Baring Brothers & Company Ltd v Cunninghame District Council [CSOH]
| Jurisdiction | Scotland |
| Judge | Lord Penrose |
| Judgment Date | 24 May 1996 |
| Date | 24 May 1996 |
| Court | Court of Session (Outer House) |
Court of Session (Outer House)
Lord Penrose
G J B Moynihan (instructed by Dundas & Wilson, CS) for the pursuers.
N F Davidson QC (instructed by Lindsays, WS) for the defenders.
The following cases were referred to in the opinion:
Arab Bank Ltd v Barclays Bank (Dominion, Colonial and Overseas) [1952] 2 TLR 920; [1953] 2 QB 527(CA).
Arab Monetary Fund v HashimUNK [1993] 1 Ll Rep 543.
Cantiere San Rocco v Clyde Shipbuilding & Engineering CoENR 1922 SC 723; 1923 SC (HL) 105.
Chandler v WebsterELR [1904] 1 KB 493.
Credit Lyonnais v George Stevenson & Co Ltd 1901 9 SLT 93.
C & E Commrs v McMaster Stores (Scotland) LtdUNK [1995] STC 486; [1995] BTC 5390.
Dimskal Shipping Co SA v International Transport Workers FederationELR [1992] 2 AC 152.
Duncan v Motherwell Bridge & Engineering CoSC 1952 SC 131.
English v DonnellySC 1958 SC 494.
Etler v Kertesz (1960) 26 DLR (2nd) 209.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour LtdELR [1943] AC 32.
Hazell v Hammersmith & Fulham London Borough CouncilELR [1992] 2 AC 1.
Hellenic Steel Co v Svolamar Shipping Co Ltd (“The Komninos S”)UNK [1991] 1 Ll Rep 370.
Kleinwort Benson Ltd v City of Glasgow District CouncilELR [1993] QB 429; [1996] CLC 759 (CA).
Morgan Guaranty Trust Co v Lothian Regional Council 1995 SLT 299.
Rae v Wright 1717 Mor 4506; Kames Remarkable Decisions No. 8.
Woolwich Equitable Building Society v IR CommrsELR [1993] AC 70; [1992] BTC 470.
Restitution — Conflict of laws — Bankers sought repayment of sums under void agreement — Whether restitutionary remedy governed by English or Scots law — Whether proper law of obligation to repay was proper law of void contract — What was proper law of obligation.
This was an action in which the pursuers who were bankers sought restitution by repayment of the excess of sums paid by them to the defenders over sums received from the defenders under a “forward rate agreement” (entered into before the qualified enactment of the Rome Convention in the Contracts (Applicable Law) Act 1990). It was agreed that the contract was ultra vires the defenders, was unlawful and was void ab initio.
The issue between the parties was whether the pursuers” restitutionary remedy, if any, was governed by English law or by Scots law. It was agreed that if Scots law was applicable the pursuers” claim had been extinguished by prescription but if English law applied the appropriate limitation period had not so expired.
The contract incorporated the terms of a forward rate agreements standard form published by the British Bankers” Association. The pursuers averred that the law of England was the proper law of the obligation to make restitution because that obligation arose in connection with the contract and it provided that English law was its governing law. If the pursuers established that the law of England governed the restitutionary remedies available to them, s. 23A(1) of the Prescription & Limitation (Scotland) Act 1973 would require a Scottish court to apply the relevant English limitation rules.
In summary the pursuers” general proposition was that even where a contract was void, all questions which related to claims for restitution were regulated by the putative proper law of the contract, at least where that putative proper law had a practical connection with the transaction which had taken place. In the 11th edition of Dicey & Morris on the Conflict of Laws, r. 201 expressed a direct and unqualified relationship between the proper law of the void contract and the law governing the restitutionary remedy. The 12th edition departed from that approach.
The defenders disputed the contention that the choice of law clause in a void contract determined the proper law of the restitutionary remedy. Further there were few facts to rely on in deciding between the claims of Scots and English law to be the law with which the arrangements between the parties had the closest connection. The decision in Morgan Guaranty Trust Co v Lothian Regional Council 1995 SLT 299 was authority for the proposition that reliance on the terms of a void contract including a choice of law clause was incompetent.
Held, allowing proof before answer accordingly:
1. The decision in Morgan Guaranty did not determine the present issue.
2. Rule 201(2)(a) in Dicey & Morris was wholly without judicial support. It might similarly be advanced as a matter of principled discussion without any obstacle in relevant adverse judicial comment.
3. Where there was not an actual relationship in law, derived from or defined by contract, identification of an erroneous belief or false assumption in the existence of a contractual obligation as a relevant factor would imply that the absence of averment or proof of that factor could affect the choice of law. A more satisfactory test would be whether in fact the payment was made because there was an apparent contractual obligation, leaving aside any question of belief in its validity or binding force.
4. The restitutionary remedy was available only because there was no contractual obligation at the date of the transfer of assets. The proper law of the contract had exhausted its purpose in dictating that conclusion and it was not attractive to proceed then to give direct effect to a term of the contract, where there was an express choice of law, or a choice of law imputed to the parties to the contract, where there was no express term, when the contract had ceased to have any validity as between the parties.
5. The attempt of parties to make a contract governed by or putatively governed by a chosen system of law, or by a system selected on conventional conflict principles, remained a reality irrespective of whether or not they succeeded in that attempt, and in particular remained a reality at the date of the performance tendered. There appeared to be no reason to deny that attempt a contributory role along with other factors in resolving a dispute. Reliance on the attempt to create a contract did not appear to be open to the same objection as the unwarranted belief in the effectiveness of the transaction or contract.
6. The restitutionary or quasi-contractual obligation was governed by the proper law of that obligation; and the proper law of the obligation was the law of the country with which in the light of the whole facts and circumstances the critical events had their closest and most real connection. Where the remedy was required because of the inapplicability of a contract or the failure of a contract, the existence of the contractor the attempts by parties to enter into a contract would be relevant and material factors in resolving any issue which arises, but would not per se be determinative.
7. Looking at the transaction, the pursuers were entitled to proceed to proof on the basis of their argument that there was only one centre with which the transaction had any material connection and that was London.
Lord Penrose:
The pursuers are bankers. In this action they seek restitution by repayment of the excess of sums paid by them to the defenders over sums received fromthe defenders under a “Forward Rate Agreement” entered into between the parties on 21 September 1988. It is agreed that the contract was ultra vires the defenders, was unlawful, and was void ab initio.
The contract incorporated the terms of a Forward Rate Agreements standard form published by the British bankers” Association. The pursuers aver that the law of England is the proper law of the obligation to make restitution because that obligation arises in connection with the contract and it provided that English law was its governing law. The sharp issue between the parties is whether, the contract being void, the pursuers” restitutionary remedy, if any, is governed by English law, or must be sought in accordance with Scots law which would have allowed repetition if the action had been raised timeously. It is agreed that if Scots law is applicable the pursuers” claim has been extinguished by prescription. If English law applies, the appropriate limitation period had not so expired, and the action would proceed.
The choice of law applicable to restitutionary claims when a contract is held or is admitted to be void after partial or complete execution has been the subject of debate amongst eminent jurists and other commentators, but has received little attention in the courts. In the second edition of Private International Law, Professor Anton commented on the lack of judicial discussion at p. 310:
“There has been virtually no discussion in the Scottish cases of the rules of choice of law appropriate to govern issues of restitution or recompense. It would seem, as a matter of general principle, that the characterisation of a claim as one of restitution must be a matter for the lex fori after considering the nature of the claim in the system from which it was said to arise. It could well have been argued in the Cantiere San Rocco case that the proper law governing the relationship between the parties was Scots law which, on that account, was appropriately applied to the issue of repetition. The obligation of recompense in its purest form arose in the case of Duncan v Motherwell Bridge & Engineering Co, but no consideration was given to the possible relevance of the law of Kuwait — arguably the place of enrichment — in regard to the counterclaim in respect of the payment of the pursuer's debt”.
Cantiere San Rocco v Clyde Shipbuilding & Engineering CoENR 1922 SC 723, 1923 SC (HL) 105 was argued throughout on the basis that Scots law applied, but that English authority provided relevant assistance in explaining Scots principle, and so pointed to the correct disposal of the case. Thus the respondents in the House of Lords argued that the laws of the two countries were the same. The basis on which Scots law was applied was not material in these circumstances and would...
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