#6781 - Kleinwort Benson V. Lincoln City Council - Restitution of Unjust Enrichment BCL

Kleinwort Benson v. Lincoln City Council

Facts

On various dates between 1982 and 1985 the plaintiff bank entered into interest rate swap agreements with each of four local authorities. Each transaction was fully performed by both parties according to its terms and resulted in the bank paying to the authorities sums totalling 811,208. Following a decision of the House of Lords in 1991 holding that such interest rate swap contracts were outside the statutory powers of local authorities the bank commenced proceedings in the Commercial Court against the four local authorities claiming restitution of the sums it had paid to them.

Interest Swap: The essence of such a transaction is that one party, known as the fixed rate payer, agrees to pay to the other party over a certain period interest at a fixed rate on a notional capital sum; and the other party, known as the floating rate payer, agrees to pay to the former over the same period interest on the same notional sum at a market rate determined in accordance with a certain formula. This can serve two purposes – first, speculation and second, hedging risks under other transactions. This may also often be used as a source of funding.

Holding

Lord Browne-Wilkinson (minority along with Lord Lloyd)

I take the view that the moneys are not recoverable since, at the time of payment, the payer was not labouring under any mistake.

Effect of the House of Lords Decision

My view, on the other hand, is that although the decision in Hazell is retrospective in its effect, retrospection cannot falsify history: if at the date of each payment it was settled law that local authorities had capacity to enter into swap contracts, the bank were not labouring under any mistake of law at that date. The subsequent decision in Hazell could not create a mistake where no mistake existed at the time.

The theoretical position has been that judges do not make or change law: they discover and declare the law which is throughout the same. According to this theory, when an earlier decision is overruled the law is not changed: its true nature is disclosed, having existed in that form all along… Therefore the precise question is whether the fact that the later overruling decision operates retrospectively so far as the substantive law is concerned also requires it to be assumed (contrary to the facts) that at the date of each payment the plaintiff made a mistake as to what the law then was. In my judgment it does not.

It would be unfortunate to introduce into the amended law a new artificiality, viz., that a man is making a mistake at the date of payment when he acts on the basis of the law as it is then established. He was not mistaken at the date of payment. He paid on the basis that the then binding Court of Appeal decision stated the law, which it did: the fact that the law was later retrospectively changed cannot alter retrospectively the state of the payer's mind at the time of payment.

In my judgment, therefore, if a man has made a payment on an understanding of the law which was correct as the law stood at the date of such payment he has not made that payment under a mistake of law if the law is subsequently changed… I am fortified in that view by considering what will be the effect of your Lordships' decision. A payment which was initially irrecoverable will subsequently become recoverable.

Can there be a “settled law” in the absence of a judicial decision?

However, your Lordships do have to decide whether, if at the trial such a settled view is proved to have existed, it would prevent the bank from recovering the moneys paid on the basis of moneys paid under a mistake of law.

There are areas of the law which are sparsely covered by judicial decision, for example, real property, banking and regulatory law. In such areas the commercial world acts, and has to act, on the generally held view of lawyers skilled in the field. In such cases, a payer who sought advice would receive the same advice from everyone skilled in the field.

I doubt whether today anyone would claim that a uniform practice of the profession makes the law. But in the present context it does have a significant impact. In holding that money paid under a mistake of law is recoverable, an essential factor is that the retention of the money so paid would constitute an unjust enrichment of the payee. What constitutes the unjust factor is the mistake made by the payer at the date of payment. If, at the date of payment, it was settled law that payment was legally due, I can see nothing unjust in permitting the payee to retain moneys he received at a time when all lawyers skilled in the field would have advised that he was entitled to receive them and the payer was bound to pay them.

My Lords, I agree with the views of the Law Commission and would therefore have held that the bank would not be entitled to recover on the grounds of mistake of law if at the time of payment the bank were, or if they had sought advice would have been, advised by all lawyers skilled in the field that the swaps agreements were valid.

Conclusion

My Lords, in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit moneys paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend, Lord Goff of Chieveley, that the relevant limitation period applicable to such a claim would be that laid down by section 32(1)(c) of the Limitation Act 1980, i.e. six years from the date on which the mistake was, or could with reasonable diligence have been, discovered. The majority of your Lordships consider that such claim will arise when the law (whether settled by existing authority or by common consensus) is changed by a later decision of the courts. The consequence of this House in its judicial capacity introducing such a fundamental change would be as follows. On every occasion in which a higher court changed the law by judicial decision, all those who had made payments on the basis that the old law was correct (however long ago such payments were made) would have six years in which to bring a claim to recover money paid under a mistake of law. All your Lordships accept that this position cannot be cured save by primary legislation altering the relevant limitation period. In the circumstances, I believe that it would be quite wrong for your Lordships to change the law so as to make money paid under a mistake of law recoverable since to do so would leave this gaping omission in the law. In my judgment the correct course would be for the House to indicate that an alteration in the law is desirable but leave it to the Law Commission and Parliament to produce a satisfactory statutory change in the law which, at one and the same time, both introduces the new cause of action and also properly regulates the limitation period applicable to it.

Lord Goff

Mistake of Law Rule

The local authorities did not press the argument that money paid under a mistake of law is not recoverable. Instead, they suggested that even if the court were to do away with this rule, it should do so while permitting exceptions to recovery in such cases – in particular that recovery must not be permitted when the payment was made in pursuance of a “settled understanding of the law.”

Ignorance of law Rationale: based on the maxim ignorantia juris non excusat. This maxim, it has been pointed out, is properly directed to cases in which the defendant was charged with wrongdoing, whether civil or criminal, and has no place in the law of quasi-contract.

Criticisms of the Mistake of Law rule: First, the rule allows the payee to retain a payment which would not have been made to him but for the payer's mistake, whereas justice appears to demand that money so paid should be repaid unless there are special circumstances justifying its retention. Second, the distinction drawn between mistakes of fact (which can ground recovery) and mistakes of law (which cannot) produces results which appear to be capricious.

Rejection of the mistake of law in common law world is due not only to specific criticism of the mistake of law rule as such, but still more to the combined effect of two fundamental changes in the law: first, recognition that there exists a coherent law of restitution founded upon the principle of unjust enrichment, and second, within that body of law, recognition of the defence of change of position.

The combined effect is not only that the mistake of law rule can no longer be allowed to survive, but also that the law must evolve appropriate defences which can, together with the defence of change of position, provide protection where appropriate for recipients of money paid under a mistake of law in those cases in which justice or policy does not require them to refund the money.

Conclusion: For all these reasons, I am satisfied that your Lordships should, if you decide to consider the point yourselves rather than leave it to the Law Commission, hold that the mistake of law rule no longer forms part of English law. I am very conscious that the Law Commission has recommended legislation. But the principal reasons given for this were that it might be some time before the matter came before the House, and that one of the dissentients in the Woolwich case (Lord Keith of Kinkel) had expressed the opinion that the mistake of law rule was too deeply embedded to be uprooted judicially: [1993] A.C. 70, 154. Of these two reasons, the former has not proved to be justified, and the latter does not trouble your Lordships...