Guinness Mahon and Company Ltd v Kensington and Chelsea London Borough Council

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE MORRITT,LORD JUSTICE WALLER,LORD JUSTICE ROBERT WALKER
Judgment Date19 February 1998
Judgment citation (vLex)[1998] EWCA Civ J0219-12
Date19 February 1998
Docket NumberQBCMF 96/0588/B

[1998] EWCA Civ J0219-12

IN THE SUPREME COURT OF JUDICATURE

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGHT COURT OF JUSTICE

QUEEN'S BENCH DIVISION#

COMMERCIAL COURT

(MR JUSTICE PHILLIPS)

Royal Courts of Justice

Strand

London W2A 21L

Before:

Lord Justice Morritt

Lord Justice Waller

Lord Justice Robert Walker

QBCMF 96/0588/B

Guinness Mahon & Company Limited
Respondent
and
Council Of The Royal Borough Of Kensington And Chelsea
Appellant

MR CHARLES BÉAR (instructed by Messrs Director of Legal Services, Royal Borough of Kensington and Chelsea) appeared on behalf of the Appellant (Defendant).

MR GEORGE LEGGATT QC (instructed by Messrs Norton Rose. London EC3A 7AN) appeared on behalf of the Respondent (Plaintiff).

1

LORD JUSTICE MORRITT
2

On 23rd September 1982 the Royal Borough of Kensington and Chelsea ("the Council") apparently entered into an agreement with Guinness Mahon & Co.Ltd ("the Bank") setting out the terms of a transaction of a type known as an interest rate swap. The Council agreed to borrow £5m. from a building society for a period of five years at an interest rate of ll.5/8% per annum. Over the same period of five years it was agreed that at the expiration of each successive period of six months the Bank should pay to the Council sums equal to the interest payments to be made by the Council to the building society for that period and the Council should pay to the Bank interest at a floating rate on a notional loan of £5m for the same period. Thus if the floating rate prescribed was less than ll.5/8% pa the Council would receive from the Bank more than it paid to the Bank and vice versa.

3

The five year period ended on 22nd September 1987. By that date, when all swaps had been effected, the Council had received from the Bank £384,409 more than it had paid. There matters might have rested but for the fact that on lst November 1989 the Divisional Court declared, as subsequently upheld in the House of Lords in Hazell v Hammersmith and Fulham London BC [1992] 2 A.C. l, that such an agreement as the Council had apparently concluded with the Bank was ultra vires the Council and so void from the start.

4

In early 1993 two actions selected as test actions for the resolution of the problems arising from the invalidity of such interest rate swaps came before Hobhouse J. They were Westdeutsche Landesbank Girozentrale v Islington Borough Council ("Westdeutsche") and Kleinwort Benson Ltd v Sandwell Borough Council ("Sandwell"). In the former the period prescribed in the agreements during which such swaps should take place had not expired at the time the proceedings were commenced. In the latter the period specified in one of the agreements sued on had, as in this case, expired, all relevant swaps having been duly paid before the writ was issued. In each case the Bank sought repayment of the net amount it had paid the local authority. Hobhouse J gave judgment in February 1993 (reported at [1994] 4 All ER 890 ) upholding the claims of the banks in all cases. In particular he refused to draw a distinction between what might be described as "open swaps" where the period prescribed in the ultra vires agreement had not expired and "closed swaps" where it had.

5

These proceedings were commenced by the Bank on 26th July 1993. On 9th November 1994 judgment in default of notice of intention to defend was entered by the Bank. On 4th March 1995 Phillips J made a consent order setting aside the judgment entered in default and, but without prejudice to the Council's right to appeal therefrom, substituting for it a judgment in favour of the Bank in the sum of £l0l,78l and interest. It is against that judgment that the Council now appeals with the leave of Staughton LJ. Though there were appeals in Westdeutsche on certain points in relation to open swaps there was none in Sandwel l, because it was settled, and therefore none in relation to a closed swap. Accordingly this appeal has been argued on the footing that it is in substance an appeal from the order of Hobhouse J in Sandwell in so far as it related to a closed swap.

6

It is necessary at the outset to consider in some detail the decisions of Hobhouse J in Westdeutsche and Sandwell and of the Court of Appeal and the House of Lords in Westdeutsche for the purpose of ascertaining the basis on which sums paid under an open swap are, as is common ground, recoverable if the agreement was ultra vires one of the parties to it. In Westdeutsche the interest rate swaps were of the conventional kind but the agreement provided for the bank to pay to the local authority a lump sum at the commencement of the period for which the agreement was intended to run. All of them were open swaps. In the case of Sandwell there was no such lump sum payment and, as I have pointed out, one of them was a closed swap. The judgment of Hobhouse J (reported at [1994] 4 All ER 890 ) after a review of the facts of the case is helpfully divided into sections. In section (l) he dealt with a number of preliminary matters, namely (a) the historical development of claims for restitution, (b) the effect of the ultra vires principle, (c) the passing of property in money, (d) the decision of the House of Lords in Sinclair v Brougham [1914] A.C. 398, and (e) the effect of certain annuity cases. For present purposes it is sufficient to note conclusions of Hobhouse J in relation to (d) and (e). With regard to the former he considered (p.921) that Sinclair v Brougham was direct authority for the proposition that if it were ultra vires the payor to make the payment in question then it had an equitable right against the recipient, in the nature of an equitable charge, to trace the money so paid into its general assets. In the case of the latter he concluded (p.923) that the annuity cases, which he described in some detail, established that the right of restitution existed in respect of payments made under void contracts even though there were payments both ways so that on a contractual analysis there was no total failure of consideration. He also considered and found to be inapplicable in Sandwell the statement of Bayley J in Davis v Bryan (1827) 6 B & C 65l, 655 to the effect that where one party received the whole of that for which he bargained it was against conscience to claim that the contract was void from the start.

7

In section (2) Hobhouse J analysed the restitutionary claim of money had and received under five headings of which only the second "void contracts and absence of consideration" is directly material. He recorded two arguments for the banks; first that payments made under a void contract do not amount to consideration for the purposes of the law of restitution; second, that the banks did not get the benefit for which they had bargained, sc. payments which would discharge a legal obligation and which, therefore, the banks might lawfully retain, but, by contrast, obtained under a void contract money which the local authority was prima facie entitled to recover. After referring to Rowland v Divall [1923] 2 K.B. 500, Linz v Electric Wire Co. of Palestine Ltd [1948] A.C. 37l and Rover International Ltd v Cannon Film Sales Ltd (No.3) [1989] l W.L.R. 912 he said

"In my judgment, the correct analysis is that any payments made under a contract which is void ab initio, in the way that an ultra vires contract is void, are not contractual payments at all. They are payments in which the legal property in the money passes to the recipient, but in equity the property in the money remains with the payer. The recipient holds the money as a fiduciary for the payer and is bound to recognise his equity and repay the money to him. This relationship and the consequent obligation have been recognised both by courts applying the common law and by Chancery courts. The principle is the same in both cases: it is unconscionable that the recipient should retain the money. Neither mistake nor the contractual principle of total failure of consideration are the basis for the right of recovery."

8

In the concluding passage of that section he decided 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 supposed contract was in fact fully performed and there was no failure of consideration in the contractual sense. In section (3) Hobhouse J considered Equitable Tracing and decided that the banks were entitled to that remedy. Sections (4) to (6) dealt respectively with the Limitation Act, the defence of change of position and interest. His ultimate conclusion (p.955) was

"The plaintiff is entitled to recover that sum either as money had and received by the defendant to the use of the plaintiff or as money which in equity belongs to the plaintiff and which it is entitled to trace in the hands of the defendant and have repaid to it out of the present assets of the defendant. The basis of the plaintiff's claim, which at common law or in equity, is that the defendant has been unjustly enriched at the expense of the plaintiff and that in conscience the defendant must repay to the plaintiff, save in so far as it has already done so, the sum which it received from the plaintiff. The right to restitution arises from the fact that the payment made by the plaintiff to the defendant was made under a purported contract which, unknown to the plaintiff and the defendant, was ultra vires the defendant and wholly void."

9

Counsel for the Council criticises this judgment on three grounds. First, he submits, Hobhouse J was wrong to distinguish Davis v Bryan. Second, Hobhouse J failed properly to apply the principle stated by Kerr LJ in Rover International Ltd v Cannon Film Sales Ltd (No.3 ). Third Hobhouse J was wrong to...

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