#6807 - Westdeutche V. Islington Borough Council Hobhouse And Ca - Restitution of Unjust Enrichment BCL

Westdeutche v. Islington Borough Council

Facts

The plaintiff bank entered into a ten-year interest rate swap agreement with the defendant local authority commencing on 18 June 1987. The interest payments, which were payable half-yearly, were calculated on a notional principal sum of 25m by reference to the difference between the fixed rate of interest (payable by the bank) and the floating London Inter-Bank Offered Rate (payable by the local authority). Additionally, the bank agreed to pay the local authority a lump sum of 2·435m on the commencement date as the first of the fixed rate payments. At the same time, the bank entered into a parallel swap transaction with a second bank in order to hedge its potential liabilities under the arrangement with the local authority. By June 1989 the local authority had made four payments to the bank under the swap agreement, totalling 1,354,474·4307. However, on 1 November 1989 the Divisional Court of the Queen's Bench Division held, in an unrelated case subsequently upheld by the House of Lords in January 1991, that interest rate swap transactions were outside the powers of local authorities and void ab initio. Thereafter the local authority made no further payments. The bank subsequently brought an action against the local authority, claiming inter alia repayment of 1,145,525·4393, being the amount of the initial lump sum payment of 2·435m less the payments made by the local authority, and interest as from 18 June 1987.

The swaps between Westdeutche and Islington were open swaps whereas the swaps between Kleinwort Benson and Sandwell were closed swaps.

Hobhouse J.

Analysis of annuity cases

The primary importance of this line of cases is that the transactions gave rise to payments both ways, that is to say both by the grantor and the grantee. When the transaction had been determined to be void, the moneys paid either way were treated as being recoverable in an action for money had and received.

Citing Lord Ellenborough in Hicks v. Hicks:

“This was either an annuity or not an annuity. If not an annuity, the sums paid on either side were money had and received by the one party to the other's use. If the consideration of the annuity be money had and received, it must be money had and received with all its consequences; and therefore the defendant must be at liberty to set off his payments as such, on the same score.”

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'.

Sandwell relied upon Davis v Bryan (1827) 6 B & C 651, 108 ER 591 as showing that there should not be a right of recovery in respect of the first Sandwell swap. The first Sandwell swap differs from the other transactions with which the present actions are concerned in that it ran its full course and all the payments contemplated by it were in fact made. In Davis v Bryan the plaintiff was the executrix of a person who had purchased an annuity for his life from the defendant who had regularly paid the annuity up to the time of the death of the grantee. However, no memorial of the grant of the annuity had ever been enrolled. The executrix of the grantee then sued for the repayment of the sum paid by the grantee to the grantor as money had and received by the defendant to the use of the grantee. The action failed.

The judgments appear to be based on three grounds. (See also the report at 9 Dow & Ry 726.) Firstly, they applied a general principle of conformity to equity and good conscience which was implicit in the action for money had and received. It was unconscionable that a party should wait to see how the contract turned out before deciding whether or not to adopt it. 'The testator received the whole of that which he bargained for, and now his representative says that the contract was void from the beginning. Is there any thing like good conscience in the claim?' Secondly, faced with a need to distinguish Hicks v Hicks, they formulated the proposition that the grantee who had failed to register the transaction could not himself unilaterally avoid it; in Hicks v Hicks the transaction had already been avoided in earlier proceedings upon the insistence of the grantor and 'the grantee was therefore at liberty to contend for the same thing'. Thirdly, it was said that a fully executed contract could not be rescinded. (See 6 B & C 651 at 655-656, 108 ER 591 at 592.)

Of these reasons, it is for the second that Davis v Bryan has been treated as authority in the later cases. There is no other authority that the mere fact that the relevant contract is no longer executory is of itself a bar to the remedy of restitution unless it be the now discredited doctrine in Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326, [1904-7] All ER Rep 817, which turned upon a proposition that the remedy of rescission was confined to the rescission of contracts, not conveyances. In my judgment, Davis v Bryan does not establish any proposition of assistance to Sandwell in relation to the first Sandwell swap save that in any action for money had and received it is always necessary to have regard to considerations of equity and good conscience.

Sumption QC’s argument:

The argument developed by Mr Sumption QC was that it is necessary to ask whether the payer got the benefit for which he bargained. 'What the bank bargained for was payments which would discharge a legal obligation and which the bank was entitled lawfully to receive. What it obtained were payments made under a void agreement which Islington was prima facie entitled to recover back.'

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'.

Distinguishing Linz and Rowland v. Divall – there was no bargain

In Linz's case it was held that 'she got exactly that which she bargained to get' (see [1948] 1 All ER 604 at 606, [1948] AC 371 at 377). In Rowland v Divall it was considered that the buyer did not get what he bargained for. This is very different from the present case where there was in truth no bargain at all and problems of deciding what was the essential part of the bargain do not arise and there can be no question whether the plaintiff's conduct has affected his right to treat the contract as rescinded.

Payments are not payments bargained for

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.

This decision is sufficient to establish the prima facie right of the plaintiffs to recover in both of the actions which are before me. It also follows from the fact that I consider that the correct analysis is absence of consideration and not failure of consideration that it is not open to Kleinwort Benson to assert an absolute right of recovery on the third and fourth Sandwell swaps on the basis of a right to recover money paid for a contractual consideration that has wholly failed to which there are no defences; it will be open to Sandwell to seek to raise a defence of change of position. Likewise, it follows that it is irrelevant to the existence of a cause of action in connection with the payments made under the first Sandwell swap that the supposed contract was in fact fully performed and there was no failure of consideration at all in the contractual sense.

Absence of Consideration

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'. I note that this was the phrase used by the House of Lords in theWoolwichcase[1992] 3 All ER 737,[1993] AC 70and has been used by other judges in the past, although it is right to say that the phrase 'failure of consideration' has very frequently been used in connection with void contracts (see eg the argument inFibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd[1943] AC 32 at 36).

What Lush J says must of course be read subject to what was said by the...