Judgment Kleinwort Benson LTD. v. Lincoln City Council
Kleinwort Benson LTD. v. Mayor etc. of the London Borough of Southwark and Others
Kleinwort Benson LTD. v. Birmingham City Council
Kleinwort Benson LTD. v. Mayor etc. of the London Borough of Kensington and Chelsea and Others
(On Appeal from the Queens Bench Division of the High Courts of Justice)

(back to preceding text)
     "had the payer taken advice from a qualified legal practitioner who was reasonably experienced in the field of law in question at the time of payment, and that practitioner had obtained access to all of the ordinarily available legal materials on the point of law in issue, he would have had no doubt in advising the payer that the law supported the payment. (para. 5.11)"

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

    My Lords, in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit monies paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend Lord Goff, 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.

    I would dismiss these appeals.


My Lords,

    There are before your Lordships consolidated appeals in four actions, each of which arises from the unravelling of one or more interest rate swap transactions which, following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, proved to be void. The process of unravelling transactions of this kind has produced a host of problems, so much so that Professor Andrew Burrows stated in 1995 (see [1995] R.L.R. 15) that "it is no exaggeration to say that one could write a book on the restitutionary consequences of the decision in Hazell." I fear that any such book will be growing in length as the cases, including the present appeals, pass through the courts.

    The nature of an interest rate swap transaction is now very well known. The description usually referred to is that of the Divisional Court in Hazell [1990] 2 Q.B. 697, 739-741, the transactions in the present cases being of the simple type there described. 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. In practice, a balance is struck at each relevant date and the party who then owes the greater sum will pay the difference to the other party.

    Interest rate swaps can fulfil many purposes, ranging from pure speculation to more useful purposes such as the hedging of liabilities. One form of interest rate swap involves an upfront payment, i.e. a capital sum paid at the outset by one party to the other, which will be balanced by an adjustment of the parties' respective liabilities. The practical result of this is to achieve a form of borrowing. It appears that it was this feature which, in particular, attracted local authorities to enter into transactions of this kind, since they enabled local authorities subject to rate-capping to obtain upfront payments uninhibited by the relevant statutory controls, though they must in the process have been storing up trouble for themselves in the future.

    The appellant in each of the four consolidated appeals is Kleinwort Benson Ltd., a bank which was an early participant in the market for interest rate swaps. Each of the respondents is a local authority. They may be described in brief as Birmingham City Council, Southwark London Borough Council, Kensington and Chelsea London Borough Council and Lincoln City Council. Kleinwort Benson entered into interest rate swap transactions with each of the respondents. Following the decision of this House in Hazell, Kleinwort Benson commenced proceedings against each of the respondents claiming restitution of the sums it had paid to them under these transactions. The total of the net payments made under them by Kleinwort Benson was £811,208.90.

    There are two features of these transactions which are of particular relevance to the present appeals, no doubt flowing from the fact that Kleinwort Benson participated in interest rate swaps at an early stage. The first is that, at the time when proceedings were commenced by Kleinwort Benson, each of the transactions was fully performed by both parties according to its terms across the whole of the agreed period. The second is that not all of the sums paid by Kleinwort Benson to the respondents were paid within the six year limitation period expiring with the date of the issue of the writ. Of the net sum of £811, 208.90 paid by Kleinwort Benson, £388, 114.72 was paid within the six year period, and £423,094.18 represented earlier payments. The former sum has been paid by the relevant local authorities to Kleinwort Benson. The latter sum is in issue, and is the subject of the cases now under appeal.

    The claim of Kleinwort Benson in each of these cases is that the money in question was paid by it under a mistake, viz. a mistaken belief that it was paid pursuant to a binding contract between it and the relevant local authority. The claims have been formulated in this way to avoid the six year time limit by bringing them within section 32(1)(c) of the Limitation Act 1980. Section 32(1) provides that:

     "Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act. . . (c) the action is for relief from the consequences of a mistake. . . the period of limitation shall not begin to run until the plaintiff has discovered the . . . mistake . . . or could with reasonable diligence have discovered it."

It is plain however that here the mistake relied upon is a mistake of law; and under the law as it stands at present restitution will in general not be granted in respect of money paid under a mistake of that kind. It follows that, in the present proceedings, Kleinwort Benson is seeking a decision that that long-established rule should no longer form part of the English law of restitution -a decision which, as all parties to the present litigation recognise, can only be made by your Lordships' House. As a result, on 12 July 1996 Langley J. (I understand by consent) made the following orders in each of the four actions. First of all, he ordered the trial of two preliminary issues, viz. (1) whether the facts pleaded by the Plaintiff disclosed a cause of action in mistake; and (2) whether, if the answer to (1) was "Yes," such a mistake was one in respect of which the Plaintiff could rely on section 32(1)(c) of the Limitation Act 1980. The first of these two issues raised directly the question whether money paid under a mistake of law is recoverable in restitution. In each of the actions Langley J. gave a negative answer to Issue (1), on the basis that he was bound by Court of Appeal authority to do so; and accordingly he did not give an answer to Issue (2). Next, he granted a certificate for an appeal (commonly called a leapfrog appeal) directly to your Lordships' House pursuant to section 12 of the Administration of Justice Act 1969. Leave to appeal was duly granted by this House, which further ordered that the parties should have leave to present arguments arising from the fact that each of the interest rate swap transactions had been fully performed, thus adding a third issue to the two which were the subject of Langley J.'s order.

    As a result of the basis on which the appeals have come before the House, the Appellate Committee has exceptionally lacked the benefit of reasoned judgments of the courts below. However the loss of that benefit has substantially been offset by arguments of exceptional quality addressed to the Committee by Counsel--Mr. Richard Southwell Q.C. and Mr. Rhodri Davies for the appellant, Kleinwort Benson, and Mr. Nicholas Underhill Q.C., Mr. Charles Béar and Mr. Mark West for the respondent local authorities. I sensed that some, if not all, of these members of the Bar are seasoned warriors in the continuing battle of the swaps.

    I propose to consider the Issues in the following order. I shall first consider Issue (1) as ordered by Langley J., which raises the question whether the rule precluding recovery of money paid under a mistake of law should remain part of English law. As part of that Issue I shall also consider whether, if the answer to that question is "No," there should be an exception to recovery on the ground of mistake of law (A) in cases where the money has been paid under a settled understanding of the law which has subsequently been changed by judicial decision, or (B) in cases where the money has been the subject of an honest receipt by the defendant. I shall refer to these two Issues as Issue (1A) and Issue (1B) respectively. I shall then consider the Issue concerned with the impact upon recovery of the fact that all the interest rate swap transactions in question were fully performed. I shall refer to that Issue as Issue (2). Finally I shall turn to consider the second Issue as ordered by Langley J. which raises the question whether, on the true construction of section 32(1)(c) of the Act of 1980, the subsection applies to mistakes of law. That I shall refer to as Issue (3).

     Issue 1 Whether the present rule, under which in general money is not recoverable in restitution on the ground that it was paid under a mistake of law, should be maintained as part of English law.

    In argument before the Appellate Committee Kleinwort Benson presented in its written case a fully developed argument for the abrogation of what I will, for convenience, call the mistake of law rule. This did not however evoke a comparable argument by the local authorities in defence of the rule. On the contrary, their submission was not that the rule should be retained, but rather that it should be reformulated. Their primary argument was that the House should not itself embark upon any such reformulation, but should leave that task to the Law Commission which already has the matter under consideration. Such a course would benefit the local authorities because, quite apart from the fact that it is uncertain when, if ever, the Law Commission's proposed reforms will be enacted, they would not, if enacted as proposed, be retrospective in effect. Their secondary argument was that, if the House did decide to abrogate the present rule, it should do so in terms which provided a defence in cases in which the money has been paid under a settled understanding of the law, or in which the money has been the subject of an honest receipt by the defendant. Such defences would recognise that the payee has, in such circumstances, a legitimate interest in retaining the payment, based on the need for certainty and finality in transactions.

    Faced with this situation, it might be thought that your Lordships need do no more than accept that the present rule should no longer remain in its present form, and then proceed to consider whether reformulation of the rule should be undertaken by this House or by the Law Commission and, if the former, whether the newly recognised right to recover money paid under a mistake of law should be subject to certain special limits as proposed by the local authorities. I myself do not consider that such a course would be appropriate. What is in issue at the heart of this case is the continued existence of a long standing rule of law, which has been maintained in existence for nearly two centuries in what has been seen to be the public interest. It is therefore incumbent on your Lordships to consider whether it is indeed in the public interest that the rule should be maintained, or alternatively that it should be abrogated altogether or reformulated. Having said this, however, your Lordships are fully entitled to recognise that the local authorities are in truth adopting a realistic stance that, in the light of prolonged criticism of the rule by scholars working in the field of restitution, and of recent decisions by courts in other major common law jurisdictions, the case for retention of the rule in its present form can no longer sensibly be advanced before your Lordships' House. In these circumstances I do not have to consider this aspect of the case in as much depth as might otherwise be regarded as appropriate, though I have discovered that consideration of the case as a whole has cast light on the formulation of the limits to the right of recovery which lie at the heart of the case as presented to your Lordships' House.

     How the rule became established: The origin of the rule is, as is very well known, the decision of the Court of King's Bench in Bilbie v. Lumley (1802) 2 East 469. There an underwriter paid a claim under a policy which he was entitled in law to repudiate for non-disclosure. Although he knew the relevant facts, he was not aware of their legal significance. He then claimed to recover the money he had paid. In the brief report of the case by East it is recorded that Lord Ellenborough C.J. asked plaintiff's counsel (Mr. Wood, later Baron Wood)

     "whether he could state any case where if a party paid money to another voluntarily with a full knowledge of all the facts of the case, he could recover it back again on account of his ignorance of the law."

    No answer being given, Lord Ellenborough gave judgment against the plaintiff. In his short judgment as reported, his reasoning is to be found in two sentences, at p. 472: "Every man must be taken to be cognisant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case."

    Previous authority, such as it was (see Jackson, History of Quasi-Contract, pp. 58-61), shows no distinction being drawn between mistakes of fact and law; on the face of the law reports the suggestion that a mistake of law did not ground recovery appears to have emerged for the first time in an obiter dictum of Buller J. in Lowry v. Bourdieu (1780) 2 Doug. 468, 471, the rule of non-recovery being based by him on the maxim ignorantia juris non excusat--an observation invoked by Lord Ellenborough in Bilbie v. Lumley, 2 East 469, 472. In 1802 Sir William Evans published an Essay on the Action for Money Had and Received. (This has since been published in [1998] R.L.R. , the text having been prepared for publication by Professor Peter Birks and Dr. Lionel Smith of Oxford University; copies were helpfully supplied by Professor Birks to Members of the Appellate Committee and to Counsel shortly before the hearing of the present appeals.) In his Essay (dedicated to Sir Richard Law, shortly to be ennobled as Lord Ellenborough) Sir William strongly supported the opinion of Vinnius that money paid by mistake is recoverable, whether the mistake is one of fact or law, and criticised the contrary view of Pothier denying recovery where the mistake is one of law. In a later publication in 1806 (his translation of Pothier's Treatise on Obligations), Sir William, disappointed by his dedicatee's decision in Bilbie v. Lumley four years earlier, maintained at greater length but with great courtesy his opinion that money paid under a mistake of law was generally recoverable on that ground. In particular he stressed the limited field of application of the maxim ignorantia juris non excusat. He stated, at pp.394-395:

     "The rule in its terms is sufficiently satisfied, by holding that no man shall, under the pretence of an ignorance of the law, excuse himself from the performance of his own obligations, or acquire an advantage, or avoid a detriment, when he has omitted using the means ordained by law for those purposes. Applied to the immediate subject matter, it has no reference to the point, of money paid under a mistaken idea of a preceding obligation."

The overall impression is that, in the eighteenth century, it was widely understood that no distinction should be drawn in the present context between mistakes of fact and law, but that towards the end of the century the view was emerging that a mistake of law should not ground recovery. This view must have been more widely held than the single dictum in Lowry v. Bourdieu suggests, having regard to the strong terms in which Lord Ellenborough expressed his judgment in Bilbie v. Lumley, and the account given by Gibbs J. (in Brisbane v. Dacres (1813) 5 Taunt. 143, 155-157) of his experience as counsel in Chatfield v. Paxton and of the universal opinion among the practitioners in the Court of King's Bench that where money was paid with knowledge of the facts it could not be recovered on the ground of mistake.

    The decision in Bilbie v. Lumley was followed and applied by the majority of the Court of King's Bench in Brisbane v. Dacres (Chambre J. dissenting). There the commander of a naval vessel, H.M.S. Arethusa, had paid to the Admiral in command a proportion of freight received for the carriage of publicly owned bullion on board the Arethusa in the belief that this was due to the Admiral as a matter of usage. On later discovering that the money was not due because the usage had been discontinued, he sought to recover it from the Admiral's widow and executrix. It is important to observe that the decision in Bilbie v. Lumley was expressly challenged in this case. Here full argument was heard on the point, unlike Bilbie v. Lumley itself which appears to have been decided on the basis of counsel's concession. Judgment was reserved, and fully reasoned judgments were delivered by all members of the Court. Although the maxim ignorantia juris non excusat was invoked by counsel, no member of the Court founded his judgment upon it; indeed the dissenting judge, Chambre J., 5 Taunt. 143, 158- 159 stated (perhaps rather too narrowly) that the maxim applied only in cases of "delinquency," and all the other judges appear to have considered that it had no role to play in the recovery of money paid by mistake. The question whether it was against conscience for the defendant to retain the money was expressly addressed, notably in the judgment of the Chief Justice, Sir James Mansfield, and was answered by him in the negative, because the admiral acted (as all admirals then did) in accordance with what was generally believed to be his accustomed right, and in particular because he might have changed his position on the faith of the payment. However, the ratio decidendi is perhaps most clearly stated in the leading judgment of Gibbs J. when he said, at p. 152:

     "We must take this payment to have been made under a  demand of right, and I think that where a man demands money of another as a matter of right, and that other, with a full knowledge of the facts upon which the demand is founded, has paid a sum, he never can recover back the sum he has so voluntarily paid. It may be, that upon a further view he may form a different opinion of the law, and it may be, his subsequent opinion may be the correct one. If we were to hold otherwise, I think that many inconveniences may arise; there are many doubtful questions of law: when they arise, the Defendant has an option, either to litigate the question, or to submit to the demand, and pay the money. I think, that by submitting to the demand, he that pays the money gives it to the person to whom he pays it, and makes it his, and closes the transaction between them."

See also p. 160, per Heath J. Such a conclusion might have provided the basis for a more sophisticated development of this branch of the law, founded upon a prima facie right of recovery subject to specific defences. Unfortunately, however, this was not to be so. It seems that the rule hardened, as rules are liable to do. In Wilson and M'Lellan v. Sinclair (1830) 3 Wilson & Shaw 398, 409, Lord Brougham L.C. stated that since Brisbane v. Dacres it had been considered an established point that the mistake must be "in the fact." Furthermore, Kelly v. Solari (1841) 9 M. & W. 54, 55 Parke B. said of Bilbie v. Lumley that "All that that case decides is, that money paid with full knowledge of all the facts cannot be recovered back by reason of its having been paid in ignorance of the law," a statement which was reflected in the judgment of Lord Abinger C.B. at pp. 57-58. These statements were made in the context of a case concerned with mistake of fact, the issue being whether means of knowledge, as opposed to full knowledge, of the facts was enough to preclude recovery. Even so, the observations of the judges appear to have reflected an accepted opinion that money paid under a mistake of law was not recoverable as such. At all events the existence of the mistake of law rule became well established in the course of the nineteenth century, and in the twentieth century it was regularly applied by courts of first instance and on occasion by the Court of Appeal. It has however never fallen for consideration by your Lordships' House before the present appeals, which are now being heard after many years of criticism of the rule by scholars specialising in the law of restitution, and after the rule itself has been discarded in a number of major common law jurisdictions.