R. 825.

This decision shows that, at least for the purpose of establishing jurisdiction, the court of the place of performance of a contractual obligation can also decide a dispute relating to the existence of a contract even though this may raise issues having no particular connection with the place of performance.

Practical Reasons for holding that the claim falls under Art. 5(1)

I say at once that the feature which ultimately has weighed heavily with me is the unattractive practical difficulties which would result from the narrow interpretation urged by the appellant local authority.

Suppose next that P, anxious to dispose of this dispute once and for all, adds an alternative claim. He wishes to recover the money he has already paid, should the court uphold the ultra vires defence. So, as an alternative to damages for breach of contract, he seeks repayment of the part-payments on the footing that there is no legally binding contract. This alternative claim is not based on any term of the contract: the contract is a nullity. The claim is a restitutionary claim.

To my mind it is really unthinkable that such an alternative claim should lie outside article 5(1). The Convention is concerned to promote the efficacious conduct of proceedings and to avoid multiplicity of closely related proceedings in different contracting states. It would be surprising and unfortunate if, having decided that the contract is null and void, the same court cannot proceed to decide on the restitutionary consequences following directly from this.

Case where nullity of the contract is already established: One final step remains to be taken, having regard to the unusual facts of the present case. After P has paid D in purported performance of the contract, the nullity of the contract is established in other proceedings. Thereafter there is no dispute between the parties over the nullity of the contract. The dispute between the parties is confined to the consequences directly flowing from the nullity. P claims to be entitled to repayment, by way of restitution. D denies this. I find it difficult to see on what basis this reduction in the ambit of...