#6854 - Guinness Mahon V. Kensington And Chelsea Rlbc - Restitution of Unjust Enrichment BCL

Guinness Mahon v. Kensington and Chelsea Royal Longon Borough Council

Facts

On 23 September 1982 the Kensington and Chelsea Royal London Borough Council apparently entered into an agreement with Guinness Mahon & Co. Ltd. ("the bank") setting out the terms of a transaction of a type known as an interest rate swap.

Decision in Hazel: 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.

Proceedings in Westdeutche: 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.

Decision in Westdeutche at first instance: Hobhouse J. gave judgment in February 1993 upholding the claims of the banks in all cases. In particular, he refused to draw a distinction between what might be described as "open swaps," where the period prescribed in the ultra vires agreement had not expired and "closed swaps," where it had.

Appeal on open swaps alone to CA: 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 from the order of Hobhouse J. in Sandwell in so far as it related to a closed swap.

Holding

Morrit LJ

Basis of the decision in Westdeutche was failure of consideration

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.

Distinguishing between closed swaps and open swaps

Absurdity Argument: Before considering these submissions in greater detail it is helpful to consider the position of the parties to an open swap and a closed swap. 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.

Other reasons for not treating closed and open swaps differently: 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:perDillon 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.

If the contractual promise was void because it was ultra vires, how could the law imply a promise to the like effect? Though the basis of the implied promise may now have gone, in my view the general principle must remain that an ultra vires transaction is of no legal effect. It must follow that the recipient of money thereunder has no right to it. If he keeps it he will be enriched. If he does not then or subsequently obtain a right to keep it such enrichment will be unjust. The claim for money had and received may be defeated by the defence of change of position. But in the absence of such a defence, and none was suggested in this case, it seems to me to be no answer to the claim to say that once the transaction has been fully performed the bank no longer has any interest in the capacity of the corporation, or that both parties have received the expected return.

Summary of Conclusions

I agree with Hobhouse J. that there is no principle which could justify drawing a distinction between a closed swap and an open swap. I can summarise my reasons for that conclusion in the following propositions. (1) A contract which is ultra vires one of the parties to it is and always has been devoid of any legal contractual effect. (2) Payments made in purported performance thereof are necessarily made for a consideration which has totally failed and are therefore recoverable as money had and received. Thus, at the first stage of the inquiry suggested in the submissions of Mr. Béar, the circumstances do give rise to a case of unjust enrichment which should prima facie lead to a recovery. (3) A party to an apparent swap contract which is void because ultra vires one party is entitled so to recover the amount by which what he paid exceeds what he received, whether or not the apparent contract has been completely performed, for there is a total failure of consideration whether it is regarded as entire or severable. (4) The fact that the swap contract, though ultra vires and void, has been fully performed does not constitute a defence or bar to the recovery of the net payment as money had and received, for the recipient had no more right to receive or retain the payment at the conclusion of the contract than he did before.

Waller LJ

Reasons in Principle for differentiating between open and closed swaps

I was much persuaded by Mr. Béar's arguments, expanding on Professor Birks's article, that there should be a distinction between "open" and "closed" swaps. There is in my view great force in the argument that "absence" of consideration as opposed to "failure" of consideration should not by itself be a ground for restitution. If one applies the concept of failure as opposed to absence of consideration, failure of consideration still provides a ground for restitution in relation to an open swap. This much is clearly recognised by Lord Goff and was...