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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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    There remains the defence of common understanding or of settled law, to which Mr. Underhill devoted much of his argument under this chapter. This clearly is a defence which would be applicable only to the mistake of law cases, and there is some justification for it on grounds of public policy. It would tend to support certainty in the law and to preserve settled transactions. In one or other of its formulations it has been supported by various Law Commissions, but in neither case can it be said that that support has been unqualified. The "common understanding" defence has become part of the law in New Zealand and in Western Australia: see the New Zealand Judicature Amendment Act 1958, section 94A(2); the Western Australian Law Reform (Property, Perpetuities and Succession) Act 1962, section 23(1). But in other jurisdictions these provisions have been criticised. The Law Reform Commission of British Columbia, Report No 51, Benefits Conferred under a Mistake of Law (1981), pp. 70-72 said, after careful analysis, that they presented formidable problems of definition and proof. A Western Australian case, Bell Bros. Pty. Ltd. v. Shire of Serpentine-Jarrahdale [1969] W.A.R. 155, was referred to in order to illustrate some of the difficulties. They concluded that the court had ample tools for limiting recovery, and that the protection offered by these provisions went far beyond what was required. Neither the Law Commission nor the Law Commission for Scotland, although initially attracted by them, have recommended their adoption in this country.

    The "settled law" defence is the one favoured by the Law Commission, after consultation, in its Report (No. 227) Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994), para. 5.13. They have recommended that a restitutionary claim in respect of any payment, service or benefit that has been made, rendered or conferred under a mistake of law should not be permitted merely because it was done in accordance with a settled view of the law at the time, which was later departed from by a subsequent judicial decision. The Scottish Law Commission in its Discussion Paper (No. 95) Recovery of Benefits Conferred under Error of Law (1993), para. 2.125 invited comments on their provisional view that provision should be made by statute to preclude the re-opening of settled payment transactions following a change in the law, or in the common understanding of the law, effected by a judicial decision. But in a subsequent Discussion Paper (No. 99) Judicial Abolition of the Error of Law Rule and its Aftermath (1996), para. 3.51 which was published following the Morgan Guaranty case they proposed that a statutory bar to this effect should not be introduced. On balance, after further consultation with the judiciary among others and after examining the difficulties, they were of the view that the case for a bar was not sufficiently strong to justify the intervention of a statute.

    One of the objections to the "settled law" defence is that it is incapable of precise definition. Each case would have to be decided on the evidence, that would create uncertainty, and it is difficult to predict the absurdities which may result. One point however does appear to emerge from the discussions so far. This is that a payment made on a settled view of the law is more likely to be excusable, and thus to be one where restitution would more obviously be justified, than a payment made as a result of one man's mistake or ignorance. Yet a mistake of law which only the payer himself had made would not be caught by the defence. As Mr. Southwell said, the worse the legal advice the more likely the payer could show that the defence was not applicable. But I do not need to elaborate on this point. The valuable work done by the Scottish Law Commission has shown a need for caution which I consider to be entirely justified. I would not favour the introduction of such a defence judicially. Nor do I think that it would be right to apply it to this case, even if its recognition were to be thought to be desirable on grounds of public policy. The fact that restitution has already been given in many of the interest swap cases, albeit on the ground of failure of consideration, would create a situation which I would find unacceptable. Unless the defence can satisfy the test of denying restitution in all cases on the same facts it ought not, in fairness to all parties, to be applied in any of them. 

The Completed Swaps

    The reason why the swap contracts were held to be void was that they were ultra vires the local authorities. The purpose of the ultra vires doctrine is to protect the public: Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, p. 36F-G per Lord Templeman. So it is a legitimate criticism of Mr. Underhill's argument for the local authorities that if, as he has contended, there is no claim for money had and received in the case of a completed swap the result will have been to give practical effect to a transaction which, on the doctrine of ultra vires, did not legally exist. All the items of account appearing within the capital markets fund account of the local authority in the Hazell case were held to be contrary to law, and the accounts were ordered to be rectified. This order extended to the swaps transactions which were entered into after July 1988 when the local authority was advised by the auditor that the transactions were of doubtful validity. It would be unsatisfactory if restitution were to be possible only in the case of the uncompleted transactions. That would leave any balance in favour of the local authorities without any item in the accounts which could properly be attached to it. It would not be possible for the bank to re-open the transactions as they are void. The grounds of decision in Hazell suggest that no distinction should be made between ultra vires transactions on the ground that in the one case they were completed and in the other they were not.

    In my opinion the law of restitution should provide a remedy in these cases irrespective of the stage which the transactions had reached. In expressing his decision on the Sandwell case in Westdeutsche Hobhouse J. said at p. 930F-G that it was irrelevant to the existence of a cause of action in connection with the payments made under the first Sandwell swap that the contract was fully performed. The Court of Appeal reached the same conclusion in the Guinness Mahon case. I agree with those decisions, and I have nothing to add to what my noble and learned friend Lord Goff has said about them. But restitution in those cases was not given on the ground of mistake, which is the ground on which Kleinwort Benson needs to succeed if they are to be successful in meeting the defence of limitation which has been raised by the local authorities.

    Had it not been for what Professor Birks has said in footnote 137 at p. 230 of his article No Consideration: Restitution After Void Contracts (1993) 23 University of Western Australia L.R. 195, I would not have thought that there was any difficulty about restitution on the ground of mistake in the case of the completed swaps. The assumption on which I proceed is that each payment was made on either side in the belief that the sum was legally due to the other party under the contract. The mistake was the same throughout the progress of the transaction. The right to recover each payment on the ground of mistake accrued when the sum was received by the payee. I do not think that it makes any difference whether there was a single payment or a series of payments or, where there was a series, whether the transaction was interrupted or had run its course. Each payment is to be looked at separately.

    Professor Birks' argument is that after the execution of the proposed contract the force of this type of mistake is spent because the matter has proceeded to the point where the only prejudice which might be entailed - non-performance by the other party - never in fact eventuated. It was only the antecedent liability which was defective. But this seems to be inconsistent with the principle that the cause of action is complete when the payment is made and received by the payee. Brennan David Securities at p. 390 said that it is at that moment that it can be determined whether and to what extent the payee has been unjustly enriched. The argument also assumes, wrongly in my opinion, that the payer's mistake was that the payee was obliged to reciprocate. That is not the basis of the claim for restitution on the ground of mistake. The mistake which the payer made was in believing that he was obliged to make the payment because it was legally due to the payee. A further difficulty is that it produces a result which is one-sided and unjust. The local authorities, unlike Kleinwort Benson, can say that the transactions which they entered into were beyond their capacity. As their accounts must be rectified the transactions, although closed, must be re-opened to enable them to recover the money which they had no power to pay out. In a case where the bank was the net beneficiary it cannot retain the net benefit which it received in the form of ultra vires payments from the local authorities. It would be unjust if the bank was not to be able to recover its net loss in those cases where the balance lies the other way.

    Professor Burrows has given convincing reasons for rejecting this argument: Swaps and the Friction between Common Law and Equity [1995] R.L.R. 15, 18-19. I also am unpersuaded by Professor Birks on this point. In my opinion completed transactions are in the same position as transactions which were not completed when restitution is claimed on the ground of mistake.


    Kleinwort Benson's purpose in claiming restitution of the ground of mistake has been to pre-empt the limitation defence by the local authorities. The final question is whether, on the assumption that restitution on the ground of mistake is available, Kleinwort Benson can take the benefit of the postponement provision in section 32(1)(c) of the Limitation Act 1980. The answer to it depends on whether the action is one for relief from the consequences of a mistake within the meaning of that subsection.

    There is no difficulty about the language. The word "mistake" appears in the subsection without qualification. There is nothing in the words used in it which restricts its application to a mistake of fact. The origin of the section suggests that the absence of restriction was intentional. In its 5th Interim Report (Statutes of Limitation) (1936) (Cmd. 5334), pp. 31-32, para. 23 the Law Revision Committee recommended that the equitable rule of postponement should prevail in all cases where relief was sought from the consequences of a mistake, and that time should only run from the moment when the mistake was discovered or could with reasonable diligence have been discovered. This recommendation was put into effect in section 26(c) of the Limitation Act 1939, of which section 32(1)(c) is a re-enactment. In In re Diplock [1948] Ch.465, 515 the Court of Appeal said that section 26(c) of the 1939 Act would operate to postpone the running of time in the case of an action to recover money paid under a mistake of fact.

    But the distinction between mistake of fact and mistake of law as a ground for recovery is not absolute. Relief is available where the mistake of law relates to private rights: Earl Beauchamp v. Winn (1873) L.R. 6 H.L. 223. Private agreements made under a mistake of law may be set aside, and relief will be given in respect of payments made under such agreements. Other examples may be given where a cause of action for relief will be available although the mistake was one of law. In Regina v. Tower Hamlets London Borough Council, Ex parte Chetnik Developments Ltd. [1988] A.C. 858, 874H-877C Lord Bridge referred to a substantial line of authority showing circumstances in which the court would not permit the mistake of law rule to be invoked. These include payments made under an error of law to or by a trustee in bankruptcy as an officer of the court: Ex parte James (1874) L.R. 9 Ch. App. 609. It is hard to see why in those cases the equitable rule which allows for the postponement of the limitation period should not apply, to the effect that time will not run until the claimant knew of the mistake or ought with reasonable diligence to have known of it. If the postponement can apply in these examples of mistake of law, I think that it ought to apply to mistakes of law generally.

    The objection may be made that time may run on for a very long time before a mistake of law could have been discovered with reasonable diligence, especially where a judicial decision is needed to establish the mistake. It may also be said that in some cases a mistake of law may have affected a very large number of transactions, and that the potential for uncertainty is very great. But I do not think that any concerns which may exist on this ground provide a sound reason for declining to give effect to the section according to its terms. The defence of change of position will be available, and difficulties of proof are likely to increase with the passage of time. I think that the risk of widespread injustice remains to be demonstrated. If the risk is too great that is a matter for the legislature. The problem does not arise under the statutory scheme which applies in Scotland. The prescriptive period of five years under section 6 of the Prescription and Limitation (Scotland) Act 1973 applies to any obligation based on redress of unjustified enrichment: Schedule I, para.1(b). It may be extended only where the creditor was induced to refrain from making a claim by fraud or error induced by the debtor's words or conduct or was under a legal disability. Mistake on its own is not a ground for relief. It may be that even in mistake of fact cases where restitution is available under English law some further restriction of the circumstances where indefinite postponement is available may be appropriate. But that is a matter which is best considered by the Law Commission.

    In my opinion Kleinwort Benson will be entitled to the benefit of section 32(1)(c) of the Act of 1980 if they can show that the payments which they seek to recover were made under a mistake of law.

    In the result I would answer each of the questions under the Issues which are before us in the terms proposed by my noble and learned friend Lord Goff of Chieveley. I too would allow these appeals.


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