Westdeutsche Landesbank Girozentrale v Islington London Borough Council

JurisdictionEngland & Wales
JudgeDillon,Kennedy L JJ,Leggatt
Judgment Date17 December 1993
Judgment citation (vLex)[1993] EWCA Civ J1217-5
CourtCourt of Appeal (Civil Division)
Docket NumberNo. QBCMF 93/0442/B
Date17 December 1993
Council of the London Borough of Islington
Westdeutsche Landesbank Girozentrale

[1993] EWCA Civ J1217-5

(Mr. Justice Hobhouse)

Before: Lord Justice Dillon Lord Justice Leggatt and Lord Justice Kennedy

No. QBCMF 93/0442/B





MR. T. PHILIPSON QC, MR. B. DOCTOR and MR. A. BURROWS (instructed by Messrs. Nabarro Nathanson, London) appeared on behalf of the Appellant.

MR. J. SUMPTION QC and MR. G. LEGGATT (instructed by Messrs. Travers Smith Braithwaite, London) appeared on behalf of the Respondent


Friday 17 December 1993.


DILLON L.J.:— This is an appeal by the Defendant in the action, the Islington London Borough Council ("the Council") against a judgment of Hobhouse J, sitting in the Commercial Court on the 18th February 1993, whereby it was adjudged that the Council pay the Plaintiff in the action, respondent to this appeal, Westdeutsche Landesbank Girozentrale ("the Bank") the sum of £1,591,894.74 being as to £1,145,525.93 principal and as to £446,368.81 interest thereon.


The main issue on the appeal is whether the Council is liable to pay the Bank the principal, the amount of which is not in dispute. But there is a subsidiary issue on the appeal as to interest, namely whether the Judge was entitled to order the Council to pay the Bank compound, and not merely simple, interest on the principal. There is also an issue raised by the Bank by a respondent's notice that interest ought to run from an earlier date, 18th June 1987, than the date, 1st April 1990, selected by the Judge.


The Judge's judgment from which this appeal is brought was delivered after the trial of this action which was heard at the same time as another action between a different bank, Kleinwort Benson Ltd, and a different local authority, the Sandwell Borough Council. We are not concerned at all on this appeal with that other action.


The present action arises out of an interest rate swap "agreement" made on the 16th June 1987 between the Council and the Bank.


How interest rate swap arrangements such as that between the Council and the Bank were supposed to work is concisely set out by Lord Templeman in Hazell v Hammersmith and Fulham London Borough Council [1992] 2 A.C.1 at page 24F-G. The contract was described as :-

"an agreement between two parties by which each agrees to pay 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 different rates of interest are payable in each case. For example, one rate may be fixed at 10 per cent. and the other rate may be equivalent to the six month London Inter-bank Offered Rate (`LIBOR'). If the LIBOR rate over the period of the swap is higher than 10 per cent. then the party agreeing to receive `interest' in accordance with LIBOR will receive more than the party entitled to receive 10 per cent. Normally neither party will in fact pay the sums which it has agreed to pay over the period of the swap but instead will make a settlement on a `net payment basis' under which the party owing the greater amount on any day simply pays the difference between the two amounts due to the other."


The arrangement between the Council and the Bank was to run for 10 years starting on the 18th June 1987 and the interest sums were to be calculated on a notional principal sum of £25m and to be payable half-yearly. The Bank was to be the fixed rate payer at a rate of 7.5 p.c.p.a. and the Council was to be the floating rate payer at the domestic sterling LIBOR rate. Additionally the Bank as the fixed rate payer was to pay the Council as the floating rate payer on the 18th June 1987 a sum of £2.5 m.


So far as the Bank was concerned, this arrangement with the Council was backed by an arrangement with Morgan Grenfell & Co Ltd, involving a like notional principal sum and a like payment of £2.5 m by the fixed rate payer, under which the Bank was the floating rate payer and Morgan Grenfell was the fixed rate payer, but nothing, in my judgment, turns, on this appeal, on that counter-arrangement, which was unquestionably valid as between its parties.


The actual payments made between the Bank and the Council were the following:-


Date Payment by Bank Payment by Council


to Council to Bank




18.12.87£172,345. 89


20.06.88£229,666. 09


19.12.88£259,054. 56


19.06.89 £693,407. 53


Totals £2,500,000 £1,354,474. 07


If the total of the payments by the Council is deducted from the £2.5m paid to the Council by the Bank, the balance left is the £1,145,525.93 which is the principal for which the Judge awarded the Bank judgment against the Council.


The trouble that has arisen for the parties is that in Hazell's case, as is well-known, the District Auditor challenged the power of the Hammersmith and Fulham London Borough Council, or any other local authority, to enter into interest rate swap transactions. The proceedings in Hazell's case were started on the 29th May 1989. The Divisional Court held that interest rate swap transactions by local authorities were ultra vires, and that view was unanimously upheld by the House of Lords on the 24th January 1991. The transactions are not illegal, but they, and the contracts purporting to embody them, are ultra vires the local authority and void.


Since Hazell's case was brought against the local authority by the District Auditor, the Courts did not have to decide the effect of the transaction having been ultra vires and void. In the present case the Court does have to decide the effect since the Bank claims against the Council repayment of the balance of its £2.5m paid to the Council —viz the £1,145,525.93 —with interest on the balance from time to time outstanding from the 18th June 1987, the day on which the £2.5m was paid to the Council.


The Council accepts that the Bank never had any intention of making a gift to the Council of the £2.5m or of any part of that sum. Consequently the Council accepts that if the legal consequences of Hazell's case had become known and clear to the parties before the 18th December 1987, when the Council made its first payment of "interest" to the Bank, the Council would have been bound to repay the whole of the £2.5m to the Bank (with interest) as money paid for a consideration which had wholly failed.


A fortiori, if interest rates at the time had been such that the first four six monthly "interest" payments had been paid by the Bank as the fixed rate payer to the Council (instead of having actually been paid the other way round), the Council would have been bound to repay to the Bank the total of the £2.5 m and the "interest" payments (assumedly) paid by the Bank to the Council.


But it is the Council's case that as the Council has made the four "interest" payments to the Bank —for the purposes of the argument one payment would have been enough —the Bank can recover nothing and the Council can keep the £1,145,525.93. I find such conclusion repugnant to common sense.


The Council's case is, in effect, that common sense or fairness do not come into it because the categories of case in which money can be recovered in quasi contract as money had and received or on grounds of unjust enrichment have been laid down long ago and the only recognised category which the Bank can hope to invoke is that of "money paid for a consideration which has wholly failed."


That is of course a well-known category for cases in which the full amount of money paid by one party to a contract or intended contract can be recovered, It applies not merely where the supposed contract has for some reason been void or was voidable and has been rescinded, but also where there was a valid contract, but there has been a fundamental breach by the other party and so the payer can get his money back instead of merely having to claim damages. It is clear from the Fibrosa case [1943] AC 32 (a case of frustration) that by "the consideration has wholly failed" is meant that the performance promised has not been provided.


Thus it is said for the Council that the performance promised by the Council to the Bank has in part been satisfied or provided because the Council has made the four "interest" payments to the Bank —and one would have been enough —and so the consideration has not wholly failed and so the Bank cannot recover the balance of the £2.5 m.


The Judge held that the balance fell to be repaid on the different ground that, as the swap transaction and the agreement for it were ultra vires and void, there was no consideration for the payment of the £2.5 m by the Bank to the Council and so, as the Bank never intended to make a gift of the money to the Council, the money was recoverable as money paid for no consideration.


That is an approach recently developed by the House of Lords in Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] 1 AC 70. That case concerned a claim by the Building Society to recover from the Revenue money paid to the Revenue under protest by the Building Society which had asserted throughout that the regulation under which the money was claimed by the Revenue was ultra vires.


Lord Goff of Chieveley referred at 166c to reinterpretation to reveal a different line of thought pointing to the conclusion that money paid to a public authority pursuant to an ultra vires demand should be repayable, without the necessity of establishing compulsion, on the simple ground that there was no consideration for the payment. A bit further down...

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