The Law Commission recommendations have been accepted by two successive governments of different political persuasions. No doubt if a bill were introduced in the form proposed by the Law Commission, an amendment might be proposed and carried to delete clause 3. We cannot tell. But for your Lordships to accept half the package proposed by the Law Commission and reject the other half, would cause me some disquiet. If that is to be the result, then the argument against pre-empting Parliament becomes much stronger. I shall return to this point at the end of my speech.

    What then are the reasons for not accepting clause 3 of the draft Bill as it stands? At the outset there is, as so often, a question of terminology. Some of the commentators regard a provision such as is found in clause 3 of the bill as providing the payee with a defence. This is the language used by the Scottish Law Commission, and by my noble and learned friend Lord Hope. I, for my part, find it easier to think of clause 3 as a safeguard (another term used by the Scottish Law Commission) rather than a defence. The safeguard is needed because law, unlike facts, can change. Facts are immutable, law is not. Where, therefore, mistake of law is relied on to ground a claim for restitution, it is necessary to define what one means by "mistake." That, as it seems to me, is the function of clause 3. It does not create a defence to a general right of recovery. It is not like the defence of change of position recognised by the House in Lipkin Gorman v. Karpnale [1991] 2 A.C. 548. Clause 3 is more in the nature of a defining clause. Its purpose is to clarify and de-limit what is meant by "mistake" in cases where the law has changed.

    This brings us to the central question. Nobody now suggests that the common law is static. It is capable of adapting itself to new circumstances. Is it then capable of being changed? or is it only capable of being developed? The common sense answer is that the common law is capable of being changed, not only by legislation, but also by judicial decision. This is nowhere clearer than when a long-standing decision of the Court of Appeal is overruled. Indeed in a system such as ours, where the Court of Appeal is bound by its own previous decisions, the main justification for the existence of a second tier appeal is that it enables the House to re-direct the law when it has taken a wrong turning. I am not thinking of landmark cases such as Donoghue v. Stevenson [1932] A.C. 562 or Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465. I am thinking of more ordinary cases, of which there may be one or two a year, in which a line of recent Court of Appeal authority is overturned. By way of example one can take two cases from the field of building contracts: Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689 overruling Dawnays Ltd. v. F. G. Minter Ltd. and Trollope & Colls Ltd. [1971] 1 W.L.R. 1205, and Beaufort Developments (N.I.) Ltd. v. Gilbert-Ash N.I. Ltd. and others [1998] 2 W.L.R. 860 overruling Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. [1984] Q.B. 644. Or there are the less frequent cases in which long-standing decisions are overruled, such as Hindcastle Ltd. v. Barbara Attenborough Associates Ltd. [1997] A.C. 70 overruling Stacey v. Hill [1901] 1 K.B. 660 and Attorney-General for Hong Kong v. Reid [1994] 1 A.C. 324 disapproving Lister & Co. v. Stubbs (1890) 45 Ch.D.1.

    What then is the House doing when it overrules a line of Court of Appeal authority? First and foremost it is determining what the law is in relation to the case which it is deciding. It will then apply that law to the facts of the particular case. Since the transaction giving rise to the case will have occurred in the past, it can be said that to that very limited extent (and the same is true of every decision of every court) it is applying the law retrospectively.

    An inevitable consequence of determining the law in relation to a particular case is that the same law will apply to other cases as yet undecided, in which the same point arises. This is so whether the transaction in question lies in the past or the future. So again, to that limited extent, it can be said that the decision operates retrospectively. But that, as it seems to me, is the full extent of any retrospective effect. There is no way in which the decision can be applied retrospectively to cases which have already been decided. Nor is there any logical reason why there should be. It is the function of the court to decide what the law is, not what it was. So when the House of Lords overrules a line of Court of Appeal decisions it does not, and cannot, decide those cases again. The law as applied to those cases was the law as decided at the time by the Court of Appeal. The House of Lords can say that the Court of Appeal took a wrong turning. It can say what the law should have been. But it cannot say that the law actually applied by the Court of Appeal was other than what it was. It cannot, in my learned and noble friend Lord Browne- Wilkinson's vivid expression, falsify history.

    It follows that in such a case the House of Lords is doing more than develop the law. It is changing the law, as common sense suggests, and as Mr. Southwell was right to concede. If this view of what happens is inconsistent with the declaratory theory of the Court's function, then it is time we said so. It always was a fairy tale.

    If it is right that the House of Lords can change the law by overruling a previous decision of the Court of Appeal, it must follow that a person relying on the old law was under no mistake at the time, and cannot claim to have been under a mistake ex post facto because the law is subsequently changed. This is obviously true where the law is changed by legislation. In my opinion it is equally true when the law is changed by judicial decision. The point is put clearly by the Scottish Law Commission in Discussion Paper No. 99, Judicial Abolition of the Error of Law Rule and its Aftermath (1996) paragraph 3.33 when summarising the views of the Court of Session judges:

  "The Court of Session judges pointed to the oddity of providing that a payment is not to be recoverable by reason of a 'change' in the law. If it is indeed a change, the payment would ex hypothesi not be recoverable. We agree that any provision introducing the bar should not refer to a change in the law. If the courts do change the law, the reference is unnecessary; if they do not (because of the declaratory theory) it would be inappropriate for statute to state that they do."

    The next question is whether the same reasoning applies where there is no previous decision of the Court of Appeal directly in point. Can the House of Lords "change" the law in those circumstances, or can it only develop the law? I can see no difference in principle. The English common law is not confined to decided cases. In the field of commercial law, for example, the custom of merchants has always been a fruitful source of law. It is true that a custom can be challenged in a court of law. But it does not need a court of law to establish a custom. Custom is binding on the parties irrespective of any judicial decision. Where therefore a long established custom is rejected by a court of law on the ground that it is inconsistent with statute, the law is "changed" just as much as when a decision of the Court of Appeal is overruled by the House of Lords. I repeat some sentences from the Law Commission Report No. 227 which I have already quoted:

 "It is not realistic to restrict 'settled law' to propositions which arise only from statute or from judicial decisions . . . Courts will be free . . . to recognise a proposition as settled irrespective of the source from which it is derived."

    I agree with these observations. There may of course be cases where there is a dispute whether the law was settled at the time of the transaction. But as the Law Commission again point out, this is just the sort of common sense question which the courts are particularly well qualified to answer.

    There are two policy reasons which support the Law Commission's view point. The prospect of transactions being reopened many years after the event by a subsequent decision of the Court of Appeal or House of Lords is not one which the law should favour, especially in the field of commerce. It is true that in many cases the defendant would be able to rely on change of position as a defence. But this would not necessarily be so in every case. Certainty and finality, as has been said so often, are twin policy objectives of the highest importance in formulating legal principles.

    Secondly, Mr. Underhill points out that if payer and payee are at one in believing the law to be in accordance with a settled understanding, there would appear to be no moral obligation resting on the payee to repay when the law is subsequently changed. Why, asks Mr. Underhill, should the payee's conscience be affected? Where is the unjust factor?

    In my opinion this is a strong argument in favour of the Law Commission's proposals. For if the payee's conscience is affected in such a case, it would seem that it ought also to be affected if the law is subsequently changed by legislation. Yet nobody suggests that a subsequent change in the law by legislation can ground a claim in restitution.

    Even when the legislation is retrospective, it by no means follows, as Lord Goff points out, that a previous payment will have been made under a mistake of law at the time of payment. My noble and learned and friend Lord Hope is of the same opinion. The correct analysis in his view is that there will have been no mistake of law when the payment was made. I respectfully agree. If the retrospective legislation positively requires a transaction to be reopened, the liability to repay will arise, not because the payee's conscience is affected, but by operation of statute: see Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 69 A.L.J.R. 51 per Brennan J. at p. 69. But if that be so, it is difficult to defend, on policy grounds, a different rule for changes in the law effected by judicial decision. Appellate courts ought to be encouraged to change the law in those rare cases where change is needed. They should not be inhibited by the fear of reopening past transactions.

    The policy arguments in favour of the Law Commission's proposals do not mean that, if the proposals are adopted, your Lordships would be indulging in a legislative act. As I have tried to demonstrate, clause 3 of the proposed Bill is in the nature of a defining clause. It tells us what mistake of law means. If your Lordships are entitled to abolish the judge-made mistake of law rule, as I firmly believe we should, we are surely entitled to define what it is that we are abolishing: quo modo oritur eodem solvitur.

    Mr. Southwell argued that if your Lordships were to accept the Law Commission's proposal on settled law, it would neutralise much of the benefit flowing from the abolition of the mistake of law rule. I agree that the restricted definition of mistake of law contained in clause 3(1) of the draft bill will confine the operation of clause 2. That, after all, is its purpose. I do not agree that it will render the whole exercise futile, or even much less beneficial. Clause 3(1) only removes those cases from the operation of clause 2 where there has been a subsequent change of the law, or where, in the language of clause 3(1) itself, a court "departs from" a settled view of the law. In all other cases where a mistake of law has in the past precluded a claim in restitution, for example, where a plaintiff has been wrongly advised as to the law, whether settled or otherwise, clause 2 will have full effect.

    It is said that the Scottish Law Commission in its 1996 Discussion Paper resiled from the view expressed in its 1993 Discussion Paper No. 95, Recovery of Benefits Conferred under Error of Law. In the former paper the Commission favoured a statutory provision precluding repetition in cases where there has been a change in the law, or in the common understanding of the law, by subsequent judicial decision. The reason why they favoured such a provision was because they regarded the safeguard as "too important to be left to the uncertainties of judicial decisions:" see paragraph 2.123. In the latter paper the Commission changed its mind as to the need for a statutory provision. In other words the Commission came down against the first and second of the possible options outlined in the paper, both of which envisaged a statutory bar to recovery. Instead it favoured the third possible option, namely to leave the development of safeguards to the courts. No doubt it was influenced in its view by the intervening decision of the Inner House in Morgan Guaranty Trust Company of New York v. Lothian Regional Council 1995 S.L.T. 299. Whereas, therefore, it is true to say that, for a variety of reasons, the Commission resiled from its former preference for a statutory safeguard, it did not express any view one way or the other, certainly no strong view, against a "settled law exception" being implemented by the court.

    Much of Mr. Southwell's final submissions were devoted to showing that the decision of the House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 did not change the law. There had been no previous decision of any court that swap transactions were intra vires, nor was there any settled law to that effect. So far as any previous judicial decision is concerned he is, of course, right. But whether or not it was settled law that the transactions were intra vires it is still too soon to say. Mr. Southwell specifically accepted towards the end of his reply that if the House were to agree with the Law Commission's proposals then the question whether there was a settled view of the law in this case would have to go back to the trial judge; see also paragraph 7 of Mr. Southwell's closing submissions in writing. Mr. Underhill expressed some surprise at Mr. Southwell's concession. But he nevertheless agreed.

    In the course of his speech Lord Goff tests his view of the law by applying it to the facts of the present case. He pre-supposes that the payer at the date of payment believed that he was bound to pay. The payer is then told in Hazell's case that, on the law applicable at the date of payment, he was not bound to pay. Lord Goff concludes that the payer paid under a mistake of law. But this assumes that the law applicable at the date of payment was the same as the law stated in Hazell's case. If it was, then of course the payer must have been mistaken. But if Hazell's case changed the law, then it would not follow. My noble and learned friend may well be right that Hazell's case did not change the law. But it was common ground, as I understand it, that we are not yet in a position to say one way or the other.

    The only other point on which I would, with diffidence, disagree with my Lord is where, towards the end of his speech, he assumes, for the purpose of argument, that the plaintiffs paid on the basis of a settled understanding of the law, later proved to be erroneous, but nevertheless holds that the payment would not for that reason alone be irrecoverable. For the reasons already mentioned, I find this hard to accept. I agree that the payment might be recoverable on some other ground, for example, total failure of consideration, assuming the claim was not time-barred, but not on the grounds on mistake. For if there really was a settled understanding of the law, then that was the law at the time of payment. The payer was not mistaken. The subsequent change in the law could not create a cause of action which, ex hypothesi, did not exist at the relevant time. Even if the change were to come very soon after the payment it would make no difference.

    I have not discussed any of the authorities, since on the crucial question whether we should adopt the Law Commission's settled law proposal, I do not regard the authorities, with one exception, as being of great assistance. The exception is the Royal Insurance Australia Ltd. case, 69 A.L.J.R. 51 and, in particular, the observations of Brennan J. at page 69 and Dawson J. at page 75.

    Mr. Underhill invited your Lordships to give some guidance as to how, if the question of settled law is to be remitted to the trial judge, that question should be approached. I do not think it would be desirable to say much in that connection, save to draw attention to paragraph 5.11 of the Law Commission Report No. 227. That paragraph provides all the guidance that can usefully be given at this stage. Thus it is not enough that there should be a "common understanding", if by common understanding is meant only the common understanding of the parties. It must be a common understanding shared by their lawyers, and indeed by lawyers in general. The essential requirement is that the plaintiff should be able to prove that he made a mistake. At one extreme he will fail if he paid in accordance with what lawyers generally believed to be the law at the time of payment, whether he obtained legal advice or not. At the other extreme he would fail if the law gave rise to serious doubts; for if lawyers differed among themselves, it could not be said that one view rather than another was mistaken.

    Last of all it is said that if Hazell's case did indeed change the law, it would mean that these plaintiffs alone among many others would have failed to recover. But the others have recovered on the ground of failure of consideration, as indeed have the plaintiffs. It is only because these plaintiffs are now seeking to recover in respect of payments which are prima facie time- barred that they are relying on mistake of law at all.

    For the above reasons, I would answer the questions formulated by Lord Goff as follows:

    Issue 1:  Subject to the answer to Issue 1A, the facts pleaded in the statement of claim disclosed a cause of action in mistake;

    Issue 1A:  Monies paid on the basis of a settled view of the law which has been subsequently overturned by judicial decision are not recoverable;

    Issue 1B, 2 & 3: As proposed by Lord Goff.

    But a majority of your Lordships are of a different view. What are the consequences? One consequence is that in all those cases where the House of Lords has overruled a previous decision of the Court of Appeal it would be open to those who have entered into transactions in reliance on the previous decision to seek to re-open their transactions. This is a consequence which, in the commercial field at any rate, I view with alarm. My noble and learned friend Lord Hoffmann accepts that there is a problem, but considers that the solution can be left to Parliament. It is reasonable to assume that Parliament would start with the Law Commission's proposals, which, as I have said, successive governments of both main parties have accepted. But in the meantime there will be an inevitable period of intense uncertainty. If your Lordships are not willing to adopt the Law Commission's solution as it stands, it is surely better to let Parliament adopt that solution, or some other solution, before our decision rather than after.

    For myself, I would want to allow the appeal, if I could, along the lines of the Law Commission's proposals. But as that is not to be, I consider the second best course is to leave the abolition of the mistake of law rule to Parliament, as the Law Commission itself envisaged. Like my noble and learned friend Lord Browne-Wilkinson therefore I would dismiss these appeals.

    

LORD HOFFMANN

My Lords,

    It is no mere form of words to say that I have had the privilege of reading in draft the speech of my noble and learned friend Lord Goff of Chieveley. It is, if I may be allowed respectfully to say so, one of the most distinguished of his luminous contributions to this branch of the law. On all but one of the questions debated before your Lordships, I understand that it commands unanimous assent. It would therefore be superfluous for me to add anything of my own. But I should say something on the issue which divides your Lordships, because I have to confess that on this point I have changed my mind. At the end of the argument I was of opinion, perhaps not in a very focused way, that a person who pays in accordance with what was then a settled view of the law has not made a mistake. In fact it seemed to me that one could go further and say that if he had acted in accordance with a tenable view of the law, he had not made a mistake. In the first case he was right, and in the second neither right nor wrong, but in both cases his state of mind could be better described as a failure to predict the outcome of some future event (scilicet, a decision of this House) than a mistake about the existing state of the law.

    On reflection, however, I have come to the conclusion that this theory was wrong, both in its stronger ("tenable view") and in its weaker ("settled view") form. The reason, I think, is that it looks at the question of what counts as a mistake in too abstract a way, divorced from its setting in the law of unjust enrichment.

    The problem arises because (1) the law requires that a mistake should have been as to some existing fact or (on the view which your Lordships now take) the then existing state of the law but (2) a judicial statement of the law operates retrospectively. So the question is whether the retrospectivity of the law- making process enables one to say that holding a contrary view of the law at an earlier stage was a mistake. This question cannot be answered simply by taking a robust, common sense stion at the time of payment, and that one does not believe in fairy stories. It is easy to understand the expostulation of Lord Coleridge C.J. in Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329 at the suggestion that, because his judgment had been reversed by the House of Lords, he had been "ignorant of the law." The common sense notion of a mistake as to an existing state of affairs is that one has got it wrong when, if one had been better informed, one could have got it right. But common sense does not easily accommodate the concept of retrospectivity. This is a legal notion. If the ordinary man was asked whether Lord Coleridge had made a mistake, he would no doubt have said that in the ordinary sense, which might carry some reflection on his competence as a judge, he had not. But if he was asked whether he should be treated for the purposes of some legal rule as having made a mistake, he might say "I don't know. You tell me that the later decision operated retrospectively, which means that at least for some purposes, it must be assumed to have been the law at the time. Therefore it may be that for some purposes a person who held the contrary view should be treated as having made a mistake. It all depends upon the context. You had better ask a lawyer."

    The lawyer would, I think, start by considering why, in principle, a person who had paid because he held some mistaken belief should be entitled to recover. The answer is that it is prima facie unjust for the recipient to retain the money when, if the payer had known the true state of affairs, he would not have paid. It has never been suggested that, in the case of a mistake of fact, he could not recover if everyone would probably have shared the same false belief. On the contrary, there was once a view that he should not be able to recover if a reasonable person in his position would not have shared his false belief, but this was repudiated in Kelly v. Solari (1841) 9 M. & W. 54. Since then, it has not mattered whether the person making the payment could have discovered the true state of affairs or not.

    The distinction therefore does not turn upon the fact that the person making the payment could not have discovered the true state of affairs about the law any more than about the facts. It turns upon the purely abstract proposition that in principle (and leaving aside the problem of Schrödinger's cat) the truth or falsity of any proposition of existing fact could have been ascertained at the time, whereas the law, as it was subsequently be declared to have been, could not.