|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) continued
For these reasons, with all respect to Brennan C.J., I am unable to accept that the defence proposed by him forms part of the common law.
Issue 2--Completed transactions: This issue was added, by leave of your Lordships' House, to the issues set out in the order of Langley J. It arose from a footnote to an Article by Professor Peter Birks entitled No Consideration: Restitution after Void Contracts (1993) 23 University of Western Australia Law Review 195. In the Article, Professor Birks was concerned to criticise the conclusion of Hobhouse J. in the Westdeutsche case  4 All E.R. 890 that the basis of recovery of money paid under void interest rate swaps agreements was absence of consideration, his preferred view being that the true ground of recovery was failure of consideration. It formed part of his argument that a party who has received full performance under such a contract cannot recover the value of his performance, i.e. the money he has paid to the other party, because in such circumstances there has been no failure of consideration for his payment. He has received what he wanted, and therefore there was no unjust factor to provide a reason for restitution. However, in a section of the Article entitled "The alternative of restitution for mistake," he reached the conclusion in the text that it seemed that, if the remedy of recovery of money paid under a mistake was available in cases of mistake of law, his earlier conclusion would be largely cancelled out. This was because, since the effect of a mistake must be judged at the time when it was made, "it would seem to follow that if the mistake causes the transfer where the plaintiff never subsequently receives a complete performance, it must equally cause it in the case of complete performance" (see p. 229). Moreover "in the context of void contracts, no valid bargain being in issue, the mistaken party cannot be barred from restitution because he received something from the other, provided only that he can make counter-restitution to the court's satisfaction" (see p. 230). His conclusion in the text (at p. 231) was that it was "undeniable that, at least in jurisdictions with a liberal regime for mistake, the refutation of Hobhouse J.'s novel doctrine will have few practical consequences."
However on p. 230 he added a footnote which appears to have been an afterthought. In this he said:
The question for consideration on this Issue is whether the thesis contained in the footnote is well-founded.
It has to be said at once that the argument set out in the text of the section of the Article entitled The alternative of restitution for mistake, from which I have quoted, is most formidable. It is well established that the cause of action for the recovery of money paid under a mistake of fact accrues at the time of payment. As authority for this proposition it is usual to cite Baker v. Courage & Co.  1 K.B. 56, a decision of Hamilton J. (later Lord Sumner) which, so far as I am aware, has never been questioned. So if an agreement such as those presently under consideration, under which a series of payments falls to be made, is held to have been void so that each payment has been made under a mistake of law, i.e. the mistaken belief of the payer that he was liable to make the payment, the cause of action for the recovery of the money so paid will accrue, in respect of each payment, on the date when the payment was made. This will be true of each payment; and if the performance of the supposed contract is completed, it will be as true of the final payment as it will have been of all the previous payments. It follows that, if the argument in Professor Birks' footnote is correct, at the moment when the final payment is made under such a contract, not only will the final payment itself be irrecoverable despite the fact that it was made under precisely the same mistake as the previous payments made by him, but the payer will somehow be divested of his accrued right to recover all those previous payments.
In the light of this analysis, the only possible basis for the thesis in Professor Birks' footnote would seem to be that, in the context of void contracts, failure of consideration should be allowed to trump mistake of law as a ground for recovery of benefits conferred. However an equally strong argument may perhaps be made in favour of mistake of law trumping failure of consideration, though either approach is antagonistic to the usual preference of English law to allow either of two alternative remedies to be available, leaving any possible conflict to be resolved by election at a late stage. Neither of these two solutions was however relied upon in argument in the present case; and it is in any event difficult to see how Professor Birks' proposal in his footnote can here be reconciled with the consequences of invalidity arising from the application of the ultra vires doctrine. As a result, following the decision of the House of Lords in Hazell, it was ordered and declared that the items of account (irrespective whether they represented payments or receipts) appearing in the capital markets fund account of the local authority in that case (Hammersmith and Fulham London Borough Council) for the years under challenge were contrary to law (see  2 A.C. 1, 43H-44A per Lord Templeman, with whose opinion the other members of the Appellate Committee agreed). Of the interest rate swap transactions entered into by the Council, some were closed transactions, and a number were profitable, but no exceptions were made for these in the declarations so made. As Mr. Southwell Q.C. submitted on behalf of Kleinwort Benson, it is incompatible with the ultra vires rule that an ultra vires transaction should become binding on a local authority simply on the ground that it has been completed. Moreover the ultra vires rule is not optional; it applies whether the transaction in question proves to have been profitable or unprofitable. If the argument in Professor Birks' footnote is right, the result would be that effect would be given to a contract which public policy has declared to be void.
In my opinion, these points are unanswerable; and they are reinforced by further arguments advanced by Professor Burrows in his Article entitled Swaps and the Friction between Common Law and Equity in  R.L.R. 15 at pp. 18-19. I would accordingly decide this Issue in favour of Kleinwort Benson.
Issue 3--Does section 32(1)(c) of the Limitation Act 1980 apply to mistakes of law: Section 32(1) of the Limitation Act 1980 provides as follows:
The question which arises under this Issue is whether the actions brought by Kleinwort Benson for the recovery on the ground of mistake of law of money paid to the local authorities under void interest swaps agreements are actions for relief from the consequences of a mistake within section 32(1)(c).
The precursor of section 32(1)(c) of the Limitation Act 1980 was section 26(c) of the Limitation Act 1939, which was in the same terms. That provision was enacted following upon the 5th Interim Report of the Law Revision Committee (Cmnd. 5334). Paragraph 23 of the Report stated that the equitable rule (that time should only run under the Statutes of Limitation from the time at which the mistake was, or could with reasonable diligence have been, discovered) did not apply to cases which fell exclusively within the cognisance of a court of law (here referring to Baker v. Courage  1 K.B. 56). Having stated that the position was unsatisfactory, it recommended that in all cases when relief was sought from the consequences of a mistake, the equitable rule should prevail.
The submission of Kleinwort Benson was that their actions for the recovery on the ground of mistake of law of money paid under void interest swap agreements were actions for relief from the consequences of a mistake within section 32(1)(c) of the Act of 1980. In support of this submission, they relied, first, on In re Diplock  Ch. 465, in which the Court of Appeal stated (at pp. 515-516) that section 26 of the Act of 1939 would operate to postpone the running of time in the case of an action at common law to recover money paid under a mistake of fact, and would likewise apply to an analogous claim in equity to recover money paid under a mistake of law. Second, they relied on the judgment of Pearson J. in Phillips-Higgins v. Harper  1 Q.B. 411, in which he stated (at p. 418) with reference to section 26 of the Act of 1939 that the essential question was whether the action was for relief from the consequences of a mistake, a familiar example of which was an action for the recovery of money paid in consequence of a mistake. On this basis, it was submitted, Kleinwort Benson's causes of action in the present cases fell clearly within section 32(1)(c) of the Act of 1980.
In answer to this submission, the submission of the local authorities was twofold. First, they submitted that there was no mistake on the part of Kleinwort Benson; but I have already explained that I am satisfied that they indeed paid the money in question under a mistake of law. Second, they submitted that section 32(1)(c) does not on its true construction apply to mistakes of law. In this connection they relied in particular on the fact that the mistake of law rule was in full force in 1939, when the provision was first enacted; and they further submitted that the words of the subsection, which referred to a mistake being "discovered", showed that the legislature was referring to mistakes of fact rather than mistakes of law--of which it would not be apt to refer to such a mistake being "discovered", still less "discovered with reasonable diligence". In my opinion, however, this verbal argument founders on the fact that the pre-existing equitable rule applied to all mistakes, whether they were mistakes of fact or mistakes of law: see, e.g., Earl Beauchamp v. Winn (1873) L.R. 6 H.L. 223, 232-5, and the dicta from In re Diplock to which I have already referred.
I recognise that the effect of section 32(1)(c) is that the cause of action in a case such as the present may be extended for an indefinite period of time. I realise that this consequence may not have been fully appreciated at the time when this provision was enacted, and further that the recognition of the right at common law to recover money on the ground that it was paid under a mistake of law may call for legislative reform to provide for some time limit to the right of recovery in such cases. The Law Commission may think it desirable, as a result of the decision in the present case, to give consideration to this question indeed they may think it wise to do so as a matter of some urgency. If they do so, they may find it helpful to have regard to the position under other systems of law, notably Scottish and German law. On the section as it stands, however, I can see no answer to the submission of Kleinwort Benson that their claims in the present case, founded upon a mistake of law, fall within the subsection.
Conclusion: In the result, I would answer the questions posed for your Lordships under the various Issues as follows:
Issue 1: The present rule, under which in general money is not recoverable in restitution on the ground that it has been paid under a mistake of law, should no longer be maintained as part of English law, from which it follows that the facts pleaded by Kleinwort Benson in each action disclose a cause of action in mistake.
Issue 1A: There is no principle of English law that payments made under a settled understanding of the law which is subsequently departed from by judicial decision shall not be recoverable in restitution on the ground of mistake of law.
Issue 1B: It is no defence to a claim in English law for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to retain the money or property.
Issue 2: There is no principle of English law that money paid under a void contract is not recoverable on the ground of mistake of law because the contract was fully performed.
Issue 3: Section 32(1)(c) of the Limitation Act 1980 applies in the case of an action for the recovery of money paid under a mistake of law.
It follows that all four appeals must be allowed with costs.
LORD LLOYD OF BERWICK
Of the sums claimed by Kleinwort Benson Ltd. £388,114 has already been repaid by the four local authorities, either voluntarily, or pursuant to proceedings brought under R.S.C. Order 14 on the basis that there had been a total failure of consideration. The claim for the balance of £423,094 is prima facie time-barred. In order to meet this difficulty, the plaintiffs rely on the alternative ground of mistake. They say that the payments made by the plaintiffs were made on the basis of a mistaken belief that there existed binding contracts between the plaintiffs and the defendants. In answer to the defendants' plea of limitation, they rely on section 32(1)(c) of the Limitation Act 1980, which provides that when an action is for relief from the consequences of a mistake, the period of limitation does not begin to run until the mistake is discovered, or could with reasonable diligence have been discovered. For the reasons given by my noble and learned friend Lord Goff, I agree that if there was here a mistake on which the plaintiffs can rely, then they could not have discovered the mistake until the House gave judgment in Hazell v. Hammersmith and Fulham London Borough Council  2 A.C. 1; I agree also that the plaintiffs are entitled to rely on section 32(1)(c) of the Limitation Act, with the result that time did not begin to run until the date of the judgment in Hazell, namely 24 January 1991.
Was there then a mistake on which the plaintiffs can rely? It is common ground that if there was a mistake, the mistake was one of law. For well over a century the courts have recognised and enforced a distinction between mistakes of fact and mistakes of law. The rule has been that, unlike mistake of fact, money paid under a mistake of law cannot be recovered. In a dissenting speech in Woolwich Equitable Building Society v. I.R.C.  A.C. 70, 154 Lord Keith of Kinkel described the rule as being "too deeply embedded in English jurisprudence to be uprooted judicially." So it is not surprising that Langley J. did not give a reasoned judgment when the case came before him at first instance. He was bound by authority to give judgment on the preliminary issues in favour of the defendants. Nor do we have the assistance of reasoned judgments in the Court of Appeal, since the appeal came direct to the House under the leap-frog procedure.
The mistake of law rule has been so heavily and effectively criticised in recent years that Mr. Nicholas Underhill Q.C. wisely did not seek to defend it. Lord Goff's speech demonstrates with compelling force that the rule is indeed indefensible. Instead of defending the rule, Mr. Underhill submits first that the rule should be abrogated by Parliament rather than by the House in its judicial capacity, and secondly that if the rule is abrogated without any safeguards, there may be undesirable side effects. In particular Mr. Underhill is concerned by what he called his paradigm case of a long-standing decision of the Court of Appeal subsequently overruled by the House of Lords. Should a person who has paid money on the faith of the Court of Appeal decision be entitled to recover his money when the decision is overruled by the House of Lords, perhaps many years later? Is there in truth in such a case any mistake at all? or, is it not more accurate to say that there has merely been a failure to predict a change in the law? I shall attempt to deal with each of these submissions in turn.
As to the first, Mr. Underhill invited your Lordships to exercise restraint. The mistake of law rule has stood for many years, and legislation to abolish the rule (so far as one can ever foretell such things) appears, he said, to be imminent. It would be wrong to pre-empt the legislature, especially as changes in other parts of the law might prove necessary. By way of example, there might have to be an amendment to the Limitation Act 1980. For mistake of law cannot have been in mind when section 32(1)(c) was enacted.
I am not persuaded. Indeed I can imagine few areas of the law in which it would be more appropriate for the House to take the initiative. The mistake of law rule is judge made law. There are no considerations of social policy involved. The proposed change is consistent with, and less far-reaching than the change effected by the House in the Woolwich case. In Scotland the Inner House abrogated the mistake of law rule in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 S.L.T. 299 (despite the strong authority of Lord Brougham L.C. to the contrary), even though legislation might also have been said to be imminent following on the Scottish Law Commission discussion paper (1993) No. 95: Recovery of Benefits Conferred under Error of Law. Elsewhere, in Canada, Australia and South Africa, the rule has been abolished by judicial decision. And we have the recommendation of the English Law Commission Report on Restitution (1994) (Cm. 2731) (Law Com. No. 227). It is true that the Law Commission was itself in favour of leaving the change to Parliament. But the Law Commission was not to know that the opportunity for judicial decision would come so soon; in contrast, the prospect of legislation is still uncertain, and perhaps remote. For these reasons I would reject Mr. Underhill's first submission. The critics of the mistake of law rule have waited long enough. The plaintiffs in these proceedings should have the benefit of a change which is long overdue. That is not to say that the plaintiffs will necessarily succeed when the case comes on for trial. But at least the mistake of law rule should not stand in their way as it would if we were to wait for Parliament to take a hand.
I turn to Mr. Underhill's second submission. Here, as it seems to me, he starts more than half way home. For Mr. Southwell conceded in his reply (in my view correctly) that if parties enter into a contract in accordance with a decision of a Court of Appeal, (it is not suggested that there was such a decision in the present case) and if the Court of Appeal decision is subsequently overruled by the House of Lords there could be no question of claiming restitution on the ground of mistake. For when the parties entered into the contract the law was as they believed it to be. How then could they claim to have been mistaken?
But even more important than Mr. Southwell's concession is the Law Commission Report itself. Annexed to the report is a draft Bill. Clause 2 abrogates the mistake of law rule.
Clause 3(1) provides:
Clause 3(1) is clearly consistent with Mr. Southwell's concession, and covers Mr. Underhill's paradigm case. But it goes wider. For it is not confined to cases where the law is settled by reason of a prior decision of the Court of Appeal. It covers other cases as well. It is this wider aspect of clause 3(1) of the draft Bill which has caused Mr. Southwell's concern.
But before I come to that concern, there is a more general point to be made. Clause 3(1) of the draft Bill implements the recommendation in paragraph 5.13 of the report. It reads as follows:
That recommendation was the result of very extensive consultation by the Commission. The arguments for and against the recommendation are set out in paragraphs 5.1--5.13 of the report. In paragraph 5.9 the Commission ask a number of questions which others have asked. How "settled" does a view or understanding of the law have to be before a payment based on that view or understanding becomes irrecoverable? The answer given in paragraph 5.10 is as follows: