Incapacity & Void
Cases
Valentini v. Canali
(1889) 24 QJJD 166,
Lord Coleridge, CJ: I am of opinion that this appeal should be dismissed. Under the contract in question, which was one for his advatttage, the plaintiff, an infant, undertook to pay the defendant a sum of money. He paid the defendant part of this sum, and gave him a promissory note for the balance. The judge satisfieq himself that the plaintiff was an iqfant at the time when he entered into the contract, and, having satisfied himself of this, did, in my opinion, justice according to law. He set aside the contract, and he ordered the promissory note to be cancelled. It is now contended that, in addition to this relief, the plaintiff was entitled to an’order for the re-payment of the sum paid by him to the defendant as money paid under a contract declared to be void. No doubt the words of s. I of the Infants’ Relief Act, 1874, are strong and general, but a reasonable construction ought to be put upon them. The construction which has been contended for on behalf of the plaintiff would in’:olve a violation of natural justice. When an infant has paid for something and has consumed or used it, it is contrary to natural justice that he should recover back the money which he has paid. Here the infant plaintiff who claimed to recover back the money which he had paid to the defendant had had the use of a quantity of furniture for some months. He could not give back this benefit or replace the defendant in the position in which he was before the contract. The object of the statute would seem to have been to restore the law for the protection of infants upon which judicial decisions were considered to have imposed qualifications. The legislature never intended in making provisions for this purpose to sanction a cruel injustice. The defendant therefore could not be called upon to repay the money paid to him by the plaintiff, and the decision appealed against is right.
Steinberg v. Scala (Leeds) Ltd
[1923] 2 Ch. 452
Lord Stemdale MR: Ithink the argument for the respondent has rather proceeded upon the assumption that the question whether she can rescind and the question whether she can recover her money back are the same. They are two quite different questions, as is pointed out by Turner LJ in his judgment in Ex parte Taylor.1 He there says: ‘It is clear that an infant can not be absolutely bound by a contract entered into during his minority. He must have a right upon his attaining his majority to elect whether he will adopt the contract or not.’ Then he pro ceeds: ‘It is, however, a different question whether, if an infant pays money on the footing of a contract, he can afterwards recover it back. If an infant buys an article which is not a necessary, he cannot be compelled to pay for it, but if he does pay for it during his minority he cannot on attaining his majority recover the money back.’ That seems to me to be only stating in other words the principle which is laid down in a number of other cases that, although the contract may be rescinded the money paid cannot be recovered back unless there has been an entire fail ure of the consideration for which the money has been paid. Therefore it seems to me that the question to which we have to address ourselves is: Has there here been a total failure of the con sideration for which the money was paid?
Now the plaintiff has had the shares; I do not mean to say she had the certificates; she could have had them at any time if she had applied for them; she has had the shares allotted to her and there is evidence that they were of some value, that they had been dealt in at from 9s. to IOs. a share. Of course her shares were only half paid up and, therefore, if she had attempted to sell them she would only have obtained half of that amount, but that is quite a tangible and substantial sum.
In those circumstances is it possible to say that there was a total failure of consideration? If the plaintiff were a person of full age suing to recover the money back on the ground, and the sole ground, that there had been a failure of consideration it seems to me it would have been impossible for her to succeed, because she would have got the very thing for which the money was paid and would have got a thing of tangible value.
The argument for the respondent is I think to this effect: That it is necessary, in order to show that the consideration has not entirely failed, to prove that the plaintiff has not only had something which was worth value in the market and for which she could have obtained value, but that she has in fact received that value. It was admitted that if she had in this case sold the shares and received the 125/. which would have been receivable according to one of the prices mentioned in evidence she could not have recovered the money back, but it is said that as she did not in fact do that and had only an opportunity of receiving that benefit, there has been a total failure of consideration. I cannot see that. If she has obtained something which hasmoney’s worth then she has received some consideration, that is, she has received the very thing for which she paid her money, and the fact that, although it has money’s worth, she has not turned that money’s worth into money, does not seem to me to prevent it being some valuable consideration for the money which she has paid. I cannot see any difference when you come to consider whether there has been consideration or not between the position of a person of full age and an infant. The question whether there has been consideration or not must, I think, be the same in the two cases.
Warrington LJ: . The only question we have to deal with is the repayment of the money she has already paid on those shares. The only ground upon which she asserts that she is enti tled to have the money repaid is that there has been a total failure of consideration, and that she is therefore entitled to be repaid that money as in the ordinary case where a man has paid money and the consideration for that payment has wholly failed. In my judgment it cannot be said in the present case that there has been a total failure of consideration. She has in fact got the very thing she bargained for, and, not only the thing she bargained for, but the thing which every other applicant for shares in this company bargained for. She was placed in exactly the same position as every other shareholder except that, being an infant, she was entitled if she pleased to repudiate the contract and so escape from any future liability. So far as the defendant com pany is concerned she has received neither more nor less than any other shareholder in the com pany. Under those circumstances it seems to me impossible to say that there has been a total failure of consideration….
Younger LJ: … Ithink, therefore, we have here to ask ourselves the question whether, dur ing the period when the plaintiff did not elect to repudiate her contract, the consideration for that contract as between herself and the company had wholly failed. To my mind it had not in any sense failed. There was some detriment to the company; and there was substantial consid eration being enjoyed by herself, either actual or in possibility, during the whole of the period. She had the tangible advantage of being in a position to sell and transfer, if she had been so minded, her shares for a consideration which would, at least, have been substantial. She might, had she chosen, have attended meetings of the company. In these circumstances I think that the condition imposed upon an infant before she can recover money paid has not been complied with by the respondent Ithink the question is not: Has the infant derived any real advantage? but the question is: Has the consideration wholly failed? In my judgment in this case the consideration has not wholly failed on either side, and accordingly the action, as my Lord has said, must be dismissed and judgment entered for the defendants.
Pearce v. Brain
[1929] 2 KB 310
Swift J: Theonly point left is the contention of the plaintiff that, as he was an infant at the time the contract was entered into, the contract was rendered void by s. 1 of the Infants Relief Act, 1874. It was said that the property in the motor bicycle never passed from the plaintiff to the defendant and that the plaintiff was entitled to have it back by virtue of s.1 of the Act, which provided: ‘All contracts, whether by specialty or by simple contract, henceforth entered into by infants for the repayment of money lent or to be lent, or for goods supplied or to be supplied (other than contracts for necessaries), and all accounts stated with infants, shall be absolutely void: Provided always, that this enactment shall not invalidate any contract into which an infant may, by any existing or future statute, or by the rules of common law or equity, enter, except such as now by law are voidable.’
In his able argument counsel for the plaintiff contended that the transaction was one which was void under that section, and that therefore the plaintiff had never ceased to be the owner of the motor bicycle and was entitled to have it back. I am quite clear that the transaction was, as the county court judge has found, a contract of exchange of goods. But it comes within the words ‘goods supplied or to be supplied,’ which are as much applicable to exchange as to sale. If I were at liberty to decide this case without authority, I should be inclined to accept the argument for the plaintiff and decide that the contract being by way of exchange it was void under the Act and that no property passed. But I cannot see any difference in principle between the recovery ofa chattel given in exchange and the recovery of money paid as the purchase price of goods. If the contract were void by statute I should have thought, apart from authority, that money paid could have been recovered as money had and received to the use of an infant plain tiff. Money paid under a merely voidable contract is in a very different position. But there is direct authority that money paid under a void contract cannot be recovered unless there isa total failure of consideration. In Valentini v. Canali,1 which was decided by Lord Coleridge CJ, and Bowen LJ sitting as a Divisional Court, Lord Coleridge said: ‘The construction which has been contended for on behalf of the plaintiff wold involve a violation of naturaljustice. When an infant has paid for something and has consumed or used it, it is contrary to natural justice that he should recover back the money which he has paid. Here the infant plaintiff who claimed to recover back the money which he had paid to the defendant had had the use ofa quantity of furniture for somemonths. Hecould not give back this benefit or replace the defendant in the position in which he was before the contract. The object of the statute would seem to have been to restore the law for the protection of infants upon which judicial decisions were considered to have imposed qualifications. The legislature never intended in making provisions for this purpose to sanction a cruel injustice.’
That case the county court judge treated as binding on him and adopted as the basis of his decision. He came to the conclusion that the plaintiff had had the benefit of the contract and that, although he had not had everything which he expected to get, there was noat total failure of consideration.
In view of Valentini v. Canali I think his decision was right. I cannot distinguish between the recovery ofa specific chattel under a void contract and the recovery of money. If the latter can not be recovered, neither can the former. In order to succeed here it was incumbent on the plaintiff to show a complete failure of consideration; this he has failed to do, and in my view the decision of the county court judge was right and the appeal must bedismissed.
Hart v. O’Connor
[1985] AC 1000, Privy Council
LordBrightman Itis important to appreciate that no imputations whatever are made by the plaintiffs against the integrity of the defendant, and rightly so. The defendant’s conduct leading up to the sale was above reproach….
Thdeefendant now appeals to Her Majesty in Council. He does not challenge the finding of the vendor’s mental incapacity, nor the Court of Appeal’s finding on the question oflaches. The plaintiff trustees for their part do not contend that the defendant knew or ought reasonably to have known of the vendor’s incapacity. Apart from questions arising out of the defendant’s claim forcompensation, the issues raised by the parties on this appeal are as follows: (A) Whether Archer v. Culler [1980) 1 NZLR 386 was rightly decided; that is to say, whethera con tract bya person of unsound mind, whose incapacity is unknown to the other contracting party, can be avoided (at law) on the ground that it is ‘unfair’ to the party lacking capacity (or those whom he represents), there being no imputations against the conduct of the other contracting party. (B) If Archer v. Cutler was rightly decided, whether the High Court and the Court of Appeal were correct in finding that the sale agreement was ‘unfair’ to the vendor. (C) If Archer v. Cutler was wrongly decided, whether the plaintiffs were entitled to have the contract set aside (in equity) as an ‘unconscionable bargain’ notwithstanding the complete innocence of the defendant. (D) If Archer v. Cutler was rightly decided, and the courts below correctly found that the sale agreement was ‘unfair,’ whether the sale agreement would escape rescission because it was impossible to achieve restitutio in integrurn.
In order to avoid unnecessary prolongation of the hearing and with a view to saving the partiesexpense, their Lordships invited counsel to confine their submissions to issues (A) and (C), leaving issues (B) and (D) for subsequent argument if necessary.
Their Lordships turn first to a consideration of Archer v. Cutler [1980) 1 NZLR 386. Their Lordships attach importance to three factors. First, this decision was accepted by both sides as correct when the case was argued at first instance. Secondly, the Court of Appeal in a strong judgment affirmed without hesitation that the law there set out was the law of New Zealand. Thirdly the Court of Appeal, when they gave judgment on the compensation appeal, under lined their previous statement of the law in the following important passage [1984]l NZLR 754, 755:
‘In that case it was held that there were no considerations of policy or principle precluding the court from holding that a contract entered into by a penon O’ unsound mind is voidable at his option if it is proved either that the other party knewo his unsoundness of mind or, whether or not he had that knowledge, the bargain was unfair. On the basis that this principle should be adopted for New Zealand this court expressly approved Archer v. Cutler. In the result it made a declaration that the agreement for sale and purchase was rescinded.’
If Archer v. Cutler is properly to be regarded as a decision based on considerations peculiar to New Zealand, it is highly improbable that their Lordships would think it right to impose their own interpretation of the law, thereby contradicting the unanimous conclusions of the High Court and the Court of Appeal of New Zealand on a matter of local significance. If how ever the principle of Archer v. Cutler, if it be correct, must be regarded as having general appli cation throughout all jurisdictions based on the common law, because it does not depend on local considerations, their Lordships could not properly treat the unanimous view of the courts of New Zealand as being necessarily decisive. In their Lordships’ opinion the latter is the cor rect view of the decision.
Archer v. Cutler was a purchaser’s action for specific performance of a contract for the sale of land. By way of defence the vendor pleaded first that she was of unsound mind to the knowledge of the purchaser, secondly that she was induced to enter into the agreement by the undue influ ence of the purchaser, and thirdly, at 388, ‘that the contract should be set aside as a catching and unconscientious bargain.’ The facts were briefly as follows. The vendor and the purchaser were adjoining land owners. The purchaser had a problem over access to his land, which would be solved ifhe acquired the vendor’s land. lie knew the vendor had already given a purchase option to a friend, but he made known to the vendor his interest in acquiring her land should the oppor tunity occur. At some later time the vendor got in touch with the purchaser, and inquired if he was still interested in buying, as her friend had decided not to exercise her option. He called on her next day to discuss the matter. The vendor suggested a price of $15,000. The purchaser thought that $17,000 would be a fairer figure and he offered to pay it subject to his being able to arrange finance. He put his offer in writing, and she wrote out her acceptance. A week later he told her that he had arranged finance an’d that the sale was therefore unconditional. McMullin J held that an informed vendor would have expected to receive at least $24,000; that there was however no evidence that the purchaser knew the true value of the land, and that it was under standable that two persons with no professional expertise should fix a value of $17,000 as being a fair price. He also found that the vendor was suffering from advanced senile dementia at the time of the agreement which rendered her incapable of understanding the bargain, but that the purchaser was unaware of this. The agreement represented a sale at a substantial undervalue. It was held that contractual incapacity was established; that a contract entered into by a person of unsound mind was voidable at that person’s option if the other party knew of the incapacity or, whether or not he knew, if the contract was ‘unfair’ to the person of unsound mind; and that the contract was unfair, the indicia of unfairness being (i) a price significantly below the true value, (ii) the absence of independent legal advice for the vendor, and (iii) the difference in bargaining positions resulting from the disparity in their respective mental capacities.
If a contract is stigmatised as ‘unfair’, it may be unfair in one of two ways. It may be unfair by reason of the unfair manner in which it was brought into existence; a contract induced by undue influence is unfair in this sense. It will be convenient to call this ‘procedural unfairness.’ It may also, in some contexts, be described (accurately or inaccurately) as ‘unfair’ by reason of the fact that the terms of the contract are more favourable to one party than to the other. In order to distinguish this ‘unfairness’ from procedural unfairness, it will be convenient to call it ‘contractual imbalance.’ The two concepts may overlap. Contractual imbalance may be so extreme as to raise a presumption of procedural unfairness, such as undue influence or some other form of victimisation. Equity will relieve a party from a contract which he has been induced to make as a result of victimisation. Equity will not relieve a party from a contract on the ground only that there is contractual imbalance not amounting to unconscionable dealing. Of the three indicia of unfairness relied upon by the judge in Archer v. Cutler (assuming unfair ness to have existed) the first was contractual imbalance and the second and third were pro cedural unfairness.
The judgment in Archer v. Cutler [1980] 1 NZLR 386 contains, if their Lordships may be permitted to say soa, most scholarly and erudite review by the judge of the textbook authori ties and reported cases on the avoidance of a contract made by a person of unsoundmind. For
present purposes the key passages in the judgment are, at 400:
‘From these authorities, it would seem that the English law on the subject is ill-defined. The case of Imperial Loan Co. Ltd v. Stone [1892) 1 Q!3 599 widely accepted as beinga statement of the law on avoidance of contracts made with persons of unsound mind would, save in the judgment of Lopes LJ, seem to regard unfairness of the contract as being of no moment. Proof of unsoundness of mind and the other party’s knowledge of that unsound ness alone will avoid the contract. But the passage cited from the judgment of Lopes LJ and the dicta of Pollock CB in Molton v. Camroux (1848) 2 Exch. 487, of PattesonJ on appeal in the same case, of Sir Ernest Pollock MR in York Glass Co. Ltdv. Jubb (l 924) 131 LT 559 and of Sargant LJ in the same case would suggest that proof of unfairness ofa bar gain entered into by a person of unsound mind, even though that unsoundness be not known to the other party, will suffice to avoid it.’
And, at 401:
‘I find nothing in policy or principle to prevent me from holding thata contract entered into bya person of unsound mind is voidable at his option if it is proved either that the other party knew of his unsoundness of mind or, whether or not he had that knowledge, the contract was unfair to the person of unsound mind.’
Their Lordships apprehend that in these passages the judge is dealing indifferently with pro cedural unfairness and contractual imbalance, either of which, or both of which in combination, may enable the contract to be avoided against a contracting party ignorant of the mental incapacity of the other.
The original rule at law, and still the rule in Scotland, was that a contract witha person of unsound mind was void, because there could be no consensus ad idem. This was later qualified bya rule thata person could not plead his own unsoundness of mind in order to avoida con tract he had made. This in turn gave way to a further rule that such a plea was permissible if it could be shown that the other contracting party knew of the insanity.
Their Lordships turn to the three cases mentioned in the first citation from Archerv. Cutler. The starting point for a consideration of the modern rule is Molton v. Camroux (1848)2 Exch. 487, and, on appeal, (1849) 4 Exch. 17, which was heard first in the Court of Exchequer, and later in the Court of Exchequer Chamber. It arose out of the purchasebya· person of unsound mind of annuities from a life assurance society. The society had granted the annuities in the ordinary course of its business. After referring to earlier authorities thaat plea of insanity would not prevail unless the other contracting party knew of it, the court said,2 Exch. 487, 502-3:
‘We are not disposed to lay down so general a proposition, as that all executed contracts bona fide entered into must be taken as valid, though one of the parties be of unsound mind; we think, however, that we may safely conclude, that whena person, apparently of sound mind, and not known to be otherwise, enters into a contract for the purchase of property which is fair and bona fide, and which is executed and completed, and the property, the subject matter of the contract, has been paid for and fully enjoyed, and cannot be restored so as to put the parties in statu quo, such contract cannot afterwards be let aside, either by the alleged lunatic, or those who represent him.’
The case was then heard by the Court of Exchequer Chamber, 4 Ex. 17. The court identitied the issue as, at 19:
‘whether the mere fact of unsoundness of mind, which was not apparent,11aufflc:tent to vacatea fair contract executed by the grantee, by payment of the conlidmtlonmoneya, nd intended bona fide to be executed by the grantor, by payment of the annuity”
The answer was:
‘the modern cases show, that when that state of mind was unknown to the other contract ing party, and no advantage was taken of the lunatic, the defence cannot prevail, especially where the contract is not merely executory, but executed in whole or in part, and the par ties cannot be restored altogether to their original position.’
In the foregoing passages and in certain other citations from the authorities, their Lordships find it convenient to emphasise references to ‘fairness’ and ‘not taking advantage’ and the like. The judge in Archer v. Cutler read these passages from Molton v. Camroux as emphasising the importance of fairness as an ingredient in an enforceable contract with a lunatic whose con dition of mind is unknown to the other party; see 396 and 397. However their Lordships respectfully think that Molton v. Camroux is not an authority for the proposition that contrac tual imbalance, or procedural unfairness short of unconscionable conduct or equitable fraud,
enables a person of unsound mind to escape from the contract.
In Molton v. Camroux, 2 Exch. 487, 503, Pollock CB listed the circumstances which would enable the courts safely to conclude that a contract with a lunatic apparently of sound mind should be upheld. One such circumstance was that the contract was ‘fair and bona fide.’ This was an appropriate qualification for the purpose of excluding cases where the other contracting
party, though ignorant of the insanity, was guilty of fraud. It does not, their Lordships respectfully think, support the proposition that the court is entitled to embark on a balancing exercise
before upholding such a contract, in order to see where the balance of advantage lies; and if it is thought that the advantage lies, or at the time of the contract lay, substantially in favour of the innocent party of sound mind, then the contract can be set aside. This seems apparent from the earlier passages in the judgment of Pollock CB. At 502 he equated ‘fairness’ with ‘made in good faith’ when discussing counsel’s distinction between the executed and the executory con tract of a lunatic. In the quotations,he selected from Brown v. Jodre/1 (1827) 3 C & P 30 and Dane v. Viscountess Kirkwa/1 (1838) 8 C & P 679 the person of unsound mind can have the con tract set aside if the other party ‘imposed’ upon him, or ‘took advantage of’ his unsoundness of mind. These references seem to their Lordships to demonstrate that it was procedural unfair ness to which Pollock CB was directing his mind and not contractual imbalance. The same is to be said of the judgment of the Court of Exchequer Chamber. Their Lordships find nothing in Molton v. Camroux to suggest that contractual imbalance, falling short of some species of fraud, entitles a person of unsound mind, whose mental impairment is not apparent, to have the contract avoided.
In Imperial Loan Co. Ltd v. Stone [1892] 1 QJJ 599 a person of unsound mind was sued on a promissory note which he had signed as surety. The jury found that he was insane when he signed the note but there was no finding as to the creditor’s knowledge of such insanity. Nevertheless the judge entered a verdict against the creditor. On appeal it was submitted that there was no authority that a man could be sued and made liable on an executory contract which he had made when of unsound mind, except in the case of a contract for necessaries. This sub mission was rejected, and a new trial was directed. Lord Esher MR said, at 601:
‘When a person enters into a contract, and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executory or executed, as ifhe had been sane when he made it, unless he can prove further that the person with whom he contracted knew him to be so insane as not to be capable of understanding what he was about.’
Fry LJ said, at 602:
‘It thus appears that there has been grafted on the old rule the exception that the contracts of a person who is non compos mentis may be avoided when his condition can be shewn to have been known to the plaintiff. So far as I know, that is the only exception.’
Lopes LJ introduced the word ‘fair’ into his statement of the rule, at 603:
‘In order to avoida fair contract on the ground of insanity, the mental incapacity of the one must be known to the other of the contracting parties. A defendant who seeks to avoid a contract on the ground of his insanity, must plead and prove, not merely his incapacity, but also the plaintiff’s knowledge of that fact, and unless he proves these two things he
cannot succeed.’
The judge in Archer v. Cutler [1980] 1 NZLR 386 relied on the statement of Lopes LJ that the mental incapacity ofa lunatic must be known to the other contracting party ‘in order to avoida fair contract on the ground of insanity’, as implying that such knowledge is unnecessary in order to avoida contract which is unfair in the sense of contractual imbalance. But in their Lordships’ view ‘fair’ was quite appropriately used by Lopes LJ so as to except the case of the apparently sane person who is imposed upon in a manner which equity regards as uncon scionable, and was not intended to permit an inquiry into the balance of the terms of the con tract. The quotation from Lopes LJ which the judge in Archer v. Cutler relied upon, at 398, omits the succeeding sentence where Lopes LJ repeats the rule without any reference to ‘fairness’ and says in unqualified terms [1892] 1 QJJ 599, 603:
‘A defendant who seeks to avoid a contract on the ground of his insanity, must plead and prove, not merely his incapacity, but also the plaintiff’s knowledge of that fact, and unless he proves these two things he cannot succeed.’
In the face of that statement of the rule, it seems to their Lordships impossible to suppose that Lopes LJ regarded proof of contractual imbalance as a permissible alternative to knowledge of insanity wherea person of unsound mind seeks to set aside an agreement which was made in good faith. (Indeed, how is one to judge a contract of suretyship in terms of contractual bal ance?) This approach is in line with two cases which shortly followed Molton v. Camroux, namely Beavan v. M’Donnell (1854) 9 Exch. 309, 314, ‘the contract was entered into by the defendant and the money received, fairly and in good faith’; and Campbell v. Hooper (1855)3 Sm. & Giff. 153, 159, ‘the money was honestly paid, and no advantage taken by the plaintiff, nor any knowledge by him of the lunacy.’
Imperial Loan Co. Ltd v. Stone [1892] 1 QJJ 599 was considered and accepted as correct by the High Court of Australia in McLaughlin v. Daily Telegraph Newspaper Co. Ltd (No 2) (1904) 1 CLR 243, where Griffith CJ delivering the judgment of the court said of the Imperial Loan case and its predecessor Molton v. Camroux, at 272:
‘The principle of the decision seems, however, to be the same in both cases, which, in our judgment, establish that a contract made by a person actually of unsound, but apparently of sound, mind with another who deals with him directly, and who has no knowledge of the unsoundness of mind, is as valid as if the unsoundness of mind had noet xisted. If the man dealing with the person of unsound mind is aware of his insanity, the contract is void able at the option of the latter, but the party who takes advantage of the other cannot him self set up the incapacity. In this respect the matter is treated on the same footing as cases of fraud inducinga contract. There is, indeed, authority for saying that the equitable doc trines governing the validity or invalidity of a contract made with an insane person are only
a particular instance of the general doctrines relating to fraudulent contracts. In the ca&e11 last mentioned no unfairness of dealing could be imputed to the persons who sousht tll take advantage of the contract, which was, in fact, made, in each case, with an apparently saneperson. Theprinciple appears to be that the validity of a contract made with an apparently sane person is to be determined by the application of the same rulesu arc applied in ordinary cases.’
The third case mentioned by the judge in the key passage which their Lordshipa havo quot, from his judgment in Archer v. Cutler [1980] 1 NZLR 386,400, was Yori Gllul Co. Ll,v,Ji (1924) 131 LT 559, and on appeal (1925) 134 LT 36. This wasa vendor’s action bnlc:h of contract against the committee of the estate of a person of unsound mind. The purchaser pleaded first that he was of unsound mind to the knowledge of the defendant, secondly (bya late amendment) that the vendor knew that he was infirm of mind and body and incapable of managing his affairs reasonably and properly, that the price was excessive, that he had no legal advice and that there was no reasonable degree of equality between the contractingparties. The first plea wasa plea atlaw. The second plea was relied upon as raising a case in equity for the rescission of the contract upon the grounds alleged, that is to say, on the assumption that at law there wasa valid and binding contract but that it was one which a court of equity under the old practice, when the two courts were separate, would have rescinded and set aside and would have granted an injunction and restrained the plaintiff from enforcing at law; see the manner in which these two pleas were distinguished by Sir Ernest Pollock MR, 134 LT 36, 37,
Warrington LJ, at 41, and Sargant LJ, at 43. Issues (A) and (C) in the instant appeal reflect the same differentiation between the plea at law and the plea in equity.
P.0 Lawrence J, 131 LT 559, 561, had no doubt as to the rule at law:
‘It is well settled that where the defendant in an action of contract sets up the defence of his insanity at the date of the contract he must, in order to succeed, show that the plaintiff knew of his insanity.’
That plea failed, because the judge held that the company did not know of the unsoundness of mind. When, throughout his judgment, e judge refers to ‘fairness’, it is plain that he was doing so in the context of the second plea, the plea in equity, as is apparent from the following passage, also at 561:
‘In the result, after having carefully considered the whole of the evidence in support of this part of the case,I have come to the conclusion and hold as a fact that there was no want of fairness either in the terms of the contract itself or in the circumstances under which it was made, andI acquit all the persons concerned in the transaction on behalf of the plaintitiff company from the charge made ‘against them of having overreached or exercised any undue influence over the defendant.’ He held that the contract was accordingly valid.
This decision was upheld on appeal, 134 LT 36; the contract was valid at law because the vendor was unaware of the unsoundness of mind. The contract was not impeachable in equity because the purchaser failed to establish any of the four circumstances on which he relied in order to establish the plea in equity. It is however necessary to look a little closely at the judg ment ofSargant LJ. He identified three issues, at 43; first, whether there wasa concluded con tract apart from lunacy; if so, secondly, was that contract enforceable at law; thirdly:
‘if it was enforceable at law, was there any case for saying that equity would restrain the enforcement of the contract, that is to say, is the case one in which, prior to the Judicature Act a, bill would have lain for an injunction to prevent the plaintiff enforcing his remedies at law?’
There was plainly a concluded contract. In dealing with the second question, whether the con tract was enforceable at law, which he held it was, he added, at43-4:
‘It is possiblea question may arise in some future case, with which we have not to deal at present, whether, in the case of a contract which is not a reasonable one and which is made by an insane person that contract can be enforced, the other person not knowing of the insanity.I have looked through a number of cases and I have not founda single case in whicha contract has in fact been binding except where the contract was an ordinary rea sonable contract.I do not in any way want to attempt to express my own view on that point because the point has not been argued before us Ionly want to guard myself by say
ing that my mind is entirely open on the question whether the fairness of the bargain is an essential element to the enforceability of the bargain against a person who was in facta lunatic although not known to be such by the other contracting party.’
He then turned to the third point, the plea in equity, and held that it failed.
York Glass Co. Ltd v. Jubb then was a case in which the court considered a lunatic’s contract from the point of view of the position at law and separately from the point of view of equity; but Sargant LJ, also posed, but did not answer (because it did not arise and was not argued) the question whether on the first aspect a court of common law would have enforced a contract by a person of unsound but apparently sound mind, the terms of which were not ‘reasonable’ or ‘fair.’ In the opinion of their Lordships it is perfectly plain that historically a court of equity did not restrain a suit at law on the ground of’unfairness’ unless the conscience of the plaintiff was in some way affected. This might be because of actual fraud (which the courts of common law would equally have remedied) or constructive fraud, i.e. conduct which falls below the stan dards demanded by equity, traditionally considered under its more common manifestations of undue influence, abuse of confidence, unconscionable bargains and frauds on a power. (cf. Snell’s Principles of Equity, 27th edn. (I973), 545 ff.) An unconscionable bargain in this context would be a bargain of an improvident character made by a poor or ignorant person acting with out independent advice which cannot be shown to be a fair and reasonable transaction. ‘Fraud’ in its equitable context does not mean, or is not confined to, deceit; ‘it means an unconscien tious use of the power arising out of these circumstances and conditions’ of the contracting par ties; Earl of Aylesford v. Morris (1873) LR 8 Ch. App. 484, 491. It is victimisation, which can consist either of the active extortion of a benefit or the passive acceptance of a benefit in uncon scionable circumstances.
Their Lordships have not been referred to any authority that a court of equity would restrain a suit at law where there was no victimisation, no taking advantage of another’s weakness, and the sole allegation was contractual imbalance with no undertones of constructive fraud. It seems to their Lordships quite illogical to suppose that the courts of common law would have held that a person of unsound mind, whose affliction was not apparent, was nevertheless free of his bargain if a contractual imbalance could be demonstrated which would have been of no avail to him in equity. Nor do their Lordships see a sufficient foundation in the authorities brought to their attention to support any such proposition.
Inthe opinion of their Lordships, to accept the proposition enunciated in Archer v. Cutler that a contract with a person ostensibly sane but actually of unsound mind can be set aside because it is ‘unfair’ to the person of unsound mind in the sense of contractual imbalance, is unsupported by authority, is illogical and would distinguish the law of New Zealand from the law of Australia … for no good reason, as well as from the law of England from which the law of Australia and New Zealand and other ‘common law’ countries has stemmed. In so saying their Lordships differ with profound respect from the contrary view so strongly expressed by the New Zealand courts.
To sum the matter up, in the opinion of their Lordships, the validity of a contract entered into by lunatic who is ostensibly sane is to be judged by the same standards as a contract by a person of sound mind, and is not voidable by the lunatic or his representatives by reason of ‘unfairness’ unless such unfairness amounts to equitable fraud which would have enabled the complaining party to avoid the contract even if he had been sane.
Their Lordships turn finally to issue (C), whether the plaintiffs are entitled to have the con tract set aside as an ‘unconscionable bargain.’ This issue must also be answered in the negative, because the defendant was guilty of no unconscionable conduct. Indeed, as is conceded, he acted with complete innocence throughout. He was unaware of the vendor’s unsoundneu of mind. The vendor was ostensibly advised by his own solicitor. The defendant had no mean1of knowing or cause to suspect that the vendor was not in receipt of and acting in accordance with the most full and careful advice. The terms of the bargain were the terms propoaed by the ven dor’s solicitor, not terms imposed by the defendant or his solicitor. There wu no equitable fraud, no victimisation, no taking advantage, no overreaching or other description of uncon scionable doings which might have justified the intervention of equity to restrain an action by the defendant at law. The plaintiffs have in the opinion of their Lordships failed to make out any case for denying to the defendant the benefit of a bargain which was struck with complete propriety on his side.
For these reasons their Lordships have tendered to Her Majesty their humble advice that the appeal should be allowed.
Brougham v. Dwyer
(1913) 108 LT 504, Divisional Court
Lush, .J:.. When one considers the real meaning of the expression that itwas ultra vires on the part of the building society to enter into this transaction, the whole case becomes plain. The directors of the society purporting to act on behalf of the building society, and lO makea con tract on itsbehalf, lent the society’s money to the defendant by way of an overdraft. It turned out that in point of law the building society were incompetent to make sucha contract, and it followed that the contract which the directors thought they were making was nota contract at all, but was simply a transaction which in point of law did not exist. The consequence was that the defendant had received moneys belonging to the building society undera transaction which had no validity of any sort or kind. If the matter stood there, I should have thought it plain that there being ho contract an action for money had and received would lie. The case appears to me to be on all fours with one in which money has been advanced on something which was thought to bea contract, but as to which it turns out that there has been a total failure of con sideration.A defence was raised to the plaintiff’s claim to which the learned judge gave effect, that this transaction being ultra vires had the same consequences in point of law as if it had been an illegal transaction. If the transaction had been illegal, of course no action would lie, because the court would not allow a person to set up as part of his cause of action something which was necessarily an illegal contract. The learned judge took the view that to all intents and purposes this was an illegal contract, and he also appears to have taken the view that the plaintiff was suing upon sucha contract. If that had been the case, the defendant would have hada complete answer to the claim. But when one remembers the meaning of ultra vires the position is differ ent. Thecontract was only no contract because the building society were unable to enter into it. There was nothing wrong in the contract itself or anything illegal in its nature, but the society being incompetent to make it, it did not exist in point of law. That being so the action was
maintainable, and the defendant had no answer to it. It was an action brought for money lent undera transaction which was thought to be valid but which was in fact not valid. Onprinciple I can see no possible reason why such an action should not be maintainable, and the Court of Appeal in Re Coltman 45 LT Rep. 392 clearly decided that in a case such as the present usum• ing the contract not to be illegal, there would be no answer to the action.I am therefore of opinion that there was no defence to the present action, and the appeal must accordingly be allowed.
Woolwich Equitable Building Society v. Inland Revenue Commissioners
[1993] AC 70, House of Lords
Lord Keith The foregoing review of the native authorities satisfies me that they afford no support for Woolwich’s major proposition. The principle to be derived from them, in my opinion, is that payments not lawfully due can not be recovered unless they were made as a result of some improper form ofpressure. Such pressure may take the form of duress, as in Maskell v. Horner [1915]3 KB 106. It may alterna tively take the form of withholding or threatening to withhold the performance of some public duty or the rendering of some public service unless a payment is made which is not lawfully due or is greater than that which is lawfully due, as was the position in the colore officii cases. The mere fact that the payment has been made in response toa demand bya public authority does not emerge in any of the cases as constituting or forming part of the ratiodecidendi. Many of the cases appear to turn upon a consideration of whether the payment was volunwy or involuntary. In my opinion that simply involves that the payment was voluntary if no improper pl’ll sure was brought to bear, and involuntary if it was. In the present case no pressure to pay waa put upon Woolwich by the revenue. Woolwich paid because it calculated that it was in its com mercial interest to do so. It could have resisted payment, and the revenue had no means other than the taking of legal proceedings which it might have used to enforce payment. The threat of legal proceedings is not improper pressure. There was no improper pressure by the revenue and in particular there was no duress.
To give effect to Woolwich’s proposition would, in my opinion, amount to a very far reach ing exercise of judicial legislation. That would be particularly inappropriate having regard to the considerable number of instances which exist of Parliament having legislated in various fields to define the circumstances under which payments of tax not lawfully due may be recov ered, and also in what situations and upon what terms interest on overpayments of tax may be paid. Particular instances are section 33 of the Taxes Management Act 1970 as regards over paid income tax, corporation tax, capital gains tax and petroleum revenue tax; section 24 of the Finance Act 1989 as regards value added tax; section 29 of the Finance Act 1989 as regards excise duty and car tax; section 241 of the Capital Transfer Tax Act 1984 as regards inheritance tax; and section 13(4) of the Stamp Act 1891 (54 & 55 Viet. c. 39) as regards stamp duty. Mention may also be made of section 9 of the General Rate Act 1967 which, as described above, was considered by this House in Reg. v. Tower Hamlets London Borough Council, Ex parte Chetnik Development Ltd (1988] AC 858. It is to be noted that the section only applies where overpayment of rates is not otherwise recoverable, and it plainly did not occur to the House in that case that the overpayment might be recoverable apart from the section. It seems to me that formulation of the precise grounds upon which overpayments of tax ought to be recoverable and of any exceptions to the right of recovery, may involve nice considerations of policy which are properly the province of Parliament and are not suitable for consideration by the courts. In this connection the question of possible disruption of public finances must obviously be a very material one. Then it is noticeable that existing legislation is restrictive of the extent to which interest on overpaid tax (described as ‘repayment supplement’) may be recovered. A general right of recovery of overpaid tax could not incorporate any such restriction.
I would add that although in the course of argument some distinction was sought to be drawn between overpayment of tax under regulations later shown to be ultra vires and overpayment due to the erroneous interpretation of a statute, no such distinction can, in my view, properly be drawn My Lords, for these reasons I would allow this appeal.
Lord Goff
There can be no doubt that this appeal is one of considerable importance. It is certainly of importance to both parties-to the revenue, which is concerned to maintain the traditional posi tion under which the repayment of overpaid tax is essentially a matter for its own discretion; and to Woolwich, which adopted a courageous and independent stance about the lawfulness of the underlying regulations, and now adopts a similar stance about the obligation of the revenue to repay tax exacted without lawful authority. In addition, of course, there is a substantial sum of money at stake. But the appeal is also of importance for the future of the law of restitution, since the decision of your Lordships’ House could have a profound effect upon the structure of this part of our law. It is a reflection of this fact that there have been cited to your Lordship not only the full range of English authorities, and also authorities from Commonwealth coun tries and the United States of America, but in addition a number of academic work of considerable importance. These include a most valuable Consultation Paper (Law C.Om. No. 120) published last year by the Law Commission, entitled ‘Restitution of Payments Made Under 1 Mistake of Law,’ for which we owe much to Mr Jack Beatson and also, I undmtsnd, to Dr Su, Arrowsmith; and a series of articles by academic lawyers of distinction workin1 In the fttld restitution. I shall be referring to this academic material in due course. But I wish to record once that, in my opinion, it is of such importance that it hasa powerful bearing upon the con sicleration by your Lordships of the central question in the case.
My first task must be to review the relevant authorities lpropose to encapsulate their effect ina number of propositions which can, I believe, be so stated as to reflect the law as it is presendy understood witha reasonable degree of accuracy. The law as so stated has,I think, been so understood for most of this century, at least at the level of the Court of Appeal; but it has been the subject of increasing criticism by academic lawyers, and has been departed from in significant respects in some Commonwealth countries, both by legislation and by judicial development of the law.A central question in the present case is whether it is open to your Lordships’ House to follow their judicial brethren overseas down the road of development of the law; and, if so, whether it would be appropriate to do so, and which is the precise path which it would then be appropriate to choose. But the answers to these fundamental questions must pforlolpowosaitiorenvs.iew of the law as understood at present, which I would express in the following
(1) Whereas money paid undera mistake of fact is generally recoverable, asa general rule money is not recoverable on the ground that it was paid undera mistake of law. This principle was established in Bi/hie v. Lumley (1802) 2 East 469. It has however been the subject of much criticism, which has grown substantially during the second half of the present century. The principle had been adopted in most, knot all, Commonwealth countries; though in some it has now been modified or abandoned, either by statute or by judicial action. No such principle applies in civil law countries, and its·adoption by the common law has been criticised by comparative lawyers as unnecessary and anomalous. This topic is the subject of the Consultation PaperNo. 120 published by the Law Commission last year, in which serious criticisms of the wrualredoffonr odniscreucsosivoenr.y are rehearsed and developed, and proposals for its abolition are put forward for discussion.
(2) But money paid under compulsion may be recoverable. In particular: (a) money paid as a result of actual or threatened duress to the person, or actual or threatened seizure ofa per son’s goods, is recoverable. For an example of the latter, see Maske/Iv. Horner [1915]3 KB 106. Since these forms of compulsion are not directly relevant for present purposes, it is unneces
sary to elaborate them; butI think it pertinent to observe that the concept of duress has in recent years been expanded to embrace economic duress.
(b) Money paid toa person ina public or quasi-public position to obtain the performance by him ofa duty which he is bound to perform for nothing or for less than the sum demanded by him is recoverable to the extent that he is not entitled to it. Such payments are often described as having been demanded colore officii. There is much abstruse learning on the subject (see, in particular, the illuminating discussion by WindeyerJ in Mason v. New South Wales, 102 CLR
108, 139-2), but for present purposes it is not, I think, necessary for us to concern ourselves with this point of classification. Examples of influential early cases are Morgan v. Palmer,2 B &
C 729 and Steele v. Williams,8 Ex. 625; a later example of some significance is T. and Brocklebank Ltd v. The King [1925]I KB 52.
(c) Money paid toa person for the performance of a statutory duty, which he is bound to perform fora sum less than that charged by him, is also recoverable to the extent of the over charge.A leading example of such a case is Great Western RailwayCo. v. Sutton, LR4 HL 226;
fora more recent Scottish case, also the subject of an appeal to this House, see South of Scotland Electricity Board v. British Oxygen Co. Ltd [l 959]I WLR 587.
(d) In cases of compulsion,a threat which constitutes the compulsion may be expressed or implied,a point perhaps overlooked in Twyford v. Manchester Corporation [l 946] Ch. 236.
(e) I would not think it right, especially bearing in mind the development of the concept of economic duress, to regard the categories of compulsion for present purposes as closed.
(3) Wherea sum has been paid which is not due, but it has not been paid undera mistake of fact or under compulsion as explained under (2) above, it is generally not recoverable. Sucha payment has often been calleda voluntary payment. In particular,a payment is regarded as a voluntary payment and so as irrecoverable in the following circumstances.
(a) The money has been paid under a mistake oflaw: see (1) above. See e.g., Slater v. Burnley Corporation, 59 LT 636 and National Pari-Mutue/ Association Ltd v. The King, 47 TLR ll0.
(b) The payer has the opportunity of contesting his liability in proceedings, but instead gives way and pays: see e.g., Henderson v. Folkestone Waterworks Co. (1885) 1 TLR 329, and Sargood Brothers v. The Commonwealth, 11 CLR 258, especially at 301, per Isaacs J.So where money has
been paid under pressure of actual or threatened legal proceedings for its recovery, the payer cannot say that for that reason the money has been paid under compulsion and is therefore recoverable by him. If he chooses to give way and pay, rather than obtain the decision of the court on the question whether the money is due, his payment is regarded as voluntary and so it not recoverable: see e.g., William Whiteley Ltd v. The King, 101 LT 741.
(c) The money has otherwise been paid in such circumstances that the payment was made to close the transaction. Such would obviously be so in the case of a binding compromise; but even where there is no consideration for the payment, it may have been made to close the transac tion and so be irrecoverable. Such a payment has been treated as a gift: see Maskell v. Horner [1915] 3 KB 106, ll8, per Lord Reading CJ.
(4) A payment may be made on such terms that it has been agreed, expressly or impliedly, by the recipient that, if it shall prove not to have been due, it will be repaid by him. In that event, of course, the money will be repayable. Such was held to be the case in Sebel Products Ltd v. Customs and Excise Commissioners [1949] Ch. 409 (although the legal basis upon which Vaisey J there inferred the existence of such an agreement may be open to criticism). On the other hand, the mere fact that money is paid under protest will not give rise of itself to the infer ence of such an agreement; though it may form part of the evidence from which it may be inferred that the payee did not intend to close the transaction: see Maskell v. Horner [1915] 3 KB 106, 120, per Lord Reading CJ.
The principles which I have just stated had come to be broadly accepted, at the level of the Court of Appeal, at least by the early part of this century. But a formidable argument has been developed in recent years by leading academic lawyers that this stream of authority should be the subject of 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 con sideration for the payment. I refer in particular to the powerful essay by Professor Peter Birks (in the volume Essays on Restitution (1990), edited by Professor Finn, at 164 ff) entitled ‘Restitution from the Executive: a Tercentenary Footnote to the Bill of Rights.’ I have little doubt that this essay by Professor Birks, which was foreshadowed by an influential lecture delivered by Professor W.R. Cornish in Kuala Lumpur in 1986 (the first Sultan Azlan Shah Law Lecture (1987) J Mal. (S Comp L 41), provided the main inspiration for the argument of Woolwich, and the judgments of the majority of the Court of Appeal, in the present case.
I have a strong presentiment that, had the opportunity arisen, Lord Mansfield would have seized it to establish the law in this form. His broad culture, his knowledge and understanding of Roman law, his extraordinary gift for cutting through technicality to perceive and define principle, would surely have drawn him towards this result. Mr Gardiner, for Woolwich, relied upon Campbell v. Hall, l Cowp. 204 as authority that he did in fact reach that very conclusion. But that case was the subject of research by Mr Glick and his team, and was revealed (from the reports in Lofft 655 and in 20 St.Tr. 239) to be a cause celebre in which the great issue (of immense public interest) related to the power to levy taxes in the island of Grenada following its capture from the French King, it being accepted by the Crown without argument that the relevant taxes, if not duly levied, must be repaid. Lord Mansfield’s judgment in the c:ae, adverse to the Crown, became known as the Magna Carta of the Colonies. The fact that the basis of recovery was not in issue, and indeed was overshadowed by the great quation in the case, must detract from its importance in the present context; even so, the limple fact remaina that recovery was stated to be founded upon absence of consideration for the payment.
Furthermore there are other cases in the late 18th and early 19th centuries, of which De11J v. Parsons,2 B & Aid. 562 is a significant example, which support this approach.
Later cases in the 19th century upon which Professor Birks places much reliance are Steele v. Williams,8 Ex. 625, and Hooper v. Exeter Corporation, 56 LJQB457. In Steele v. Williams, the judgment of MartinB was certainJy on the basis that the money, having been the subject of an ultra vires demand bya public officer, was as such recoverable. That approach seems also to have provided considerable attraction for Parke B; but although the point was left open by him, the case was decided by the majority (Parke and Platt BB) on the ground of compul sion. Both of them treated the case as one in which there was an implied threat by the defen dant to deprive the plaintiff’s clerk of his right to take extracts from the parish register for no charge; and both appear to have concluded that, in the circumstances, although that threat was made before the plaintiff’s clerk obtained the extracts he needed, nevertheless it was causative of the payment which was therefore recoverable on the ground of compulsion. In Hooper v. Exeter Corporation, 56 LJQB 457 Professor Birks is perhaps on stronger ground, although the basis on which the court proceeded is not altogether clear. The plaintiff sought to recover dues paid by him for landing stone for which, unknown to him, he was not liable because the stone was covered by an exemption. It was argued on his behalf that the payment was not voluntary, citing Morgan v. Pp/mer, 2 B & C 729 (a case of compulsion). Reliance was also placed upon the power of absolute and immediate distress in thestatute. The court accepted the plaintiff’s argument. Both Lord Coleridge CJ and SmithJ relied on Morgan v. Palmer; SmithJ also invoked Steele v. Williams, 8 Ex. 625, without however referring to the judgment of Martin B. Neither referred to the power of immediatedistress. The case, brief and obscure though it is, might well have provided a basis upon which judges could later have built to develop a principle that money demanded ultra vires bya public authority was prima facie recoverable.
Professor Birks also places reliance upon Queens of the River SteamshipCo. Ltd v. Conservators of the River Thames, 15 TLR 474, and an obiter dictum of Atkin LJ in Attorney-Generavl . Wilts United Dain.es Ltd, 37 TLR 884,887. The former case, so far as it goes is undoubtedly consis tent with his thesis; but it is very briefly reported, without any indication of the arguments advanced or cases cited, and the conclusion is encapsulated in one brief sentence. The dictum of Atkin LJ is to the effect that such a payment is, if paid under protest, recoverable on the simple ground that it wasa sum received by the public authority to the use of the citizen. However, the subsequent decision of the Court of Appeal inT and .J. Brocklebank Ltd v. The King [l 925]I KB 52 shows that, in circumstances similar to those of the Wilts United Dairies case, recovery could be, and indeed there was, founded upon compulsion and not upon the simple fact that the money was paid pursuant to an ultra viresdemand: see [1925]I KB 52, 61-2, 67, 72, per Bankes LJ (accepting the opinion of the trial judge, AvoryJ [1924)I KB 647, 652-3), and per Scrutton and Sargant L JJ. So the question of the soundness of Atkins LJ’s dic tum did not arise for decision in that case. Even so, a similar approach to that of Atkin LJ is to be found in an obiter dictum of Dixon CJ in Mason v. Ne11J South Wales, 102 CLR 108, II 7, which was to the effect that he had not been able completely to reconcile himself to the view that, if the weight ofa de facto governmental authority manifested ina money demand is not froersmistseodf, cthoemmpuolnseioynb. elongs to the Crown unless the payment was made under certain specific In all the circumstances, it is difficult to avoid the conclusion that in this country, at the level of the Court of Appeal (see, in particular, the decisions of that court inT and .J. Brocklebank Ltdv. The King [l 925]I KB 52 and National Pan·-Mutue/ Association Ltd v. The King, 47 TLR 110), the law had settled down in the form which I have indicated.I have little doubt thata major force in the moulding of the law in this form is to be found in the practitioners’ text books of the time, notably Bullen (S Leake’s Precedents of Pleadings, 3rdedn. (1868), 50, and Leake’s La11J of Contracts, 5thedn. (1906), 61; we can see this reflected in the form of the arguments advanced in the cases, and the manner in which the court reacted to submissions by counsel challenging the accepted view. I fear that the courts sorely missed assistance from academic lawyers specialising in this branch of the law; but the law faculties in our universities were only beginning to be established towards the end of the 19th century. It can however be said that the principle of justice, embodied in Martin B’s judgment in Steele v. Williams, 8 Ex. 625 and per haps also in Hooper v. Exeter Corporation, 56 LJQB 457, and expressed in the dicta of Lord Atkin and Sir Owen Dixon, still calls for attention; and the central question in the present case is whether your Lordships’ House, deriving their inspiration from the example of those two great judges, should rekindle that fading flame and reformulate the law in accordance with that principle. I am satisfied that, on the authorities, it is open to your Lordships’ House to take that step. The crucial question is whether it is appropriate for your Lordships to do so.
I now turn to the submission of Woolwich that your Lordships’ House should, despite the authorities to which I have referred, reformulate the law so as to establish that the subject who makes a payment in response to an unlawful demand of tax acquires forthwith a prima facie right in restitution to the repayment of the money. This is the real point which lies at the heart of the present appeal; in a sense, everything which I have said so far has done no more than set the stage for its consideration.
The justice underlying Woolwich’s submission is, I consider, plain to see. Take the present case. The revenue has made an unlawful demand for tax. The taxpayer is convinced that the demand is unlawful, and has to decide what to do. It is faced with the revenue, armed with the coercive power of the state, including what is in practice a power to charge interest which is penal in its effect. In addition, being a reputable society which alone among building societies is challenging the lawfulness of the demand, it understandably fears damage to its reputation if it does not pay. So it decides to pay first, asserting that it will challenge the lawfulness of the demand in litigation. Now, Woolwich having won that litigation, the revenue asserts that it was never under any obligation to repay the money, and that it in fact repaid it only as a matter of grace. There being no applicable statute to regulate the position, the revenue has to maintain this position at common law.
Stated in this stark form, the revenue’s position appears to me, as a matter of common just ice, to be unsustainable; and the injustice is rendered worse by the fact that it involves, as Nolan J pointed out [1989] I WLR 137, 140, the revenue having the benefit of a massive interest-free loan as the fruit of its unlawful action. I turn then from the particular to the general. Take any tax or duty paid by the citizen pursuant to an unlawful demand. Common justice seems to require that tax to be repaid, unless special circumstances or some principle of policy require otherwise; prima facie, the taxpayer should be entitled to repayment as of right.
To the simple call of justice, there are a number of possible objections. The first is to be found in the structure of our law of restitution, as it developed during the 19th and early 20th centuries. That law might have developed so as to recognise a condictio indebiti-an action for the recovery of money on the ground that it was not due. But it did not do so. Instead, as we have seen, there developed common law actions for the recovery of money paid under a mis take of fact, and under certain forms of compulsion. What is now being sought is, in a sense, a reversal of that development, in a particular type of case; and it is said that it is too late to take that step. To that objection, however, there are two answers. The first is that the retention by the state of taxes unlawfully exacted is particularly obnoxious, because it is one of the most fun damental principles of our law–enshrined in a famous constitutional document, the Bill of Rights 1688-that taxes should not be levied without the authority of Parliament; and full effect can only be given to that principle if the return of taxes exacted under an unlawful demand c:an be enforced as a matter of right. The second is that, when the revenue makes a demand for tar,
that demand is implicitly backed by the coercive powers of the state and may well entail unpleasant economic and social consequences if the taxpayer doee noc p!I)’, In any event, it seems strange to penalise the good citizen, whose natural instinct ia to h’Ult tht revenue and pay taxes when they are demanded of him. The force of this ansser is recognised in a much-quoted passage from the judgment of Holmes J in Atchison, Topeka (S Santa Fe Railway Co. v. O’Connor, 223 US 280, 285-6, when he said:
‘when, as is common, the state has a more summary remedy, such as distress, and the party indicates by protest that he is yielding to what he cannot prevent, courts sometimes per haps have been a little too slow to recognise the implied duress under which payment is made. But even if the state is driven to an action, if at the same time the citizen is put at a serious disadvantage in the assertion of his legal, in this case of his constitutional, rights, by defence in the suit, justice may require that he should be at liberty to avoid those dis advantages by paying promptly and bringing suit on his side. He is entitled to assert his supposed right on reasonably equal terms.’
This particular answer might however point at first sight to a development of the common law concept of compulsion, rather than recognition of the broad principle of justice by which Woolwich contends. This was what in fact occurred in the leading Australian case of Mason v. New South Wales 102 CLR 108. It is impossible to summarise the effect of that complicated case in a few lines, but in practical terms the High Court of Australia found duress to exist in the possibility that the state might seize the plaintiff’s property. A similar tendency to expand the concept of compulsion is to be discovere,d in the majority judgment of the Supreme Court of Canada in Eadie v. Township of Brantford (1967) 63 DLR (2d) 561 (though events of a more dramatic character have since occurred in that jurisdiction, to which I will refer in a moment). This type of approach has also been advocated by Mr Andrew Burrows in his interesting essay entitled ‘Public Authorities, Ultra Virei and Restitution’ in Essays on the Law of Restitution (1991), edited by Mr Burrows, at 39 ff. We may expect that in any event the common law prin ciples of compulsion, and indeed of mistake, will continue to develop in the future. But the dif ficulty with this approach for the present case is that Woolwich was in reality suffering from no mistake at all, so much so that it was prepared to back its conviction that the revenue was act ing ultra vires by risking a very substantial amount of money in legal costs in establishing that fact; and, since the possibility of distraint by the revenue was very remote, the concept of com pulsion would have to be stretched to the utmost to embrace the circumstances of such a case as this. It is for this reason that Woolwich’s alternative claim founded upon compulsion did not loom large in the argument, and is difficult to sustain. In the end, logic appears to demand that the right of recovery should require neither mistake nor compulsion, and that the simple fact that the tax was exacted unlawfully should prima facie be enough to require its repayment.
There is however a second objection to the recognition of such a right of recovery. This is that for your Lordships’ House to recognise such a principle would overstep the boundary which we traditionally set for ourselves, separating the legitimate development of the law by the judges from legislation. It was strongly urged by Mr Glick, in his powerful argument for the revenue, that we would indeed be trespassing beyond that boundary if we were to accept the argument ofWoolwich. I feel bound however to say that, although I am well aware of the exist ence of the boundary, I am never quite sure where to find it. Its position seems to vary from case to case. Indeed, if it were to be as firmly and clearly drawn as some of our mentors would wish, I cannot help feeling that a number of leading cases in your Lordships’ House would never have been decided the way they were. For example, the minority view would have pre vailed in Donoghue v. Stevenson [1932) AC 562; our modern law of judicial review would have never developed from its old, ineffectual, origins; and Mareva injunctions would never have seen the light of day. Much seems to depend upon the circumstances of the particular case. In the present case Mr Glick was fully entitled to, and did, point to practical considerations to reinforce his argument. The first was that a case such as the present was so rare that it could not of itself call for a fundamental reformulation of the underlying principle a point which I
find unimpressive, when I consider that our task is essentially to do justice between the parties in the particular case before us. Second, however, he asserted that, if your Lordships’ House were to accept Woolwich’s argument, it would be impossible for us to set the appropriate limits to the application of theprinciple. An unbridled right to recover overpaid taxes and duties subject only to the usual six-year time bar was, he suggested, unacceptable in modern society. Some limits had to be set to such claims; and the selection of such limits, being essentially a matter of policy, was one which the legislature alone is equipped to make.
My reaction to this submission of Mr Glick is to confess (to some extent) and yet to avoid.I agree that there appears to be a widely held view that some limit has to be placed upon the recovery of taxes paid pursuant to an ultra vires demand. I would go further and accept that the armoury of common law defences, such as those which prevent recovery of moneypaid.under a binding compromise or to avoid a threat of litigation, may be either inapposite or inadequate for the purpose; because it is possible to envisage, especially in modern taxation law which tends to be excessively complex, circumstances in which some very substantial sum of money may be held to have been exacted ultra vires from a very large number oftaxpayers. It may well therefore be necessary to have recourse to other defences, such as for example short time limits within which such claims have to be advanced. An instructive example of this approach is to be found in German law, in which we find a general right of recovery which is subject to the prin ciple that an administrative act is, even if in fact unlawful, treated as legally effective unless and until it is cancelled, either by the authority itself or by an administrative court. Furthermorea citizen can only enforce the cancellation by making a formal objection within one month of noti fication; and if that objection is rejected by the authority, the citizen cannot benefit from the successful formal objection of another citizen; he must object in due time himself. Such dra conian time limits as these may be too strong medicine for our taste; but the example ofa general right of recovery subject to strict time limits imposed asa matter of policy is instructive for
us as we seek to solve the problem in the present case.
At this stage of the argument, I find it helpful to turn to recent developments in Canada.First, ina notable dissenting judgment (with which Laskin CJC concurred) in Hydro Electric Commission of Township of Nepean v. Ontario Hydro (1982) 132 DLR (3d) 193, 201-211, DicksonJ subjected the rule against recovery of money paid undera mistake of law toa devastating analysis and concluded that the rule should be rejected. His preferred solution was that, as in cases of mistake of fact, money paid under a mistake of law should be recoverable if it would be unjust for the recipient to retain it. Next, in the leading case of Air Canada v. British Columbia, 59 DLR (4th) 161, the question arose whether money in the form of taxes paid under a statute held to be ultra vires was recoverable. It is impossible for me, for reasons of space, to do more than summarise the most relevant parts of the judgments of the Supreme Court of Canada. Of the seven judges who heard the appeal, four thought it necessary to consider whether the taxes paid were recoverable at common law. The leading judgment was delivered by La Forest}, with whom Lamer and L’Heureux-DubeJJ agreed. First, he decided, at 192, to follow Dickson J’s lead, and to hold that the distinction between mistake of fact and mistake of law should play no part in the law of restitution. This did not however imply that recovery would follow in every case where a mistake had been shown toexist: ‘If the defendant can show that the payment was made in settlement of an honest claim, or that he has changed his posi tion asa result of the enrichment, then restitution will be denied.’ However he went on to hold, at 193, that, where ‘unconstitutional or ultra vires levies’ are in issue, special considerations arose. These weretwofold. First, if the plaintiff had passed on the relevant tax to others, the taxing authority could ·not be said to have been unjustly enriched at the plaintiff’s expense, and
he was not therefore entitled torecover. As La Forest} said, at 193: ‘The law of restitution is not intended to provide windfalls to plaintiffs who have suffered noloss.’ On that basis alone, he held that the plaintiff’s claim in the case before the court must fail. However, he went on to hold that the claim failed on another ground, viz., that as a general rule there willu, a matter of policy, be no recovery of taxes paid pursuant to legislation which is unconstitutional oor ther• wise invalid. Basing himself on authority from the United States, La ForestJ concludedmat any other rule would at best be inefficient, and at worst could lead to financiacl chaos … The rule against recovery should not however apply wherea tax isexacted,not under unconstitutional legislation, but through a misapplication of thelaw. He added, at 198, that, in his opinion, if recovery in all cases is to be the general rule, then that was best achieved through the route of statutory reform.
WilsonJ dissented. She did not think it necessary to consider whether the old rule barring recovery of money paid under mistake of law should be abolished, though had she thought it necessary to do so, she would have followed the approach of Dickson]. She considered, at 169, that money paid under unconstitutional legislation was generally recoverable:
‘The taxpayer, assuming the validity of the statute as I believe it is entitled to do, consid ers itself obligated to pay. Citizens are expected to be law-abiding. They are expected to pay their taxes. Pay first and object later is the general rule. The payments are made pursuant toa perceived obligation to pay which results from the combined presumption of constitutional validity of duly enacted legislation and the holding out of such validity by the legislature. In such circumstances I consider it quite unrealistic to expect the taxpayer to make its payments ‘underprotest.’ Any taxpayer paying taxes exigible undera statute
which it has no reason to believe or suspect is other than valid should be viewed as having paid pursuant to the statutory obligation to do so.’
Furthermore, she was unable to accept fhe view of La ForestJ that the principle of recovery should be reversed for policy reasons. S.he spoke in forthright terms, at 169: ‘What is the policy that requires such a dramatic reversal of principle? Why should the individual taxpayer, as opposed to taxpayers as a whole, bear the burden of government’s mistake?I would respectfully suggt:st that it is grossly unfair that X, who may not be (as in this case)a large corporate enterprise, should absorb the cost of government’s uncon stitutionalact. If it is appropriate for the courts to adopt some kind of policy in order to protect government against itself (and I cannot say that the idea particularly appeals to me), it should be one that distributes the loss fairly across thepublic. Theloss should not fall on the totally innocent taxpayer whose only fault is that it paid what the legislature improperly said was due.’
She also rejected, at 169-70, the proposed defence of ‘passing on.’ Accordingly in her opinion the taxpayer should be entitled to succeed. .
I cannot deny thatI find the reasoning of Wilson J most attractive. MoreoverI agree with her that, if there is to bea right to recovery in respect of taxes exacted unlawfully by the rev enue, it is irrelevant to consider whether the old rule barring recovery of money paid under mis take of law should be abolished, for that rule can have no application where the remedy arises not from error on the part of the taxpayer, but from the unlawful nature of the demand by the revenue. Furthermore, like Wilson J, I very respectfully doubt the advisability of imposing special limits upon recovery in the case of ‘unconstitutional or ultra vireslevies.’I shall reverta little later to the defence of passing on.
In all the circumstances,I do not consider that Mr Glick’s argument, powerful though it is, is persuasive enough to·deter me from recognising, in law, the force of the justice underlying Woolwich’s case. Furthermore, there are particular reasons which impel me to that conclusion. The first is that this opportunity will never come again. If we do not take it now, it will be gone forever. The second is thatI fear that, however compelling the principle of justice may be, it would never be sufficient to persuade a government to propose its legislative recognition by Parliament; caution, otherwise known as the Treasury, would never allow this to happen. The third is that, turning Mr Glick’s argument against him, the immediate practical impact of the recognition of the principle will be limited, for (unlike the present case) most cases will con tinue for the time being to be regulated by the various statutory regimes now in force. The fourth is that, if the principle is to be recognised, this is an almost ideal moment for that recog nition to take place. This is because the Law Commission’s Consultation Paper is now under active consideration, calling for a fundamental review of the law on this subject, including a fresh look at the various, often inconsistent, statutory regimes under which overpaid taxes and duties either may or must be repaid. The consultation may acquire a greater urgency and letlN of purpose if set against the background of a recognised right of recovery at common law. But in addition there is an immediate opportunity for the authorities concerned to reformulate, in collaboration with the Law Commission, the appropriate limits to recovery, on a coherent sys tem of principles suitable for modem society, in terms which can (if it is thought right to do so) embrace the unusual circumstances of the present case. In this way, legislative bounds can be set to the common law principle, as Mr Glick insists that they should. Fifth, it is well estab lished that, if the Crown pays money out of the consolidated fund without authority, such money is ipso facto recoverable if it can be traced: see Auckland Harbour Board v. The King [1924) AC 318. It is true that the claim in such a case can be distinguished as being proprietary in nature. But the comparison with the position of the citizen, on the law as it stands at pres ent, is most unattractive.
There is a sixth reason which favours this conclusion. I refer to the decision of the European Court of Justice, in Amministrazione de/le Finanze de/lo Stato v. SpA San Giorgio (Case 199/82) [1983) ECR 3595, which establishes that a person who pays charges levied by a member state contrary to the rules of community law is entitled to repayment of the charge, such right being regarded as a consequence of, and an adjunct to, the rights conferred on individuals by the Community provisions prohibiting the relevant charges: see paragraph 12 of the judgment of the court, at 3612. The San Giorgio case is also of interest for present purposes in that it accepts that Community law does not prevent a national legal system from disallowing repayment of charges where to do so would entail unjust enrichment of the recipient, in particular where the charges have been incorporated into the price of goods and so passed on to the purchaser. I only comment that, at a time when Community law is becoming increasingly important, it would be strange if the right of the citizen to recover overpaid charges were to be more restricted under domestic law than it is under European law.
I would therefore hold that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authority is prima facie recover able by the citizen as of right. As at present advised, I incline to the opinion that this principle should extend to embrace cases in which the tax or other levy has been wrongly exacted by the public authority not because the demand was ultra vires but for other reasons, for example because the authority has misconstrued a relevant statute or regulation. It is not however nec essary to decide the point in the present case, and in any event cases of this kind are generally the subject of statutory regimes which legislate for the circumstances in which money so paid either must or may be repaid. Nor do I think it necessary to consider for the purposes of the present case to what extent the common law may provide the public authority with a defence to a claim for the repayment of money so paid; though for the reasons I have already given, I do not consider that the principle of recovery should be inapplicable simply because the citizen has paid the money under a mistake of law. It will be a matter for consideration whether the fact that the plaintiff has passed on the tax or levy so that the burden has fallen on another should provide a defence to his claim. Although this is contemplated by the European Court of Justice in the San Giorgio case, it is evident from Air Canada v. British Columbia, 59 DLR (4th) 161 that the point is not without its difficulties; and the availability of such a defence may depend upon the nature of the tax or other levy. No doubt matters of this kind will in any event be the subject of consideration during the current consultations with the Law Commission. For these reasons, I would dismiss the appeal with costs.
Frederick Inns, Re
[1993] IESC 1 (5th November, 1993)
Supreme Court
In the Matter of Frederick Inns Limited (in liquidation), The Rendezvous Limited (in liquidation), The Graduate Limited (in liquidation), Motels Limited (in liquidation) and in the Matter of the Companies Acts 1963 to 1986
Nos. 217, 218, 219 & 220 of 1991
[5th of November, 1993]
Status: Reported at [1994] 1 ILRM 387
Blayney J. (O’Flaherty and Denham JJ concurring)
1. The well-known Belton group of companies which owned and managed nine public houses in Dublin, comprised ten separate companies, a holding company, Motels Ltd, and nine subsidiaries. This appeal is concerned with that company and with three of its subsidiaries, namely, Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd.
2. Since the late 1970s the group was in a position of constant indebtedness to the Revenue in respect of VAT, PAYE/PRSI and corporation profits tax. In April 1984 the group’s liabilities stood at approximately £1.6 million and by June 1986 this had risen to £2.8 million. On 12 June 1986 the Collector General sent to each of the ten companies a separate letter demanding the amount due from such company and giving notice that in the event of its failure to pay, the letter would be used for the purposes of s. 214 of the Companies Act 1963 as evidence that the company was unable to pay its debts, and a petition for winding-up would be issued.
3. Subsequent to the receipt of that letter, negotiations took place between a representative of the Revenue Commissioners and some of the directors of the Belton group and their accountants, as a result of which an arrangement was reached whereby the licensed premises in which Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd carried on business (two of which were leased from Motels Ltd) would be sold, and £1.4 million would be paid to the Revenue Commissioners out of the proceeds. The precise terms of the arrangement were set out in a letter from the group’s solicitor to the Revenue Commissioners dated 22 August 1986:-
4. Motels Ltd, The Graduate Ltd, Frederick Inns Ltd and The Rendezvous Ltd.
Dear Sirs,
5. With reference to our interview of 21st inst we confirm that we act for the above companies. We further confirm that Motels Ltd and The Graduate Ltd have agreed to sell The Graduate public house at Rochestown Avenue to Terence E. Dickson, solicitor, in trust for the sum of £650,000. We have received the contract duly signed and a cheque for the deposit. Motels Ltd, The Rendezvous Ltd have agreed to sell The Rendezvous at Shantalla Road, Beaumont to Dermot Carew for the sum of £550,000. We sent out the contracts for signature on 15th inst and anticipate receiving same back in the next day or so. We have to-day received instructions that Frederick Inns Ltd have agreed to sell the premises The Hunters, South Frederick Street, for the sum of £400,000. We are awaiting particulars of the purchaser’s solicitors and will be sending you out contracts for the sale immediately we receive such particulars.
6. We are instructed by our clients and hereby undertake to pay to the Revenue Commissioners the sum of £1,400,000 out of the sale of the above three premises. We anticipate that all sales will be closed by 30th approx. and it is hoped that The Rendezvous sale will close in or about 5th approx. and The Graduate sale in the middle of September.
7. Yours faithfully.
8. The arrangement outlined in that letter was duly carried out, with one variation, £1.2 million being paid instead of £1.4 million. It was paid in three instalments as follows:-
£400,000 on 3 October 1986
9. £600,000 on 24 October 1986, and
£200,000 on 8 December 1986.
10. The £1.2 million was made up of the following contributions made by the four companies:-
11. Frederick Inns Ltd: £ 200,000
12. The Rendezvous Ltd: £ 100,506
13. The Graduate Ltd: £ 122,517
Motels Ltd: £ 776,977
TOTAL: £1,200,000
14. All four companies were insolvent when each of the instalments was paid and the Revenue Commissioners were aware that they were insolvent. Mr. Ray Jackson was appointed official liquidator of Motels Ltd on 15 December 1986, the petition having been presented on the 3 December 1986, and he was appointed official liquidator of the other three companies on 30 March 1987 on foot of petitions presented on 13 March 1987.
15. The Revenue Commissioners appropriated the £1.2 million to reducing the amounts owing by all ten companies in the group, the division being made rateably according to the amount of tax owed by each. It is not disputed that such appropriation was what both sides intended.
16. The issue in the High Court was whether the payments made in reduction of the amounts owing by the other six companies were ultra vires and, if so, if they could be recovered by the official liquidator. The learned trial judge held that they were. He held that each of the companies in the group was a separate company and that the Revenue Commissioners were not entitled to treat the group as a single entity. He further held that none of the four companies had power in its memorandum of association to pay the debts of any associated company in the group and that accordingly the payment made in reduction of the amounts owing by the other six companies was ultra vires. He held also that as the four companies were insolvent at the time the payments were made, the payments were in breach of the duty owed by the companies and their directors to the general creditors of the companies and accordingly were misapplications of the respective companies’ assets.
17. The learned trial judge made a separate order in respect of each of the four companies. The orders made in respect of Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd were all in the same form. Each of these companies owed the Revenue more than the amounts they respectively contributed to the £1.2 million. The learned trial judge found that the payment of the parts of their contributions which had been appropriated to other companies was ultra vires and directed that such parts should be credited to the companies themselves in reduction of the amounts owing respectively by them. Accordingly there was no order for the repayment of any part of the amounts contributed by them to the £1.2 million.
18. The position of Motels Ltd was different. Its contribution to the £1.2 million was much greater than the amount it owed to the Revenue. It contributed £776,977 whereas it only owed £125,058. The Revenue had appropriated £30,000 of the £776,977 in reduction of its debt and the balance in reduction of what was owing by the other nine companies. The learned trial judge found that the payment of so much of the amount contributed by Motels Ltd as exceeded what it owed, (which came to a sum of £65l,919) was ultra vires the company and he directed the Revenue Commissioners to repay this sum to the official liquidator together with interest thereon at the statutory rate from time to time payable on judgment debts from 26 November 1986 down to the date of payment.
19. In this appeal the Revenue Commissioners dispute the finding that the payment of part of the £1.2 million was ultra vires and seek an order setting aside the judgment of the High Court. By a notice to vary, the official liquidator seeks an order that the Revenue Commissioners should be directed to repay to each of the four companies the amount which each respectively had contributed to the £1.2 million.
20. In dividing the £1.2 million between the ten companies in the group, the Revenue Commissioners appropriated the following sums in reduction of the amounts owing by each of the four companies:-
21. Frederick Inns Ltd: £ 28,000
22. The Rendezvous Ltd: £ 24,000
23. The Graduate Ltd: £ 54,000
Motels Ltd: £ 30,000
TOTAL: £136,000
24. It had originally been contended by the official liquidator that these payments were fraudulent preferences but that contention was withdrawn in the High Court. As this was the only ground on which these payments could be disputed, and as it is no longer being relied upon, and in my opinion quite properly since the payments were made as a result of pressure brought by the Revenue Commissioners, it is clear that the Revenue Commissioners are entitled to retain these sums which amounted together to £136,000, and this is conceded by counsel for the official liquidator. So this appeal is concerned with the balance of £1,064,000 which was appropriated by the Revenue Commissioners to the other six companies.
25. While the appropriation of the £1.2 million had been made independently by the Revenue Commissioners, it was accepted by both sides that it constituted a payment by the four companies in reduction of the amounts owing by all ten companies in the group, so the first issue to be resolved is whether the learned trial judge was correct in holding that the payments made in reduction of the amounts owing by the other six companies amounting, as I have just indicated, to £1,064,000 were ultra vires. If he was correct in so deciding, the second issue is whether he was correct in holding that the contribution made by each of the four companies to the £1.2 million over and above the amount originally appropriated to each in reduction of their respective liabilities should now be credited to the company which made it in reduction of the amount owing by such company to the Revenue. The effect of this finding was that the official liquidator did not recover any part of the sums contributed by Frederick Inns Ltd, The Rendezvous Ltd or The Graduate Ltd as each of these companies owed more than the amount of their respective contributions, and he recovered less of the contribution made by Motels Ltd than would otherwise have been the case. The final issue is as to what order the official liquidator is entitled to if it is held that the Revenue Commissioners are not entitled at this stage to make a new appropriation of the amounts originally credited to the other six companies.
Whether the payments made in reduction of the amounts owing by the other six companies were ultra vires
26. The first submission made on behalf of the Revenue Commissioners was that the memorandum of association of each of the four companies contained a power to make the relevant payments. A number of different clauses in the respective memoranda of association were relied upon, but most reliance was placed on the following two clauses which are to be found in the memorandum of association of each of the companies:-
1. To establish or promote or concur in establishing or promoting any other company whose objects shall include the acquisition and taking over of all or any of the assets and liabilities of, or the promotion of which shall be in any manner calculated to advance directly or indirectly the objects or interests of this company, and to acquire and hold, or dispose of shares, stock or securities of, and guarantee the payment of any securities issued by or any other obligation of any such company.
To purchase or otherwise acquire and undertake all or any part of the business, property, liabilities and transactions of any person, firm or company carrying on or proposing to carry on any business which this company is authorised to carry on, or possessed of property suitable for the purpose of the company or to promote any company or companies for the above purpose.
27. In my opinion neither of these clauses gives the power to pay the debts of an associate company, which is what happened here. What the first clause gives is a power ‘to establish or promote or concur in establishing or promoting’ another company in certain circumstances. That could not be construed as a power to pay the debts of another company. And the second clause gives the power ‘to purchase or otherwise acquire and undertake all or any part of the. . . liabilities of any company etc.’ The companies here were neither ‘purchasing’ nor ‘acquiring and undertaking’ the liabilities of the other companies. They were paying part of their debts. This clause did not give any power to do this.
28. It was also submitted that the power to lend money could be relied upon, such as the following power in the memorandum of association of Frederick Inns
Ltd:-
29. To advance and lend money from time to time either with or without mortgage or other security at such rates of interest and generally upon such terms and conditions and in such manner as may be thought expedient.
30. I reject this submission also. The four companies did not lend any monies to the other six. What they did was to pay part of their debts which was something very different.
31. I have read the other clauses in the four memoranda of association on which reliance was also placed and I am satisfied that none of them gave power to make the relevant payments. I find accordingly that the payments were ultra vires.
32. It was then submitted that even if the payments were ultra vires, they were nonetheless validated in favour of the Revenue Commissioners by either s. 8 of the Companies Act 1963 or article 6 of the European Communities (Companies) Regulations 1973. In my opinion neither of these provisions had this effect. I start with article 6 which is as follows:-
(1) In favour of a person dealing with a company in good faith, any transaction entered into by an organ of the company, being its board of directors or any person registered under these regulations as a person authorised to bind the company, shall be deemed to be within the capacity of the company and any limitation of the powers of that board or person, whether imposed by the memorandum or articles of association or otherwise, may not be relied upon as against any person so dealing with the company.
33. I think it is clear that none of the companies had any person registered under the regulations as a person authorised to bind the company, so if the Revenue Commissioners are to get the benefit of the article they would need to show that the payment to them was a transaction entered into by the board of directors of each of the companies. There is no evidence of this in any of the affidavits filed by either side. The payment appears to have been agreed to be made as a result of informal meetings between accountants acting on behalf of the companies and Mr. Patrick Burke acting on behalf of the Revenue Commissioners. In these circumstances it seems to me that the Revenue Commissioners cannot rely on article 6 as validating the payment.
34. They are confined then to relying on s. 8 of the Companies Act 1963. This section is as follows:-
8—( 1) Any act or thing done by a company which if the company had been empowered to do the same would have been lawfully and effectively done, shall, notwithstanding that the company had no power to do such act or thing, be effective in favour of any person relying on such act or thing who is not shown to have been actually aware, at the time when he so relied thereon, that such act or thing was not within the powers of the company, but any director or officer of the company who was responsible for the doing by the company of such act or thing shall be liable to the company for any loss or damage suffered by the company in consequence thereof.
35. It seems clear that the Revenue Commissioners cannot be shown to have been actually aware that the payment was not within the powers of the four companies. Mr. Burke seems generally to have been of the belief that he was dealing with a group of companies and that the payment was being made by some of the companies within the group on behalf of the entire group. I consider, accordingly, that the Revenue Commissioners would be entitled to rely on the section if they could show that the payment by the four companies, if they had been empowered to make it, ‘would have been lawfully and effectively done.’ The view I take is that the facts here are such that the Revenue Commissioners could not establish this.
36. At the time the payments were made, all four companies were insolvent and were known by the Revenue Commissioners to be insolvent. Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd had each sold their licensed premises and had ceased to trade. In addition, a s. 214 demand had been served on each of the companies and had not been complied with. The position of each of the companies was, accordingly, that all that was required to wind it up was that a petition should be presented. And the moment that had been done, it is clear that the relevant payments could not have been made as the company would have ceased to be the beneficial owner of its assets. In Ayerst v. C. & K. (Construction) Ltd [1974] 1 All ER 676 Templeman J cited in his judgment at p. 684 the following passage from the judgment of James LJ in In re Oriental Inland Steam Co. (1874) 9 Ch App 557 at p. 559 setting out the effect of a winding-up order:-
37. The English Act of Parliament has enacted that in the case of a winding-up the assets of the company so wound up are to be collected and applied in discharge of its liabilities [there is a similar provision in s. 235 of the Companies Act 1963]. That makes the property of the company clearly trust property. It is property affected by the Act of Parliament with an obligation to be dealt with by the proper officer in a particular way. Then it has ceased to be beneficially the property of the company; and, being so, it has ceased to be liable to be seized by the execution creditors of the company.
38. It is clear from this that as soon as a winding-up order has been made the
company ceases to be the beneficial owner of its assets, with the result that the directors no longer have power to dispose of them. Where, as here, a company’s situation was such that any creditor could have caused it to be wound up on the ground of insolvency, I consider that it can equally well be said that the company had ceased to be the beneficial owner of its assets with the result that the directors would have had no power to use the company’s assets to discharge the liabilities of other companies. Once the company clearly had to be wound up and its assets applied pro tanto in discharge of its liabilities, the directors had a duty to the creditors to preserve the assets to enable this to be done, or at least not to dissipate them.
39. This conclusion is supported by the decision of the Court of Appeal in New South Wales in Kinsela v. Russell Kinsela Properly Ltd (in liquidation) [1986] 4 NSWLR 722. The essential facts of the case were summarised as follows by Street CJ in his judgment at p. 727:-
40. This insolvent company, in a state of imminent and foreseen collapse, entered into a transaction which plainly had the effect, and was intended to have the effect, of placing its assets beyond the immediate reach of its creditors; it did this by means of a lease of its business premises entered into with the intention that two of its directors, as lessees, would use those premises for the purpose of continuing to conduct a business of the nature of that which the family of the directors and all of the shareholders had carried on for many years; the lease was executed on behalf of the company by the two directors who were to be lessees with the unanimous approval of all the shareholders of the company; it may be added, for what it is worth, that the terms of the lease were, to say the least, commercially questionable.
41. He went on to say at p. 728 of his judgment:-
42. Where, as here, a question arises regarding the extent to which a company is bound by a transaction entered into by it there are two separate questions, namely, is the transaction within the power or capacity of the company and, secondly, if it is, has that power been validly exercised so as to bind the company?
43. He held that the transaction was within the power of the company but that it had not been validly exercised:-
44. The lease was not ultra vires and void as exceeding the capacity of the company. It was, however, entered into by the directors (albeit with unanimous approval of all of the shareholders) in breach of their duty to the company in that it directly prejudiced the creditors of the company. It was accordingly a voidable transaction and, no third party rights having intervened, the company on the initiation of the liquidator is entitled to the aid of the court to void it.
45. At p. 730 of his judgment he outlined as follows the principle on the basis of which he came to this conclusion:-
46. In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.
47. I would respectfully adopt and follow this statement of the law and when it is applied to the facts here I think it is clear that it could not be held that the payments by the four companies were ‘lawfully and effectively done’. At the time the payments were made, the four companies were under the management of their directors pending imminent liquidation. Because of the insolvency of the companies the shareholders no longer had any interest. The only parties with an interest were the creditors. The payments made could not have been lawful because they were made in total disregard of their interests. And since the payments were not lawfully made, the Revenue Commissioners cannot rely on s. 8 of the Companies Act 1963 to remedy the fact that the payments were ultra vires. So this submission also fails.
48. I would accordingly uphold the finding of the learned trial judge that the payments made by the four companies in reduction of the amounts owing by the other six companies were ultra vires and therefore void.
49. That brings me to the second issue to which I referred earlier and which is whether the learned trial judge was correct in the order he made in regard to how the ultra vires payments should be dealt with. He directed the Revenue Commissioners to credit to each of the four companies the difference between the amount of its contribution to the £1.2 million and the amount originally appropriated to it in reduction of what it owed to the Revenue Commissioners. This resulted in the entire of the contributions made by Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd being credited to those companies respectively and to £95,058 being credited to Motels Ltd, this amount being sufficient to discharge the entire of that company’s liability. The only sum which the learned trial judge directed to be repaid was the balance of Motels Ltd’s contribution which came to £651,919.
50. In my opinion the learned trial judge was not correct in directing that the ultra vires payments should be dealt with in this way. I am satisfied that the entire of these payments are held by the Revenue Commissioners on a constructive trust for the four companies and accordingly that they must be repaid to the companies without any deduction being made from them. I would respectfully adopt and apply the principle set out in the judgment of Buckley LJ (with whom Goff and Waller LJJ agreed) in Belmont Finance Corporation Ltd v. Williams Furniture Ltd (No. 2) [1980] 1 All ER 393 at p. 405:-
51. A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (In re Lands Allotment Co. [1894] 1 Ch 616 at p. 638, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v. Wakefield Waterworks Co. (1875) LR 20 Eq 474 at p. 479 where he said:-
52. In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.
53. This passage was cited with approval by Slade LJ in Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1986] Ch 246 at p. 298, and he added this comment which is particularly relevant to the present appeal:-
The Belmont principle thus provides a legal route by which a company may recover its assets in a case where its directors have abused their fiduciary duties and a person receiving assets as a result of such abuse is on notice that they have been misapplied. The principle is not linked in any way to the capacity of the company; it is capable of applying whether or not the company had the capacity to do the acts in question.
The ultra vires payments in the present case were made on the authority of the directors of the four companies and, being ultra vires, they constituted a misapplication by the directors of the companies’ funds and were found as a fact by the learned trial judge to be such a misapplication. The misapplication was a breach by the directors of their fiduciary duties and the monies were received by the Revenue Commissioners with constructive knowledge of the breach since, if they had read the memoranda of association of the four companies, as they could have done since they are documents of public record, they would have seen that the companies had no power to make the payments. It follows in my opinion that the Revenue Commissioners are constructive trustees of the sums which were the subject of the ultra vires payments and must repay them to the official liquidator for each of the companies. The particular amounts to be repaid are as follows:-
54. Frederick Inns Ltd £ 172,000
55. The Rendezvous Ltd £ 76,506
56. The Graduate Ltd £ 68,517
Motels Ltd £ 746,977
TOTAL: £1,064,000
57. I would therefore allow this appeal and direct that these sums be repaid by the Revenue Commissioners to the respective companies together with interest thereon at the statutory rate from time to time payable on judgment debts from 8 December 1986, being the date of the payment of the final instalment making up the £1.2 million, to the date of repayment.
58. There are two further submissions made on behalf of the Revenue Commissioners which I should deal with before concluding. It was submitted that as the form of the proceedings before the High Court was an application for directions by the official liquidator, it was not appropriate to make an order for the payment of monies and it was submitted as an additional ground why such an order should not be made that it would prevent the Revenue Commissioners from raising the question of set-off.
59. I am satisfied that there is no substance in either of these submissions. As to the first, in the points of claim that were served on behalf of the official liquidator there was a clear claim to the repayment of the £1.2 million and the points of defence did not contain any plea that the court would not have power to direct repayment. In addition the point is not raised in any of the four notices of appeal served on behalf of the Revenue Commissioners. In the circumstances I have no hesitation in rejecting it.
60. As to the submission that the Revenue Commissioners should not be prevented from raising the question of set-off, I am satisfied that this submission must be rejected also. The sums which I have found to be due to be repaid by the Revenue Commissioners to the four companies are due by them in their capacity as constructive trustees for the companies, whereas the sums due to the Revenue Commissioners by the companies are due to them in their personal capacity, and where such is the case there is a want of mutuality and so no set-off is possible. This is clear from the following passage in Robb on Bankruptcy at pp. 133-134:-
61. Set-off existed in bankruptcy long before any such right was given at common law by the statutes of set-off (a); and was allowed with a different object. Set-off at law aimed at preventing cross-actions; but in bankruptcy the object aimed at was to do substantial justice between a debtor to the bankrupt’s estate and that estate, where the debtor was at the same time a creditor upon the estate: for it seemed unjust that in respect of what he owed to the estate the man who was also a creditor should have to pay 20s. in £1, while in respect of what was due to him he would receive no more than a dividend (b). This distinction led to this difference: at law a debt owing by a trustee could be set-off against a debt owing to him, even though the former was a purely personal matter, while the latter was due to him purely in his capacity as a trustee, and was a debt in which he had no beneficial interest. These were legal debts between the same parties which could be enforced by cross-actions, and that was sufficient. But in bankruptcy it was different: there was no reason in justice why a trustee who was a debtor to a bankrupt’s estate should not pay that debt, merely because it so happened that the bankrupt was a debtor to the trust estate in which the trustee had no beneficial interest. . . . So, the rule was evolved that a trustee cannot set-off a debt owed by him to the bankrupt’s estate against a debt owing by that estate to him in his capacity as trustee; because, as was said, ‘there was no mutuality’.
62. Since the bankruptcy rules are applicable in the winding-up of an insolvent company by virtue of s. 284(1) of the Companies Act 1963, this passage is applicable to the situation existing in the present case and rules out any possibility of the Revenue Commissioners being entitled to claim a set-off.
Ulster Factors Ltd. v. Entonglen Ltd.
[1997] IEHC 34 (21st February, 1997)
Judgment of Miss Justice Laffoy delivered on the 21st day of February 1997
1. The Plaintiff is a limited liability company incorporated in Northern Ireland which provides factoring facilities for clients. The first named Defendant (the Company) was incorporated in this jurisdiction under the Companies Acts, 1963 to 1986 on 16th November, 1988 and subsequently carried on an advertising business trading as Holland Callan Annesley Quinn Advertising. The second named Defendant (the Liquidator) is the Liquidator of the Company in a creditors’ voluntary winding-up which commenced on 31st August, 1991.
2. By an agreement dated 7th April, 1989 made between the Plaintiff of the one part and the Company of the other part (the Agreement), the Plaintiff agreed to provide factoring facilities for the Company and, in particular, it was agreed that during the continuance of the Agreement the Company would assign all its debts to the Plaintiff by way of absolute purchase by and sale and assignment to the Plaintiff and that the Company would request, when required, any payment and that the Plaintiff would, on such request, make payment “to or to the order of” the Company of a sum not exceeding the Availability Balance, as therein defined. It was further provided that the Plaintiff would be entitled to a “Factor’s Discount” at the rate of 2% per annum above either the prime rate specified from time to time by the National Irish Bank or 8% per annum, whichever should be the higher, charged on the debit Cleared Balance, as therein defined, on the Company’s current account with the Plaintiff calculated daily and debited to the current account at the end of each month.
3. By a letter dated 6th April, 1989 from the Plaintiff to the Directors of the Company, the method of operation of the Agreement was set out. It was stipulated that the Company would advise the Plaintiff as to which officers of the Company had been nominated “to call off Factor’s funds”. The terms of the letter of 6th April, 1989 were accepted by the Company as evidenced by the signatures thereon of Lionel A. Annesley (Mr. Annesley) and Alan Tolerton, the two directors of the Company who witnessed the affixing of the seal of the Company to the Agreement. In Clause 8(a) of the Agreement, the Company agreed to inform the Plaintiff and to provide the Plaintiff with the names and specimen signatures of all persons authorised to sign documents on behalf of the Company relating to the Agreement. No instructions or mandate in writing as to the formalities to be complied with in relation to draw-down of funds by the Company was ever given by the Company to the Plaintiff.
4. The evidence establishes that during the continuance of the Agreement between April 1989 and August 1991 all but three transactions whereby money due to it was drawn-down by the Company involved payments to the Company directly. The established procedure was that an officer of the Company telephoned the Plaintiff’s office in Belfast in the morning and ascertained the amount available for draw-down. Later in the day, the Plaintiff received a request by telephone or by fax indicating the amount which the Company wished to draw-down. The amount in question was paid to the Company either by a credit transfer to a bank account in the name of the Company in Dublin or, alternatively, by cheque in favour of the Company, the cheque sometimes being collected from the Plaintiff’s offices in Belfast. All such draw-downs were authorised by one officer of the Company either by telephone call or by fax communication. A telephone request was not required to be verified in writing.
5. On three occasions draw-down was effected by payments to third parties. The first of these occasions occurred shortly after the Agreement came into force. By a faxed letter of 10th May, 1989, on the letter-heading of Holland Callan Annesley Quinn Advertising, which was signed by Mr. Annesley, who was described as the Managing Director, and by John Holland (Mr. Holland), who was described as the Financial Director, the Plaintiff was instructed to issue a cheque for the equivalent of IR£40,000 in sterling to Mr. D. Tolerton trading as C.D.C. and to debit the Company’s account accordingly. The second occasion, which has given rise to the dispute the subject of these proceedings, occurred on 21st June, 1990 at a time when the Agreement had been in operation for over a year. The evidence establishes that on the morning of 21st June, 1990, Mr. Holland, who at the time was a director of the Company, its financial director and also the company secretary, telephoned Mr. Bill Murray (Mr. Murray) of the Plaintiff in the normal way to find out what amount the Company could draw-down. Before 9.00 a.m. that morning, the Company transmitted to the Plaintiff by fax on the letter-heading of Holland Callan Annesley Quinn Advertising instructions to make a cheque payable to “King & Goddy Solicitors” for £35,000 sterling, which would be collected by 11.00 a.m. This instruction was signed by Mr. Holland. Mr. Murray knew of a firm of solicitors in Belfast known as King and Gowdy, although he did not know the firm. On receipt of the first fax, he telephoned Mr. Holland and pointed out the mistake in the name of the firm. The Plaintiff received a second faxed communication from the Company, again on the letter-heading of Holland Callan Annesley Quinn Advertising, instructing the Plaintiff to amend the name to “King and Gowdy Solicitors” and to change the Company’s account accordingly. This instruction was signed by Mr. Holland. The two faxed letters and the two fax covering sheets which accompanied them each bore the date 22nd June, 1990. However, it is absolutely clear that the date was incorrect on each document and that all four documents were transmitted by fax to and received by the Plaintiff on 21st June, 1990. The third occasion occurred on 1st March, 1991. At that time, the Plaintiff’s officers were aware that a dispute between David Tolerton and Alan Tolerton, on the one hand, and the Company, on the other hand, had been settled by an agreement made on 21st February, 1991 under which the Company was to pay the sum of IR£100,000 to David Tolerton and Alan Tolerton by staged payments. By a faxed letter of 1st March, 1991 to the Plaintiff, which was signed by Mr. Annesley, who was described as Managing Director, and Ronan Callan, who was described as Director, the Plaintiff was authorised to discharge the scheduled payment for March 1st, 1991 of IR£30,000 to the Tolerton brothers by draw-down from the Company’s account in favour of either or both David Tolerton and Alan Tolerton.
6. The Plaintiff complied with the instructions received by fax from Mr. Holland on 21st June, 1990 and on that day issued a cheque for STG£35,000 to King & Gowdy which was marked “For H.C.A.Q. A/c”. At the beginning of July 1990, the Plaintiff sent to the Company a statement of the transactions on the Company’s current account with the Plaintiff for the month of June 1990 which showed a debit of IR£37,839.83 on 21st June, 1990, which represented the payment of STG£35,000 to King & Gowdy. The debit was not queried at that stage. Subsequently, by faxed letter dated 14th January, 1991, which was signed by the then company secretary, Susan Morgan, the Company requested, inter alia, –
“… a copy of cheque made out to Gaul & Knowlton, Solicitors, for STG£35,000 which became a debit of IR£37,839.83 on our Account drawn on the 21.06.90.”
7. The evidence establishes that this request was made in the context of the Company’s auditors endeavouring to reconcile inter-company accounts with the Tolerton brothers. By letter dated 15th January, 1991, the Plaintiff confirmed that it had charged to the Company’s current account on 21st June, 1990 the sum of IR£37,839.83 ” representing the punt equivalent of a sterling cheque issued to Messrs. King and Gowdy Solicitors “. The Company did not query the debit of IR£37,839.83 on 21st June, 1990 further and continued to do business in accordance with the Agreement with the Plaintiff until the commencement of the winding-up. Moreover, as I have indicated, at the beginning of March 1991, the Plaintiff, having been apprised of the terms of the settlement with the Tolerton brothers, was instructed to make a payment in partial implementation of that settlement.
8. These proceedings were initiated by Plenary Summons which was issued on 13th February, 1992. At that time, the Plaintiff’s claim was that there was a balance of IR£207,462.23 due to it by the Company on foot of the Agreement. Contemporaneously with the issue of the Plenary Summons, the Plaintiff issued a Notice of Motion seeking a Mareva injunction, in consequence of which the Liquidator released the sum of IR£165,000 to the Plaintiff. What remained in issue between the Liquidator and the Plaintiff, and what was in issue at the hearing of the action, was a sum equivalent to the payment made by the Plaintiff on 21st June, 1990 to Messrs. King and Gowdy, that is to say, the sum of IR£37,839.83, which the Liquidator contended was not properly paid. In essence, the Liquidator’s stance is that he is entitled to withhold that sum so as to, in effect, reverse the debit on 21st June, 1990 of that sum on the Company’s current account with the Plaintiff. The Plaintiff also claims that it is entitled to its “Factor’s Discount” on the sum withheld in accordance with the terms of the Agreement.
9. The case made by the Company and the Liquidator in their Defence and Counterclaim is that payment of IR£37,839.83 was made by the Plaintiff to Messrs. King and Gowdy without the authority or mandate of the Company or, alternatively, that the Plaintiff has failed to establish that it was duly mandated to make the said payment. In their replies to particulars sought by the Plaintiff, the Company and the Liquidator broadened their case for withholding the sum of IR£37,839.83 in that they contended as follows:-
“The payment to Messrs. King & Gowdy was wrongful in that no monies were payable by the first named Defendant to Messrs. King & Gowdy. It was also ultra vires the first named Defendant in these circumstances. The payment was also made without the authority of the first named Defendant. Furthermore, the Plaintiff made no enquiry as to why the payment (which was a very substantial payment) was being made to King & Gowdy notwithstanding that the request to the Plaintiff to make the said payment was signed by only one of the directors of the first named Defendant and notwithstanding that it was very rare for a request to be made to anyone other than to the first named Defendant itself.”
10. So the Company and the Liquidator justify the reversal of the debit on the current account on 21st June, 1990 on two grounds: that the payment reflected in the debit was ultra vires the Company and that the payment was made without the authority of the Company.
11. The basis of the contention that the payment to Messrs King & Gowdy was ultra vires the Company is that under its memorandum and articles of association the Company had no power to pay the debts of a third party. The payment by the Plaintiff to Messrs King & Gowdy, it was contended, constituted the use of the Company’s money to pay the debt of a third party and, accordingly, on the authority of the decision of the Supreme Court in In Re Frederick Inns Limited (1994) 1 I.L.R.M. 387 the payment was ultra vires and was not saved as against the Plaintiff by Section 8 of the Companies Act, 1963. While the Liquidator testified that from his examination of the books and records of the Company he was not able to establish that the Company received value for the payment to Messrs. King & Gowdy, and while Mr. Annesley testified that Messrs. King & Gowdy were not creditors of the Company and he does not know what the payment was for, in my view, the evidence does not establish why the payment was directed to be made to Messrs. King & Gowdy or who ultimately benefited from the payment nor does it establish that the payment constituted the use of the Company’s monies in the discharge of debts owed by a third party. Moreover, in my view, the Liquidator’s reliance on the decision of the Supreme Court in In Re Frederick Inns Limited in support of its argument that the Plaintiff would not be protected by Section 8 is misplaced. The ratio decidendi of that decision was that the Revenue Commissioners were not entitled to rely on Section 8 because the companies by whom the payments in issue in that case were made to them were insolvent and known to the Revenue Commissioners to be insolvent when the payments were made. In this matter, there is no evidence nor has there been any suggestion that the Company was insolvent on 21st June, 1990.
12. Even if the Liquidator had established that as between the Company, on the one hand, and Messrs. King & Gowdy, on the other hand, the payment made on 21st June, 1990 was ultra vires the Company and the Plaintiff was not protected by Section 8, the Liquidator has not established any basis on which the Plaintiff, which was merely the medium through which the payment was made, should be required, in effect, to make restitution for the ultra vires payment. The Liquidator sought to rely on the principle enunciated in Belmont Finance Corporation Limited -v- Williams Furniture Limited
(No. 2) (1980) 1 All E.R. 393 applied by Blayney J. in In Re Frederick Inns Limited that, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds as against the company unless he has some better equity. In applying the Belmont principle, Blayney J. stated as follows:-
“The ultra vires payments in the present case were made on the authority of the directors of the four companies and, being ultra vires, they constituted a misapplication by the directors of the companies’ funds … This misapplication was a breach by the directors of their fiduciary duties and the monies were received by the Revenue Commissioners with constructive knowledge of the breach since, if they had read the Memoranda of Association of the four companies, as they could have done since they are documents of public record, they would have seen that the companies had no power to make the payments. It follows in my opinion that the Revenue Commissioners are constructive trustees of the sums which were the subject of the ultra vires payments and must repay them to the Official Liquidator for each of the companies.”
13. Under the Belmont principle, as applied by the Supreme Court, what renders the recipient of or the dealer with funds which are being misapplied in breach of the fiduciary duties of the directors of a company liable as a constructive trustee is knowledge, actual or constructive, of the breach of trust. The factual position in this matter is that on the morning of 21st June, 1990 the Plaintiff acknowledged that it held at least IR£37,839.83 which, in accordance with the terms of the Agreement, was payable at the request of the Company to the Company or to its order and, later that morning, the Plaintiff received a request on the letter-heading of the Company showing its trading name and signed by a director of the Company, who was also the financial director and secretary of the Company, to make a payment equivalent to IR£37,839.83 to Messrs. King & Gowdy and the Plaintiff duly made that payment. Even if the payment was ultra vires the Company and in breach of the directors’ fiduciary duties, it is clear from the evidence that Mr. Murray did not have actual knowledge of the purpose for which the payment was being made or of the breach. The Agreement specifically provided that the Plaintiff was obliged to make payments to third parties at the request of the Company. There was no obligation on the Plaintiff to enquire as to the purpose for which any payment which the Company requested the Plaintiff to make to a third party was being made or to satisfy itself that the payment was intra vires the Company and, even if the payment was ultra vires, constructive knowledge of a breach of trust cannot be imputed to the Plaintiff for failure to make such enquiries.
14. I turn now to the contention of the Liquidator and the Company that the payment made to Messrs. King & Gowdy on 21st June, 1990 was made without the authority of the Company. Mr. Annesley, who was the Managing Director of the Company at all material times, testified that Mr. Holland had no authority to direct payments of funds of the Company to third parties on his own: his authority was as one of two signatories, the other signatory originally being any director of the Company and subsequently being Mr. Annesley. However, Mr. Annesley accepted that the Company had never communicated to the Plaintiff that two signatories were required to authorise a payment of company funds to a third party. On the evidence, I am satisfied that Mr. Holland on his own did not have actual authority to direct the payment to Messrs. King & Gowdy.
15. However, the case made by the Plaintiff is that Mr. Holland had ostensible authority to bind the Company and that the Company and the Liquidator are estopped from denying the existence of such ostensible authority. On the evidence, I am satisfied that the four conditions laid down by Diplock L.J. in Freeman and Lockyer -v- Buckhurst Park Properties (Mangal) Limited (1964) 2 Q.B. 480 for the successful invocation of the doctrine of ostensible authority have been fulfilled in that –
(1) there was a representation that Mr. Holland, as a director and as company secretary, had authority to request draw-down of funds to the Company or to a third party,
(2) such representation was made by the board of directors of the Company, which had actual authority under its articles of association to manage its business,
(3) the Plaintiff actually relied on such representation, and
(4) under its memorandum or articles of association, the Company was not deprived of the capacity to request payment of its funds to a third party or to delegate authority to do so.
16. The representation on which the ostensible authority of Mr. Holland, as a director and as company secretary, was founded was a tacit representation. The Agreement specifically provided for monies due to the Company being drawn-down either by payment to the Company directly or to a third party. The Agreement itself and the terms and conditions contemporaneously agreed to by the Company in relation to the method of the operation of the Agreement required the Company to advise the Plaintiff as to which officers of the Company had authority to draw-down funds due to the Company. The evidence establishes that in the early stages of the operation of the Agreement it was verbally agreed, in the context of a draw-down of funds into the Company, that draw-downs would be advised by the directors and the company secretary. In the operation of the Agreement prior to 21st
17. June, 1990, subject to one exception, every draw-down was requested by one officer of the Company only. In failing to communicate to the Plaintiff that draw-downs to the order of the Company were to be authorised in a different manner to draw-downs into the Company, in my view, the Company tacitly represented that all draw-downs were to be authorised in the same manner – by one officer of the Company. Moreover, the fact that the first authorisation to make a payment to the order of the Company, that is to say, the authorisation date of 10th May, 1989, was signed by Mr. Annesley, as Managing Director, and Mr. Holland, as Financial Director, in my view, did not negative that tacit representation. That authorisation was made in the early stages of the operation of the Agreement and authorised a payment to a director of the Company, which might well have been perceived as being a special category of payment.
18. I think it is also of significance that although the payment to Messrs. King & Gowdy was queried in January 1991 and the particulars of it were given to the then company secretary, the regularity of the payment was never impugned until it was impugned by the Liquidator after the commencement of the winding-up. The regularity of the payment to Messrs. King & Gowdy was at least tacitly acknowledged by the Company in the first quarter of 1991.
19. The Liquidator having failed to justify withholding payment of the sum of IR£37,839.83 on either of the grounds advanced by him, in my view, the Plaintiff is entitled to judgment in that sum. Moreover, as a matter of contract, the Plaintiff is entitled to its “Factor’s Discount”, as defined in the Agreement, under the terms of the Agreement from the date on which the said sum was withheld to the date of this judgment. The Plaintiff has conceded that the “Factor’s Discount” may be calculated at the flat rate of 10% rather than the higher alternative rate provided for in the Agreement. Accordingly, there will also be judgment for interest at the rate of 10% calculated in accordance with the provisions of the Agreement.
Ball v Mannin
1 Dow & Clark 380 (1829)
John Ball beiing seised in fee of t.’eT’tain. lands in the e.ounty of Kilkenny in Ireland, on the 10th July 1762, oonveyed them to trustees to the useof himself for life, rema.inder to hill) daughter, Dorothea Marga:ret, (who had priva.tely married Richard; Shinton,) for life,, rema.inder to her heirs in tail male,, eto.
In 1778, R. Shinton, the husband of Dorohl Margaret, died, leaving issue, John> their eldest oon, who was of an imbecility o;f mind from his infancy, [381] nearly
approaching to idiotcy; La,uncelot, their second son, (father of defendant in error); Richard, their third son, ere.
Soon after the den.th of Shinton, who had assumed the name of Ball on ma,rrying Ball’s daughter, hi;; widow intermarried with Richard Ball, an at,torney and a. relation of the family, by whom she b.a.d an only son, Abraham, (father of t,he plaintiff in erro•r).
In 1785, John Shinton BaU, the :first tenM1t in tail of the la,nds above mentioned, was prevailed upon by his mother a,nd her second husband to levy a fine and s,uffer a rooo.very, and to bar his estate tail ; a.nd, by deed to lead the uses, the lands, subject to a life annuity for John Shinron Ball, were settled for the benefit of Dorothea and her second husband, a.nd their issue.
In 1794, John Shinton BaU died, and his brother, Launoolot Shinton Ban, the second son of Dorothea by her :first husband, exhibited his bill in Chancery to have the trusts of the settlement of l ‘762 performed, and to• oot aside the deed of 1785 as fraudulent; but waa advised to get the bill dismissed a.t that time, and to suspend proceedings till thedea.th -0.f his mother, the renant for life.
In 1809, on occasion of and previous to the ma,rrying of Abraham Ball, who claimed to be entitled to the estate, with Jane Wemyss, Launcei!ot S. Ba.U caused notice to be given to the father of the lady that he(L. S. B.) was renant in tail of the estate ex:pootMlt on the deiath of his mother, and that he intended! to assert his claim.
In 1813, Richard Ball, the second hu&band, died, and the sou, Abraham, died in 1814, lea”ing issue, Richard Ball, (pla.intiff in error). In 1818 Dorothea died, and in 1819 L. S. Ball brought his ejootment [382] in whioh aetioru, for soms reaaoo., of foirm, a juror was withdrawn; and in the same year L. S. BaU dlied, leaving issue L. S. Ban, lessor of defenda,nt in error. . ·
L. S. Ball, the oon, in 1821 brought his: ejootment. a,nd the ca,use was tried on 6th.August 1823, when it was agreed, by the counsel for the parties on each side, that the sole question to be tried should be (as set, forth in the record) : ” Whether a certa.in deed executed by the said John Shinton Ball in his lifetime, bea.ring da,te the 17th day of October 1785, was or was not valid at law, as the deed of him the said John Shinton Ball, which deed had been executed by the said John Shinton Ball and the other parties thereto, for the purpooe of leading the use,s of a certain fine and common recovery levied and suffered by the said John Shinton Ball in his lifetime, of the lands in the said ejectment mentioned, as remainder-man in tail thereof in conjunction with his mother, Dorothea Ball, the preceding tenant for life of the said la,nds; and that if the said deed should be found to be not valid, as the deed o,f the said John Shinton Ball, that the,n a verdict should pass fo,r the lessor of the plaintiff in this case as heir male of the body of Launcefot Shinton, his fa.ther, deceased, who, in his life time was next rema.inder-man in tail of the sa.id land’S, and in such right entitled to the said lands on the death of his mother, the said Dorothea, the tenant for life, (the sa.id John Shinton Ball, his elder brother, being then dead without lawful issue of his body); and on the other ha.nd, if the said deed should be foundl to be valid as the deed of the said John Shinton Ball, then that a, verdict should pass for the defenda.nt: and it having boon further admitted and agreed by the counsel on each side for the said [383] parties, that the said John Shinto,n Ball had died in the month of December 1794, a.:nd had not left a,ny lawful issue of his body, and; that Richard Ball, the second husband of the i.a.id Dorothea Ball, had died in the year 1813, and that the said Dorothea had died in the year 1818, leaving the sa.id Launcelot Shinton, the father of the le.isor of the pla.intiff, her then oldest surviving son by her first husba,nd, and Abraha,m Ball, father of the defendant, her so,n by the said Richard Ball, her second husband, her survi,ving; and counsel for the le.’i!sor of the pla.intifi having thereupon opened the case on his behalf in o,rder to maintain the sa.id issue, on his part produced several witnesses, who, being duly sworn, deposed that the said John Shinton Ball, at the time of his executing the sa.id deed, was not in tlheir opinion competent to exooute the same, and further deposed to acts and cond\uct of the said John Shinton Ball as evidencing his mental incapacity; and having given such evidence, and the said deed of the 17th October 1785 having been read in evidence, the sa,id counsel t,hereupon closed the pla.intiff’s case; and counsel for the defendant thereupon, after stating the case on, his behalf, called several witness.es to maintain the said issue on his part, who being sworn and examined, deposed, that in their opinion the said John Shinton Ball at the said time was competent to execute the said deed, a.nd further deposed to acts and conduct of the said John Shinton Ball as evidencing his mental capacity, and deposed that the said John Shinton Ball was certainly not an idiot: and thereupon the case and evidence having boon clooed on both sides, and it having been admit,ted and agreed by the counsel for each of the parties, that the[384] alleged inca,pacity of mind of the said John Shinton Ball did not arise from luna,ey, no evidence ha,ving boon given of lunacy in him, the learned Judge in his charge com· mented and observed upon the evidence given on each side, and told the said jury, that the question for them t-0 try was, whether the said John Shinton Ball was a person of sound mind or not; a.nd that, to constitute such unsoundness of mind as should avoid a deed at law, the person executing such deed must be incapable of under• standing and acting in the ordinary a.fiairs of life; that it was not necessary that he should be without any glimmering of rea.son, but that it was sufficient if he was incapable of understanding his own ordina.ry concerns, anq_ that, as one test of such inca,pacity, the jury were at liberty to consider whether he was capa,ble Olf under standing what he did by executing the deed in question, when its general purport was fully a’l:plained to him; whereupon counsel called on the le.arned Judge, and required him to tell a.nd direct’the jury, that in order to avo,id said dood at law, the unsound ness of mind of the said John Shinton Ball must amount to that degree of unsoundness which constituted idiotcy, a.ccordling to the strict legal definition of an idiot. But the learned Judge refused so to tell o;r direct the said jury on the said trial, but, on the contrary, directed them as before stated; wherefore the counsel for the said de fendant, on his behalf, excepted to the said opinion and d.irection of the learned Judge on the i.a.id t,rial ;” and, at the request of the co,unsel for the plaintiff in error, the lea.rued Judge who presided a.t the said trial put his seal to a bill of exceptions to the abo-ve effect, tendered by them.
[385] It will be observed that, at the time of the ruling, no notice was given to the Judge that there was any objection to, the direction on the ground of its being too vague, geneiral, and uncertain.
The ma,tter having been argued upon the said exceptions befor’e the O:rnrt of King’s Bench in Ireland, that Court, on the 8th February 1825, o<verruled the said exceptions:, and judgment was theireupon entered for the defendant in error.
The plaintiff in error being dissat,isfied with this: judgment of the Court of King’s Bench, bro,ught his writ of error returnable in the Exchequer Chamber in Ireland, ins,isting ” tha,t in the record and proceedings aforesa,id, and also, in the matter re• cited an.d conta.ined in the sa,id bill of exceptions, and also in giving the judgment a.foresa.id, there is: manifest error in this, to, wit., tha,t the Hono·urable Mr. Justice Jebb, the learned Judge before whom, and so forth, at and upon the trial of the said issue s,o joined betwoon the parties aforesaid, did direct and tell the said jury so im pa,nnelled to try the said issue, that, the question for them to try was, whether the said John Shinton Ball was a person of sound mind or not, and that, to constitute such un soundness of mind as sho,uld avoid a dood at law, the person executing such deed must be incapable of understanding and acting in the ordinary affairs of life; that it was not necessary that he should be witho,ut any glimmering of reason, but that it was sufficient if he was inca,pable of understanding his own ordinary concerns; and tha,t, as one test of such incapacity, the sa,id jury were at liberty to, consider whether he wa,s, capable of understanding what he, did by making the deed in question, when it,s general purport was geneirally expla.ined to him. And [386] there is also e,rro,r in this, to wit, tha,t the le,arned Judge, upon the trial of the said is·sue, did refuse, to teU and direct the sa,id jury, though called upon so, to do by counsel for the s,a,id Richa,rd Ball, that, in order to, a,void the sa,id deed so executed by the said John Shint-On Ba11 at la,w, the unsoundness of mind of the sa.id John Shinton Ball must amount to, tha,t degree of unsoundness of mind which constituted idiotcy, according to the st,rict legal definition of an idiot. And there is aJso error in this, to wit, that by the record aforesa,id it a,ppea,rs that the verdict aforesaid was, given upon the i,;aid issue for the said Pa.trick Mannin, whe,reas the said verdict,, by the law of the land a,s to the sa,id issue, o,ught. to have be€,n given for the said Richard BaJl,” etc.
The Court of Exchequer Chamber affirmed the judgment of the Court of King’s Bench; and thereupon Richard Ball brought, his: writ of error returnable in Parliar ment, for the following, among other reasons,:
L Because no othe•r ground of personal disability, a.rising from defect of ca,pacity in a, pa,rty, is known or· recognized in the law t,han idiotcy and lunacy, including under the latter head all cas,es of occa.sional and temporacry derangement and incapacity, and nothing short of one or othe,r of these can by the la,w of the land inflict disability on the subject, or nullify his, deed and contract; and the la,tter ground having been ad mittedly excluded from cons,ide,rahon in the present case, there, rema,ins no othe,r except the former, on which the deed in question could be de,nied it% proper effect and opera.tion.
2. Because idiotcy, in the view of the la,w, implies a tot.al absence and deprivation of the faculty of rea,son in the party, and is not a question of degrees, but of the nature and quality of the mind and faculty, directly [387] at variance with the language and direction of the learned Judge in his charge to the jury in this case.
3. Because, although the jurisdiction exeruised in matters of lunacy and idiotcy by the Lord Chancellor, or other person under the a,uthority of the royal commission, is a legal one, yet the view and object of the Judge, in the exercise of such jurisdict.ion, is very different from that of a, court of Ia.w, in deciding upon the validity or nullity of a pa,rt,y’s deed; and therefore the language employed by the person exercis,ing the jurisdiction in lunacy, when inst.ituting an inquiry to ascerta.in a pa,rt,y’s competence to manage his own a,ffairs, in order to, judge whether he needs the, protection of a curator or tutor, is, no precedent o,r a,uthority for a, court, of law in judging of the validity of his deed.
4. Because the direction given by the learned Judge in his charge to the jury in this case was va.gue and indefinite, and calculated to mislead them as to the proper ob.. ject of their inquiry, direct,ing them, as he did, a.s a, test to determine the valiiii.//y of tlie deed in ques;f)wn., to try and ” consider whether the party was capable or not of understanding and acting in the ordinary affairs of life, and of under standing his own ordinary concerns ;”-and although, if the jury were of opinion that the pa,rty- was capable of understa.nding and knowing the nature and efi’ect o,f the deed he executed, and did in fact know the same, his deed ought, to, be held valid and effective at law, however incompetent, they might coni;;ider him to have been t.o underi;;ta.nd and a.ct in the ordinary affairs of life. •
Lai;;tly, Because the exceptions w taken t.o the Judge’s charge and direction, by the
counsel for the plaintiff m error, expressly extend as well to his diroo-[388]-tion to the jury as to· his opinion in refusing to, direct them in the manner and to the effect required by them on the occasion of his said charge; and for this purpose the language of his charge is set out in their said bill of exceptions. And therefore the plaint.iff in error is at liberty to insist, on his objection to the s•aid direction in this ca.se.
On the part of the defendant in error, it, was contended that the judgment ought to be affirmed, for the following, among other reasons: ·
1. Because the learned Judge who tried the ca.use wa.s correct in s.tating, that to constitute such unsoundness of mind as would avoid a deed at la,w, the party executing such deed must he incapable of understanding a.nd acting in the ordina,ry a.ffairs of lifo, and that it was not necessa.ry that he should he without any glimmering o,f reason.
2. Because it is not necessary at law, in order to avoid the dood of John Shinton Ball, that there should be proved to have existed that unsoundness of mind which con stitutes idiotcy, according to the strict legal definition of an idiot.
3. . Because it is not competen.t for the plaintiff in error to goout of the pa,rticular exception pointed hy his bill of eocceptions, and to object to other and different parts of the direction of the learned Judge who tried the cause; a court of error being bound to proceed ” a-ecordling t-0 tJhe exception:” and
Lastly, Beca,use if the pla,intiff in error were at liberty to depa,rt from the pa,r ticula,r exception taken by the bill of exceptions, the direction of t.he lea,rned Judge who tried the cause is unexceptiona.ble.
The ca.use was heard in the House of Lords on the 16th March 1829, and tJie following authorities were cited: Bennett v. V ade, 2 At. 324; Ex pa,rte Bar’nes-[389} ley, 3 At. 168.; Lord Down-egal!s Ca,se, 2 Ves. sen. 401; Ri4geurag v. Darrwin,, 3 Ves.
65; Be1Jerley’s Ca,se, 4 Co. 126; Thompso:n, v. Leach, 2 Salk. 427, and Lord Ray. 31:3; Warre v. Miller, 4 Barn. Cres. 538; Corder v. Silk, 3 Camp. 33; Jonson v. ll1edlicott, l P. Wms. 130 (n.)
Lord Tenterden: This case comes before your Lordships on a bill of exceptions to the directions of a lea,rned Judge. The Courts o,f King’s Bench and Exchequer Cha,mber, in Ireland, have decided that the direction was right, a,nd we a.re called upon t.o r€1View the judgment; and in considering the question, we ha,ve to look solely at the hill of exceptions itself, and confine ourselves to what we there find.
One of the counsel for the pla,intiff in erro•r rested much of his argument on the ground that six Judges were of opinion tha,t the jury might have been misled by the charge. That is an a.rgument which cannot prevail in thiS1 House; for if all the Judges had been of that opinion, a.nd your Lordships were of a. different opinion, it would be your Lordships’ duty to act on your own opinion, though contra.ry to that of the twelve Judges. Courts of error would be established in vain if they were to he influenced by the opinions of the Courts belo,w, instead of being governed by their own. I thought it right, in this instance, to throw out these few words on that point.
Now as to t.he contents of the bill of exceptions, a.nd the question of law arising from them. This is an action of ejectment brought to try the title to the lands speci• fied in the plea.dings; and it was agreed by the counsel concerned for t.he pa,rties on each side, that the sole question t.o he tried should be, whether a certain deed executed by the late John Shinton Ball, [390] in his lifetime, beasring date 17th October 1785, was or was not valid in law, as the deed of him the said John Shinton Ball, etc.; and if the sa.id deed should be found to, he not valid as the deed of.the sa,id John Shint.on Ball, that then a verdict should pass for the lessor of the plaintiff in this ca,se, as heir male of the body o,f La.uncelot Shinton, his fa.t.her, deceased, who in his lifetime was next remainder-man in tail of the sa.id land,i, and in such right entitled to the lands after t.he decease of his mother, the tenant for life (the said John Shinton Ball, his elder brother, being then deceased without lawful issue of his body); and on the other hand, if the said deed should be found to he valid as the deed of the said John Shinton Ball, then a verdict should pass for t.he defendant. That having been the question, the record goes on to sta,te that the counsel for the lessor of the plaintiff produced several witnesses., who being duly sworn and examined, deposed tha.t the said John Shinton Ball, at the time of exoouting the sa.id deed, was not in their opinion com petent to exooute the same; and further deposed to acts and conduct of the said John Shinton Ball, as evidencing his mental incapacity. .And then the record states that the counsel for the defendant called several witnesses, who deposed that, in their opinion, the said John Shinton Ball, at the said time; was competent to execute the said deed, and further deposed to acts and conduct as evidencing his mental capa.city, and deposed that the said John Shinton Ball was certainly not an idiot. The record further states tha,t it was agreed that the alleged incompetency of mind of the said John Shinton Ball did not arise from lunacy, no evide11Ce of luna.ey having boon given; that is, tha,t John Shinton Ball was not an insane person, who had occasionally lucid intervals, or a person whose [391] mind was at one time sound, and at another not, but that the state of mind, whatever it was, was uniform, a.nd tha.t the incapacity, if any, was not tempora,ry but permanent.
This being the evidence, the Iea,rned Judge commented and observed upon it, and told the jury, “that thequestion for them to try was, whether the sa.id John Shinton Ball was a person of sound mind or not;” a.nd undoubtedly tha.t was the question, a.nd the direct.ion was perfectly correct. But the learned Judge goes further, and tells the jury what it was that constituted unsoundness, and that, to constitute such un soundness o•f mind as would avoid a deed a.t law, the person executing such deed must be inca.pa.ble of understanding and acting in the ordina.ry a:ffafrs of life; and perhaps in that he went too far, but that was a, matter of which the plaintiff in error was not, under this bill of exceptions, entitled to complain.
Ulen the lea,rned Judge goes on to sa.y tha.t, it was not necessa.ry that the person executing should be without a.ny glimmering of reason, but that it was sufficient if he was incapable of understa.nding his ordina.ry concerns, and that, as one test of such inca,pa.city, the jury were at liberty to consider whether he wa.s. capa.ble of under standing what he did by executing the deed in question, when its general import was explained to him. The counsel for the defendant below objected to this, a.nd required the learned Judge to tell and direct the jury, that in order to· avoid the said deed at la.w, the unsoundn&Ss of mind of the party executing must amount to tha.t degree of unsoundness which constituted idiotcy, according to the strict legal definition of an idiot, but this the Judge refused to do. The proposition was tha,t the Judge ought to have told the jury that they had no right to conside1· any [392] description of un soundness except what constituted idiotcy according to the strict legal definition of an idiot. If the Judge ought to have done so, then he was wrong, as he told the jury that thequestion for them to try was whether John Shinton Ball was of unsound mind or not. Now I believe that in thecommission for inquiring whether lunatic or not, the jury have not boon limited to the inquiry whether lunatic or not, but that if they found that the party was of unsound mind, it ha., beein held a sufficient finding. The strict legal definition of an idiot, in an old book which I have brought down with me, is, that if a. ma,n can repeat the letters of the alphabet, or read what is set before him, he cannot be taken to be an idiot. But you would say that this was contrary to common sense; for as to repeating the letters of the alphabet, or reading what is set before him, a child of three years old may do that. Then the question is whether the party was of sound mind or not, and that is the question here. To be sure the Judge goes on to say that, as one test of capacity or incapa.city, the jury was at liberty to consider whether the party was capable of understanding what he did by executing the deed in question, when its general import was expla.ined to him; a.nd surely that is one good test, and there is nothing irregular in that. But the question is whether, t,aking the whole direction together, it is right, and I think it is.
But I say that, if the direction had boon as vague and general a& has been contended, the counsel ought to have brought tha,t point distinctly to the notice of tlie Judge at the time, and have made it a distinct point of objection; for if he had done so, the Judge might have removed the ambiguity; but as tha,t was not ma.de a point of objection or exception a,t the [393] time, the plaintiff in error cannot ava.il himself of it now.
I move, therefore, according to the form of your Lordships House, tha,t the judg ment of the Court of Exchequer Chamber be reversed, mea.ning tha.t it should be a.ffirmed.
Lord Plunkett: I entirely concur with the noble and lea.med Lord, and for t,he same reasons.