Morgan Guaranty Trust Company v Lothian Regional Council

JurisdictionScotland
Judgment Date01 December 1994
Date01 December 1994
Docket NumberNo 20
CourtCourt of Session (Inner House - Full Bench)

Full Bench

Lord President (Hope), Lord Mayfield, Lord Clyde, Lord Cullen and Lord Kirkwood

No 20
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
and
LOTHIAN REGIONAL COUNCIL

Contract — Unjustified enrichment — Repetition — Condictio indebiti — Error of law — Whether money paid under an erroneous interpretation of statutory provisions recoverable — Whether relevant that contract ultra vires and accordingly void ab initio

A firm of merchant bankers contracted with a local authority to enter into an interest rate and currency exchange agreement whereby both agreed to pay to the other on a specified date or dates an amount calculated by reference to the interest which would have accrued over a given period on the same notional principal sum, assuming that different rates were payable in each case. Prior to the House of Lords decision ofHazell v Hammersmith and Fulham London Borough CouncilELR[1992] 2 AC 1, the bankers had made a series of payments to the local authority. The House of Lords, however, had held that local authorities in England and Wales had no power to enter into such an agreement under statute. The bankers were of the view that the local authority had had power to enter into such an agreement but, in light of the House of Lords decision on the English statute, argued that the Scottish provisions likewise prohibited the entering into of such an agreement and accordingly that the contract was ultra vires of the local authority and void ab initio. In those circumstances, the bankers sought repayment of the sums paid. The Lord Ordinary (Penrose) held that the relevant statutory provisions in Scotland rendered void the transaction between the parties; and that payment having been made under error of law as to the interpretation of a public general statute, the bankers were not entitled to repayment. The bankers reclaimed. For the purposes of the reclaiming motion it was accepted that the local authority had no power to enter into an agreement by statute and the House of Lords decision equally applied to the Scottish legislation.

Held (rev judgment of Lord Penrose) (1) that the appropriate remedy was an action of repetition under the condictio indebiti being a remedy available for the recovery of money paid or property transferred under an obligation which was void but was erroneously thought to be valid; (2) that the rule that payments made under an error of law were not recoverable had no foundation in principle and no distinction should be made between an error of fact and an error of law in an action of repetition under the condictio indebiti, the question of whether the court should order recovery being a matter for equity and the circumstances of each individual case; (3) that in such an action the onus of demonstrating that payment was made in error and was not intended as a donation rested on the parties seeking to recover the payment but it was not necessary for the pursuer to aver that the error was excusable for, once he had averred the necessary ingredients to show that prima facie he was entitled to the remedy sought, it was for the defender to raise the issues which might lead to a decision that the remedy should be refused on grounds of equity; and (4) that, as the defenders had failed to raise such issues, the pursuers were entitled to decree de plano; and reclaiming motion allowed.

Observed (per the Lord President (Hope) and Lord Clyde) that Scots law still lacked a clear and coherent structure in the field of unjustified enrichment but, in an area of law where fine analysis or distinction between forms of action might well be dangerous, formal categorisation of different examples might not be useful.

Glasgow Corporation v Lord AdvocateSC 1959 SC 203 andTaylor v Wilson's TrusteesSC1975 SC 146overruled.

Authorities reviewed.

Morgan Guaranty Trust Company Of New York brought an action against Lothian Regional Council. The relevant averments of parties are sufficiently set forth in the opinions of their Lordships in the Inner House.

The cause called in procedure roll before the Lord Ordinary (Penrose) on parties' preliminary pleas in law.

At advising, the Lord Ordinary dismissed the action.

The pursuers thereafter reclaimed to the Inner House. In light of the authorities on the subject, their Lordships remitted the cause to be considered by a bench of five judges.

Cases referred to:

Agnew v FergusonUNK (1903) 5 F 879

Air Canada v British Columbia (1989) 59 DLR (4th) 161

Armour v Glasgow Royal InfirmaryENR 1909 SC 916

Bilbie v LumleyENR (1802) 2 East 469

British Hydro-Carbon Chemicals Ltd and British Transport Commission, Petitioners 1961 SLT 280

British Oxygen Co Ltd v South of Scotland Electricity BoardSC 1959 SC (HL) 17.

Cantiere San Rocco v Clyde Shipbuilding and Engineering Co 1923 SC (HL) 105

Carrick v Carse (1778) Mor 2931

Cuthbertson v LowesUNK (1870) 8 Macph 1073

David Securities Pty Ltd v Commonwealth Bank of AustraliaUNK (1991-2) 175 CLR 353

Dickson v HalbertUNK (1854) 16 D 586

Dixon v Monkland Canal Co (1831) 5 W & S 445

Edinburgh and District Tramways Co Ltd v CourtenayENR1909 SC 99

General Property Investment Co v Mathieson's TrusteesUNK(1888) 16 R 282

Glasgow Corporation v Lord AdvocateSC 1959 SC 203

Grant v Grant's Executors 1994 SLT 163

Haggerty v Scottish Transport and General Workers' UnionSC 1955 SC 109

Hazell v Hammersmith and Fulham London Borough CouncilELR[1990] 2 QB 697; [1992] 2

AC1

Hydro Electric Commission of the Township of Nepean v Ontario Hydro (1982) 1 SCR 347

Jamieson v Watt's TrusteeSC 1950 SC 265

Keith v Grant (1792) Mor 2933

Kiriri Cotton Co Ltd v DewaniELR [1960] AC 192

Kleinwort Benson v Glasgow District Council, Financial Times 4th March 1992

Mann v Edinburgh Northern Tramways Co (1892) 20 R (HL) 7

Martin v Scottish Transport and General Workers' UnionSC1952 SC (HL) 1

Meiklejohn v Erskine 31 January 1815, FC

Nicol (D&J) v Dundee Harbour Trustees 1915 SC (HL) 7

Royal Bank of Scotland plc (The) v WattSC 1991 SC 48

Shiell's Trustees v Liquidators of Scottish Property Investment Co Building Society (1884)

12 R (HL) 14

Sinclair v BroughamELR [1914] AC 398

Stirling v Earl of Lauderdale (1733) Mor 2930Stonehaven (Magistrates of) v Kincardineshire County CouncilSC 1939 SC 760 1939 SC

760

Swinton v Holman 10th June 1665, unreported

Taylor v Wilson's TrusteesSC 1975 SC 146

Varney (Scotland) Ltd v Lanark Town CouncilSC 1974 SC 245

Watson v ShanklandUNK (1871) 10 Macph 142

Willis Faber Enthoven (Pty) Ltd v Receiver of Revenue1992 (4) SA 202

Wilson & McLellan v Sinclair (1830) 4 W & S 398

Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC

70

Youle v CochraneUNK (1868) 6 Macph 427

Textbooks etc referred to:

Bankton Institute I viii 23,24,31 and 215

Bell, Principles (10th edn), para 534

Erskine, Institute (Nicolson's edn), III iii 54

Hume Lectures Vol III, pp 172 and 174

Stair, Institutions (2nd can), I vii 9

Stair, Institutions (More's edn), I vii 9n

Whitty, “Some Trends and Issues in Scots Enrichment Law” 1994 JR 127

Wright, Legal Essays and Addresses, p xix Zimmerman, The Law of Obligations p 843

The cause called before a court of five judges, comprising the Lord President (Hope), Lord Mayfield, Lord Clyde, Lord Cullen and Lord Kirkwood for a hearing.

At advising, on 1st December 1994 —

LORD PRESIDENT (Hope)—The parties to this action entered into an interest rate and currency exchange agreement of a type sometimes referred to as a “swap” on 16 July 1987. A swap is an agreement between two parties by which each agrees to pay to the other on a specified date or dates an amount calculated by reference to the interest which would have accrued over a given period on the same notional principal sum, assuming that different rates are payable in each case. Numerous such agreements were entered into between financial institutions and local authorities throughout the United Kingdom during the 1980s. In the present case the pursuers, who carry on business as merchant bankers, and the defenders, who are a local authority within the meaning of sec 235(1) of the Local Government (Scotland) Act 1973, entered into their agreement on a standard form provided by the International Swap Dealers Association Inc. In Hazell v Hammersmith and Fulham London Borough Council it was held that a local authority in England and Wales had no power to enter into a transaction of this kind under sec 111(1) of the Local Government Act 1972 and that the transactions which were under consideration in that case were ultra vires and unlawful. Prior to the decision of the Divisional Court in that action on 1 November 1989 the pursuers had made a series of payments to the defenders which, after allowing for the offsetting of payments by the defenders, amounted to £368,104.52. The agreement was to endure from 17 July 1987 to 17 July 1992, but in the light of that decision no payments were made under it by either party after 17 October 1989.

The pursuers are now seeking repayment of the sum of £368,104.52 from the defenders on the ground that it was paid by them to the defenders pursuant to an agreement which was void ab initio.When the case came before the Lord Ordinary for a debate on the procedure roll the pursuers' claim was presented to him as one which fell within the ratio of Magistrates of Stonehaven v Kincardineshire County Council, in which it was held that money received under a null contract, although not recoverable under contract, was recoverable from the recipient in quantum lucratus. The Lord Ordinary was not satisfied that the remedy described in Magistrates of Stonehaven was available in this case and he dismissed the action. He observed also that, in the light of the reasons given by Lord President Clyde in Glasgow Corporation v Lord Advocate for excluding the operation of thecondictio indebiti in cases of error of law, he saw no room for the existence of a general equitable remedy...

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