#6796 - Guiness Mahon And Co. V. Kensington And Chelsea Rlbc - Restitution of Unjust Enrichment BCL

Guinness Mahon and Co. v. Kensongton and Chelsea RLBC

Facts

The council, which had agreed to borrow from a building society 5m. at 11 5/8 per cent. interest for five years, entered into an interest rate swap agreement with a bank on the terms that over that period the bank would pay to the council every six months the amount of the interest due to be paid by the council, and the council in return would pay to the bank interest at a floating rate on a nominal loan of 5m. By the end of the period the bank had paid more than the council under the agreement, which was ultra vires the council. The judge gave judgment for the bank on its claim to recover payments made under the agreement.

The five-year period ended on 22 September 1987. By that date, when all swaps had been effected, the council had received from the bank 384,409 more than it had paid. There matters might have rested but for the fact that on 1 November 1989 the Divisional Court, in Hazell v. Hammersmith and Fulham London Borough Council [1990] 2 Q.B. 697, declared, as subsequently upheld in the House of Lords [1992] 2 A.C. 1, that such an agreement as the council had apparently concluded with the bank was ultra vires the council and so void from the start.

In early 1993 two actions selected as test actions for the resolution of the problems arising from the invalidity of such interest rate swaps came before Hobhouse J. They were Westdeutsche Landesbank Girozentrale v. Islington London Borough Council ("Westdeutsche") and Kleinwort Benson Ltd v. Sandwell Borough Council ("Sandwell") [1994] 4 All E.R. 890. In the former the period prescribed in the agreements during which such swaps should take place had not expired at the time the proceedings were commenced. In the latter the period specified in one of the agreements sued on had, as in this case, expired, all relevant swaps having been duly paid before the writ was issued. In each case the bank sought repayment of the net amount it had paid the local authority.

Though there were appeals in Westdeutsche [1994] 1 W.L.R. 938 on certain points in relation to open swaps there was none in Sandwell because it was settled and therefore none in relation to a closed swap. Accordingly this appeal has been argued on the footing that it is in substance an appeal *220 from the order of Hobhouse J. in Sandwell in so far as it related to a closed swap.

Holding

Moritt LJ

Failure of consideration and ultra vires payments

I have referred to these judgments in some detail, for it seems to me that, as submitted by Mr. Leggatt for the bank, the Court of Appeal decided, quite separately from their conclusion on the claim on equitable grounds, that the bank was entitled to succeed in its claim on the ground of money had and received on the basis of a total failure of consideration, notwithstanding that in one sense consideration was given by the local authority in performing its part of the swap.

Lord Browne Wilkinson speaking for the House of Lords in the appeal in Westdeutche had held as follows:

“in Sinclair v. Brougham the depositors should have had a personal claim to recover the moneys at law based on a total failure of consideration. The failure of consideration was not partial: the depositors had paid over their money in consideration of a promise to repay. That promise was ultra vires and void; therefore the consideration for the payment of the money wholly failed. So in the present swaps case (though the point is not one under appeal) I think the Court of Appeal were right to hold that the swap moneys were paid on a consideration that wholly failed. The essence of the swap agreement is that, over the whole term of the agreement, each party thinks he will come out best: the consideration for one party making a payment is an obligation on the other party to make counter-payments over the whole term of the agreement.”

I have referred at length to the course of the proceedings in Westdeutsche to demonstrate that the true basis for the recovery by the bank of the net amount it paid to the local authority, which had no capacity to enter into the swap agreement, was for money had and received as on a total failure of consideration. I take this to have been one of the two distinct grounds of decision of Hobhouse J. and of the Court of Appeal and that ground was expressly approved by at least two of the members of the Appellate Committee in the House of Lords.

Does failure of consideration apply to closed swaps equally?

Argued: He pointed out that the only interest the bank had ever had in the capacity of the council was to ensure performance of the swap agreement but once it had been completed the bank was in exactly the same position as it would have been if the council had had the necessary capacity…. Mr. Béar's concluding submission was to the effect that if the argument for the bank was right it would amount to giving a right in restitution to repayment of money on the sole ground that its original payment had not been due.

This argument was rejected by the court on the following grounds:

Absurdity argument: I assume a swap period of five years with swap payments between the bank and local authority every six months. The penultimate payments made 4 years after the date of the agreement have given rise to a net balance in favour of the local authority of 100,000. Westdeutsche establishes that if the original swap agreement was ultra vires the local authority the bank would have a cause of action for repayment of that balance as money had and received or for restitution at common law. Then I assume that six months later the final swap payments are made by a net payment from the bank to the local authority of a further 50,000. The argument for the council, if accepted, would deny the bank any right of recovery. But if the restitutionary principle requires the recognition of a cause of action for recovery of 100,000 when the penultimate payments were made it is difficult to see on what basis it denies any claim at all when on the final payments the balance in favour of the local authority rises to 150,000…. It is hard to see any basis of logic or justice which would justify allowing the claim of the local authority to the balance due after the penultimate swap but denying it in respect of the final balance.

What is the Consideration: The first theoretical basis on which the case for the council is put is that because over the whole of the term of the swap agreement the parties paid and received exactly what they had bargained for there can be no failure of consideration in the case of the closed swap. By contrast, in the case of the open swap one or more of the swaps envisaged has not been carried out; therefore, it is said, there is a total failure of consideration, for the parties have not received all that for which they bargained. But this argument assumes that in the case of a swap contract the relevant bargain was for the payments which were actually made rather than the legal obligation to make them. It is true that in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] A.C. 32 Viscount Simon L.C. said, at p. 48: “when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.” But that case concerned a contract originally valid but subsequently frustrated due to the outbreak of war and not a contract void from the outset. In any event the statement was not intended to be exhaustive as is apparent from the qualification introduced by the words “generally speaking.”

Citing Rover International Ltd. v. Cannon Film Sales Ltd., [1989] l W.L.R. 912:

“The question whether there has been a total failure of consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract. The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract.”

But I do not accept Mr. Béar's further submission that Kerr L.J. was considering only the performance of the promise. It seems to me that he was considering whether Rover obtained the legal rights for which it had stipulated as well as the fruits of such rights.

Bound by the Court of Appeal and House of Lords in Westdeutche

But whether or not my reading of the judgment of Kerr L.J. is correct one principle clearly established by the Court of Appeal in Westdeutsche [1994] 1 W.L.R. 938 is that in the case of a contract void from the start there must for that reason have been a total failure of consideration: per Dillon L.J., at p. 945h, and Leggatt L.J., at p. 953e. To the same effect is the speech of Lord Browne-Wilkinson in the House of Lords [1996] A.C. 669, 710h-711a. These passages, which I have already quoted, demonstrate that it is the very fact that the contract is ultra vires which constitutes the total failure of consideration justifying the remedy of money had and received or restitution for unjust enrichment. If partial performance of that assumed obligation in the case of an open swap does not preclude a total failure of that consideration then there is no basis on which complete performance of a closed swap could do so.

Public Policy Argument: It must be borne in mind that the ultra vires doctrine exists for the protection of the public… It is true, as Hobhouse J. observed in Westdeutsche, that...