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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)

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    One must therefore ask why, in the context of unjust enrichment, this should make a difference. In both cases it has turned out that the state of affairs at the time was not (or was deemed not to have been) what the payer thought. In the case of a mistake of fact, it is because things were actually not what he believed them to be. In the case of a mistake of law, it is by virtue of the retrospectivity of the decision. Does the principle of unjust enrichment require that this retrospectivity should be carried through into the question of whether the payer made a mistake?

    In my view, it would be very anomalous if it did not. Imagine a client who has paid under what he thought to be a legal obligation. He had not consulted a lawyer at the time, but seeks advice after a case in the House of Lords which decides that the obligation was void. The lawyer tells him that according to the House of Lords, he need not have paid. He asks whether he can recover his money on the grounds of mistake. On the "settled view" theory, the lawyer has to say: "No, because if you had consulted me at the time, I would have told you that you were certainly right to pay. Therefore you made no mistake." The client asks: "Does that mean that the obligation was actually valid? If so, what has made it invalid?" The lawyer has to answer "No, the House of Lords has told us that it was always void. Nevertheless, you made no mistake. On the other hand, if lawyers had regarded it as a doubtful point, or if any lawyer would have told you then that the obligation was void, so that it would have been extremely foolish of you not to have sought advice, then you would have been able to recover."

    My Lords, it seems to me that the imaginary client would have great difficulty in understanding how these distinctions can arise out of a rule giving a remedy for unjust enrichment. In each case he thought that the obligation was valid and it has subsequently turned out that it was not. In principle, the question should not turn upon what other people might have thought was the law but upon what he thought was the law. And this has turned out to have been wrong, however many lawyers might have agreed with him at the time. So there ought to be a remedy in all cases or none. I should mention that Mr. Southwell Q.C. said in his written submissions in reply that if someone made a payment because he had been told that the Court of Appeal had decided that a person in such circumstances should do so, he would not be treated as having made a mistake when the decision was subsequently reversed. But he thought that the answer would be different if he had not been told of the decision but came to the same conclusion on first principles or by accident. He commented that this was an absurdity, which might be thought to cast doubt upon the soundness of the proposition. I think it is wrong. It does not matter why the payer thought that the law required him to pay. Retention is prima facie unjust if he paid because he thought he was obliged to do so and it subsequently turns out that he was not.

    An analogy was drawn in argument between a retrospective decision of a court and a retrospective Act of Parliament. A failure to predict the latter, it was said, could not possibly be a mistake and therefore why should the former. I do not myself see why, in principle, if an Act of Parliament requires that the law be deemed to have been different on an earlier date, it should not follow that a person who acted in accordance with the law as it then was should be deemed to have made a mistake. This was the view of Mason C.J. in Commissioner of State Revenue v. Royal Insurance Australia Ltd. [1992] 182 C.L.R. 51 and I respectfully think that in principle he was right. But usually the question will turn upon the construction of the statute: it may provide expressly for the refund of money declared not to be owing, or such an obligation may be implied, or it may be argued that the failure to provide expressly for repayment showed a Parliamentary intention that transactions under the previous law should not be disturbed. I find the analogy of a retrospective Act of Parliament, which can deal with the consequences of its retrospectivity, unhelpful in dealing with a change of law by judicial decision. The judges who change the law can use only the common law to remedy any injustices which compliance with the previous law may have caused.

    I therefore do not think that there are any reasons of principle for distinguishing cases in which a subsequent decision changes a settled view of the law, or, for that matter, settles what was previously an unsettled view of the law. The enrichment of the recipient is in each case unjust because he has received money which he would not have received if the payer had known the law to be what it has since been declared to have been. 

    There is, however, another ground for adopting the "settled view" theory and that is simply in order to preserve the security of past transactions. The argument is that where the law was thought to have been settled, there are likely to have been many transactions entered into in reliance upon it. Therefore a rule which uniformly denies recovery in such cases would, on balance, do less harm than good.

    The adoption of the "settled view" rule on these grounds would be a legislative act in a sense in which the abrogation of the mistake of law rule would not. The latter rule is, as my noble and learned friend Lord Goff of Chieveley has amply demonstrated, not founded upon any defensible logic or principle. It is the proper business of your Lordships in a judicial capacity to clarify and develop the common law by restating rules in accordance with principle, even when this may require the correction of ancient heresies. But the adoption of the "settled view" rule would be founded purely upon policy; upon a utilitarian assessment of the advantages of preserving the security of transactions against the inevitable anomalies, injustices and difficulties of interpretation which such a rule would create. That is not a course which I think your Lordships should take.

    I accept that allowing recovery for mistake of law without qualification, even taking into account the defence of change of position, may be thought to tilt the balance too far against the public interest in the security of transactions. The most obvious problem is the Limitation Act, which as presently drafted is inadequate to deal with the problem of retrospective changes in law by judicial decision. But I think that any measures to redress the balance must be a matter for the legislature. This may suggest that your Lordships should leave the whole question of the abrogation of the mistake of law rule to the legislature, so that the change in the law and the necessary qualifications can be introduced at the same time. There is obviously a strong argument for doing so, but I do not think that it should prevail over the desirability of giving in this case what your Lordships consider to be a just and principled decision.

    I should say in conclusion that your Lordships' decision leaves open what may be difficult evidential questions over whether a person making a payment has made a mistake or not. There may be cases in which banks which have entered into certain kinds of transactions prefer not to raise the question of whether they involve any legal risk. They may hope that if nothing is said, their counter-parties will honour their obligations and all will be well, whereas any suggestion of a legal risk attaching to the instruments they hold might affect their credit ratings. There is room for a spectrum of states of mind between genuine belief in validity, founding a claim based on mistake, and a clear acceptance of the risk that they are not. But these questions are not presently before your Lordships.


My Lords,

    The background to these consolidated appeals is to be found in sections 5 and 32(1)(c) of the Limitation Act of 1980. Section 5 of that Act provides that an action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued. Section 32(1)(c) provides that, where in the case of any action for which a period of limitation is provided by the Act 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.

    Interest rate swap contracts first came into use in about 1981, and in the following year they began to be used by local authorities. But it was not until 30 May 1989 that Anthony John Hazell, the auditor appointed by the Audit Commission for Local Authorities in England and Wales to audit the accounts of Hammersmith and Fulham London Borough Council, applied to the court for a declaration that the items of account appearing in the capital market fund account relating to the interest rate swaps which had been entered into by that local authority were contrary to law and for an order for rectification of the accounts. By that date a very large number of similar transactions had been entered into by numerous other local authorities. Following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 that, having regard to the provisions and limitations of the Local Government Act 1972 regulating the function of borrowing, interest rate swaps were ultra vires local authorities, actions were begun by both banks and local authorities to obtain restitution under interest rate swap contracts which, as a result of that decision, were held to be void. In those cases where the contracts had only recently been entered into there was no limitation problem. But in some others, particularly some of those involving Kleinwort Benson Limited which was one of the first of several merchant banks to have attracted business in this field, this was not so. In their case, where the contracts had been entered into more than six years previously, the limitation defence was available.

    The right of a party to a void interest rate swap contract to recover its net payments by an action for money had and received was established by the decision of Hobhouse J. in Westdeutsche Landesbank Girozentale v. Islington London Borough Council [1994] 4 All E.R. 890. His decision on this point was upheld by the Court of Appeal. No question of limitation was raised in the Westdeutsche case. But in Kleinwort Benson Ltd. v. Sandwell Borough Council, in which certain of the issues of law arising on the pleadings were tried together with the Westdeutsche case - as to which there had been a full trial of the action on an agreed statement of facts supplemented by oral evidence called by both sides--the limitation defence was raised in regard to the first of four swaps, as the limitation period had been exceeded in the case of that swap. Following dicta in In re Diplock's Estate [1948] Ch. 465, 514, Hobhouse J. held that section 5 of the Limitation Act 1980 applied to causes of action for money had and received. His decision that the limitation defence applied was not challenged in the Court of Appeal.

    No issue was raised in the Sandwell case as to whether the exception under section 32(1)(c), as the action was for relief from the consequences of a mistake, was available. The ground on which the plaintiffs had a prima facie right to recover the net payments was held by Hobhouse J. to be absence of consideration: [1994] 4 All E.R. 890, 936E. The plaintiffs had submitted that mistake gave them an additional ground on which they could base their claim. But Hobhouse J. held at p. 931E-F that the critical matter of which they were unaware was the provisions of the Local uot;had the payer taken advice from a qualified legal practitioner who was onal Court and the House of Lords in Hazell. He said that lack of knowledge of a statutory provision and its legal effect was an error of law, with this result: "The plaintiffs accept that in this court I am bound by authority to hold that a mistake of law does not give a right to recover money at common law as money had and received."

    The swaps in the present cases involve a number of payments which were made more than six years before the writs were issued. The respondents seek to rely on the limitation defence in regard to these payments. So, in order to obtain the full restitution which would not otherwise be available to them, Kleinwort Benson have renewed their alternative cause of action on the ground of mistake. They contend that section 32(1)(c) of the Limitation Act 1980 applies where the mistake is one of law.

    The first of the three issues, as stated in the Agreed Statement of Facts and Issues, relates to this alternative cause of action. It is whether the facts pleaded by Kleinwort Benson in the relevant paragraphs of their Points of Claim disclose a cause of action in mistake. The answers to be given to the other two issues, as to whether recovery is available in the case of those swap contracts which been fully performed--the "closed swaps" - and as to the limitation point, depend upon the answer which is to be given to the first issue. The primary question is whether there is a cause of action in mistake for money paid under a mistake of law.

    Although this question has come before us in these appeals on preliminary issues it is, I think, necessary to have regard to at least part of the factual background. This is particularly important in the context of the discussion as to whether Kleinwort Benson were acting under a mistake of law when they made the payments. So I should like to begin by summarising my understanding of the facts before I turn to the questions of law which we must decide.

The Facts

    The Points of Claim state that the payments were made by Kleinwort Benson on the basis of a mistaken belief that they were being made pursuant to a binding contract. No details are given of the circumstances or nature of the alleged mistake, and there has been no request for further and better particulars. The pleadings appear to have been framed on the assumption that there was no issue as to whether or not Kleinwort Benson were acting under a mistake when they made the payments, the only issue being whether the mistake was a mistake of law. It seems to have been assumed also, while the argument was being developed before Hobhouse J. in Westdeutsche, that all the payments in that case were made under a mistake. In the event it was sufficient for his purpose that there was no evidence of or allegation in either case that the relevant bank was mistaken as to any actual fact: p. 931E. He did not need to examine the matter further. The circumstances of the mistake affecting the payment made by Westdeutsche to Islington had however been the subject of evidence. It was in the light of that evidence that Hobhouse J. made findings at pp. 930J-931E which I think are of some help as background to this case-- although it cannot, of course, be assumed that the facts here are exactly the same, as the judge in this case has not heard any evidence.

    In the Islington case the investment banker employed by Westdeutsche was telephoned in June 1987 by a firm of interest swap brokers asking whether the bank would be interested in becoming a party to a swaps transaction with a local authority. He assumed that any reputable local authority would not enter into transactions which it was not empowered to do. He believed that the swap contract was a proper contract for Islington to undertake. He was confirmed in this belief by his knowledge that local authorities had been engaging in the swaps market for a number of years as ordinary participants in that market. So he assumed that in making his agreement with Islington he was entering into a legal contract with them. He was a commercial man, not a lawyer. There was no evidence that he sought legal advice before he entered into the contract.

    His position can be seen from the narrative which Hobhouse J. provided at pp. 896E-898D to have been unremarkable. A sophisticated market had developed since interest rate swaps first came into use in about 1981. It involved institutions in the position of market makers and a corps of money brokers. As it became more complex it was recognised that it needed to become more organised. A set of standard terms and conditions was formulated by the British Bankers Association in association with the Foreign Exchange Currency Deposit Brokers Association. The parties to these contracts were normally regular participants in the money markets. Local authorities were among the participants in the money markets, and they were regarded as being institutions of unquestioned solvency. It was assumed that interest rate swaps could legitimately be entered into with them as an ancillary to their statutory borrowing and lending powers. The Chartered Institute of Public Finance and Accountancy received advice to this effect in the latter part of 1983. The absence of any legal risk was based on what was understood to be the effect of para. 20 of Schedule 13 to the Local Government Act 1972.

    This assumption continued to be acted upon uncritically until 1987. In August of that year the Audit Commission and its officers made statements which for the first time called into question their legality. The advice of counsel was obtained that, unless they were actual hedging transactions in relation to actual loans that fell within the powers of a local authority, interest rate swap contracts were not within the powers of a local authority under the Act of 1972. On 14 July 1988 a press release was issued by the Commission publishing that advice and warning that auditors might challenge items arising from such transactions that were not permitted by the statute.

    It appears therefore that at the time when the transactions in the present case were entered into there was a general understanding, which was shared by banks and local authorities as regular participants in the money markets, that interest rate swap contracts were within the borrowing and lending powers of local authorities. This understanding appears to have based upon commercial assumptions which developed within the money markets, not as a result of initiatives taken on legal advice by either party to the transactions. When advice was taken by the Chartered Institute it confirmed what was already understood to be the position in the money markets. The formulation of standard clauses for use in the basic interest swap contracts - although not designed specifically for use in transactions with local authorities - no doubt added to the general understanding that there was no legal risk. It does not appear that any auditor of local authority accounts expressed doubt on the matter until the issue was first raised in 1987 by the Audit Commission.

The Mistake of Law Rule

    On the primary question whether the time has now come to end the rule that payments made under a mistake of law are not recoverable, I agree with my noble and learned friend Lord Goff of Chieveley that we should decide the point now rather than leave this task to the Law Commission. Mr. Underhill Q.C. said that he was not seeking to uphold the rule in its traditional form. What he sought to do was to draw attention to the problems which might arise if it were to be removed without regard to the consequences. He went on to develop arguments as to how those problems might be met in a way which, in these cases, would provide the local authorities with a defence. For my part, I think that the case for a departure from the traditional rule is now unanswerable. But I also agree with my noble and learned friend that the taking of this step gives rise to difficult questions of policy and analysis.

    Three considerations have persuaded me that the mistake of law rule should no longer form part of English law.

    The first relates to the ground of the decision by Lord Ellenborough C.J. in Bilbie v. Lumley (1802) 2 East 469, following Buller J. in Lowrie v. Bourdieu (1780) 2 Dougl. 468. The maxim ignorantia juris non excusat, upon which Lord Ellenborough based his decision, had featured regularly in debates among the civilian lawyers as to whether a person who paid money under an error of law could obtain a remedy. The pleadings in the Scottish case of Stirling v. Earl of Lauderdale (1733) Mor. 2930, the relevant passages from which are to be found in the opinion which I delivered in Morgan Guaranty Trust Company of New York v. Lothian Regional Council 1995 S.C. 151, 162-163, show that it was an important part of the petitioner's argument in the Stirling case that the maxim did not apply only to the law of delict. It had been applied by the many of the great civilian Commentators to the case of indebiti solutio, to the effect that no action was competent where the sum was paid under an error of law. This argument was met by the response that, while some Commentators were of that view, others were of the contrary opinion. The petitioner's main point was that the great rule of equity is nemo debet locupletior cum alterius jactura. The maxim that every man is presumed to know the law ought to be applied equally to the recipient, who had taken what he ought to be presumed to have known was not due to him.

    In the light of this background Lord Wright's description, in the Preface to his Legal Essays and Addresses (1939) at p. xix, of Lord Ellenborough's use of the maxim as "hasty and ill-considered" may seem to have been rather harsh. Anyone who was familiar with the debate which had been going on among the civilian lawyers for centuries would have recognised the use of the maxim in this context as a legitimate part of the argument. The Scottish institutional writer Erskine, Institutes III iii 54 (1773) wrote: "Civilians are not agreed whether it takes place where one pays the indebitum through a mistake in law; because by a known maxim ignorantia juris neminem excusat." But there is now wide support for the view that the maxim is out of place in this field and that it cannot serve as the foundation for the rule barring recovery of monies paid under a mistake: Hydro-Electric Commission of the Township of Nepean v. Ontario Hydro [1982] 1 R.C.S. 347, 358-361, per Dickson J.; David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1991-92) 175 C.L.R. 353, 402 per Dawson J. agreeing with the reasoning of Mason C.J. and four other members of the High Court on this point; Willis Faber Enthoven (Pty.) Ltd. v. Receiver of Revenue 1992 (4) SA 202, 221-223 per Hefer J.A.; Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 S.C. 151, 164 in my own opinion and 174 per Lord Cullen.

    The second consideration relates to the principle of unjust enrichment itself, which now lies at the heart of the law of restitution in English law. The principle was stated by Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] A.C. 32, 61, in words which restated in the English language the maxim nemo debet locupletari aliena jactura of the civil law:

     "It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep."

In Ontario Hydro at pp. 367-368 Dickson J. said: "Once a doctrine of restitution or unjust enrichment is recognized, the distinction as to mistake of law and mistake of fact becomes simply meaningless."

In Air Canada v. British Columbia (1989) 59 D.L.R. (4th) 161, 192 La Forest J. said that he had no hesitation in following Dickson J.'s lead in these matters:

     "In my view the distinction between mistake of fact and mistake of law should play no part in the law of restitution. Both species of mistake, if one can be distinguished from the other, should, in an appropriate case, be considered as factors which can make an enrichment at the plaintiff's expense 'unjust' or 'unjustified'."

In David Securities, 175 C.L.R. 353, 375 Mason C.J. and others, after referring to the statement by Dickson J. and to the description by Deane J. in Pavey & Matthews Pty Ltd v. Paul (1987) 162 C.L.R. 221, 256-257 of unjust enrichment as a "unifying legal concept", said:

     "If the ground for ordering recovery is that the defendant has been unjustly enriched, there is no justification for drawing distinctions on the basis of how the enrichment was gained, except in so far as the manner of gaining the enrichment bears upon the justice of the case."