Guinness Mahon & Company Ltd v Kensington and Chelsea Royal Borough Council

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeMorritt,Waller,Robert Walker L JJ
Judgment Date19 Feb 1998

Court of Appeal (Civil Division).

Morritt, Waller and Robert Walker L JJ.

Guinness Mahon & Co Ltd
and
Kensington and Chelsea Royal Borough Council

Charles Bar (instructed by Director of Legal Services, Royal Borough of Kensington and Chelsea) for the council.

George Leggatt QC (instructed by Norton Rose) for Guinness Mahon.

The following cases were referred to in the judgments:

Chillingworth v EscheELR[1924] 1 Ch 97.

Cotman v BroughamELR[1918] AC 514.

Davis v BryanENR(1827) 6 B & C 651; 108 ER 591.

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour LtdELR[1943] AC 32.

Goss v ChilcottELR[1996] AC 788.

Hazell v Hammersmith and Fulham London Borough CouncilELR[1992] 2 AC 1.

Hicks v HicksENR(1802) 3 East 16; 102 ER 502.

Kleinwort Benson Ltd v Sandwell Borough CouncilUNK[1994] 4 All ER 890.

Linz v Electric Wire Co of Palestine LtdELR[1948] AC 371.

Midland Bank Trust Co v GreenELR[1981] AC 513.

Pearce v BrainELR[1929] 2 KB 310.

Phoenix Life Assurance Co, Re. Burges and Stock's Case (1862) 2 J & H 441, 70 ER 1131; 31 Courts of Chancery NS 749.

Rover International Ltd v Cannon Film Sales Ltd (No. 3)WLR[1989] 1 WLR 912 (CA); (1987) 3 BCC 369.

Rowland v DivallELR[1923] 2 KB 500.

Rugg v MinettENR(1809) 11 East 210, 103 ER 985.

Sinclair v BroughamELR[1914] AC 398.

Steinberg v Scala (Leeds) LtdELR[1923] 2 Ch 452.

Warman v Southern Counties Car Finance Corporation LtdELR[1949] 2 KB 576.

Westdeutsche Landesbank Girozentrale v Islington London Borough CouncilUNK[1994] 4 All ER 890; [1994] CLC 96 (CA); [1996] CLC 990, [1996] AC 669 (HL).

Woolwich Equitable Building Society v IR CommrsTAX[1992] BTC 470; [1993] AC 70.

Swap Restitution Unjust enrichment Total failure of consideration Swap agreement between bank and council completed Council swaps subsequently held ultra vires and void ab initio in test case relating to swaps where period of agreement had not expired Whether bank entitled to recover net payment to council in closed swap where all payments had been effected.

This was an appeal by a council from a judgment in favour of a bank on the basis that a swap transaction which had been completed was ultra vires the council and void (applyingHazell v Hammersmith & Fulham LBCELR[1992] 2 AC 1).

In test cases relating to the invalidity of council swaps the House of Lords held inWestdeutsche Landesbank Girozentrale v Islington LBC[1996] CLC 990which concerned open swaps, where the period prescribed in the swap agreement had not expired, that banks were entitled to recover net payments to councils on the basis of money had and received on a total failure of consideration. InKleinwort Benson Ltd v Sandwell BCUNK[1994] 4 All ER 890in which one of the swap transactions was a closed swap, the transaction having been completed, Hobhouse J refused to draw a distinction between open swaps and closed swaps. where the swap transaction had been completed. The Sandwell case was settled and there was therefore no appeal in relation to the closed swap. In this case the swap in issue had been completed, all swap payments had been effected and the council had received from the bank more than it had paid. The council appealed against a judgment for the bank. The appeal was argued on the footing that it was in substance an appeal from the order of Hobhouse J in Sandwell in so far as it related to a closed swap.

The council argued that the fact that the swap was closed made all the difference. The only interest the bank had in the capacity of the council was to ensure performance of the swap agreement, but once it had been completed the bank was in exactly the same position as it would have been if the council had had the necessary capacity. There was no authority binding on the court on the question whether full performance of a void contract precluded a claim for recovery which would have succeeded in the case of partial performance. The decision of Hobhouse J in Sandwell was in conflict withDavis v BryanENR(1827) 6 B & C 651andRover International Ltd v Cannon Film Sales Ltd (No. 3)WLR[1989] 1 WLR 912. There was nothing unjust in refusing recovery for the enrichment of the council because it was exactly what the parties had bargained for.

Held, dismissing the appeal:

1. The argument that there was a total failure of consideration in the case of an open swap where one or more of the swaps envisaged had not been carried out because the parties had not received all that for which they bargained, but that there could be no failure of consideration in the case of the closed swap because over the whole of the term of the swap agreement the parties paid and received exactly what they had bargained for, wrongly assumed that in the case of a swap contract the relevant bargain was for the payments which were actually made rather than the legal obligation to make them. It was the fact that the contract was ultra vires and void from the beginning which constituted the total failure of consideration justifying the remedy of money had and received or restitution for unjust enrichment. If partial performance of that assumed obligation in the case of an open swap did not preclude a total failure of that consideration then there was no basis on which complete performance of a closed swap could do so. An ultra vires transaction was of no legal effect. It followed that the recipient of money thereunder had no right to it. If he kept it he would be enriched. If he did not then or subsequently obtain a right to keep it such enrichment would be unjust. In the absence of a defence of change of position, it was no answer to the claim to say that once the transaction had been fully performed the bank no longer had any interest in the capacity of the corporation or that both parties had received the expected return. There were no grounds negativing the prima facie case of unjust enrichment. (Westdeutsche Landesbank Girozentrale v Islington LBC[1996] CLC 990applied;Davis v BryanENR(1827) 6 B & C 651andRover International Ltd v Cannon Film Sales Ltd (No. 3)WLR[1989] 1 WLR 912distinguished.)

2. The individual swap payments were not severable. (Rugg v MinettENR(1809) 11 East 210considered.)

JUDGMENT

Morritt LJ: On 23 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 11 and 5/8ths per cent 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 11 and 5/8ths per cent p.a. the council would receive from the bank more than it paid to the bank and vice versa.

The five-year period ended on 22 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 1 November 1989 the Divisional Court declared, as subsequently upheld in the House of Lords in Hazell v Hammersmith and Fulham London Borough CouncilELR[1992] 2 AC 1, that such an agreement as the council had apparently concluded with the bank was ultra vires the council and so void from the start.

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 London 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.

These proceedings were commenced by the bank on 26 July 1993. On 9 November 1994 judgment in default of notice of intention to defend was entered by the bank. On 4 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 101,781 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 Sandwell, 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.

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...

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