#6851 - Westdeutche Landesbank V. Islington Borough City Council - Restitution of Unjust Enrichment BCL

Westdeutche Landesbank v. Islington Borough City Council

Facts

Mr Hazell was the district auditor and he was challenging the legality of the accounts of the Hammersmith Council for the years ending 31 March 1988 and 1989. The transactions which were called into question were what have been called interest rate swaps. The council had entered into a large number of such transactions, almost entirely on a speculative basis, with other councils and with various banks. In its simplest form, an interest rate swap contract involves an agreement by two parties to make to each other on specified dates over a period of time, usually a number of years, a series of payments calculated by reference to the differences between a fixed rate of interest and whatever may be from time to time the current market rate of interest upon a notional sum of principal.

Proceedings in Hazel v. Hammersmith: On 29 May 1989 Mr Hazell started the proceedings against Hammersmith Council for a declaration that the swaps contracts were illegal and for an order for the rectification of the accounts of that council for the years 1986/7 and 1987/8. On 24 January 1991 the House of Lords ([1991] 1 All ER 545,[1992] 2 AC 1) unanimously allowed the appeal and restored the judgment of the Divisional Court.

Westdeutche entered into transaction under the belief that they were valid: Although Westdeutsche had not been entering into contracts with English local authorities, local authorities were, and had been for a number of years, well-established participants in the swap market in London and Mr Goodwin had never heard of any question being raised as to their capacity to enter into such contracts… Mr Goodwin was cross-examined by Miss Appleby QC on behalf of Islington so as to suggest that he had knowingly at the time of entering into this contract accepted a risk that it might be unenforceable. He firmly rejected that suggestion.

When netted against each other, Westdeutche had made payments in favour of the city council.

Nature of Claims: there were several claims clubbed together in this case. Some of them related to transactions that were fully performed on both sides, some of them were partly performed, and some of them were fully performed by one party alone.

Hobhouse J.

It was not in dispute before me that the present case is concerned with acts which were ultra vires the local authority in the proper use of that term. The authority lacked the necessary capacity and therefore its acts were without legal effect.

Distinguishing Sinclair v. Brougham: The case arose out of the winding up of the insolvent Birkbeck Permanent Building Society. The society had been formed under the Building Societies Acts. Those Acts laid down what were to be the objects of the society and the purposes for which it could borrow and lend money. The powers of the society did not include the capacity to carry on a banking business or to borrow money for the purposes of or as part of such a business. However, from an early stage the society did undertake a banking business, becoming commonly known as the 'Birkbeck Bank'. After the banking business had been carried on successfully for a considerable number of years the society got into difficulties and in 1911 an order was made for it to be wound up. Questions of priority arose in the winding up between the outside creditors of the society.

The ground upon which the claim in money had and received failed in the House of Lords was that to permit it to succeed would be contrary to the statute which restricted the capacity of the society. To succeed the depositors must persuade the court to imply a contract to repay since the implication of such a contract was considered at that time to be an essential basis of a cause of action in money had and received. The society had no capacity to promise to repay the moneys lent to it by the depositors, whether such a promise was actual or was to be implied. Viscount Haldane LC founded his decision upon the fact that the taking of deposits from banking customers was the equivalent to taking a loan from them and that to order the repayment of the deposit would be the equivalent of enforcing an ultra vires contract of loan.

The decision in Sinclair v Brougham that the personal claim in money had and received could not succeed therefore depended upon the fact that the relevant transactions were characterised as borrowing transactions and the recognition that, because of the statute, a promise to repay could not be implied. That situation is clearly distinguishable from the present cases. The banks do not seek directly or indirectly to enforce the ultra vires contracts. Their claims are the reverse of that. They do not allege or need to allege any promise to repay. They simply say that the councils have received their money under void contracts and that they should have it back.

Void Contract – “absence of consideration”

These authorities therefore establish that the right of restitution existed in respect of payments made under void contracts even though there were payments both ways and therefore on a contractual analysis there was no 'total failure of consideration'. Also, they are not cases which depended upon any submission or finding of mistake of fact. The cause of action at common law was an action for money had and received.

The phrase 'failure of consideration' is one which in its terminology presupposes that there has been at some stage a valid contract which has been partially performed by one party. It is essentially a concept for use in the law of contract and provides a common law remedy governed by rigid rules granted as of right where the contract becomes ineffective through breach or otherwise. The rules that govern the application of the principle include the technical concept of an 'entire' consideration, what amounts in law to a total failure of consideration, and the absence of defences to the action for the recovery of money paid for a consideration which has wholly failed. In the case of ultra vires transactions such as those with which I am concerned where there is not and never has been any contract, I prefer to use the phrase 'absence of consideration'.

What Lush J says must of course be read subject to what was said by the House of Lords inSinclair v Brougham,but it confirms the basic proposition that in the absence of some special factor money paid under an ultra vires contract can be recovered as money had and received in the same manner as can money paid for a consideration that has totally failed. This is so even though no question of mistake of fact arises and there were mutual dealings under the supposed contract which would preclude the application of what I have chosen to characterise as the ordinary contractual principle.

In my judgment, the correct analysis is that any payments made under a contract which is void ab initio, in the way that an ultra vires contract is void, are not contractual payments at all. They are payments in which the legal property in the money passes to the recipient, but in equity the property in the money remains with the payer. The recipient holds the money as a fiduciary for the payer and is bound to recognise his equity and repay the money to him. This relationship and the consequent obligation have been recognised both by courts applying the common law and by Chancery courts. The principle is the same in both cases: it is unconscionable that the recipient should retain the money. Neither mistake nor the contractual principle of total failure of consideration are the basis for the right of recovery.

Voluntary assumption of risk exception – Birks’ model?

If the facts were that these payments had been made with a conscious appreciation that the contracts were or might be void, that would normally suffice to negative any right of recovery. They would be voluntary payments. But, unless there was such an actual conscious appreciation, the principle cannot be applied. It does not suffice that a fully informed investigation of the legal position leading to the correct conclusions in law would have disclosed that the councils did not have the capacity to enter into the contracts. A situation has to be disclosed which is tantamount to a willingness to make a gift of the money to the recipient.

On the evidence in the Islington case there clearly was no voluntary assumption of risk in any relevant respect and in the Sandwell case it does not appear that the points of defence show any basis for a different conclusion. However, in the Sandwell case the court has not yet been concerned with any question of fact.

Court of Appeal

Dillon J

It is clear from Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd[1942] 2 All ER 122, [1943] AC 32 (a case of frustration) that by 'the consideration has wholly failed' is meant that the performance promised has not been provided.