Limits to Recovery
Cases
Avon County Council v. Howlett
[1983] I WLR 605, Court of Appeal.
Cumming-Bruce LJ : In argument before us upon this hypothetical question, it was contended on behalf of the defendant that where the defendant successfully proved that he had acted to his detriment upon a representation by the plaintiff which was inconsistent with the true facts, and that his detriment was proved to be substantial in the sense that it was not de minimis, he was entitled to keep all the money paid through the mistake which the plaintiff wa estopped from alleging, even though the result was to leave him with a windfall profit.
Alternatively, it was contended that if he was liable to repay any sum on the ground that it was inequitable for him to retain it (a) the onus lay upon the plaintiff to prove that the facts that made such retention inequitable, and (b) on the pleadings the plaintiffs had alleged no such facts or resulting inequity. Having regard to the facts actually found by the judge, the whole of this argument was fanciful. The money had never been paid as a single sum to the defendant. £1,007 represented the total arrived at by adding together a large number of small sums received over a period of many month and paid as the remuneration on which he relied for discharge of his ordinary living expectations.
If the plaintiffs wished to argue that it was inequitable that the defendant should retain some part of the £1,007, they should have pleaded the facts relied upon in support of that plea. It was submitted by Mr Fletcher [counsel for the plaintiffs] that only the defendant could know what had happened to the money, so to require the plaintiffs to plead facts giving rise to an equity in their favour is to place upon them a burden impossible to discharge. I disagree. The solution of their procedural problem may in the appropriate case lie in an application for discovery of documents and answers to interrogatories. But before the judge there was no reply by the plaintiffs alleging that it was inequitable for the defendant to retain any part of the money, and the evidence which the judge admitted proved that it was not inequitable. So on the case as pleaded, and on the evi dence before him, there was no material on which he could hold that the defendant was liable to pay back any part of the money paid to him by the proved mistake of fact….
Eveleigh LJ: …
Thejudge was. asked to decide the case upon the basis that there had been an overpay ment of£ 1,007 caused by a mistake of fact and that the defendant, relying upon a representa tion that he was entitled to the £1,000 spent £546,61 of it. The problem as thus posed contained no information as to whether or not it would be ilnconscionable for the defendant to retain the balance of the sum. It contained no information upon which the court could determine whether or not it would be unfair to make him repay. Having, in effect, been asked to ignore his finding of fact which was so favourable to the defendant I can readily understand the judge coming to the conclusion which he did. However, not without some hesitation, I have reached the same conclusion as Slade LJ, namely that once the defendant had shown detriment which prevented the plaintiffs from asserting the truth behind the payment that obstacle barred the whole of their claim for, pleaded simply as a case of mistake, evidence of the defendant’s true entitlement was essential if the plaintiffs were to succeed. I think that this must follow from the speech of Lord Watson in Ogilvie v. West Australian Mortgage andAgenry Corporation Ltd [1896] AC 257, 270; and Fung Kai Sun v. Cha11 Fui Hing (1951] AC 489 in which the former case was consid ered. Strictly speaking the words of Lord Watson were obiter, but as Slade LJ has pointed out, the decision of the Court of Appeal in Greenwood v. Martins Bank Ltd [1932] l KB 371 was to the same effect. In that case Scrutton LJ said, at 383-4:
‘If the claim of the bank were for damages for failure to disclose, it might be that the improbabilities of recovering anything in the action might be taken into account; but the authorities show that in a question of estoppel, where the question is whether the customer is estopped from alleging that certain bills are forgeries, if the bank has lost something, the value of that something is not the measure of its claim, but, the customer being estopped from proving the bills forgeries, the bank gains by the amount of the bills.’
I would not for myself regard Skyring v. Greenwood (1825) 4 B & C 281 and Holt v. Markham (1923] 1 KB 504 as determining the same question. Those cases may be explained upon the basis that the defendant’s manner ofliving generally had been influenced by the payments made to them so that although they had not been able to point to specific items of expenditure amounting to the whole sum in question the money had nonetheless been spent. Alternatively such cases may be said to rest upon the basis that to compel the defendant to make any repay ment would be to impose upon him an overall financial strain brought about only by his being misled as to his financial position by the representations of the plaintiffs.
However I am far from saying that whenever the recipient of money paid under a mistake has been led to think that it is his, then he will be entitled to retain the whole by demonstrat ing that he has spent part of it. The payment may involve no representation, as where a debtor presents an account to a creditor. Then while there might have been a representation there may bf circumstances which would render it unconscionable for the defendant to retain a balance in his hands. There may also be circumstances which would make it unfair to allow the plaintiff to recover. It may be that it is important to determine whether or not the plaintiff making the representation owes a duty to the defendant as was the case in Ogilvie v. West Australian Mortgage and Agency Corporation Ltd[1896] AC 257. I too am unhappy in being asked to decide a case in an unreal situation and I am content to say that the question we have been asked to determine is that already decided in Greenwood v. Martins Bank Ltd by Scrutton LJ [1932] I KB 371.
Slade LJ: .
Estoppel
I now turn to the defence of estoppel. The following general propositions of law are to be found set out in Goff and Jones, The Law of Restitution, 2nd edn. (1978), ;54-5 (though I do not quote them verbatim). A plaintiff will be estopped from asserting his claim to restitution if the following conditions are satisfied: (a) the plaintiff must generally have made a representation of fact which led the defendant to believe that he was entitled to treat the money as his own; (b) the defendant must have, bona fide and without notice of the plaintiff’s claim, consequently changed his position; (c) the payment must not have been primarily caused by the fault of the defendant.
In my opinion these propositions are entirely consistent with both the general principles which govern the duclrine of estoppel and with the authorities which have been cited to this court, illustrating the relevance of estoppel as a defence to claims to restitution. Examples of the more important of such authorities are Skyringv. Greenwood, 4 B & C 281; Holtv. Markham [1923] 1 KB 504 and Lloyds Bank Ltdv. Brooks (1950) 6 Legal Decisions Affecting Bankers 161. In the present case it is common ground that the plaintiffs made representations to the defen dant which led him to believe that he was entitled to treat the entirety of the overpaid moneys as his own. This was conceded by the plaintiffs at the trial, so that the judge did not find it nec essary in his judgment to give any particulars at all of the relevant representations. Certain authorities suggest that a plea of estoppel can afford a good defence to a claim for restitution only if the plaintiff owed a duty to the defendant to speak or act in a particular way: see, for example, R. E. Jones Ltd v. Wari11t and Gil/ow Ltd[l926] AC 670, 693,per Lord Sumner; L/Qyds Bani Ltd v. Brooks, 6 Legal Decisions Affecting Bankers 161, 168 ff. However, this point causes no difficulty for the defendant in the present case since the plaintiffs, as the defendant’s employers, in my opinion clearly owed him a duty not to misrepresent the amount of the pay to which he was entitled from time to time, unless the misrepresentations were caused by incor rect information given to them by the defendant. It has not been suggested that the misrepre sentations were so caused or that the overpayments were brought about by the defendant’s own fault.
The judge found as a fact that the defendant had, bona fide and without notice of the plaintiffs’ claim, changed his position in reliance on the representations, by losing the claim for £86.11 social security benefit and expending the sum of £460.50 which I have already men tioned. In the circumstances and in accordance with the principles already stated, he was in my opinion clearly right to hold that the plaintiffs’ claim was barred by estoppel to the extent of at least £546.61 and there is no challenge to this part of his decision. .
If I may respectfully say so, I feel some sympathy with the judge’s point of view. I also initially found unattractive the submission, placed before and rejected by him, that, if the defen dant be treated as having spent in reliance on the plaintiff’s representations some £546.61 of the £1,007 received, the plaintiffs could not recover the balance of £460.39, even if it were still sitting untouched in some deposit account. At first sight such a conclusion would seem to leave the defendant unjustly enriched.
On further reflection, however, I think that references to broad concepts of justice or equity in a context such as the present may be somewhat misleading, as well as uncertain in their appli cation. The conclusion uf the judge in the present case really involves the proposition that, if the defendant is successfully to resist a claim for repayment of the entire sum of £1,007, the onus falls on him to prove specifically that the pecuniary amount of the prejudice suffered by him as a result of relying on the relevant representations made by the plaintiffs equals or exceeds that sum. For present purposes, however, one has to postulate a situation in which the defendant was perfectly entitled to conduct his busine s affairs on the assumption that the rel evant representations were true, until he was told otherwise. Meantime, a defendant in the situ ation of the defendant in the present case may, in reliance on the representation, have either altered his general mode of living or undertaken commitments or incurred expenditure or entered into other transactions which it may be very difficult for him subsequently to recall and identify retrospectively in complete detail; he may even have done so, while leaving some of the particular moneys paid to him by the plaintiff untouched. If the pecuniary amount of his pre judice has to be precisely quantified by a defendant in such circumstances, he may be faced with obvious difficulties of proof. Thus, though extreme hypothetical cases can be envisaged, and indeed were canvassed in argument, in which broad considerations of equity and justice might appear to require the barring of a plaintiff’s claim only pro taoto, if this were legally possible, I would not expect many such cases to arise in practice. In any event I do not consider the pres ent case to be one of them, even on the basis of the facts as pleaded. I prefer to approach it sim ply by what I regard as the established legal principles governing the doctrine of estoppel.
Estoppel by representation is a rule of evidence, the consequence of which is simply to pre clude the representor from averring facts contrary to his own representation: see Spencer Bower and Turner, Estoppel by Representation, 3rd edn. (1977), 112. It follows that a party who, asa result of being able to rely on an estoppel, succeeds on a cause of action on which, without being able to rely on it, he would necessarily have failed, may be able to recover more than the actual damage suffered by him as a result of the representation which gave rise to it. Thus if a bank’s customer is estopped from asserting that a cheque with which he has been debited is a forgery, because of his failure to inform the bank in due time, so that it could have had recourse to the forger, the debit will stand for the whole amount and not merely that which could have been recovered from the forger: see Ogilvie v. West Australian A,fortgage and Agency Corporation Ltd 11896] AC 257. In that case Lord Watson said, at 270:
‘There are some obiter dicta favouring the suggestion that, in a case like the present, where the amount of the forged cheques is about£),500, the estoppel against the customer ought to be restricted to the actual sum which the bank could have recovered from the forger. But these dicta seem to refer, not to the law as it was, but as it ought to be; and, in any view of them, they are contrary to all authority and practice.’ The decision of the Court of Appeal in Greenwood v. Martins Bank Ltd [1932) l KB 371, affirmed in the House of Lords [1933] AC 51, is to the same effect.
So far as they go, the authorities suggest that in cases where estoppel by representation is available as a defence to a claim for money had and receive , the courts similarly do not treat the operation of the estoppel as being restricted to the precise amount of the detriment which the representee proves he has suffered in reliance on the representation. In Skyrmg v. Greenwood, 4 B & C 281, the paymasters of a military corps had given credit in account to an officer for a period from January 1817 to November 1820, for certain increased pay. They had mistakenly supposed that this had been granted by a general order of 1806 to an officer of his situation. But in fact the paymasters had been informed in 1816 that the Board of Ordnance would not allow the increased payments to persons in the officer’s situation. A statement of that account was delivered to the officer early in 1821, gi,,ing him credit for the increased pay to which they supposed him to be entitled. After the officer’s death in 1822, his personal repre sentatives sought to recover the whole of the pay which had been credited to him. The defen dants claimed the right to retain the merpaid sums. The Court of King’s Bench rejected this claim, apparently without any inquiry as to the amount of the expenditure or financial commitments which the officer had incurred in reliance upon the erroneous credit. The basis of the court’s decision is to be found in the following passage from the judgment of Abbott CJ, at 289:
‘I think it was their duty to communicate to the deceased the information which they had received from the Board of Ordnance; but they forbore to do so, and they suffered him to suppose during all the intervening time that he was entitled to the increased allowances. It is of great importance to any man, and certainly not less to military men than others, that they should not be led to suppose that their annual income is greater than it really is. Every prudent man accommodates his mode of living to what he supposes to be his income; it therefore works a great prejudice to any man, if after having had credit given him in account for certain sums, and having been allowed to draw on his agent on the faith that those sums belonged to him, he may be called upon to pay them back.’
In Holt v. Markham [1923] I KB 504 the defendant was a demobilised officer of the Royal Air Force. His name was on a list called the Emergency List. This meant that, under a certain military regulation, he was entitled to a gratuity at a lower rate than ifhe was not on that list. The plaintiffs acted as the government’s agents for the payment of gratuities to demobilised officers. In ignorance of the fact that the defendant was on the Emergency List, but also in for getfulness of the regulation, and not appreciating the materiality of an officer being on that list, they paid the defendant his gratuity at the higher rate to which he would have been entitled if he had not been on it. Subsequently they sought to recover this sum. But by then the defen dant, thinking this matter was concluded, had sold his holding of War Savings certificates and invested a substantial sum in a company which subsequently went into liquidation: seep. 507 of the report of the facts. The Court of Appeal held that the plaintiffs’ action failed on two grounds, first that the plaintiffs’ mistake was one of law rather than of fact and secondly that, as their conduct had led the defendant to believe that he might treat the money as his own and he had altered his position in that belief, the plaintiffs were estopped from alleging that the money had been paid under a mistake. Scrutton LJ put the matter very simply, at 514:
‘l think this is a simple case of cstoppel. The plaintiffs represented to the defendant that he was entitled to a certain sum of money and paid it, and after a lapse of time sufficient to enable any mistake to be rectified he acted upon the representation and spent the money.’
……
If it were in every case possible for the doctrine of estoppel by representation to operate merely pro tanto in cases where it is being imoked as a defence to an action for money had and received, I think that the Court ofK.ing’s Bench in Skyring v. Greenwood, 4 B & C 281, and the Court of Appeal in Holt v. Markham [1923] 1 KB 504 and indeed Lynskey Jin Lloyds Bank Ltd·v. Brooks, 6 Legal Decisions Affecting Bankers 161, would have been bound to conduct a much more exact process of quantification of the alteration of the financial position of the recipients, which had occurred by reason of the representations. The courts, however, in those cases, man ifestly regarded any such process as irrelevant and inappropriate. All the relevant conditions for the operation of an estoppel being satisfied in those cases, the plea operated as a rule of evidence which precluded the payers from recovering any part of the money mistakenly overpaid or from retaining any part of the moneys mistakenly over-credited.
I think that no authority has been cited, other than the judgment of the judge, which directly supports the proposition that estoppel is-capable of oqerating merely pro tanto in a case such as the present, where it is otherwise capable of being imoked as a complete defence to an action for money had and received. For the reasons which I have given, I conclude that such a pro position is contrary to principle and authority. The authors of Goff and Jones, The Law of Restitution, 2nd edn. (1978), do not assert any such proposition, but they do say, at 556:
‘The effect of such an estoppel will generally be to defeat the claim altogether. But where the defendant’s change of position has deprived.him of the opportunity to return only part of the money he has received, to dismiss the plaintiff’s claim in its entirety would enable the defendant to make a profit out of the transaction. This should not be allowed. In such circumstances the court may only give effect to the estoppel, subject to the defendant’s undertaking to repay to the plaintiff any part of the sum received which he ought not to be entitled to keep.’
The suggestion of an undertaking stems from the speech of Viscount Cave LC in R. E. Jones Ltd v. Waring and Gil/ow Ltd [1926] AC 670. In that case the majority of the House of Lords held that the plaintiffs were entitled to recover certain moneys on the principle of Kelly v. Solari, 9 M & W 54. Viscou_nt Cave LC who dissented and with whom Lord Atkinson agreed, considered that the plaintiffs were estopped from recovering the money. On the particular facts, however, the operation of an estoppel in this manner would have left the defendants with a profit. The defendants disclaimed any desire to make such a profit and offered an undertaking (in effect) to return it to the plaintiffs. Viscount Cave LC, at 685, expressed the view that such undertaking should be recited in the order to be made on the appeal, but said that, subject to the undertaking, he would dismiss it.
I recognise that in some circumstances the doctrine of estoppcl could be said to give rise to injustice if it operated so as to defeat in its entirety an action which would otherwise lie for money had and received. This might be the case for example where the sums sought to be recovered were so large as to bear no relation to any detriment which the recipient could pos sibly have suffered. I would for my part prefer to leave open the question whether in such a case the court would have jurisdiction, in the exercise of its discretion, to exact an undertaking of the nature referred to by Viscount Cave LC, if it was not voluntarily proferred by the defen dant.
On the particular facts of the present case as pleaded and prove<l, however, I could in any event see no sufficient ground for exacting any such undertaking from the defendant in the exercise of the court’s discretion, even assuming that such discretion existed. The conditions for the operation of an estoppel have in my opinion all been satisfied. For the reasons which I have given, both on principle and in accordance with authority, I conclude that such cstoppel bars the whole of the plaintiffs’ claim.
Australia and New Zealand Banking Group Ltd v. Westpac Banking Corporation
(1987) 164 CLR
Mason CJ, Wilson, Deane, Toohey and Gaudron JJ:is whether the
fact that an agent has paid over money received by him as an agent to, or on behalf of, his principal will of itself constitute a good defence to an action against him for recovery of money paid under a fundamental mistake.
It was submitted on behalf of ANZ that the fact that Westpac had applied most of the over payment in payments made on behalf of Jakes did not of itself constitute any defence in rela tion to the moneys so applied. The basis of that submission was the contention that the fact that an agent has applied funds received by him on behalf of a principal by payment to, or on behalf of, the principal does not, of itself, constitute a defence to an action for money paid under fun damental mistake of fact unless it appears that the agent would have suffered overall detriment if it had repaid the money at the time when it first received notice of the claim for repayment. The fact that Westpac had paid out most of the funds received on behalf of Jakes would not, so it was said, constitute such a detriment unless it appeared that Westpac would have been worse off by reason of the overpayment if it had, when it received notice of the mistake, repaid the
$100,000 to ANZ, debited Jakes’ account with that amount (on the basis that it was entitled to claim indemnity from Jakes), and dishonoured all of the cheques which it might then have dis honoured. The measure of whether Westpac would have been worse off appears, upon analysis, to be whether Jakes would have owed it more in the situation which would have existed if, at the time it received notice of the mistake, Westpac had taken the above steps than Jakes would have owed it in the hypothetical situation which would have existed at that time if the overpayment had never been made and the cheques which it would probably have dishonoured but for the overpayment had in fact been dishonoured.
There are several points at which this submission of ANZ is susceptible of legitimate criticism. For example, the proposition that a financial institution which makes profits by lending money at interest is better off whenever a corporate customer, which is not known to be insol vent, reduces its use of an overdraft facilitY, which has been made available on commercial terms sounds somewhat strangely in modern eall5. The complete answer to the overall submission is, however, that its legal basis is mistaken for the reason that, on balance, both authority and prin ciple support the conclusion that an agent who has received money on his principal’s behalf will, without more, have a good defence if, before learning that the money was paid under fun damental mistake, he has ‘paid it to the principal or done something equivalent’ thereto. The rationale of such a general rule can be identified in terms of the law of
agency and of notions of unjust enrichment. If money is paid to an agent on behalf of a princi pal and the agent receives it in his capacity as such and, without notice of any mistake or irreg ularity in the payment, applies the money for the purpose for which it was paid to him, he has applied it in accordance with the mandate of the payer who must look to the principal for recov ery (see per Palles CB, Fitzpatrick v. M’Glone [1897] 2 [R 542 at 551 and per Cockburn CJ, Holland v. Russell (1861) 1 8 & S 424 at 434; [121.ER 773 at 777]). In those circumstances, the benefit of the payment has been effectively passed on to the principal who will be prima facie liable to make restitution if the payment was made under a fundamental mistake of fact. If the matter needs to be expressed in terms of detriment or change of position, the payment by the agent to the principal of tile money which he has received on the principal’s behalf, of itself con stitutes the relevant detriment or change of position. [n that regard, no relevant distinction can be drawn between payment to the principal or payment to another or others on behalf of the principal (cf. Gowers v. Lloyds and National Provincial Foreign Bar,k Ltd, at 773G-H).
In support of the submission that an agent who has paid out the money to, or on behalf of,
his principal will have no defence to a claim for repayment by the payer unless he can show some overall detriment which would result from his receipt of the payment if he, as distinct from his principal, were required to make restitution, ANZ placed particular reliance upon Buller v. Harrison and K/einwort, Sons and Co. v. Dunlop Ruhher Compar,y (1907) 97 LT 263. Buller v. Harrison, like Cox v. Prentice, was a case where money paid under a fundamental mis take was recovered from an agent notwithstanding that he had made a reversible entry in his own books crediting the amount to his principal. In neither case however, had there been any subsequent transaction which would be affected if the book entry were reversed. Thus, in Buller
v. Harrison, Lord Mansfield was at pains to stress (at 568; 1245 [ER]): ‘In this case, there was no new credit, no acceptance of new bills, no fresh goods bought
In so far as general principle was concerned, Lord Mansfield was emphatic (at 568: 1244–5 [ER]):’The whole question at the trial was, whether the defendant, who was an agent, had paid the money over. Now, the law is clear, that if an agent pay over money which has been paid to him by mistake, he does no wrong; and the plaintiff must call on the principal … ‘
In that regard, we do not read Lord Mansfield’s subsequent comment that if ‘there had been any new credit given, it would have been proper to have left it to the jury to say, whether any prejudice had happened to the defendant by means of this payment’ (at 568; 1245 [ER], italics added) as intended to qualify his earlier statement that payment over of the money paid would constitutea good defence. If that subsequent comment is, however, properly to be read as imposinga separate requirement of overall prejudice in a case where the money received has been paid over, it should not be accepted as correctly stating the law. Similarly, Cox v. Prentice was a case where it was stressed that ‘things remained unaltered between the agent and his principal’ (per Dampier J, at 351; 643 [ER)) and no ‘new credit’ had been ‘given’ (per Le Blanc J, at 349; 643 [ER]). Again, there was no doubt aboutthe general rule which was stated by Lord Ellenborough CJ in plain terms (at 348; 642 [ER]):
‘I take it to be clear, that an agent who receives money for his principal is liable asa prin cipal so long as he stands in his original situation; and until there has beena change of cir cumstances by his having paid over the money to his principal, or done something equivalent to it.’
The case of Kleinwort, Sons and Co. v. Dunlop Rubber Co. is not really in point since, as Robert GoffJ pointed out in Barclays Bank Ltd v. W. J. Simms Son fS Cooke (Southern) Ltd
(at 690), the appellant’s defence based on payment had been conclusively negatived by the jury’s finding that they had received the money as ‘principals, and in their ownright’ (see Kltinwort, at 264, 265). It is true that, in the course of his judgment, Lord Loreburn LC commented (at 264) that ‘if money is paid under a mistake of fact and is redemanded from the person who received it before his position has been altered to his disadvantage, the money must be repaid in whatever character it was received.’.
There is, however, nothing in Lord Lorebum’s judgment that would indicate that he would not have regarded payment by the agent to, or at the direction of, the principal as not of itself rep resenting an alteration of the agent’s position to his disadvantage. Lord Atkinson left no doubt that payment to, or at the direction of, the principal would suffice asa good defence. He said (at 265): ‘Whether he would be liable if he dealt as agent with such a person will <lepend upon this, whether, before the mistake was discovered, he had paid over the money which he received to the principal, or settled such an account with the principal as amounts to payment, or did something which so prejudiced his position that it would be inequitable to require him
to refund’
Clarke v. Dickson
Crompton J: When once it is settled that a contract induced by fraud is not void, but voidable at the option of the party defrauded, it seems to me to follow that, when that party exercises his option to rescind the contract, he must be in a state to rescind; that is, he must be in such a situ ation as to be able to put the parties into their original state before the contract. Now here I will assume, what is not clear to me, that the plaintiff bought his shares from the defendants and not from the Company, and that he might at one time have had a right to restore the shares to the defendants ifhe could, and demand the price from them. But then what did he buy? Shares in a partnership with others. He cannot return those; he has become bound to those others. Still stronger, he has changed their nature: what he now has and offers to restore are shares in a quasi corporation now in process of being wound up. That is quite enough to decide this case. The plaintiff must rescind in toto or not at all; he cannot both keep the shares and recover the whole price. That is founded on the plainest principles of justice. If he cannot return the article he must keep it, and sue for his real damage in an action on the deceit. Take the case I put in the argument, of a butcher buying live cattle, killing them, and even selling the meat to his cus tomers. If the rule of law were as the plaintiff contends, that butcher might, upon discovering a fraud on the part of the grazier who sold him the cattle, rescind the contract and get back the whole price: but how could that be consistently with justice? The true doctrine is, that a party can never repudiate a contract after, by his own act, it has become out of his power tu restore
the parties to their original condition.
Erlanger v. New Sombrero Phosphate Co.
(1878) 3 App. Cas. 1218,
Lord Blackbum: … Thceontract was not void, but only voidable at the election of the com pany.
In Clough v. The London and North We.rem Railway Cornpany,1 in the judgment of the Exchequer Chamber, it is said, ‘We agree that the contract continues valid till the party defrauded has determined his election by avoiding it. In such cases, (i.e., of fraud) the question is, Has the person on whom the fraud was practised, having notice of the fraud, elected ilot to avoid the contract? Or, Has he elected to avoid it? Or, Has he made no election? We think that so long as he has made no election he retains the right to determine it either w.ay; subject to this, that if, in the interval whilst he is deliberating, an innocent third party has acquired an interest in the property, or if, in consequence of kis delay the position even of the wrongdoer is affected, it will preclude him from exercising his right to rescind.’ It is, I think, clear on principles of gen eral justice, that as a condition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo. See per Lord Cranworth in Addie v. The Western Bank.2 It is a doctrine which has often been acted upon both at law and in equity. But there is a considerable differ ence in the mode in which it is applied in Courts of Law and Equity, owing, as I think, to the difference of the machinery which the Courts have at command. I speak of these Courts as they were at the time when this suit commenced, without inquiring whether the Judicature Acts make any, or if any, what difference.
It would be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw that back on the other party’s hand without accounting for any benefit he may have derived from the use of the property, or if the property, though not destroyed, has been in the interval deteriorated, without making compensation for tha: deterioration. But as a Court of Law has no machinery at its command for taking an account of such matters, the defrauded party, ifhe sought his remedy at law, must in such cases keep the property and sue in an action for deceit, in which the jury, if properly directed, can do complete justice by giving as damages a full indemnity for all that the party has lost: see Clarke v. Dic/eson,3 and the cases there cited.But a Court of Equity could not give damages, and, unless it can rescind the contract, can give no relief. And, on the other hand, it can take accounts of profits, and mai<e allowance for deterioration. And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract. And a Court of Equity requires that those who come to it to ask its active interposition to give them relief, should use due diligence, after there has been such notice or knowledge as to make it inequitable to lie by. And any change which occurs in the position of the parties or the stlte of the property after such notice or knowledge should tell much more against the party in rnora, than a similar change before he was in mora should do….
Armstrong v.Jackson
[1917] 2 KB 822,
McCardie J:……argued that no decree should be granted inas much as the circumstances had changed through the lapse of time and that the plaintiff could not restore in 1917 that which he had received from the defendant in 1910. The shares in 1910 stood at nearly 31. for each Ss. share. They are now worth 5s. only, or slightly less, and at such a price they have been standing at and since the issue of the writ. But in my view this second contention fails also, although, of course, it is clear law that restitutio in integrum is essential to a claim for rescission. The plaintiff still holds the shares he bought in 1910. He can hand them back to the defendant. The company is the same as in 1910. Its name only has been changed. The objects of the company have not changed though the assets of the company may have varied. The market valuation of the shares has greatly dropped, but the shares are the same shares. In my view the words of Lord Blackburn in Erlanger v. New Somhrero Phosphatt Co.,1 quoting Clough v. London and North-Western Ry. Co.,2 have no application to the present case. In the Erlanger Ca,e Lord Blackburn says this:’ “We think that so long as he has made no elec tion he retains the right to determine it either wa,y; subject to this, that if, in the interval whilst he is deliberating, an innocent third party has ac<juired an interest in the property, or if, in con sequence of his delay, the position even of the wrongdoer is affected, it will preclude him from exercising his right to rescind.” It is, l think, clear on principies of general justice, that as a con dition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo. See per Lord Cranworth in Western Bank of Scotland v. Addie.3 It is a doctrine which has often been acted upon both at law and in equity.’ I think that such words refer to a delay which occurs after a plaintiff has ascertained his right to rescind and whereby the position of a defen dant is substantially altered and prejudiced. No such delay has here occurred, inasmuch as the plaintiff acted with promptitude in issuing his writ when he became suspicious of the defen dant’s conduct. The phrase ‘restitutio in integrum’ is somewhat vague. It must be applied with care. It must be considered with respect to the facts of each case. Deterioration of the subject matter does not, I think, destroy the right to rescind nor prevent a restitutio in integrum. Indeed, it is only in cases where the plaintiff has sustained loss by the inferiority of the subject matter or a substantial fall in its value that he will desire to exert his power of rescission. Such was the state of things in Rothschildv. Brookman.4 Such, I infer, was the state of things in Gillett
v. Peppercorne,5 where the plaintiff alleged that he had paid extravagant prices for the shares. Such too, I infer, was the state of things in Oelkers v. Ellis.6 If mere deterioration of the sub ject-matter negatived the right to rescind, the doctrine of rescission would become a vain thing. Rescission was refused in Clarke v. Dickson7 because the plaintiff had there changed the shares in a company on the cost-book principle into shares in a joint-stock corporation. Upon that ground the decision in Clarke v. Di_ckson is correct. The dicta in that case, so far as they go beyond that ground, are not, I think, consistent with the various decisions already cited in this judgment. Rescission was impossible in Wmern Bank of Scotland v. Addie,8 inasmuch as the shares purchased by the plaintiff, namely, shares in an unincorporated company, had been changed into shares of a company registered under the then existing Companies Acts. But Lord Cranworth in his opinion9 used the following words: ‘I agree with the learned judges below, that the circumstance that the shares, from mismanagement or otherwise, had become depre ciated in value subsequently to the purchase by the pursuer, would of itself have been of no importance. He might still have been able to restore that which he was fraudulently induced to purchase.’ Those words are directly applicable to the present case: see also the American decision of Conkey v. Bond,10 cited in Story on Agency, notes to s. 211. The fall of the shares here is serious. Had, indeed, the plaintiff discovered the fraud at an early date he could have repudiated the transaction whilst the price was still high, and the loss to the defendant would then not have been so great in view of his power to dispose of them on the market. But the plain tiff is in no way to blame, and the considerations of hardship urged before me by Mr Distumal were similarly urged in 1856 before Sir John Romilly in a somewhat analogous case. Yet the plea of hardship fails here as it failed sixty years ago. In rejecting the plea of hardship in Blake
v. Mowatt’ 1 the then Master of the Rolls said: ‘It is the leading principle of the equity admin istration in this Court, that truth shall govern all transactions, and that one who deludes another ina contract, or permits him to be deluded, and takes advantage of that delusion, cannot after wards complain, that, if the contract be set aside, he will be in a worse situation than if the contract had never been entered into.’
The extent to which the requirement of restitutio in integrum may be limited in its application is strikingly illustrated by the decision in Adam v. Newbigging.I may point out that mere lapse of time is no answer to a plea of rescission. Here some six years elapsed before the plaintiff claimed to rescind In cases like the present the right of the party defrauded is not affected by the mere lapse of time so long as he remains in ignorance of the fraud If,however, he delays his claim to rescission until after the lapse of six years from his discovery of the fraud, then the Court will (apart from any other point) act by analogy to the Statute of Limitations and refuse to grant relief:
Spence v. Crawford
[1939] 3 All ER 271, House of Lords
Lord Wright: … On the basis that the fraud is established, I think that this is a case where the remedy of rescission, acoompanied by restitutio in integrum, is proper to be given. The prin ciples governing that form of relief are the same in Scotland as in England. The remedy is equi table. Its application is discretionary, and, where the remedy is applied, it must be moulded in accordance with the exigencies of the particular case. The general principle is authoritatively stated in a few words by Lord Blackburn in Erlanger v. New Sombrero Phosphate Co. [(1878) 3 App. Cas. 1218] where, after referring to the common law remedy of damages, he went on to say, at 1278:
But a court of equity could not give damages, and, unless it can rescind the contract, can give no relief. And on the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.
In that case, Lord Blackburn is careful not to seek to tie the hands of the oourt by attempting to form any rigid rules. The court must fix its eyes on the goal of doing ‘what is practically just.’ How that goal may be reached must depend on the circumstances of the case, but the court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of inno cent misrepresentation. This is clearly recognised by Lindley, MR, in Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392. There is no doubt good reason for the distinction. A case of innocent misrepresentation may be regarded rather as one of misfortune than as one of moral obliquity. There is no deceit or intention to defraud. The court will be less ready to pull a trans action to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff. Restoration, however, is essen tial to the idea of restitution. To take the simplest case, if a plaintiff who has been defrauded seeks to have the contract annulled and his money or property restored to him, it would be inequitable ifhe did not also restore what he had got under the contract from the defendant. Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in return. The purpose of the relief is not punishment, but compensation. The rule is stated as requiring the restoration of both parties to the status quo ante, but it is gener ally the defendant who complains that restitution is impossible. The plaintiff who seeks to set aside the contract will generally be reasonable in the standard of restitution which he requires. However, the court can go a long way in ordering restitution if the substantial identity of the subject-matter of the contract remains. Thus, in the Lagunas case, though the mine had been largely worked under the contract, the court held that, at least if the case had been one of fraud, it could have ordered an account of profits or compensation to make good the change in the position. ……The difficulties which have been raised have reference to the collateral terms of the contract. Of these I need only refer to ell. 5 and 6. These clauses were primarily due to the fact that completion of the transaction was deferred for the benefit of the respondent for2 years, but they also involved relieving the appellant of the obligations which he had assumed whilea shareholder and director. When he sold all his shares and interest in the company, it was nat ural that he should be relieved of these liabilities, in particular of his guarantee to the bank, and of the deposit of his shares with the bank. When, however, the status quo ante is restored and he again becomes holder of 2,925 shares, it might seem equitable that he should reassume the liabilities to which he was subject when he made the contract. However, during the years since the sale, during which the respondent has been conducting the affairs of the company on his own responsibility and in his own interest, the financial position of the company has been so changed that it is not clear to me that anything further is necessary to restitution than the rctransfer of 2,925 shares and repayment of the purchase price with interest. The appellant’s claim for intermediate profits or dividends was not originally brought into the action.I cannot see how the fact that for the 2 years between the oontract and its completion the respondent relieved, under cl. 6, the appellant of his liability can affect the position. If the respondent had been compelled to pay moneys, or was still under the liabilities under which the appellant had been, it would be different. However, the whole finam,;al position of the company changed. It is not suggested that an indemnity for the past liabilities would be of any use. Though thereis a further point on which I feel more difficulty, I am not satisfied that the sale which the bank required of the respondent’s shares held by it as security would ever have been necessary, even to secure the release of the appellant’s shares, except for the manner in which the respondent conducted the affairs of the company, in particular in regard to the understatementof stock and suppression of sales in the balance sheets. However, it is unnecessary to decide finally how these matters should be dealt with, because, as my noble and learned friend Lord Thankerton stated, the parties have agreed upon a form of order which is to be made in the event of this House holding that the contract should be rescinded and that there should be restitution.
I should, however, refer shortly to Hunt v. Silk, which was quoted by Lord Carmont . With all respect, I do not think that that decision affords any assistance here. That was an action at common law for money had and received. The plaintiff had paid £10 under an agreement for a lease of premises which contained certain conditions. The plaintiff entered into possession of the premises, and continued in possession after the conditions had to his know ledge been broken. It was held that he could not claim to rescind and recover the money he had
paid, but that his action was in damages. It appears from the judgment of Lawrence, J, that he failed because there had been no total failure of consideration, so that the money could not be recovered in that form of action. N
O’Sullivan v. Management Agency and Music Ltd
[1985] QB 428
Dunn LJ
‘If the case had to be decided according to the principles of the common law, it might have been argued that at the date when the respondent issued his writ he was not entitled to rescind the purchase, because he was not then in a position to return to the appellant in specie that which he had received under the contract, in the same plight as that in which he had received it: Clarke v. Dickson, EB & E 148. But it is necessary here to apply the doc
trine of equity, and equity has always regarded as valid the disaflirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo: Erlanger v. Neri, Sombrero Phosphate Co., 3 App.Cas. 1218, at 12i8, 1279. It is not that equity asserts a power by its decree to avoid a contract which the defrauded party himself has no right to disaffirm, and to revest property the title to which the party cannot affect. Rescission for misrepresentation is always the act of the party him self: Reese River Silver Mining Co. Ltd. (Directors of the) v. Smith (1869) LR 4 HL 64, 73. The function of a court in which proceedings for rescission arc taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio, and, if it is valid, te give effect to it and make appropriate consequential orders: see Abram Steamship Co. Ltd. v. Wemille Shipping Co. Ltd. (1923) A.C. 773. The difference between the legal and the equitable rules on the subject simply was that equity, having means which the common law lacked to ascertain and provide for the adjustments necessary to be made between the parties in cases where a simple handing back of property or repayment of money would not put them in as good a position as before they entered into their transac tion, was able to see the possibility of restitutio in integrum, and therefore to concede the right of a defrauded party to rescind, in a much wider variety of cases than those which the common law could recognise as admitting of rescission. Of course, a rescission which the common law courts would not accept as valid cannot of its own force revest the legal title to property which had passed, but if a court of equity would treat it as effectual the equitable title to such property revests upon the rescission.’
This analysis of the cases shows that the principles of restitutio in integrum is not applied with its full rigour in equity in relation to transactions entered into by persons in breach of a fiduciary relationship, and that such transactions may be set aside even though it is impossible to place the parties precisely in the position in which they were before, provided that the court can achieve practical justice between the parties by obliging the wrongdoer to give up his prof its and advantages, while at the same time compensating him for any work that he has actually performed pursuant to the transaction. Erlanger v. NeTIJ Sombrero Phosphate Co., 3 App.Cas. 1218 is a striking example of the application of this principle.
Mr Bateson [counsel for the plaintiff] submitted that the defendants had gained the follow ing advantages: (I) profits from the agreements; and (2) the copyrights in the songs and master tapes for the life of O’Sullivan and 50 years thereafter. He pointed out that none of the agree ments obliged the defendants to do any work on behalf of O’Sullivan whether by promoting or exploiting him or his works or at all, although he conceded that the defendants had in fact done such work gratuitously. He accepted that the defendants in accounting for their profits were entitled to credit in respect of their proper and reasonable expenses for the work done, includ
ing work done gratuitously, but that they were not entitled to credit for any profit element in such work. He submitted that the exception made in Phipps v. Boardman (1967) 2 AC 46, where the trustees were morally blameless should not become the rule.
I do not think that equity requires such a narrow approach. It is true that in this case moral blame does lie upon the defendants as the judge’s findings of fact show. On the other hand it is significant that until O’Sullivan met Mills he had achieved no success, and that after he effec tively parted company with Mills in 1976 he achieved no success either. During the years that he was working with Mills his success was phenomenal. Although equity looks at the advantage gained by the wrongdoer rather than the loss to the victim, the cases show that in asKSSing the advantage gained the court will look at the whole situation in the round. And it is relevant that if Mr Bateson’s approach is applied O’Sullivan would be much better off than ifhe had received
separate legal advice and signed agreements negotiated at arm’s length on reasonable terms current in the trade at the time. This point was made forcibly by Mr Miller at the conclusion of his address in reply, when he relied on the maxim ‘He who seeks equity must do equity’ and submitted that equity required that the position of O’Sullivan was relevant in conidering the appropriate remedy.
In my judgment the judge was right to set the agreements aside and to order an account of the profits and payment of the sums found due on the taking of the account. But in taking the account the defendants are entitled to an allowance as proposed by Fox LJ, whose judgment I have read in draft, for reasonable remuneration including a profit element •for all work done in promoting and exploiting O’Sullivan and his compositions, whether such work was done pur suant to a contractual obligation or gratuitously. What constitutes ‘reasonable remuneration’ will depend on evidence on the taking of the account, but not the evidence of Mr Levison who approached the question on a different basis.
The assignments of the copyrights were made pursuant to the agreements. It was said on behalf of the defendants that each separate assignment was made for good consideration, and consequently that the copyrights cannot be re-assigned. Mr Bateson submitted that the indi vidual assignments were made for no consideration and that the only consideration was con tained in the agreements themselves. However that may be I accept that the validity of the individual assignments depends on the validity of the agreements themselves, and if the agree ments are set aside I see no reason why the copyrights should not be re-assigned to O’Sullivan.
The same consideration applies to the delivery up of the master tapes..
FoLxJ: … In cases where a plaintiff was s eking to obtain rescission for breach of contract the requirement of restitutio in integrum seem!. to have been strictly enforced at common law: see for example Hunt v. Silk (1804) 5 East 449 and Blackburn v. Smith (1848) 2 Ex. 783. But the equitable rules were, or became, more flexible. The position is stated in the dissenting judgment of Rigby LJ in Lagunas Nitrate Co. v. L11grmasSyndicate (1899] 2 Ch. 392 (and was approved by the House of Lords in Spence v. Crawford [1939] 3 All ER 271,279 and 285), at 456:
‘Now, no doubt it is a general rule that in order to entitle beneficiaries to rescind a void able contract of purchase against tht1 vendor, they must be in a position to offer back the subject-matter of the contract. But this rule has no application to the case of the subject matter having been reduced by the mere fault of the vendors themselves; and the rule itself is, in equity, modified by another rule, that where compensation can be made for any dete rioration of the property, such deterioration shall be no bar to rescission, but only a ground for compensation. I adopt the reasoning in Er/anger’s case, 3 App.Cas. 1218, 1278 of Lord Blackburn as to allowances for depreciation and permanent improvement. The noble Lord, after pointing out that a court of law had no machinery for taking accounts or esti mating compensation, says: “But a court of equity could not give damages, and, unless it can rescind a contract, can give no relief. And, on the other hand, it can take accounts of profits, and make allowances for deterioration. And I think the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.” This important passage is, in my judgment, fully supported by the allowance for deterioration and permanent improvements made by Lord Eldon and other great equity judges in similar cases.’
The result, I think, is that the doctrine is not to be applied too literally and that the court will do what is practically just in the individual case even though restitutio in integrum is impossi ble. Spence v. Crawford [1939] 3 All ER 271 was itself concerned with misrepresentation. But the principles states by Rigby LJ are, I think, equally applicable in cases of abuse of fiduciary relationship and indeed Rigby LJ regarded Lagun/lS (1899] 2 Ch. 392 as such a case: see 442.
It is said on behalf of the plaintiffs that, if the principle of equity is that the fiduciary must account for profits obtained through the abuse of the fiduciary relationship there is no scope for the operation of anything resembling restitutio in integrum. The profits must simply be given up. I think that goes too far and that the law has for long had regard to the justice of the mat ter. If, for example, a person is by undue influence persuaded to make a gift of a house to another and that other spent money on improving the house, I apprehend that credit could be given for the improvements. That, I think, is recognised by Lord Blackburn in Erlanger v. New Sombrero Phosphate Co., 3 App.Cas. 1278 and by Rigby LJ in Lagunas in the reference to allowance for permanent improvements in the passage which I have cited.
Accordingly, it seems to me that the principle that the court will do what is practically just as between the parties is applicable to a case of undue influence even though the parties cannot be restored to their original position. That is, in my view, applicable to the present case. The question is not whether the parties can be restored to their original position; it is what does the justice of the case req iire? That approach is quite wide enough, if it be necessary in the indi vidual case, to accommodate the protection of third parties. The rights of a bona fide purchaser for value without notice would not in any event be affected.
The next question is, it seems to me, the recompensing of the defendants. The rules of equity against the retention of benefits by fiduciaries have been applied with severity. In Phipps v. Boardman [1967) 2 AC 46, where the fiduciaries though in breach of the equitable rules, acted with complete honesty throughout, only succeeded in obtaining an allowance ‘on a liberal scale’ for their work and skill. They were allowed that in the High Court by Wilberforce J [1964] 1
WLR 993, 1018 on the ground that it would be inequitable for the beneficiaries to take the profit without paying for the skill and labour which produced it. The point does not seem to have been disputed thereafter. In the Court of Appeal [1965] Ch. 992 Pearson LJ said, at 1030;
‘It is to my mind a regrettable feature of this case that the plaintiff seems likely to recover an unreasonably large amount from the defendants’-the fiduciaries-‘even when under the judgment [1964] I W.L.R. 993, !018 the defendants have been credited with an allowance on a liberal scale for their work and skill. The rule of equity is rigid. The agent who has made a profit from his agency, without having obtained informed consent from his principal, has to account for the whole of the profit.’
Russell LJ, at 1032, said that, without intending to throw doubt on the defendants’ right to the liberal allowance, he preferred to express no view on the law, the matter not having been argued. Lord Denning MR said, at 1020:
‘Ought Boardman and Tom Phipps to be allowed remuneration for their work and skill in these negotiations? The plaintiff is ready to concede it, but in case the other beneficiaries are interested in the account, I think we should determine it on principle. This species of action is an action for restitution such as Lord Wright described in the Fibrosa case [1943]
A.C. 32, 61. The gist of it is that the defendant has unjustly enriched himself, and it is against conscience that he should be allowed to keep the money. The claim for repayment cannot, however, be allowed to extend further than the justice of the case demands. If the defendant has done valuable work in making the profit, then the court in its discretion may allow him a recompense. It depends on the circumstances. If the agent has been pilty any dishonesty or bad faith, or surreptitious dealing, he might not be allowed any remuneration or reward.’
What the first five defendants in substance are seeking is that the parties should be put in a position in which they would have been if the agreements had been on the basis which Mr Levison, an expert witness, thought might reasonably have been negotiated if Mr O’Sullivan had received independent advice from experienced persons. I do not feel able to accept that. In the first place, Mr Levison’s evidence was really only directed to the question of what might reasonably have been negotiated. The question what recompense in the circumstances of this case it would be reasonable to allow was not investigated. If, for example, there was any failure by the M.A.M. companies or Mr Mills to promote Mr O’Sullivan’s interests as vigorously or competently as they might have been expected to do, with the result that Mr O’Sullivan suf fered loss that might affect the position. Secondly, an order which, in effect, would involve sub stantial division of the profits between the beneficiary on the one hand and the fiduciary (and persons for whom he procured benefits) on the other, goes far beyond anything hitherto per mitted.
Once it is accepted that the court can make an appropriate allowance to a fiduciary for his skill and labour I do not see why, in principle, it should not be able to give him some part of the profit of the venture if it was thought that justice as between the parties demanded that. To give the fiduciary any allowance for his skill and labour involves some reduction of the profits otherwise payable to the beneficiary. And the business reality may be that the profits could never have been earned at all, as between fully independent persons, except on a profit sharing basis. But be that as it may, it would be one thing to permit a substantial sharing of profits in a case such as Phipps v. Boardman [1967] 2 Ac 46 where the conduct of the fiduciaries could not
be criticised and quite another to permit·it in a case such as the present where, though fraud was not alleged, there was an abuse of personal trust and confidence. I am not satisfied that it would be proper to exclude Mr Mills and the M.A.M. companies from all reward for their efforts. I find it impossible to believe th t they did not make a significant contribution to Mr O’Sullivan’s success. It would be unjust to deny them a recompense for that. I would, there fore, be prepared as was done in Phipps v. Boardman to authorise the payment (over and above out of pocket expenses) of an allowance for the skill and labour of the first five defendants in promoting the compositions and performances and managing the business affairs of Mr O’Sullivan, and that an inquiry (the terms of which would need to be considered with counsel) should be ordered for that purpose. Such an allowance could include a profit element in the way that solicitors’ costs do.
In my view this would achieve substantial justice between the parties because it would take account of the contribution made by the defendants to Mr O’Sullivan’s success. It would not take full account ofit in that the allowance would not be at all as much as the defendants might have obtained if the contracts had been properJy negotiated between fully advised parties. But the defendants must suffer that because of the circumstances in which the contracts were pro cured. On the basis that the first five defendants are remunerated as I have mentioned I see no reason in equity why the agreements and the assignments of copyright should not be set aside, the master recordings transferred to Mr O’Sullivan and an account of profits ordered. , ..
Waller LJ: … The important words of Lord Blackburn are that equity should give relief ‘whenever, by the exercise of its powers, it can do what is practically just.’ In my judgment this court is not concerned with punishing the defendants for their behaviour. We are concerned to see that the plaintiff gets the profit to which he is entitled and at the same time see that the defendants receive fair remuneration, but no more, for all the work that they have done in pur suance of this joint project. Although the trustee authorities indicate that trustees should retain no profit secretly made and only reasonable remuneration for their work as trustees, and although the present case is a fiduciary situation it is a case where the defendants, as the plain tiff knew, were doing a considerable amount of work. They are entitled to reasonable remu neration for that work. To apply the words of Lord Wright in Regal (Hastings) Ltd v. Gulliver (Note) [1967] 2 AC134, 154, the defendants here did make some profit with the knowledge and
assent of the plaintiff. This the defendants are entitled to keep and would be reasonable remu neration. On the other hand it is clear that the profit which the defendants kept was excessive. The excess profit was retained without the knowledge of the plaintiff. The defendants must account for this profit. It will be for the official referee to decide what would be reasonable remuneration. It must include all expenses and a fair profit.
In the present case the publishing agreement for overseas is different from the other contracts. In that case there were deductions made and part of the overseas receipts was transferred before any account W:!S made to the plaintiff. When this account is taken it will require very careful inquiry to see that only legitimate costs are deducted.
It was part of the defendants’ argument that the decision of this court should be confined to compensation and should not include the transfer of all copyrights back to the plaintiff. Since I would adopt Lord Blackburn’s approach of doing what is practically just, I have come to the conclusion that restitution requires that the court order should include the transfer of all the plaintiff’s copyrights back to him and, disagreeing on this point with Dunn and Fox L JJ, that only the master recording in which the copyright would be in the maker should remain with the maker. Since all, or nearly all, the master recordings have been transferred to third parties for good consideration this question is probably academic and I do not further discuss it….
Guinness plc v. Saunders
[1990] 2 AC 663, House of Lords
Lord Templeman: … Since, for the purposes of this application, Guinness concede that Mr Ward performed valuable services for Guinness in connection with the bid, counsel on behalf of Mr Ward submits that Mr Ward, if not entitled to remuneration pursuant to the articles, is, nevertheless, entitled to be awarded by the court a sum by way of quantum meruit or equitable allowance for his services. Counsel sub111its that the sum awarded by the court might amount to £5.2m. or a substantial proportion of that sum; therefore Mr Ward should be allowed to retain the sum of £5.2m. which he has received until, at the trial of the action, the court deter mines whether he acted with propriety and, if so, how much of the sum of £5.2m. he should be permitted to retain; Mr Ward is anxious for an opportunity to prove at a trial that he acted with propriety throughout the bid. It is common ground that, for the purposes of this appeal, it must be assumed that Mr Ward and the other members of the committee acted in good faith and that the sum of £5.2m. was a proper reward for the services rendered by Mr Ward to Guinness. ,
My Lords, the short answer to a quantum meruit claim based on an implied contract by Guinness to pay reasonable remuneration for services rendered is that there can be no contract by Guinness to pay special remuneration for the services of a director unless that contract is entered into by the board pursuant to article 9I. The short answer to the claim for an equitable allowance is the equitable principle which forbids a trustee to make a profit out of his trust unless·the trust instrument, in this case the articles of association of Guinness, so provides. The law cannot and equity will not amendhe articles of Guinness. The court is not entitled to usurp the functions conferred on the board by the articles.
The 28th edition (1982) of Snell’s Principles of Equity, first published in 1868, contains the distilled wisdom of the author and subsequent editors, including Sir Robert Mcgarry, on the law applicable to trusts and trustees. It is said, at 244, that:
‘With certain exceptions, neither directly nor indirectly may a trustee make a profit from his trust Threule depends not on fraud or mala tides, but on the mere fact of a profit made.’
Equity forbids a trustee to make a profit out of his trust. The articles of association of Guinness relax the strict rule of equity to the extent of enabling a director to make a profit pro vided that the board of directors contracts on behalf of Guinness for the payment of special remuneration or decides to award special remuneration. Mr Ward did not obtain a contract or a grant from the board of directors. Equity has no power to relax its own strict rule further than and inconsistently with the express relaxation contained in the articles of association. A share holder is entitled to compliance with the articles. A director accepts office subject to and with the benefit of the provisions of the articles relating to direcwrs. No one is obliged to accept appointment as a director. o director can be obliged to serve on a committee. A director of Guinness who contemplates or accepts service on a committee or has performed outstanding services for the company as a member of a committee may apply to the board of directors for a contract or an award of special remuneration. A director who does not read the articles or a director who misconstrues the articles is nevertheless bound by the articles. Article 91 provides clearly enough for the authority of the board of directors to be obtained for the payment of spe cial remuneration and the submissions made on behalf of Mr Ward, based on articles 2, 100(D) and 110, are more ingenious than plausible and more legalistic than convincing. At the board meeting held on 19 January 1986, Mr Ward was present but he did not seek then orthereafter to obtain the necessary authority of the board of directors for payment of special remuneration.
In these circumstances there are no grounds for equity to relax its rules further than the arti cles of association provide. Similarly, the law will not imply a contract between Guinness and Mr Ward for remuneration on a quantum meruit basis awarded by the court when the articles of association of Guinness stipulate that special remuneration for a director can only be awarded
by the board.
It was submitted on behalf of Mr Ward that Guinness, by the committee consisting of Mr Saunders, Mr Ward and Mr Roux, entered into a voidable contract to pay remuneration to Mr Ward and that since Mr Ward performed the services he agreed to perform under this voidable contract there could be no restitutio integrum and the contract cannot be avoided. This sub mission would enable a director to claim and retain remuneration under a contract whicha com mittee purported to conclude with him, notwithstanding that the committee had no power to enter into the contract. The fact is that Guinness never did contract to pay anything to Mr Ward. The contract on which Mr Ward relies is not voidable but non-existent. In support ofa quantum meruit claim, counsel for Mr Ward relied on the decision of Buckley J in In re Duomalic Ltd [1969] 2 Ch. 365. In that.case a company sought and failed to recover remunera tion received by a director when the shareholden or a voting majority of the shareholders had sanctioned or ratified the payment. In the present case there has been no such sanction or rat ification either by the board of directors or by the shareholders. Mr Ward also relied on the decision in Cr11ven-Ellis v. Canons Ltd [1936] 2 KB 403. In that case the plaintiff was appointed managing director of a company by an agreement under the company’s seal which also provided for his remuneration. By the articles of association each director was required to obtain quali fication shares within two months of his appointment. Neither the plaintiff nor the other direc tors obtained their qualification shares within two months or at all and the agreement with the managing director was entered into after they had ceased to be directors. The plaintiff having done work for the company pursuant to the terms of the agreement was held to be entitled to the remuneration provided for in the agreement on the basis of a quantum meruit. In Craven Ellis the plaintiff was not a director, there was no conflict between his claim to remuneration and the equitable doctrine which debars a director from profiting from his fiduciary duty, and there was no obstacle to the implication of a contract between the company and the plaintiff entitling the plaintiff to claim reasonable remuneration as of right by an action in law. Moreover, as in In re Duomatic Ltd, the agreement was sanctioned by all the directors, two of whom were beneficially entitled to the share capital of the company. In the present case Mr Ward was a director, there was a conflict between his interest and his duties, there could be no contract by Guinness for the payment of remuneration pursuant to article 91 unless the board made the contract on behalf of Guinness and there was no question of approval by directors or shareholders.
In support of a claim for an equitable allowance, reference was made to the decision of Wilberforce] in Phipps v. Boardman [1964] I WLR 993. His decision was upheld by the Court of Appeal [l 965] Ch. 992 and ultimately by this House under the name of Boardman v. Phipps [1967] 2 AC 46. In that case a trust estate included a minority holding in a private company which fell on Jean times. The trustees declined to attempt to acquire a controlling interest in the company in order to improve its performance. The solicitor to the trust and oneof the ben eficiaries, with the knowledge and approval of the trustees, purchased the controlling interest from outside shareholders for themselves with the help of information about the shareholden acquired by the solicitor in the course of acting for the trust. The company’s position was improved and the shares bought by the solicitor and the purchasing beneficiary were ultimately sold aat profit. A complaining beneficiary was held to be entitled to a share of the profits on the resale on the grounds that the solicitor and the purchasing beneficiary were assisted in the ori ginal purchase by the information derived from the trust. ……. Phipps v. Boardman decides that in exceptional circumstances a court of equity may award remuneration to the trustee. Therefore, it is argued, a court of equity may award remu neration to a director. As at present advised, I am unable to envL age circumstances in which a court of equity would exercise a power to award remuneration to a director when the relevant articles of association confided that power to the board of directors. Certainly, the circum stances do not exist in the present case….
Lord Goff of Chievcley: … As a matter of general law, to the extent that there was failure by Mr Ward to comply with his duty of disclosure under the relevant article of Guinness (art icle lOO(A) ), the contract (if any) between him and Guinness was no doubt voidable under the ordinary principles of law But it has long been the law that, as a condition of rescission of
a voidable contract, the parties must be put in statu quo; for this purpose a court of equity can do what is practically just, even though it cannot restore the parties precisely to the state they were in before the contract. The most familiar statement of the law is perhaps that of Lord Blackburn in Erlanger v, New Sombrero Phosphate Co. (1878) 3 App.Cas. 1218, when he said, at 1278; ‘It is, I think, clear on principles of general justice, that as a condition to a rescission there must be a rcstitutio in integrum. The parties must be put in statu quo It isadoctrine which has often been acted upon both at law and in equity.’
However on that basis Guinness could not simply claim to be entitled to the £5.2m. received by Mr Ward. The contract had to be rescinded, and as a condition of the rescission Mr Ward had to be placed in statu quo. No doubt this c uld be done by a court of equity making a just allowance for the services he had rendered; but no such allowance has been considered, let alone made, in the present case.
Let it be accepted that the contract under which Mr Ward claims to have rendered valuable ser vices to Guinness was void for want of authority. I understand it to be suggested that articles 90 and 91 provide (article 100 apart) not only a code of the circumstances in which a director of Guinness may receive recompense for services to the company, but an exclusive code. This is said to derive from the equitable doctrine whereby directors, though not trustees, are held to act in a fiduciary capacity, and as such are not entitled to receive remuneration for services rendered to the company except as provided under the articles of association, which are treated as equivalent to a trust deed constituting a trust. It was suggested that, if Mr Ward wishes to rece.ive remuneration for the services he has rendered, his proper course is now to approach the board of directors and invite them to award him remuneration by the exercise of the power vested in them by article 91.
The leading authorities on the doctrine have been rehearsed in the opinion of my noble and learned friend, Lord Templeman. These indeed demonstrate that the directors ofa company, like other fiduciaries, must not put themselves in a position where there is a conflict between their personal interests and their duties as fiduciaries, and are for that reason precluded from contracting with the company for their services except in circumstances authorised by the arti cles of association. Similarly, just as trustees are not entitled, in the absence of an appropriate provision in the trust deed, to remuneration for their services as trustees, so directors are not entitled to remuneration for their services as directors except as provided by the articles of asso ciation.
Plainly, it would be inconsistent with this long-established principle to award remuneration in such circumstances as of right on the basis of a quantum meruit claim. But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered. That such an allowance may be made to a trustee for work performed by him for the benefit of the trust, even though he was not in the circumstances entitled to remunera tion under the terms of the trust deed, is now well established. In Phipps v. Boardman [1964]1 WLR 993, the solicitor to a trust and one of the beneficiaries were held accountable to another beneficiary for a proportion of the profits made by them from the sale of shares bought by them
with the aid of information gained by the solicitor when acting for the trust. Wilberforce J directed that, when accounting for such profits, not merely should a deduction be made for expenditure which was necessary to enable the profit to be realised, but alsoa liberal allowance or credit should be made for their work and skill. His reasoning was, at 1018:
‘:\foreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J, in In re Macadam [1946) Ch. 73, 82, gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, i.e., the acquisition of a controlling interest in the com pany, was one of a special character calling for the exercise of a particular kind of profes sional skill. If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ sucha person, they would in all probability have been authorised to do so, and to remu nerate the person in question. It seems to me that it would be inequitable now for the ben eficiaries to step in and take the profit without paying for the skill and labour which has
produced it.’
Wilberforce J’s decision, including his decision to make such an allowance, was later to be affirmed by the House of Lords: sub nom. Boardman v. Phipps [1967]2 AC 46.
It will be observed that the decision to make the allowance was founded upon the simple pro position that ‘it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.’ Ex hypothesi, such an allowance was not in the circumstances authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plain tiff beneficiary. The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit.
The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed. Strictly speaking, it is irreconcilable with the rule as so stated. It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, asI see it, sucha con flict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves ina position where their interests conflict with their duties as trustees.
Not only was the equity underlying Mr Boardman’s claim in Phipps v. Boardman clear and, indeed, overwhelming; but the exercise of the jurisdiction to award an allowance in the unusual circumstances of that case could not provide any encouragement to trustees to put themselves ina position where their duties as trustees conflicted with their interests. The present c:asc is, however, very different. Whether any such an allowance might ever be granted bya oourt of equity in the case of a director of a company, as opposed to a trustee, is a point which has yet to be decided; and I must reserve the question whether the jurisdiction could be exerci11ed in sucha case, which may be said to involve interference by the court in the adminiamrion of a company’s affairs when the company is not being wound up. In any event, however, like my noble and learned friend, Lord Templeman, I cannot see any possibility of 111ch juriediction being exercised in the present case. I proceed, of course, on the buia that Mr Ward acted throughout in complete good faith. But the simple fact remains that, by agreein to provide his services in return for a substantial fee the size of which was dependent upon the amount ofa successful bid by Guinness, Mr Ward was most plainly putting himself in a position in which his interests were in stark conflict with his duty as a director. Furthermore, for such services as he rendered, it is still open to the board of Guinness (if it thinks fit, having had a full opportu nity to investigate the circumstances of the case) to award Mr Ward appropriate remuneration.
In all the circumstances of the case, I cannot think that this is a case in which a court of equity (assuming that it has jurisdiction to do so in the case of a director of a company) would order the repayment of the £5.2m. by Mr Ward to Guinness subject to a condition that an equitable allowance be made to Mr Ward for his services….
Cheese v. Thomas
[1994] 1 WLR 129
Sir Donald Nicholls V-C: … Manifest Disadvantage
The necessity for a plaintiff to prove that the transaction was manifestly disadvanta us to him before he can succeed in a claim to set it aside for undue influence finds recent expression in National Westminster Bank Pie v. Morgan [1985] AC 686 and Bank ofCreiJit and Commerce International SA v. Aboody [1990] I QB 923. Herc, Mr Cheese paid £43,000, and in return he had the right to live rent-free for the rest of his life in a house approved by him, and which he himself could not afford to buy, in an area where he wished to live. But there were drawbacks in the transaction so far as he was concerned.
The principal drawbacks were threefold. First, he paid over all his capital. The £43,000 represented the major part of the proceeds of his flat at Peacehaven. He had no other money of his own. Second, if in future he needed or wished to live elsewhere, there was no way he could compel Mr Thomas to sell the house or return his money or even some of it. At the time Mr Cheese was 85 years old. He might become less robust and need to live in sheltered accommo dation. He had moved house in 1985 and in 1986, and in 1990 he had in mind that he might wish to move again and not be confined to Jonson Close for the rest of his days. Third, and importantly, Mr Oieese would be in jeopardy if Mr Thomas failed to keep up the mortga payments to the building society. When the house was acquired both Mr Thomas and his com pany were financially embarrassed. If Mr Thomas defaulted, Mr Cheese had no money of his own with which to keep up the mortgage payments. If Mr Cheese were evicted by the building society, he would have a claim against Mr Thomas for damages for breach of contraa. But that, for what it might be worth, would be poor consolation for all the upset and worry and possible loss involved. Indeed, these proceedings were prompted by Mr Cheese’s concern when he opened a letter from the building society in October 1990 and learned that Mr Thomas was four months in arrears with the mortgage payments. He became fearful and anxious and disillusioned.
I agree with the judge that the transaction is properly to be described as manifestly, that is, clearly and obviously, disadvantageous to Mr Cheese. He used all his money, and it was not an insignificant amount, in buying a right which,was seriously insecure and which tied him to this particular house. I add two points. First, their Lordships in the House of Lords are currently considering their judgments on two appeals where one of the issues is whether manifest disadvantage is an essen tial in edient of an undue influence claim. Having regard to the view I have reached, it is not necessary to postpone giving judgment on this appeal until the outcome in those two cases is known.1 Mr Cheese has established manifest disadvantage whether or not, as remains to be seen, this is a necessary prerequisite to success on this claim. Second, a feature of importance
is that before the trial judge Mr Thomas conceded that the presumption of undue influence applied on the facts of this case. Mr Thomas did not seek to rebut the application of the pre sumption, for instance, by showing that Mr Oieese received independent advice. So the oalJ issue the judge was called upon to decide on this part of the claim was whether or not the tralll action was clearly disadvantageous to Mr Cheese. I mention this in fairness to Mr Thoma. Otherwise one might think Mr Thomas had behaved improperly, and sought to trick or take advantage of his aged uncle. No conduct of this sort occurred. This point is also relevant on the next issue.
Setting Aside the Transaction
If,then,.the transaction is to be set aside, the next step is the restoration of the parties to their original positions. Achieving this would mean sale of the house and repayment of what each had paid over. Mr Cheese should get back his £43,000, and Mr Thomas should get back and repay to the building society the money he borrowed for the purchase.
The house has now been sold. Unhappily, as already mentioned, although £83,000 was spent in buying the house, only £55,400 came from the sale. By the time of the salethe amount out standing on the mortgage was about £37,700. On the sale the building society had to be repaid first. It had a mortgage over the house. The effect of paying back the building societywas, in substance, to restore Mr Thomas to his original position, although he had paid some mortgage instalments. The net balance remaining from the sale proceeds was only £17,667. Clearly, this sum has to be paid to Mr Cheese, but that will still leave him more than£25,000 out opf ocket. The shortfall represents, in round figures, the amount by which the house declined in value after its purchase in June 1990.
The question therefore arises: on whom should this loss fall? Mr Cheese contends he is enti tled to look to Mr Thomas personally to make good the whole of the shortfall. He paid £43,000 to Mr Thomas, and on the transaction being fet aside he can look to Mr Thomas for repayment ofa likesum. Thejudge did not accept this.•He held that the loss brought about by the fall in the market value of the house should be shared between the two of them in the same propor tions( 43:40) as they had contributed to the price. He said that the parties went into a joint ven ture, investing approximately similar sums in it: they should bear the loss equally. In short, this would mean that Mr Cheese could look to Mr Thomas for a further £11,000. Mr Cheese would then recover altogether about £28,700, leaving him £14,300 out of pocket compared with his original contribution of£ 43,000. For his part Mr Thomas would be out of pocket bya similar but proportionately smaller amount. He would be out of pocket to the extent of £13,300, made up of the £11,000 he would have to pay Mr Cheese and £2,300 he had paid to the building society, before the sale, in reduction of the principal owing on the mortgage. From that decision Mr Cheese has appealed.
Restoring the Parties to their Original Positions
I cansummarise the thrust of Mr Hanier’s argument as follows. When the court sets aside the transaction between Mr Cheese and Mr Thomas, the inflexible rule of equity which comes into play is that Mr Cheese is entitled to have restored to him the benefits he passed to Mr Thomas under the impugned transaction. It matters not if, for reasons unconnected with Mr Cheese, the property being returned to the defendant has declined in value: that is irrelevant.
I approach the matter in this way. Restitution has to be made, not damages paid. Damages look at the plaintiff’s loss, whereis restitution is concerned with the recovery back from the defendant of what he received under the transaction. If the transaction is set aside, the plaintiff also must return what he received. Each party must hand back what he obtained under the con tract. There has to be a giving back and a taking back on both sides, as Bowen LJ observed in Ne’f1Jbiggini v. Adam (1886) 34 Ch.D 582, 595. If, for this purpose, the transaction in this case is analysed simply as a payment of£ 43,000 by Mr Cheese to Mr Thomas in return for the right to live in Mr Thornas’s house, there is a strong case for ordering repayment of £43,000, the benefit received by Mr Thomas, regardless of the subsequent fall in the value of the house. In the ordinary way, if a plaintiff is able to return to the defendant the property received from him under the impugned transaction, it matters not that the property has meanwhile fallen in value. This i11 not surprising. A defendant cannot be heard to protest that such an outcome is unfair when he is receiving back the very thing he persuaded the plaintiff, by undue influence or misrepresentation, to buy from him.
In my view the present case stands differently. Mr Cheese paid Mr Thomas£43,000, not outright, but as part of the purchase price of a house in which both would have rights: Mr Cheese was to have sole use of the house for his life, and then the house would be Mr Thomas’s. Mr Thomas was not free,to dispose of the house, or use it, until then. In fact the money was handed over by .M.r Cheese in the form of a bankers’ draft, made payable to the solicitors act ing for Mr Thomas in the purchase of 4, Jonson Close. For his part Mr Thomas also con tributed to the purchase of the house. He contributed £40,000, by obtaining a building society loan of this amount. In other words, the transaction was that each would contribute a sum of money to buying a houoc in which each was to have an interest. This is the transaction which has to be reversed. Doing so requires, first, that the house should be sold and, second, that each party should receive back his contribution to the price. There is no difficulty over the first requirement. Mr Cheese sought an order for sale, the judge so directed, and the sale has taken place. The second requirement is more difficult. Indeed, it cannot be achieved, because under the transaction the money each contributed was spent in buying a house which then lost one third of its value.
This difficulty, rightly in my view, has not been allowed to stand in the way of setting aside the transaction. It is well established that a court of equity grants this type of relief even when it cannot restore the parties precisely to the state they were in before the contract. The court will grant relief whenever, by directing accounts and making allowances, it can do what is prac tically just: see Erlanger v. New Sombrero Phosphate Co. (1878) 3 App.Cas. 1218, 1278-9, per Lord Blackburn. Here justice requires that each party should be returned as near to his original position as is now possible. Each should get back a proportionate share of the net proceeds of the house, before deducting the amount paid to the building society. Thus the £55,400 should be divided between Mr Cheese and Mr Thomas in the proportions of 43:40. Mr Cheese should receive about £28,700 and Mr Thomas £26,700. To achieve this result Mr Thomas should pay
£11,033 on top of the net proceeds, of £17,667, remaining after discharging the mortgage. This was the view of the judge, and I see no occasion to disturb his conclusion. On the contrary, I agree with him. It is interesting to note that this result accords with the primary relief sought by Mr Cheese in the action. His primary claim was that the house belonged to them both in the proportions of 43:40. Had the claim succeeded, Mr Cheese would have borne a proportionate share of the loss on the sale of the house.
Restitution for Both Parties
We were much pressed with an argument that there is no decided case in which a court has ever directed a sharing of the loss in this way. This is a principle unknown to English law. The court has no discretion in this regard. I have two observations on this argument.
First, when considering what was the original position of the parties it is important to iden tify, and properly characterise, the transaction being set aside. In a simple case of a purchase of property there is no difficulty. Before the transaction the plaintiff had a sum of money and the defendant owned the property. By the transaction the money paucd to the defendant, and the property was transferred to the plaintiff. That is the transaction which has to be reversed. Likewise there is no difficulty with a simple case of II gift, The present case, as already noted, is not so straightforward. Here the transaction involved /Jotll parties making a financial contri bution to the acquisition of a new asset from which both were intended to benefit. This was so even though Mr Cheese’s only interest in the hoUK wu a a contractual licensee, and even though .\1r Thomas regarded the house u an investment. It is axiomatic that, when reversing this transaction, the court is concerned to achieve practical justice for both parties, not the plaintiff alone. The plaintiff is aeeking the uaiatance of a court of equity, and he who seeks equity must do equity. Under the transaction Mr Thomas parted with money, albeit borrowed, as well as Mr Cheese. This situation is to be contrasted with the facts in Newbigging v. Adam, 34 Ch.D 582; (1888) 13 App.Cas. 308. There the plaintiff was induced to enter into a partnership with the defendant by misrepresentations about the state of the business. The business foundered. On having the transaction set aside, the court held the plaintiff was entitled to the return of the cap ital introduced by him and to an indemnity against the liabilities he had assumed as a partner.
In that case the transaction was akin to a sale of property, there a share in a partnership. The defendant had to return the capital sum introduced and reassume the burden of partnership
debts which under the contract the plaintiff had taken upon himself.
My second observation is this. The basic objective of the court is to restore the parties to their original positions, as nearly as may be, consequent upon cancelling a transaction which the law will not permit to stand. That is the basic objective. Achieving a practically just outcome in that regard requires the court to look at all the circumstances, while keeping the basic objec tive firmly in mind. In carrying out this exercise the court is, of necessity, exercising a measure of discretion in the sense that it is determining what are the requirements of practical justice in the particular case. It is important not to lose sight of the very foundation of the jurisdiction being invoked. As Lord Scarman observed in the Morg11n case [1985] AC 686, a court in the exercise of this jurisdiction is a court of conscience. He noted, at 709:
‘There is no precisely defined law setting limits to the equitable jurisdiction of a court to relieve against undue influence . . . Dyfinition is a poor instrument when used to deter mine whether a transaction is or is not unconscionable: this is a question which depends upon the particular facts of the case.’
As with the jurisdiction to grant relief, so·with the precise form of the relief to be granted, equity as a court of conscience will look at all the circumstances and do what fairness requires. Lord Wright adverted to this in Spence v. Crawford [1939] 3 All ER 271, which was a misrep resentation case. He said regarding rescissipn and restitution, at 288:
‘The remedy is equitable. Its application is discretionary, and, where the remedy is applied, it must be moulded in.accordance with the exigencies of the particular case.’
The law repons are replete with examples of the way couns have applied this principle. These, and the reasoning underlying them, afford valuable guidance when fairly comparable situations arise in the future. They are not immutable rules of law which must be applied irre spective of whether in the panicular case they will assist in achieving an outcome which is prac tically just. A few examples will suffice. If the defendant has improved the property he is ordered to return, the plaintiff may be required to compensate him. On the other hand, if the plaintiff has improved the property he seeks to return, ·he will not necessarily be entitled to a further payment from the defendant; it may not be just to require the defendant to pay for improvements he does not want. If the plaintiff has perrnitted the property to deteriorate, he may be required to make an allowance to the defendant for this when seeking an order com pelling him to retake the property. If a joint business venture is involved, such as an agreement between a pop star and a manager, and the agreement is set aside and an account directed of the profits received by the defendant under the agreement, the court in its discretion may permit the defendant to retain some profits, if it would be inequitable for the plaintiff to take the profits without paying for the expertise and work which produced them. In O’Sullivan v.
Management Agency a’lld Music Ltd [1985] ® 428, 468 Fox LJ observed it was clearly neces sary that the court should have power to make an allowance to a fiduciary. He continued:
‘Substantial injustice may result without it. A hard and fast rule that the beneficiary can demand the whole profit without an allowance for the work without which it could not have been created is unduly severe. Nor do I think that the principle is only applicable in cases where the personal conduct of the fiduciary cannot be criticised. I think that the just ice of the individual case must be considered on the facts of that case. Accordingly, where there has been dishonesty or surreptitious dealing or other improper conduct then, as indi cated by Lord Denning MR, it might be appropriate to refuse relief; but that will depend upon the circumstances.’
What is true of profits must also be true oflosses. In the ordinary way, when a sum of money is paid to a defendant under a transaction which is set aside, the defendant will be required to repay the whole sum. There may be exceptional cases where that would be unjust. This may the more readily be so where the personal conduct of the defendant was not open tocriticism. Here, having heard the parties give evidence, the judge acquitted Mr Thomas of acting ina morally reprehensible way towards Mr Cheese. He described Mr Thomas as an innocent fidu ciary. Herc also, and I return to this feature because on any view it was an integral element of the transaction, each party applied money in buying the house. In all the circumstances, to require Mr Thomas to shoulder the whole of the loss flowing from the problems which have beset the residential property market for the last year or two would be harsh. That is not an
outcome a court of conscience should countenance….
Kleinwort Benson Ltd v. Birmingham City Council
[1996] 3 WLR 1139,
Evans LJ: …
‘Passing On’ or ‘Windfall Gain’
This defence has been considered by the Supreme Court of Canada in Air Canada v. British Columbia (1989) 59 DLR (4th) 161 and twice by the High Court of Australia in M,,son v. Ne111 South Wales (1959) 102 CLR 108 and Commissioner of Stale Revenue,,. Royal lmu,anceAustralia Ltd (1994) 126 ALR I. In these as in numerous United States authorities the claim was for repayment of over-paid tax (in Mason’s case, statutory dues paid as fees). In such cases, the defence is raised when the plaintiff taxpayer has passed on the burden of the tax to his own cus tomers and he will be under no obligation to reimburse them if he succeed& in recovering the tax which he has paid. Then it can be said that repayment will result in a windfall gain for him or, conversely, that the benefit to the tax:ing authority even if it is properly regarded as ‘just enrichment’ has not been at the tax-payer’s expense.
Whether the defence is available in taxation cases under English law must be regarded as uncertain. The taxpayer’s right to recover tax paid under a void statutory instrument was upheld in the WoolllJich Equit11l,/t Building So,uty v. Jn/11,uJ Revenue Commissioners [1993] AC 70, where Lord Goff said with regard to a passing on defence at 177-8:
‘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 ahould provide a defence to his claim. Although this is contemplated by the European Court of Justice in the San Georgie case [1983] ECR 3595, it is evident from Ai, C11nllda v. British Columbia that the point is not without its difficulties and the availability of such defence may depend upon the nature of
the tax or other levy.’
Lord Goff then referred to pending consultations by the Law Commission. Its Report has now been published (Restitution: Mista es of LallJ and Ult,11 Vires Public Authority Receipts and Payments (1994) (Law Com. No. 227) (Cm. 2731)) and its recommendations include at 192 ‘(20) it should be a defence to claims for the repayment of taxes overpaid [as a result of mistake) that repayment will unjustly enrich the claimant’ (cf. (21) dealing with ultra vim claims). A statutory scheme has this effect with regard to V.A.T.: see the Value Added Tax Act 1994, sec tion 80(3). But the Law Commission expressly excluded questions arising under swaps contracts from its consideration (para 1.11) and so there is nothing in its report of direct relevance to the present case.
Apparently there is no reported authority from Canada, Australia or the United States where the defence has been raised, except to a claim for overpaid tax and apart from an anti-trust suit in the United States where the defence was rejected by the Supreme Court: United Shoe Machinery Corporation v. Hanover Shoe Inc. (1968) 392 US 481.
In my judgment, the taxation cases are of limited assistance in addressing the question of general principle which is raised by the present appeal. There is a public law element involved
in them (see Air Canada v. British Columbia, 59 DLR (4th) 161, 170, per Wilson J) and a fur ther question, akin to agency, which is whether the taxpayer should be regarded as having collected tax from his customers on behalf of the taxing authority. Conversely, it may apJJear that any tax recovered by him will be held by him as a fiduciary for his customers: 123 East Fifty Fourth Street Inc v. United States (1946) 157 F Rep. (2d) 68 per Learned Hand]. Statements of principle in the Air Canada case are fivourable to the authority in the present case, but the con verse is true so far as the Australian cases are concerned. These judgments are mo t relevant for present purposes, in my respectful view, for what they say with regard to the private law of restitution, and in particular the full survey of the common law position by Mason CJ in Commissioner of State Revmue v. Royal Insurance Australia Ltd 126 ALR I. His conclusion in that case was that ‘the Commissioner would have no defence to a restitutionary claim by Royal to recover the mistaken payments of,duty’ and that even if it was established that Royal charged the tax as a separate item on the policy holders it would be entitled to recover the moneys which it would then hold as a constructive trustee (see 18). In relation to restitutionary relief, which he distinguished from the public law aspects, he quoted with approval what WindeyerJ said in
Mason v. New South Wales, l02 CLR 108, 146:
‘If the defendant be improperly enriched on what legal principle can it claim to retain its ill-gotten gains merely because the plaintiffs have not, it is said, been correspondingly impoverished? The concept of impoverishment as a correlative of enrichment may have some place in some fields of continental law. It is foreign to our law. Even if there were any equity in favour of third parties attaching to the fruits of any judgment the plaintiffs might recover … this circumstance would be quite irrelevant to the present proceedings. Certainly it would not enable the defendant to refuse to return moneys which it was not in law entitled to collect and which ex hypothesi it got by extortion.’
He then said, 126 ALR I, 15:
‘Restitutionary relief, as it has developed to this point in our law, does not seek to pro vide compensation for loss. Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched. As in the action for money had and received, the defendant comes under an obligation to account to the plaintiff for money which the defendant has received for the use of the plaintiff. The subtraction from the plaintiff’s wealth enables one to say that the defendant’s unjust enrichment has been “at the expense of the plaintiff”, notwithstanding that the plaintiff may recoup the outgoing by means of transactions with third parties. On this approach, it would not matter that the plaintiff is or will be overcompensated because he or she has passed on the tax or charge to someone else. And it seems that there is no recorded instance of a court engaging in the daunting exercise of working out the actual loss sustained by the plaintiff and restricting the amount of an award to that measure.’
There are also judgments of the Court of Justice of the European Communities, including Amministrazione de/le Finanze Stato v. San Giorgio (Case 199/82) [1983] ECR 3595 to which Lord Goff referred in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70, 177-8 (quoted above). This too was a claim to recover overpaid statutory charges. Italian law required the taxpayer to prove that he had not passed them on to his customers and
it imposed a burden of proof upon him which it might be virtually impossible to discharge. The European Court held that this provision of Italian law was contrary to European law, but the judgment and the opinion of Advocate General G. F. Mancini were in terms which can be regarded as supporting the lawfulness of a passing on defence. This approach was re-affirmed in’Les Fils de Jules Bianco SA and J. Girard Fils SA v. Directeur General des Douanes et Droits
Indirects Goined Cases 331/85, 376/85) [1988] ECR 1099, and in Commission of the European Communities v. Italian Republic(Case 104/ 86) [1988) ECR 1799 the court held that Community law does not require (but neither does it prohibit) an order for such repayment to be made in circumstances which would involve an ‘unjust enrichment’ of the taxpayer, including the pass ing on to other traders or to consumers of the burden of the charge. The opinion of the Advocate General, Sir Gordon Slynn, in the former case shows the difficulties that can arise when it becomes necessary to inquire whether the burden of the over payment has been passed on to customers in the form of increased charges for the taxpayer’s goods or services. Economic factors come into play: has the taxpayer by raising his prices reduced the demand for what he supplies, so that he has not benefited overall? This prompts a further question: why should it be assumed that a repayment of tax will not be passed on to future customers in the form of reduced prices?
The present case is far removed from the taxation authorities. No element of public law is involved. No question of a constructive trust or of any obligation to account to custumers can arise. This follows from the admitted fact that the hedge contracts, even if they were perfect matches, were market transactions independent of the swaps contract which were and remained binding on the bank and third parties notwithstanding that the swaps contract was void. This also means that the bank paid its own money to the authority and for its own account: no ques tion of agency or any third party interest can arise.
South Tyneside
The relevant part of the judgment of Hobhouse J in Kleinwort Benson Ltd v. South TyntSiu Metropolitan Borough Council [1994] 4 All ER 972 is 984-7. He held, first, that the defendants were seeking to invoke ‘some unspecific principle which derives not from the law of restitution but from some concept of causation’ (984-5). He continued: ‘Even in the simplest cases where parties are dealing on a market, other individual contracts are in principle too remote to be taken
into account’ and he held as a second ground of his decision that the hedge contracts wen too remote to be taken into account, in any event (987). But the primary answer was that such con• siderations were not relevant to restitution. ‘What contracts or other transactions or commitments the plaintiffs may have entered into with third parties have nothing to do with the
principle of restitution. Therefore is suffices in the present case for the plaintiffs to lhow lhlt they were the payers of the relevant money, that the defendants were unjustly enriched by t: payments and that there is no obstacle to restitution’ (985). He held that in the law ·special considerations may apply (987D) and that there was no place in the law of ‘for some principle borrowed from the law of compensation’ (987F).
Submissions
…..
He submits further that there is no justification for interpreting this requirement by refer ence to the relationship between the payer and the payee alone. Regard should also be had to related transactions, including in the present case any hedges which were entered into in order to protect the bank from suffering losses under the swaps contract. The area of inquiry should belimited, he concedes, by what he calls the normal rules of remoteness; but within those lim-
. its, the plaintiff cannot show that the defendant was enriched ‘at his expense’ if after taking account of all the relevant transactions he suffered no or only a smaller loss than the amount which he seeks to recover from the defendant.
Mr Rhodri Davies for the bank submits that the law of restitution as it is now established does not recognize the claimed defence of passing on, except possibly in the special case where the plaintiff seeks to recover over-paid tax. He carefully analysed the authorities to show that there is no support, as he submits, for Mr Underhill’s contention, and he pointed to practical diffi culties and certain anomalies which might re ult if the defence was one of general application. Among these anomalies was the possible conflict between a judgment in the present case which recognized hedge contacts as providing a passing-on defence, though not as increasing the
amount of the claim, and the judgments in Kleinwort Benson Ltd v. South Tyneside Metropolitan Borough Council [1994] 4 All ER 972 and Soufk Tyneside Metropolitan Borough Council v. Svenska International pk [1995] 1 All ER 545 which have held, as he submits, that market transactions with third parties do not enable the defendant to rely upon the ‘change of position’ defence, which logically he ought to be able to do if the passing on defence was recognized.
Conclusion
I can accept Mr Underhill’s submission that the phrase ‘at the expense of’ forms part of the definition of a restitutionary claim, and that the central issue is whether that has to be inter preted by reference to the payer/payee relationship alone, as distinct from other parts of what he calls the overall transaction. But I have no doubt that the former interpretation is correct. Th.is is because the payee’s obligation, which is correlative to the payer’s right to restitution, is
to refund or repay the amount which he has received and which it is unjust that he should keep. ‘At his expense’, in my judgment, serves to identify the person by or on whose behalf the pay ment was made and to whom repayment is due: compare Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd [1981] Ch. 105, 125 E, per Goulding, J and see Birks Introduction to the Law of Restitution 132. That person, having made the payment, is necessar
ily out of pocket to that extent, and the defendant’s obligation is to replenish his pocket when the circumstances are such that the money should be returned.
If the payment was made for valuable consideration, then the payer did not suffer ‘loss’ even though the payment was made by him. But if it appears, as it did in the present case, th.at in law there was no consideration for it, then in that sense the payer has suffered loss. His pocket is emptier than it would have been if the money, or its value, was still there. But I would not give ‘loss’ any wider meaning than that. In particular, it seems to me that it would be inconsis tent with the principle of repayment that ‘loss’ should be given some wider meaning equivalent to ‘overall losses on the transaction’, even if’the transaction’ could be sufficiently identified, or that the right to recover restitution should be limited to the amount of ‘loss’ in th.at sense, though never increased above the amount of the payment.
I therefore agree with the first of Hobhouse J’s two reasons for holding that no ‘passing on’ defence arises in the present case. I agree with the second reason also. If the claim is treated as limited to compensation for Joss in fact suffered, taking account of related transactions which are not too remote from it, then in my judgment such hedge contracts as were entered into by the bank in the normal course of its business were ‘too remote’ to be taken into account. Market rates are taken into account when assessing damages because the plaintiff comes under a duty to miti gate his loss and it is presumed that he has done so by entering the market for that purpose. It is only in special cases that actual transactions are taken in to account: R. Pagnan (5 Fratelli v.Corbisa Industrial Ag,opacuaria Limitada [1970] 1 WLR 1306. But here, there was no duty on the bank to hedge the risks to which it was exposed under the swaps contract, and its claim for restitution is not based on any wrongdoing or breach of contract by the authority.
For these reasons, I would hold that the alleged passing on defence does not arise in the pres ent case. Out of deference to the thorough and well-researched submissions which were so attractively presented to us I would add just the following. (1) This is not a proprietary claim, and Mr Underhill accepted that there could be no scope for a passing on defence, if it was. It is a claim for restitution precisely because the plaintiff can only claim repayment of an equiva lent amount of money to what he paid. That is a further reason, in my judgment, for defining the right to recovery in terms of that amount of money, and nothing else. (2) If it was neces sary to have regard to the status of the ‘change of position’ defence, which in my judgment it is not, then I would agree with Mr Underhill’s submission (in reply) that the existing authorities of Klein11Jort Benson Ltd v. South Tyneside Metropolitan Borough Council [1994) 4 All ER 972 and South Tyneside Metropolitan Borough Council v. Svenska International pie [1995) 1 All ER 545 do not establish a clear rule that no such defence can be raised. The Svenska case in par ticular turned on special facts, and I prefer to express no view as to whether that defence, which was recognized in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548, could ever be established by reference to market transactions. (3) This is not a case where the payment which it is sought to recover was made to the defendant by a third party, not by the plaintiff. Again, it is unnec essary in my view to deal further with this different aspect of the problem….
Iwould dismiss the appeal.
Saville LJ: I agree. I also agree with the Judgment of Morritt LJ, which I have had the advantage of reading in draft.
The payee has been unjustly enriched by receiving and retaining money he has received from the payer and to which he has no right. He does not cease to be unjustly enriched because the payer for one reason or another is not out of pocket. His obligation to return the money is not based on any loss the payer may have sustained, but on the simple ground that it is unjust that he should keep something to which he has no right and which he only received through the payer’s performance of an obligation which did not in fact exist. The expression ‘at the payer’s expense’ is a convenient way of describing the need for the payer to show that his money was used to pay the payee. Thus there may well be cases where this cannot be shown, but where in truth, for example, the payer was only the conduit throuJh which the funds of others passed to the payee. What this expression does not justify i1 the
importation of concepts of loss or damage with their attendant concepts of mitigation, ft have nothing whatever to do with the reason why our law imposes an obligation on the to repay to the payer what he ha no right to retain. I too would dismiss this appeal,
Oom v. Bruce
(1810) 12 East 225,
Lord Ellenborough CJ: ……[the preminum cannot be recovfred if] the party making the insurance know it to be illegal at the time: but here the plaintiffs had no knowledge of the commencement of hostilities by Russia, when they effected this insurance; and, therefore, no fault is imputable to them for entering into the contract; and there is no reason why they should not recover back the premiums which they have paid for an insurance from which, without any fault imputable to themselves, they could never have derived any benefit…..
Smith v. Bromley
(1760) 2 Doug. 696
Lord Mansfield: … It is argued, that, as t;he plaintiff founds her claim on an illegal act, she shall not have relief in a Court of Justice. But she did not apply to the defendant or his agent to sign the certificate on an improper or illl!gal consideration: but, as the defendant insisted upon it, she, in compassion to her brother, paid what he required. If the act is in itself immoral, or a violation of the general laws of publi-cpolicy, there, the party paying shall not have this action; for where both parties are equally criminal against such general laws, the rule is, potior est conditio defendentis. But there are other laws, which are calculated for the protection of the subject against oppression, extortion, deceit, &c. If such laws are violated, and the defendant takes advantage of the plaintiff’s condition ‘or situation, there the plaintiff shall recover, and it is astonishing that the reports do not distinguish between the violation of the one sort and the other The present is the case of a transgression of a law made to prevent oppression, either on the bankrupt, or his family, and the plaintiff is in the case of a person oppressed, from whom money has been extorted, and advantage taken of her situation and concern for her brother. This does not depend on general reasoning only, but there are analogous cases; as that of Astley v. Reynolds (BRM 5 Geo. 2, 2 Str. 915). There, the plaintiff having pawned some goocls with
the defendant for £20, he refused to deliver them up, unless the plaintiff would pay him £10. The plaintiff had tendered £4 which was more than the legal interest amounted to; but, find ing that he could not otherwise get his goods back, he at last paid the whole demand, and brought an action for the surplus beyond legal interest, as money had and received to his use, and recovered. It is absurd to say, that any one transgresses a law made for his own advantage, willingly Upon the whole, I am persuaded it is necessary, for the better support and maintenance of the law, to allow this action; for no man will venture to take, if he knows he is liable to refund. Where there is no temptation to the contrary, men will always act right….
Smith v. Cuff
(1817) 6 M & S 169
Lord Ellenborough CJ: This is not a case of par delictum: it is oppression on one side, and submission on the other: it never can be predicated as par delictum, when one holds the rod, and the other bows to it. There was an inequality of situation between these parties: one was creditor, the other debtor, who was driven to comply with the terms which the former chose to enforce. And is there any case where money having been obtained extorsively, and by oppres sion, and in fraud of the party’s own act as it regards the other creditors, it has been held that it may not be recovered back? On the contrary, I believe it has been uniformly decided that an
action lies.
Bayley J: The reason assigned in Smith v. Bromley for that decision was, that the party who insisted on payment was acting with extortion and oppressively, and in the teeth of that which he had agreed to accept. And does not this reason apply to the present case? The conduct of the defendant here, is that of one taking undue advantage of the plaintiff’s situation, and endeav ouring to extort from him by oppression that which he stipulated not to demand.
Holroyd J delivered a concurring judgment.
Parkinson v. College of Ambulance Ltd
[1925] 2 KB 1,
Luah J : The contract being against public policy, and being of the character that I have described, can the plaintiff still rely upon the fraud of Harrison and recover damages against him; and can he, as against the college, recover the 3000/. which the college has received through that fraud, as money had and received to his use? I am not prepared to hold-it is not necessary that I should decide the question-that in every case where a contract is agai{lst public policy, where one of the parties to it is defrauded by the other, he is prevented from recovering. It may be that whenever one
party to a contract which is not improper in itself is unaware that it is illegal and is defrauded, the parties may not be in pari delicto. However that may be, I am of opinion that if the contract has any element of turpitude in it the parties are in pari delicto and no action for damages can be maintained by the party defrauded. It is not correct to say, as was contended before me, that it is only if the contract is of a criminal nature that the plaintiff is precluded from recovering…. Itwas also contended that fraud has the same effect as duress, and that it would be contrary to public policy to allow a party who has defrauded another to retain the fruits of his fraud. I can not agree with that contention. The case of Hughes v. Liverpool Victoria legal Friendly Society,1 which appears to support it, does not do so when the facts are considered. The fraud there was committed by an agent of the defendants who deceived the plaintiff into believing that an insur ance could be properly effected and would ,be valid, although there was no insurable interest. The fraud there related to the validity of the contract. The agent of the insurance company, who knew that the contract was illegal, deceived the policy holder as to its validity. It was held that the parties were not in pari delicto, anti that an action would lie to recover the premiums which the plaintiff had paid. The decision of the Court of Appeal in Kettlewell v. Refuge Assurance Co.2 is another illustration of the same principle. These cases are very different from the present case. In the present case the plaintiff knew that he was entering into an illegal and improper contract. He was not deceived as to the legality of the contract he was ma.king. How then can he say that he is excused? How c’an he say that he has suffered a loss through being defrauded into making a contract which he knew he ought never to have made? The answer is that he ought not to have made it. Where he was deceived was that he thought he would make a profit, derive a benefit from his unlawful act. He cannot be heard to say that. He has himself to blame for the loss that he has incurred. It is no excuse to say that Harrison was more blame worthy than he, which is all that he really can say. That being the position, the plaintiff is in this difficulty. He cannot recover damages either against Harrison or the college, because he is disclosing or setting up a contract which is unlawful, and which he had no right to make. For the same reason he cannot recover the 30001. from the college as money had and received.
Re Cavalier Insurance Co. Ltd
[1989] 2 Lloyd’s Rep. 430, Chancery
KnoxJ I turn now to the last issue argued before me namely whether Mr Carey and others in his position can recover the premiums they paid on the basis that they were paid for a consideration which wholly failed. Mr Pickering made the following submissions on this aspect of the matter which I accept.
The assured had no knowledge or notice of any illegality nor were they personally involved in the commission of any offence or moral turpitude of any sort. If the contracts are not enforce able at all through illegality the assured received no benefit whatever from them. This needs some qualification with regard to those few cases where Cavalier did satisfy claims and I shall return to deal with that aspect later. In seeking a return of premiums the assured are in no sense seeking to enforce what Parliament has prohibited but rather to undo the prohibited transac tion. Finally’if an unauthorized insurer is permitted to keep the premiums he has taken in breach of the unilateral prohibition laid upon him he succeeds in doing rather better than that which Parliament has said he shall not do, namely carry on the relevant insurance business, because he not only receives and keeps the premium but does not have to underwrite the risk. In general the test applied to determine whether a plaintiff is prevented from recovering money or property paid or transferred pursuant to a transaction affected by illegality is to ask whether the plaintiff has to set up the illegal transaction to establish his cause of action for recovery. Thus in Taylor v. Chester (1869) LR 4 QB 309 at 314 Mr Justice Mellor said:
The true test (or determining whether or not the plaintiff and the defendant were in pari delicto is by considering whether the plaintiff could make out his case otherwise than through the medium and by the aid of the illegal transaction to which he was himself a party.
If that was a universal limit to a plaintiff’s right to recovery the insured here would fail because it would be necessary for them to plead the insurance contracts in order to establish their right to recovery of the premiums. There is however an exception to the general rule which applies where the parties are treated as not being in pari delicto so that the innocent can recover notwithstanding that the illegal transaction has to be pleaded to establish his cause of action. The relevant line of authority for present purposes is that dealing with statutory illegality where the statute in question was passed to protect one class of persons from the undesirable activi ties of another class. Thus it was said by Lord Mansfield in BrollJning v. Morris (1778) 2 Cowp,790 at 792:
When contracts or transactions are prohibited by positive statutes, for the sake of pro tecting one set of men from another set of men: the one, from their situation and cond tion, being liable to be oppressed or imposed upon by the other: then the parties in pari delicto: and in furtherance of those statutes the person injured after the ….is finished and completed may bring his action and defeat the contract.
…..I do not accept that the doctrine is so narrow as this, nor do I accept that there is not a significant measure of exploitation in the activities of an unauthorised insurer who takes premiums and does not underwrite the risk. In a sense the transaction is even less advantageous than the eighteenth century lottery where there must have been some chance of winning. In my judgment the circumstances of this case where the statutory duty was laid exclusively on the shoulders of the insurer for the protection of insured persons and the insured had no reason to suspect that he was being asked to enter into a void contract amply justify treating the insured as not equally delictual as the insurer and therefore entitled to recover the premiums.
It was also submitted that Green v. Portsmouth Stadium [1953] 2 QB 190 established a prin ciple that for there to be a right of recovery of money paid in the course of a tTansaction made illegal by Parliament the statute must positively contemplate the bringing of a civil action to recover the money. Doubtless that is true where the statute in question was not passed to pro tect the class of persons of whom the plaintiff is one. In Green v. Portsmouth Stadium it was held, not surprisingly, that the Betting and Lotteries Act, 1934, the Act in question, was not passed for the protection of bookmakers. As Kiriri Cotton Co. Ltd v. Dewani, sup., shows where the Act is passed for the protection of a class of persons of whom the plaintiff is one it is not necessary for the Act in question to provide for recovery. Jtwas in fact Lord Denning who as Lord Justice Denning gave the leading judgment in Green v.’Portsmouth Stadium and the opinion of the Privy Council in Kiriri Cotton Co. Ltd v. Dewani and it seems to me plain that he did not intend to lay down a rule of universal application in the former case.
Accordingly I conclude that the insured are entitled to recover the premiums paid by them. There remain those who submitted claims which were satisfied by Cavalier. In my judgment it is not possible to say of those contracts that the consideration wholly failed and that does con stitute a bar against recovery of the premium .
I have deliberately refrained from expressing a view upon the validity of an alternative claim put forward by Mr Pickering that premiums could be recovered on the basis of a mistake of fact, that is to say that Cavalier had a relevant authorization. In the circumstances it is not nec essary for me to decide that issue and I prefer to express no view upon it.
Another question upon which no decision is called for is whether the rule in Ex parte James [1874] LR 9 Ch. App. 609 can have any application in the circumstances of this case. The argu ment that it could was confined to the situation that would have arisen had I held that Mr Carey and other assured persons under extended warranty policies could neither enforce contractual rights nor recover the premiums they had paid. In those circumstances it would have been at least possible that Cavalier’s liabilities could all be met and a surplus would have been available for contributories. That problem does not arise on the view I have taken of the matter and here too I prefer to say nothing about it.
Bowmakers Ltd v. Barnet Instruments Ltd
[1945] 1 KB 65
Du Parcq LJ. They simply say that the machines were their property, and this, we think, cannot be denied. We understood Mr Gallop to con cede that the property had passed from Smith to the plaintiffs, and still remained in the plain tiffs at the date of the conversion. At any rate, we have no doubt that this is the legal result of the transaction and we find support for this view in the dicta of Parke B in Scarfo v. Morgan.1 Why then should not the plaintiffs have what is their own? No question of the defendants’ rights arises. They do not, and cannot, pretend to have had any legal right to possession of the goods at the date of the conversion. Their counsel has to rely, not on any alleged right of theirs, but on the requirements of public policy. He was entitled, and bound, to do so, although, as Lord Mansfield long ago observed, ‘The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant.’ ‘No court,’ Lord Mansfield added, ‘will lend its aid to a man who founds his cause of action upon an immoral or an illegal act:’ Holman v. Johnson.2 This principle, Jong firmly established, has probably even been extended since Lord Mansfield’s day. Mr Gallop is, we think, right in his submission that, if the sale by Smith to the plaintiffs was illegal, then the first and second hir ing agreements were tainted with the illegality, since they were brought into being to make that illegal sale possible, but, as we have said, the plaintiffs are not now relying on these agreements or on the third hiring agreement. Prima facie, a man js entitled to his own property, and it is not a general principle of our law (as was suggested) titat when one man’s goods have got into
another’s possession in consequence of some unlawful dealings between them, the true owner can never be allowed to recover those goods by an action. The necessity of such a principle to the interests and advancement of public policy is certainly not obvious. The suggestion that it exists is not, in our opinion, supported by authority. It would, indeed, be astonishing if (to take one instance) a person in the position of the defendant in Pearce v. Brooks,3 supposing that she had converted the plaintiff’s brougham to her own use, were to be permitted, in the supposed interests of public policy, to keep it or the proceeds of its sale for her own benefit. The prin ciple which is, in truth, followed by the courts is that stated by Lord Mansfield, that no claim founded on an illegal contract will be enforced, and for this purpose the words ‘illegal contract’ must now be understood in the wide sense which we have already indicated and no technical meaning must be ascribed to the words ‘founded on an illegal contract.’ The form of the plead ings is by no means conclusive. More modern illustrations of the principle on which the courts act are Scott v. Brown, Doering, McNab (S Co.4 and Alexander v. Rayson,5 but as Lindley LJ said in the former of the cases just cited:6 ‘Any rights which [a plaintiff] may have irrespective of his illegal contract will, of course, be recognized and enforced.’
In our opinion, a man’s right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim.
Mr Gallop sought to derive assistance from the decision of the Court of Qi.teen’s Bench in Taylor v. Chester.’ The decision there was, however, entirely consonant with the vi,:w which we have expressed. It differed from the present case in one essential respect, since in that case the defendant had prima facie a right to possession of the half-note which the plaintiff claimed. She was holding it as a pledge to secure the payment of money which remained due. The plain tiff could only defeat her plea by showing that the money due had been lent for an immoral pur pose, and this could not avail him since he was in pari delicto with her. The judgment of the court, delivered by Mellor J, makes it plain that this was the ratio of the decision. ‘The plain tiff,’ said Mellor J,8 ‘no doubt, was the owner of the note, but he pledged it by way of security for the price of meat and drink provided for, and money advanced to, him by the defendant.
Had the case rested there, and no pleading raised the question of illegalitya, valid pledge would have been created, anda special property conferred upon the defendant in the half-note, and the plaintiff could only have recovered by showing pa}ment or a tender of the amount due. In order to get rid of the defence arising from the plea, which set up an existing pledge of the half note, the plaintiff had recourse to the special replication, in which he was obliged to set forth the immoral and illegal character of the contract upon which the half-note had been deposited. It was, therefore, impossible for him to recover except through the medium and by the aid of an illegal transaction to which he was himself a party. Under such circumstances, the maxim”in pari delicto potior est conditio possidentis” clearly applies, and is decisive of the case.’ The Latin maxim which MellorJ cited must not be understood as meaning that wherea transaction is vitiated by illegality the person left in possession of goods after its completion is always and of necessity entitled to keep them. Its true meaning is that, where the circumstances are such that the court will refuse to assist either party, the consequence must, in fact, follow that the party in possession will not be disturbed. As Lord Mansfield said in the case already cited, the defendant then obtains an advantage ‘contrary to the real justice,’ and, so to say, by accident.’ It must not be supposed that the general rule which we have stated is subject tp no excep tion. Indeed, there is one obvious exception, namely, that class of cases in which the goods claimed are of sucha kind that it is unlawful to deal in them at all, as for example, obscene books. No doubt, there are others, but it is unnecessary, and would we think be unwise, to seek to name them all or to forecast the decisions which would be given ina variety of circumstances which may hereafter arise. We are satisfied that no rule of Jaw, and no considerations of public policy, compel the court to dismiss the plaintiffs’ claim in the case before us, and to do so would be, in our opinion,a manifest injustice. The appeal will be dismissed, with costs.
Tinsley v. Milligan
[1994] I AC 340,
Lord Goff.: .. Threaseon why the court of equity will not assist the claimant to recover his property or to assert his interest in it bas been variously stated. It is sometimes said that it is because he has not come to equity with clean hands. This was the reason given by the Lord Chief Baron Sir William Alexander in Groves v. Groves,3 Y & J 163, 174 and by Salmon LJ (with whom Cross LJ agreed) in Tinker v. Tinker (1970)P 136, 143. Sometimes it is said that the claimant cannot be heard or allowed to assert his claim to an equitable interest, as in Curtis v. Perry,6 Yes. 739, 746, per Lord Eldon LC; CJ,i/dm v. Childers (1857)3 K & J 310, 315,per Page Wood V-C and Cantor v. Cox, 239 EG 121, 122,per Plowman V-C. But this is, asI see it, another way of saying that the claimant must fail because he has not come to the court with clean hands. It follows that in these cases the requirements necessary to give rise to an equitable interest are present; it is simply that the claimant is precluded from asserting them. This explains why, in cases where the unlawful purpose has not been carried into effect, the cloauimrtainst aisbleenttiotlehdo.ld that, despite the illegality, there is an equitable interest ….
Another conclusion follows from the identification of the basis upon which equity refuses its assistance in these cases. This is that the circumstances in which the court refuses to assist the claimant in asserting his equitable interest are not limited to cases in which there isa pre sumption of advancement in favour of the transferee. If that was thecase, the principle could be said to be limited to those cases in which the transferor has to rely upon the illegal transac tion in order to rebut the presumption; in other words the cases could be said to fall within what is sometimes called the Bowmakers rule, under which a claimant’s claim is unenforceable when he has either to found his claim on an illegal transaction, or to plead its illegality in order to sup port his claim: Bowmakers Ltdv. Barnet Instruments Ltd (1945] KB 65. Of course, ina number of cases of this kind, especially in modern times, the presumption of advancement does apply, because many cases are concerned with a man hiding away his assets in order to escape his cred itors or for some other similar purpose, by transferring them to his wife or to one of his chil dren. But there are cases in which the principle has been applied, or has been recognised, where there was no presumption of advancement. …… Of course, where the presumption of advancement does apply, and the illegality is not established from another source, for example by the defendant, the claimant will be in the par ticular difficulty that, in order to rebut the presumption, he will have to rely upon the under lying transaction and so will of necessity have to disclose his own illegality. This is what happened in Palaniappa Chettiar v. Arunasalam Chettiar [1962] AC 294 where the property in question had been transferred by the claimant to his son who, having fallen ill, took no part in the hearing and so himself gave no evidence of the illegality; even so, the father’s claim failed because he was unable to rebut the presumption of advancement without relying upon the illegal transaction. But the case does not decide that the principle only applies where it is nec essary to rebut the presumption of advancement; and, as I have already stated, there are many cases in which the principle has been recognised or applied where there was no such presump tion. Furthermore, if for example the defendant proves that the property was transferred to him for a fraudulent or illegal purpose, a court of equity will refuse to assist the claimant when asserting his interest in it, even though the claimant’s case can be, and was, advanced, without reference to the underlying legal purpose, for example on the simple basis that the transfer of the property to the defendant was without consideration. This conclusion follows inevitably from the nature of the principle, and the grounds upon which equity refuses its assistance; it is at least implicit in a number of cases……. It follows that the so-called BoTIJmakers rule [1945] KB 65 does not apply in cases concerned with the principle under discussion, because once it comes to the attention of a court of equity that the claimant has not come to the court with clean hands, the court will refuse to assist the claimant, even though the claimant can prima facie establish his claim without recourse to the underlying fraudulent or illegal purpose.
Itis against the background of these established principles that I turn to consider the judg ments of the majority of the Court of Appeal. As I have recorded, Nicholls LJ in particular invoked a line of recent cases, largely developed in the Court of Appeal, from which he deduced the proposition that, in cases of illegality, the underlying principle is the so-called public con science test, under which the court must weigh, or balance, the adverse consequences ofrespec t’ively granting or refusing relief. This is little different, if at all, from stating that the court hu a discretion whether to grant or refuse relief. It is very difficult to reconcile such a test with the principle of policy stated by Lord Mansfield CJ in Holman v. Johnson, l Cowp. 341, 343, or with the established principles to which I have referred. …
There may be cases in which the fraud is far more serious than that in the present case, and is uncovered not as a result of a confession but only after a lengthy police investigation and a prolonged criminal trial. Again there may be cases in which a group of terrorists, or armed robbers, secure a base for their criminal activities by buy ing a house in the name of a third party not directly implicated in those activities. In cases such as these there will almost certainly be no presumption of advancement. Is it really to be said that criminals such as these, or their personal representatives, are entitled to invoke the assist ance of a court of equity in order to establish an equitable interest in property? It may be said that these are extreme l.-ases; but I find it difficult to see how, in this context at least, it is pos sible to distinguish between degrees of iniquity. At all events, I cannot think that the harsh con sequences which will arise from the application of the established principle in a case such as the present provide a satisfactory basis for developing the law in a manner which will open the door to far more unmeritorious cases, especially as the proposed development in the law appears to me to be contrary to the established principle underlying the authorities.
Finally, I wish to reven to the public cons ience test favoured by Nicholls LJ in the Court of Appeal. Despite the fact that I have concluded that on the authorities it was not open to the Coun of Appeal to apply the public conscience test to a case such as the present, I have con sidered whether it is open to your Lordships’ House to do so and, if so, whether it would be desirable to take this course. Among the a thorities cited to your Lordships, there was no decision of this House; technically, therefore, it may be said that this House is free to depart from the line of authority to which I have referred. But the fact remains that the principle invoked by the appellant has been consistently applied for about two centuries. Furthermore
the adoption of the public conscience test, as stated by Nicholls I.J, would constitute a revolution in this branch of the law, under which what is in effect a discretion would become vested in the court to deal with the matter by the process of a balancing operation, in place of a sys tem of rules, ultimately derived from the principle of public policy enunciated by Lord Mansfield CJ in Holman v. Johnson, I Cowp. 341, which lies at the root of the law relating to claims which are, in one way or another, tainted by illegality. Furthermore, the principle of public policy so stated by Lord Mansfield cannot be disregarded as having no basis in principle. In his dissenting judgment in the present case Ralph Gibson LJ pointed out (1992] Ch. 310, 334:
‘In so far as the basis of the ex turpi causa defence, as founded on public policy, is directe at deterrence it seems to me that the force of the deterrent effect is in the existence of the known rule and in its stem application. Lawyers have long known of the rule and must have advised many people of its existence.
The position at law is well illustrated by the decision in Bowmakers Ltd v. Barnet Instruments Ltd [1945] KB 65. In that case Barnet acquired three parcels of machine tools which had pre viously belonged to Smith. The transaction was carried through by three hire-purchase agree ments under which Smith sold the goods to Bowmakers who then hired them to Barnet. All three agreements were unlawful as being in breach of Defence Regulations: it is important to note that in the case of at least two of the parcels the illegality lay in the contract under which Bowmakers acquired the machine tools from Smith: see 69. Bowmakers succeeded in an action for conversion against Barnet. Even though it appeared from the pleadings and the evidence that the contract under which Bowmakers acquired the goods was illegal, such contract was effective to pass the property in the goods to Bowmakers who could therefore found their claim on the property right so acquired.
The position at law is further illustrated by Fe”et v. Hill (1854) 15 CB 207 where A, with intent to use premises as a brothel, took a lease from 8. B, having discovered that the premises were being used as a brothel, ejected A. A was held entitled to maintain cjectmcnt against B notwithstanding that A entered into the lease for an illegal purpose.
In Taylor v. Chester, LR 4 QB 309 the plaintiff had deposited with the defendant half a £50 note as security for payment due under an illegal contract with the defendant. The plaintiff was held unable to recover the half note as a special property in it (i.e. the security interest) had passed to the defendant.
In Alexander v. Rayson [1936] 1 KB 169 the plaintiff had leased a property to the defendant. For the purpose of defrauding the rating authorities; the plaintiff had carried through the trans action by two documents, one a lease which expressed a low rent the other a service agreement providing for additional payments sufficient to bring up the annual payment to the actual rent agreed. The plaintiff failed in an action to recover rent due under the agreements but the Court of Appeal, at 186, said that if the plaintiff had let e flat to be used for an illegal purpose, the leasehold interest in the flat would have vested in the defendant who would have been entitled to remain in possession of the flat until and unless the plaintiff could eject her without relying on the unlawful agreement.
From these authorities the following propositions emerge: (I) property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough.
I have stressed the common law rules as to the impact of illegality on the acquisition and enforcement of property rights because it is the appellant’s contention that different principles apply in equity. In particular it is said that equity will not aid Miss Milligan to assert, establish or enforce an equitable, as opposed to a legal, proprietary interest since she was a party to the fraud on the D.S.S. The house was put in the name of Miss Tinsley alone (instead of joint names) to facilitate the fraud. Therefore, it is said, Miss Milligan does not come to equity with clean hands: consequently, equity will not aid her.
Most authorities to which we were referred deal with enforcing proprietary rights under a trust: I will deal with them in due course. But before turning to them, I must point out that if Miss Tinsley’s argument is correct, the results would be far reaching and, I suggest, very sur prising. There are many proprietary rights, apart from trusts, which arc only enforceable in equity. For example, an agreement for a lease under which the tenant has entered is normally said to be as good as a lease, since under such an agreement equity treats the lease as having been granted and the ‘lessee’ as having a proprietary interest enforceable against the whole world except the bona fide purchaser for value without notice. Would the result in Ft”et v. Hill, 15 CB 207 have been different if there had only been an agreement for a lease? Say that in Taylor v. Chester, LR 4 ® 309 the plaintiff had deposited by way of security share certificates instead of half a bank note (thereby producing only an equitable security): would the outcome have been different? Similarly, if the plaintiff were relying on an assignment of a chose in action would he succeed if the assignment was a legal assignment but fail if it were equitable?
In my judgment to draw such distinctions between property rights enforceable at law and those which require the intervention of equity would be surprising. More than 100 years has elapsed since law and equity became fused. The reality of the matter is that, in 1993, English law has one single law of property made up of legal and equitable interests. Although for his torical reasons legal estates and equitable estates have differing incidents, the person owning either type of estate has a right of property, a right in rem not merely a right in personam. If the law is that a party is entitled to enforce a property right acquired under an illegal transac tion, in my judgment the same rule ought to apply to any property right so acquired, whether such right is legal or equitable.
In the present case, Miss Milligan claims under a resulting or implied trust. The court below have found, and it is not now disputed, that apart from the question of illegality Miss Milligan would have been entitled in equity to a half share in the house in accordance with the princi ples exemplified in Gissing v. Gissing [1971) 1 AC 886; Grant v. Edwards [1986) Ch. 638 and Lloyds Bank Pie v. Rossel [1991] AC 107. The creation of such an equitable interest does not depend upon a contractual obligation but on a common intention acted upon by the parties to their detriment. It is a development of the old law of resulting trust under which, where two parties have provided the purchase money to buy a property which is conveyed into the name of one of them alone, the latter is presumed to hold the property on a resulting trust for both parties in shares proportionate to their contributions to the purchase price. In argument, nodis tinction was drawn between strict resulting trusts and a Gissing v. Gissing type of trust.
A presumption of resulting trust also arises in equity when A transfers personalty or money to 8: see Snell’s Eqllity, 29th edn. (1990), 183-4; Standing v. Bowring (1885) 31 Ch.D 282,287, per Cotton LJ; Dewar v. Dewar [1975) 1 WLR 1532, 1537. Before 1925, there was also a pre sumption of resulting trust when land was voluntarily transferred by A to B: it is arguable, how ever, that the position has been altered by the 1925 property legislation: see Snell’s Equity, 182. The presumption of a resulting trust is, in my view, crucial in considering the authorities. On that presumption (and on the contrary presumption of advancement) hinges the answer to the crucial question ‘does a plaintiff claiming under a resulting trust have to rely on the underly ing illegality?’ Where the presumption of resulting trust applies, the plaintiff does not have to rely on the illegality. Ifhe proves that the property is vested in the defendant alone but that the
plaintiff provided part of the purchase money, or voluntarily transferred the property to the defendant, the plaintiff establishes his claim under a resulting trust unless either the contrary presumption of advancement displaces the presumption of resulting trust or the defendant leads evidence to rebut the presumption of resulting trust. Therefore, in cases where the pre sumption of advancement does not apply, a plaintiff can establish his equitable interest in the property without relying in any way on the underlying illegal transaction. In this cue MIN Milligan as defendant simply pleaded the common intention that the property should belonl to both of them and that she contributed to the purchase price: she claimed that in conaequen, the property belonged to them equally. To the same effect was her evidence in chief. Thertfl Miss Milligan was not forced to rely on the illegality to prove her equitable interest
….
Against this background, I tum to consider the authorities dealing with the position in equity where A transferred property to B for an illegal purpose. The earlier authorities, primarily Lord Eldon, support the appellant’s proposition that equity will not aid a plaintiff who has trans ferred property to another for an illegal purpose. ….
However, in my view, the law was not so firmly established as at first sight it appears to have been. The law on the effect of illegality was developing throughout the 19th century. [He then comidered the development of the law during the nineteenth century and continued:] Although in the cases decided during the last 100 years there are frequent references to Lord Eldon’s wide prin ciple, vrith one exception (Cantorv. Cor, 239 EG 121) none of the English decisions are decided by simply applying that principle. They are all cases where the unsuccessful party was held to be precluded from leading evidence of an illeir,il situation in order to rebut the presumption of advancement. Lord Eldon’s rule would have provided a complete answer whether the transfer was made to a wife or child (where the presumption of advancement would apply) or to a stranger. Yet with one exception none of the cases in this century has been decided on that simple basis.
The majority of cases have been those in which the presumption of advancement applied: in those authorities the rule has been stated as being,that a plaintiff cannot rely on evidence of his own illegality to rebut the presumption applicable in such cases that the plaintiff intended to make a gift of the property to the transferee. Thus in Gascoigne v. Gascoigne [1918) I KB 223; McEvoy v. Belfast Ba11king Co. Ltd [1934) NI 67; In re Emery’s Inveslmnlls Trusts [1959) Ch. 410; Palaniappa Chettia, v. Arunsa/am Chettiar EJ962] AC 294 and Tinker v, Ti,1ker [1970) P 136, 141H, 14Zc the crucial point was said to be the inability of the plaintiff to lead evidence rebutting the presumption of advancement. In each case the plaintiff was claiming to recover property voluntarily transferred to, or purchased in the name of, a wife or child, for an illegal purpose. Although reference was made to Lord Eldon’s principle, none of those cases was decided on the simple ground (ifit were good law) that equity would not in my circumstances enforce a resulting trust in such circumstances. On the contrary in each case the rule was stated to be that the plaintiff could not recover because he had to rely on the illegality to rebut the pre sumption of advancement.
In my judgment, the explanation for this departure from Lord Eldon’s absolute rule is that the fusion of law and equity has led the courts to adopt a single rule (application both at law and in equity) as to the circumstances in which the court will enforce property interests acquired in pursuance of an illegal transaction, viz., the Bo’wmaker rule [1945] KB 65. A party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality. In cases where the presumption of advancement applies, the plaintiff is faced with the presumption of gift and therefore cannot claim under a resuhing trust unless and until he has rebutted that presumption of gift: for those purposes the plaintiff docs have to rely on the underlying illegality and therefore fails.
The position is well illustrated by two decisions in the Privy Council. In the first, Singh v. Ali [1960) AC 167 a plaintiff who had acquired legal title to a lorry under an illegal transaction was held entitled to succeed against the other party to the illegality in detinue and trespass. The Board approved the Bo’ll>makers test. Two years later in Pal11niappa Chettuir v. Arunasa/11m Cliettiar [1962] AC 294 the Board had to consider the case where a father, who had transferred land to his son for an illegal purpose, sought to recover it under a resulting trust. It was held that he could not, since be had to rely on his illegal purpose in order to rebut the presumption of advancement. The Board distinguished, at 301, the decision in Haigh v. Kaye, LR 7 Ch. 469 on the following grounds:
‘It appears to their Lordships, however, that there is a clear distinction between Haigh v. Kaye and the present case.In Haigh v. Kaye the plaintiff conveyed a freehold estate to the defendant. In the conveyance it was stated that a sum of £850 had been paid by the defendant for it. The plaintiff proved that no such sum was paid and claimed that the defen dant was a trustee for him. Now in that case the plaintiff had no reason to disclose any ille gality and did not do so. It was the defendant who suggested that the transaction was entered into for a fraudulent purpose. He sought to drag it in without pleading it distinctly and he was not allowed to do so. But in the present case the plaintiff had of necessity to disclose his own illegality to the court and for this reason: He had not only to get over the fact that the transfer stated that the son paid S7,000 for the land. He had also to get over the presumption of advancement, for, whenever a father transfers property to his son, there is a presumption that he intended it as a gift to his son; and if he wishes to rebut that presumption and to say that his son took as trustee for him, he must prove the trust clearly and distinctly, by evidence properly admissible for the purposes, and not leave it to be inferred from slight circumstances: see Shepherd v. Cartwright [1955] AC 431, 445.’
Further, the Board distinguished Sing/iv. Ali [1960) AC 167. It was pointed out that in Singh v. Ali the plaintiff founded his claim on a right of property in the lorry and his possession ofit. TheBoard continued [1962) AC 294, 303:
‘[The plaintiff] did not have to found his cause of action on an immoral or illegal act. He was held entitled to recover. But in the present case the father has of necessity to put for ward, and indeed, assert, his own fraudulent purpose, which he has fully achieved. Heis met therefore by the principle stated long ago by Lord Mansfield “No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act,” see Holman
v. Johnson, I Cowp. 341, 343.’
In my judgment these two cases show that the Privy Council was applying exactly the same principle in both cases although in one case the plaintiff’s claim rested on a legal title and in the other on an equitable title. The claim based on the equitable title did not fail simply because the plaintiff was a party to the illegal transaction; it only failed because the plaintiff was bound to disclose and rely upon his own illegal purpose in order to rebut the presumption of advance ment. ThePrivy Council was plainly treating the principle applicable both at law and in equity as being that a man can recover property provided that he is not forced to rely on his own illegality.
I therefore reach the conclusion that, although there is no case overruling the wide principle
stated by Lord Eldon, as the law has developed the equitable principle has become elided into the common law rule. In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable tide: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction.
As applied in the present case, that principle would operate as follows. Miss Milligan established a resulting trust by showing that she had contributed to the purchase price of the house and that there was common understanding between her and Miss Tinsley that they owned the house equally. She had no need to allege or prove why the house was conveyed into the name of Miss Tinsley alone, since that fact was irrelevant to her claim: it was enough to show that the house was in fact vested in Miss Tinsley alone. The illegality only emerged at all because Miss Tinsley sought to raise it. Having proved these facts, Miss Milligan had raised a presumption of resulting trust. There was no evidence to rebut that presumption. Therefore Miss Milligan should succeed. This is exactly the process of reasoning adopted by the Ontario Court of Appeal in Gorog v. Kiss (1977) 78 DLR (3d) 690 which in my judgment was rightly decided.
Finally, I should mention a further point which was relied on by Miss Tinsley. It is said that once the illegality of the transaction emerges, the court must refuse to enforce the transaction and all claims under it whether pleaded or not: see Scott v. Brolllff, Dotring, McNab (S Co. [1892) 2 QJ3 724. Therefore, it is said, it does not matter whether a plaintiff relies on or gives evidence of the illegality: the court will not enforce the plaintiff’s rights. In my judgment, this submission is plainly ill founded. There are many cases where a plaintiff has succeeded, notwithstanding that the illegality of the transaction under which she acquired the property has emerged: see, for example, BQwmaleers Ltd v. Barnet Instruments Ltd [1945) KB 65 and Singh v. Ali [1960] AC 167. In my judgment the court is only entitled and bound to dismiss a claim on the basis that it is founded on an illegality in those cases where the illegality is of a kind which would have provided a good defence if raised by the defendant. In a case where the plaintiff is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract (such as a right of property) the court is neither bound nor entitled to reject the claim unless the illegality of necessity forms part of the plaintiff’s case.
I would therefore dismiss the appeal.
Tribe v. Tribe
[1996] Ch. 107
Nourse LJ: In Tinsley v. Milligan [1994] I AC 340 it was held by a majority of the House of Lords that where, in order to achieve an illegal purpose, property is transferred by one person into the name of another, being persons between whom the presumption of advancement does not apply, the transferor can recover the property, on the ground that he is not forced to rely on the illegality but only on the resulting trust that arose in his favour on the transfer. It is inherent in that decision that it makes no difference whether or not the illegal purpose has been carried into effect, as it clearly had been in that case. Here the question is whether, where the presumption of advancement applies, the transferor can still recover the property, on the ground that, although he is forced to rely on the illegality in order to rebut the presumption, the illegal purpose has not been carried into effect in any way.
In both Tinsley v. Milligan [1994] I AC 340 and the present case A transferred property into the name of B with the mutual intention of concealing A’s interest in the property for a fraud ulent or illegal purpose. Before Tinsley v. Milligan the general rule that A could not recover the property was consistently applied irrespective of whether the presumption of advancement arose between A and B or not: see per Lord Goff, at 356 and the authorities there cited. But now the majority of their Lordships have made a clear distinction between the two cases. In holding that the general rule does not apply where there is no presumption of advancement, they have necessarily affirmed its application to cases where there is. Thus Lord Browne Wilkinson pointed out, at 372, that, in a case where the presumption of advancement applies in order to establish any claim, the plaintiff has himself to lead evidence sufficient to rebut the pre sumption of gift and in so doing will normally have to plead, and give evidence of, the under lying illegal purpose: see also at 375c.
There is one authority in which it has been distinctly held that the exception can apply to a case where the presunwtion of advancement arises: see Perpetual Executor; and Trustees Association of Australia Ltd v. Wright (1917) 23 CLR 185, which does not appear to have been cited_in any English case before Tinsley v. Milligan (1994] I AC 340. In that case the plaintiff, in about 1906 and out of his own moneys and savings, had purchased a piece ofland and erected thereon a house and premises. He said in evidence at the trial that the property had been put in his wife’s name at her request, and for convenience, and not as a gift, but for the purpose of securing a home for himself and his family in the event of his failing in business. The wife died in 1915. The administrators of her estate having refused to recognise his claim to the property, the plaintiff brought an action against them claiming a declaration that he was beneficially and absolutely entitled thereto and an order that the defendants should transfer it to him.
The defendants argued that, because of the illegal purpose to defeat his creditors, the plaintiff could not set up the arrangement under which he said that the property had been put into his wife’s name, and that there was therefore no evidence to rebut the presumption of advance ment. The High Court of Australia rejected that argument and gave judgement for the plain
tiff, on the ground that the illegal purpose had not in any respect been carried into effect. Barton ACJ said, at 193: ‘Had there been creditors to hoodwink or, at any rate, had there been any attempt at such an act, the case would probably have been different. But, so far as we know, there were no creditors to hoodwink, and the whole thing rested on what might happen but never did happen. That such a state of things, carried no further, is not a bar to the respondent’s claim to what is beneficially his own is to me apparent, and I need only mention three cases, namely, Symes v. Hughes (1870) LR 9 Eq. 475; T,ylor v. Bo11Jers (1876) I QBD 291
and Payne v. McDonald (1908) 6 CLR 208.’
The other three members of the court, Isaacs, Gavan Duffy and Rich JJ, gave a joint judgment. They said, 23 CLR 185, 196: ‘The test appears to be, not whether the plaintiff in such a case relies on the illegal agree ment, because in one sense )le always does so, but whether the illegal purpose from which the plaintiff insists on retiring still rests in intention only. If either he is seeking to carry out the illegal purpose, or has already carried it out in whole or in part, then he fails.’
Having then referred to Payne v. McDonald, 6 CLR 208 and having read at some length from the judgment of the Privy Council in Petherperma/ Chetty v, Muniaui Strvai, LR 35 Ind.App. 98, 103, they said, 23 CLR 185, 198:
‘In this case no creditors have been defrauded, the illcpl purpose has never been in any respect carried into effect, and therefore the respondent was entitled to succeed, and is now entitled to a dismissal of this appeal.’
On this state of the authorities I decline to hold that the exception does not apply to a case where the presumption of advancement arises but the illegal purpose has not been carried into effect in any way. Wright’s case, 23 CLR 185, supported by the observations of the Privy Council in Palaniappa Chettiar v. Arunasalam Chettiar [1962] AC 294, is dear authority for its application and no decision to the contrary has been cited. In the circumstances I do not pro pose to distinguish between law and equity, or to become embroiled in the many irreconcilable authorities which deal with the exception in its application to executory contracts, or even to speculate as to the significance, if any, of calling it a locus poenitentiae, a name I have avoided as tending to mislead. In a property transfer case the exception applies if the illegal purpose has not been carried into effect in any way.
I return to the facts of this case. The judge found that the illegal purpose was to deceive the plaintiff’s creditors by creating an appearance that he no longer owned any shares in the company. He also found that it was not carried into effect in any way. Mr Tunkel, for the defen dant, attacked the latter finding on grounds which appeared to me to confuse the purpose with the transaction. Certainly the transaction was carried into effect by the execution and registra tion of the transfer. But Wright’s case, 23 CLR 185 shows that that is immaterial. It is the pur pose which has to be carried into effect and that would only have happened if and when a creditor or creditors of the plaintiff had been deceived by the transaction. The judge said there was no evidence of that and clearly he did not think it appropriate to infer it. Nor is it any objec tion to the plaintiff’s right to recover the shares that he did not demand their return until after the danger had passed and it was no longer necessary to conceal the transfer from his creditors. All that matters is that no deception was practised on them. For these reasons the judge was right to hold that the exception applied.
Millett LJ: …
The judge held that, because the illegal purpose had not been carried out, the plaintiff was entitled to withdraw from the transaction and to rely on his evidence of the reason why he trans ferred the shares to the defendant in order to rebut the presumption of advancement. According to the judge he had what is called a locus poenitentiae. It is submitted on behalf of the defen dant that the judge was in error. First, it is said, the doctrine of the locus poenitentiae allows a party to an illegal contract to withdraw while the contract is still executory, but it has no appli cation to a transfer of property. In such a case the illegal purpose is partly carried into effect as soon as the property is transferred. Secondly, and in the alternative, a transferor cannot rely on his illegal purpose to rebut the presumption of advancement, and it makes no difference that the illegal purpose has not been carried into effect. Thirdly, there was no true repentance in the present case. The plaintiff never abandoned his illegal purpose; he did not demand the return of his shares until the danger had passed and it was no longer necessary to conceal them from his creditors.
There are, in my opinion, two questions of some importance which fall for decision in the present case. The first is whether, once property has been transferred to a transferee for an illegal purpose in circumstances which give rise to the pr umption of advancement, it is still open to the transferor to withdraw from the transaction before the purpose has been carried out and, having done so, give evidence of the illegal purpose in order to rebut the presumption of advancement. The second is whether, if so, it is sufficient for him to withdraw from the trans action because it is no longer necessary and without repenting of his illegal purpose. I shall deal with these two questions in tum.
The Presmnption of Advancement and the Locus Poenitentiae
[n Tinsley v. Milligan [1994] I AC 340, 370 Lord Browne-Wilkinson summarised the com mon law rules which govern the effect of illegality on the acquisition and enforcement of prop erty rights in three propositions:
‘( 1) property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidlNll: if the plaintiff has acquired legal title under the illegal contract that is enough.’
The decision of the majority of their Lordships in that case was that the same princ:iplet applied in equity. It is, therefore, now settled that neither at law nor in equity may a party rely on hill own fraud or illegality in order to found a claim or rebut a presumption, but that the common law and equity alike will assist him to protect and enforce his property right if he can do so without relying on the fraud or illegality. This is the primary rule.
It is, however, also settled both at law and in equity that a person who has transferred prop erty for an illegal purpose can nevertheless recover his property provided that he withdraws from the transaction before the illegal purpose has been wholly or partly performed. This is the doctrine of the locus poenitenriae and it applies in equity as well as at law: see Symes v. Hughes (1870) LR 9 Eq. 475 for the former and Taylor v. BoJZJm (1876) I Q!3D 291 for the latter. The availability of the doctrine in a restitutionary context was expressly confirmed by Lord Browne Wilkinson in Tinsley v. Milligan (1994] I AC 340, 374.
While both principles are well established, the nature of the relationship between them is unclear. Is the doctrine of the locus poenitentiae coextensive with and by way of general excep tion to the primary rule? The question in the present case is whether a plaintiff who has made a gratuitous transfer of property to a person in whose favour the presumption of advancement arises can withdraw from the transaction before the illegal purpose has been carried into effect and then recover the property by leading evidence of his illegal purpose in order to rebut the presumption. Closely connected with this question is its converse: is a plaintiff who has made such a transfer in circumstances which give rise to a resulting trust so that he has no need to rely on the illegal purpose, as in Tinsley v. Millitan itself, barred from recovering if the illegal purpose has been carried out? If both questions are answered in the negative, then either the
locus poenitentiae is a common Jaw doctrine hich has no counterpart in equity or it is a contractual doctrine which has no place in the law of restitution.
It is convenient to consider first the position at common Jaw. It is important to bear in mind that the common law starts from the opposite premise from that on which equity bases the presumption of resulting trust. In an action for money had and received, for example, what ever the relationship between the parties, the burden lies on the plaintiff to prove that the money was not paid by way of gift or pursuant to an enforceable contract. Absence of con sideration is not of itself a ground of restitution: it is for the transferor to show that no gift was intended. The leading case is Taylor v. Bowers, I ®D 291. In order to prevent his creditors seizinghis goods the plaintiff transferred all is stock-in-trade to one Alcock in exchange for fictitious bills of exchange. At first instance Cockburn CJ held, at 295:
‘where money has been paid, or goods delivered, under an unlawful agreement, but there has been no further performance of it, the party paying the money or delivering the goods may repudiate the transaction, and recover back his money or goods.’
The decision was affirmed in the Court of Appeal. All four members of the court held that the plaintiff could prove his title without having to rely on the fraud. Sisnificantly, however, Mellish LJ (with whom Baggallay JA agreed) laid stress on the fact that the illegal purpose had not been carried out and made it clear that, even though the plaintiff did not need to rely on the illegality in order to prove title, he could not have recovered the goods if the illegal purpose had been carried out.
The case is described as controversial and criticised in Goff (5 Jo11es, The Law of Restitution, 4th edn. (1993), 513 partly on the ground that the contract was not wholly executory because the goods had been handed over to Alcock. But the principle has been applied in subsequent cases and the case itself is cited without disapproval in Tiruley v. Milligan [1994] 1 AC 340, 374. It is too late now to hold that it was an illegitimate application of a contractual doctrine to a claim for restitution. But the proposition that the plaintiff did not need to rely on the illegality could not be supported today. It is explicable only on the basis that the rule that title can pass under an illegal contract had not yet been clearly established. Nowadays we would say that Alcock, or his successor in title, did not need to rely on the illegal nature of the contract pur suant to which the goods were delivered because the title passed to him despite the illegality and want of consideration; but the plaintiff did. In order to recover the goods as goods received and held to his own use he had to show that they had not been delivered by way of gift or pur suant to an enforceable contract. This required him to show that they had been delivered pursuant to an illegal contract which he had repudiated; and he could not repudiate the contract once the illegal purpose had been wholly or partly achieved.
In Taylorv. Bowers, 1 Q!3D 291 the goods were delivered for an illegal purpose but the deliv
ery itself was not illegal. In Bo-,,,,na/urs Ltd v. Barnet Instruments Ltd [I 945] KB 65 the trans fers were assumed to be illegal and it was obviously too late for the transferor to invoke the locus poenitentiac. (In any case the transferor did not bring a claim in restitution but contented itself with pleading illegality as a defence to a claim in conversion.) In Singh v. Ali (1960] AC 167 Lord Denning, giving the opinion of the Board, confirmed the rule that title passes at law notwithstanding the illegal purpose for which the transfer was made. But he was clearly of the opinion that the transferor’s claim to restitution was barred only where the illegal purpose had been carried out. He explained, at 176:
‘The reason is because the transferor, having fully achieved his unJZJorthy end, cannot be allowed to turn round and repudiate the means by which he did it-he cannot throw over the transfer.’ (Emphasis added.)
Lord Denning clearly intended it to be understood that the converse applies: the transferor is allowed to repudiate the transfer provided that the illegal purpose has not been achieved. This has not been displaced by anything in Tinsley v. Milligan [1994] 1 AC 340. Lord Browne Wilkinson, at 374, expressly confirmed the existence of the doctrine of the locus poenitentiae and its application in a restitutionary context; indeed, he founded part of his reasoning upon it. Moreover, it is in accordance with ordinary restitutionary principles. The fact that title has passed is no bar to a claim for restitution; on the contrary, this is the normal case. But to suc ceed at law it is necessary for the transferor to repudiate the transaction which gave rise to its passing, and this is what the locus poenitentiae allows him to do.
The locus poenitentiae is not therefore an exclusively contractual doctrine with no place in the law of restitution. It follows that it cannot be excluded by the mere fact that the legal ownership of the property has become lawfully vested in the transferee. It would be unfortunate if the rule in equity were different. It would constitute a further obstacle to the development of a coherent and unified law of restitution. Most of the cases in equity have been concerned with gratuitous transfers made with the intention of defrauding creditors and often for a pretended consideration. It is not easy to discern any difference in principle between a transfer of prop erty against fictitious bills of exchange and a transfer of shares for a stated consideration which it is not intended shall be paid.
The leading cases on illegality and resulting trusts prior to Tinsley v. Milligan are Curtis v. Perry (1802), 6 Ves. 739; Ex parte Ya/lop (1808), 15 Ves. 60; Groves v. Groves (1829) 3 Y & J 163; Coultwas v. SJZJan (1870) 18 WR 746; Symes v. Hughes, LR 9 Eq. 475; In re Great Berlin Steamboat Co. (1884) 26 Ch.D 616; Petherpermaf Chetty v. Muniandi Servai (1809) LR 35 Ind.App. 98 and RoJZJan v. Dann (1991) 64 P & CR 202.
In his dissenting speech…Lord Goff ofChieveley refused to draw any distinction between eases where the presumption of advancement applied and cases in which the plaintiff could rely on a resulting trust. From the authorities he derived a single principle: that If one party puts property in the name of another for a fraudulent or illegal purpose neither law nor equity will allow him to recover the property: see 356. Even ifhe can establish a raultln1 Cl’Ult in his favour he cannot enforce it. Given Lord Goff’s opinion that there wu but one prlnclple in play, it was natural for him to describe the doctrine of the locus poenitentiae u an exception to that principle. Since the defendant could not bring herself within the exception, ht would have allowed the appeal. …….. She had no need to allege or prove why she had allowed the house to be conveyed into the sole name of the plain tiff, since that fact was irrelevant to her claim.
The necessary consequence of this is that where he can rely on a resulting trust the trans feror will normally be able to recover his property if the illegal purpose has not been carried out. In Tinsley v. Milligan she recovered even though the illegal purpose had been L.!rried out. It does not, however, follow that the transferor will invariably succeed in such circumstances, so that the presence or absence of a locus poenitentiae is irrelevant where the transfer gives rise to a resulting trust. A resulting trust, like the presumption of advancement, rests on a pr sumption which is rebuttable by evidence: see Standing v. Bowring (1885) 31 Ch.D 282, 287. The transferor does not need to allege or prove the purpose for which property was transferred into the name of the transferee; in equity he can rely on the presumption that no gift was intended. But the transferee cannot be prevented from rebutting the presumption by leading evidence of the transferor’s subsequent conduct to show that it was inconsistent with any inten tion to retain a beneficial interest. Suppose, for example, that a man transfers property t(! his nephew in order to conceal it from his creditors, and suppose that he afterwards settles with his creditors on the footing that he has no interest the property. Is it seriously suggested that he can recover the property? I think not. The transferor’s own conduct would be inconsistent with the retention of any beneficial interest in the property. I can see no reason why the nephew should not give evidence of the transfero_r’sdealings with his creditors to rebut the presump tion of a resulting trust and show that a gift was.intended. He would not be relying on any illegal arrangement but implicitly denying it. The transferor would have to give positive evidence of his intention to retain a beneficial interest and dishonestly conceal it from his creditors, evi dence which he would not be allowed to give once the illegal purpose had been carried out.
This analysis is not, in my view, inconsistent with a passage in Lord Browne-Wilkinson’s speech [1994] I AC 340, 374, where he said:
‘The equitable right, if any, must arise at the time at which the property was voluntarily transferred to the third party or purchased in the name of the third party. The existence of the equitable interest cannot depend upon events occurring after that date. Therefore
if, under the principle of locus poenitentiae, the couns recognise that an equitable inter est did arise out of the underlying transaction, the same must be true where the illegal pur pose was carried through. The carrying out of the illegal purpose cannot, by itself, destroy the pre-existing equitable interest.’
But it does not follow that subsequent conduct is necessarily irrelevant. Where the existence of an equitable interest depends upon a rebuttable presumption or inference of the transferor’s intention, evidence may be given of his subsequent conduct in order to rebut the presumption or inference which would otherwise be drawn.
Tinsley v. Milligan [1994] I AC 340 is, in my opinion, not authority for the proposition that a party who transfers property for an illegal purpose in circumstances which give rise to a resulting trust can invariably enforce the trust and recover the property even though the illegal purpose has been carried into effect. I do not accept the suggestion that cases such as In re Great Berlin Steamboat Co., 26 Ch.D 616 have been impliedly overruled or that the dicta in the many cases, including Taylor v. Bowers, 1 QJJD 291 and Singh v. Ali [1960] AC 167, indicating that the result would have been otherwise if the illegal purpose had or had not been carried out must be taken to have been overruled.
The question in the present case is the converse: whether the transferor can rebut the pre-· sumption of advancement by giving evidence of his illegal purpose so long as the illegal pur pose has not been carried into effect. The leading cases on illegality and the presumption of advancement are Childers v. Childers (1857) 3 K & J 310; Crichton v. Crichton (1895) 13 R 770; Perpetual Executors and Trustees Association of Australia Ltd v. Wright (1917) 23 CLR 185;
Gascoigne v. Gascoigne [1918] 1 KB 223; McEvoy v. Belfast Ban/ting Co. Ltd [1935] AC 24; /,i re Emery’s Investments Tru5/s [1959] Ch. 410; Palaniappa Chettiarv. Arunasalam Chettiar[l962] AC 294 and Tinker v. Tinker [1970] P 136. ….
There is no modern rnse in which restitution has been denied in circumstances comparable to those of the present case where the illegal purpose has not been carried out. In Tinsley v. Milligan Lord Browne-Wilkinson expressly recognized, at 374, the availability of the doctrine of the locus poenitentiae in a restitutionary context, and cited Taylor v. Bowers·,1QBD 291 as well as Symes v. Hughes, LR 9 Eq. 475 without disapproval. In my opinion the weight of the authorities supports the view that a person who seeks to recover property transferred by him for an illegal purpose can lead evidence of his dishonest intention whenever it is necessary for him to do so provided that he has withdrawn from the transaction if he can rely on an express or resulting trust in his favour; but it is necessary (i) if he brings an action at law and (ii) if he brings proceedings in equity and needs to rebut the presumption of advancement. The avail ability of the locus poenitentiae is well documented in the former case. I would not willingly adopt a rule which differentiated between the rule of the common law and that of equity in a restitutionary context.
It is of course true that equity judges are fond of saying that a party ‘cannot be heard to say’
that his purpose was dishonest, and that this approach represents a mainspring of equitable jurisprudence. A man who puts himself in a position where his interest conflicts with his duty, for example, ‘cannot be heard to say’ that he acted in accordance with his interest; he is treated as having acted in accordance with his duty: see for example In re Biss [1903] 2 Ch. 40, 45 and Auorney-Generalfor Hong Kong v. Reid[l994J 1 AC 324. But this is a substantive rule of equity, not a merely procedural rule as the primary rule appears to be, and it does not preclude the court from taking cognisance of an uneffectuated intention from which the party in question has resiled. I would hold that Sir William Page Wood V-C’s first thoughts in Childers v. Childers, 3 K & J 310, 315-16 are to be preferred to his second. I would also hold that there was no ‘inescapable dilemma’ in Tinker v. Tinker [1970] P 136, where it was said by Salmon LJ in the course of the argument at 139 that the transferor was either an honest man, in which case the property belonged to his wife, or he would have to give evidence of his dishonesty, it being implicit that this was something which he could not do. Such statements are due to an instinc tive feeling that a dishonest man should not succeed where an honest man would fail, but this is to misrepresent the effect of allowing a locus poenitentiae. The dishonest man is not treated more favourably than the honest man; provided that the illegal purpose has not been carried out they are treated in the same way. The outcome is different because their intentions were different. The honest man intended a gift; the dishonest man did not.
At heart the question for decision in the present case is one oflegal policy. The primary rule which precludes the court from lending its assistance to a man who founds his cause of ac:tlon on an illegal or immoral act often leads to a denial of justice. The justification for this is that du rule is not a principle of justice but a principle of policy: see the much quoted statement oflMcl Mansfield CJ in Holman v. Johnson (1775) I Cowp. 341,343. The doctrine of the locul pcllfti tentiae is an exception which operates to mitigate the harshness of the primary rule. It enablw the coun to do justice between the parties even though, in order to do so, it m111t allow I pWn tiff to give evidence of his own dishonest intent. But he must have withdrawn from the action while his dishonesty still lay in intention only. The law draws the line once the contract has been wholly or partly carried into effect.
… To my mind these considerations are even more compelling since the decision in Tinsley v.Milligan [1994] 1 AC 340. One might hesitate before allowing a novel exception to a rule oflcgal policy, particularly a rule based on moral principles. But the primary rule, as it has emerged from that decision, does not conform to any discernible moral principle. It is procedural in nature and depends on the adventitious location of the burden or proof in any given case. Had the plaintiff transferred the shares to a stranger or distant relative whom he trusted, albeit for the same dishonest purpose, it cannot be doubted that he would have succeeded in his claim. He would also have succeeded if he had given them to the defendant and procured him to sign a declaration of trust in his favour. But he chose to transfer them to a son whom he trusted to the extent of dispensing with the precaution of obtaining a declaration of trust. If that is fatal to his claim, then the greater the betrayal, the less the power of equity to give a remedy.
In my opinion the following propositions represent the present state of the law. (1) Title to property passes both at law and in equity even Jfthe transfer is made for an illegal purpose. The fact that title has passed to the transferee does not preclude the transferor from bringing an action for restitution. (2) The transferor’s action will fail if it would be illegal for him to retain any interest in the property. (3) Subject to (2) the transferor can recover the property if he can do so without relying on the illegal purpose. This will normally be the case where the property was transferred without consideration in circumstances where the transferor can rely on an express declaration of trust or a resulting trust in his favour. (4) It will almost invariably be so where the illegal purpose has not been carried out. It may be otherwise where the illegal pur pose has been carried out and the transferee can rely on the transferor’s conduct as inconsistent with his retention of a beneficial interest. (5) The transferor can lead evidence of the illegal pur pose whenever it is necessary for him to do so provided that he has withdnwn from the trans action before the illegal purpose has been wholly or partly carried into effect. It will be necessary for him to do so (i) if he brings an action at law or (ii) if he brings proceedings in equity and needs to rebut the presumption of advancement. (6) The only way in which a man can protect his property from his creditors is by divesting himself of all beneficial interest in it. Evidence that he transferred the property in order to protect it from his creditors, therefore, does nothing by itself to rebut the presumption of advancement; it reinforces it. To rebut the presumption it is necessary to show that he intended to retain a beneficial interest and conceal it from his creditors. (7) The court should not conclude that this was his intention without com pelling circumstantial evidence to this effect. The identity of the tnnsrerce and the circumstances in which the transfer was made would be highly relevant. It is unlikely that the court would reach such a conclusion where the transfer was made in the absence of an imminent and perceived threat from known creditors.
The Doctrine of the Locus Poenitentiae
It is impossible to reconcile all the authorities on the circumstances in which a party to an illegal contract is permitted to withdraw from it. At one time he was allowed to withdraw so long as the contract had not been completely performed; but later it was held that recovery was barred once it had been partly performed: sec Kt11rlty v. Thomson (1890) 24 QBD 742. It is clear
that he must withdraw voluntarily, and that iris notsufficient that he is forced to do so because his plan has been discovered. In Bigos v. Bousttd (1951] 1 All ER 92 this was, perhaps dubi
ously, extended to prevent withdnwal where the scheme has been frustrated by the refusal of the other party to carry out his part.
The academic arricles Grodecki, ‘In Pari Delicto Potior Est Conditio Defendentis’ (1955) 71 LQR 254, Beatson, ‘Repudiation of Illegal Purpose as a Ground for Repudiation’ (1975) 91 LQR 313 and Merkin, ‘Restitution by Withdrawal from Executory Illegal Contracts’ (1981) 97 LQft 420 are required reading for anyone who attempts the difficult task of defining the pre cise limits of the doctrine. I would draw back from any such attempt. But I would hold that genuine repentance is not required. Justice is not a reward for merit; restitution should not be confined to the penitent. I would also hold that voluntary withdrawal from an illegal transac tion when it has ceased to be needed is sufficient. It is true that this is not necessary to encour age withdrawal, but a rule to the opposite effect could lead to bizarre results. Suppose, for example, that in Bigos v. Rousted [1951) 1 All ER 92 exchange control had been abolished before the foreign currency was made available: it is absurd to suppose that the plaintiff should have been denied restitution. I do not agree that it was correct in Grot1es v. Groves, 3 Y &J 163, 174, and similar cases for the court to withhold its assistance from the plaintiff because ‘if the crime has not been completed, the merit was not his.’
Conclusion
On the facts found by the judge the plaintiff was entitled to judgment. I would dismiss the appeal.
Nelson v. Nelson
(1995) 70 ALJR 47,
Dawson J: … Agreeing, as I do, that disconformity is undesirable in the rules relating to ille gality at law and in equity, I find difficulty in accepting the distinction drawn in Tinsley v. Milligan between a resulting trust established without the need to rebur the presumption of advancement and a resulting trust that can only be established by rebutting that presumption. In the former case, according to the decision, an illegal purpose does not preclude relief because the resulting trust will be presumed upon proof that the purchase price was paid by the party asserting the trust without any need for that party to place reliance upon the illegal purpose. In the latter case, however, where the presumption of advancanent cannot be rebutted without revealing the illegal purpose, there can be no assertion of a resultin trust. The distinction can
hardly be based upori a policy of discouraging the transfer of property for an illegal purpose because a knowledgable transferor would choose a transferee other than one who could take advantage of the presumption of advancement. Moreover, where a presumption of advancement applied, the distinction would be such as to lead the transferee to encourage the carrying out of the illegal purpose so as to acquire a benefit for himself. And, if the presumption of advance ment cannot be rebutted because of the revelation of an illegal purpose, the result is a windfall gain to the transferee who may in fact share the illegal purpose.
Once it is recognised that Lord Eldon’s broad rule exceeds the true scope of the equitable maxim that he who comes to equity must come with clean hands and that a party who the evi dence reveals is tainted with illegality may nevertheless succeed, as in Tinsley v. Milligan, in establishing a resulting trust, it seems to me to be unacceptable that a party, tainted by a sim ilar illegality, cannot establish a resulting trust merely because evidence advanced to rebut the presumption of advancement reveals the illegality. The different result is entirely fortuitous being dependent upon the relationship between the parties and is wholly unjustifiable upon any policy ground. That the transfer of property by a husband to his wife for an illegal purpose and not intended as a gift should not give rise to a resulting trust whereas a similar transfer of prop erty by a man to his de facto wife1 for a similar illegal purpose should do so, because in the for mer instance the husband is required to rebut the presumption of advancement and cannot do so merely because he would reveal the illegal purpose, cannot, in my view, have any basis in principle. If, as it does, a locus poenitentiae exists, rhen there is an existing equitable interest in each instance.2 It is simply that in the former instance the husband will not be heard to assert its existence. In the words of Lord Browne-Wilkinson in Tinsley v. Milligan in each instance:
‘The effect of illegality is not substantive but procedural. The question therefore is, “In what circumstances will equity refuse to enforce equitable rights which undoubtedly exist.” ‘
Nor, in my view, can it be said that a party seeking to rebut the presumption of advancement in the case of a transaction for an illegal purpose is forced to rely upon his own illegality. What must be established in order to rebut the presumption is that no gift was intended. There may be an illegal purpose for the transfer of the property and that may bear upon the question of intention,+ but it is the absence of any intention to make a gift upon which reliance must be placed to rebut the presumption of advancement. Intention is something different from a reason or motive. The illegal purpose may thus be evidentiary, but it is not the foundation of a claim to rebut the presumption of advancement.5 Both the presumption of a resulting trust and the presumption of advancement may be rebutted by showing the actual intention of the parties.6 Each presumption dictates where the evidentiary burden of doing so lies. But that affords no basis for drawing a distinction between the effect of an illegal purpose where the presumption of advancement applies and where it does not. Reliance is placed in each case upon the inten tion of the parties, whether aided by a presumption or not, and not upon the illegality.
Justification for the view that the presumption of advancement may be rebutted so as to allow a resulting trust to arise, notwithstanding that the rebuttal reveals that the transaction involved was for an illegal purpose, is to be found in the principle that illegal conduct on the part of a person claiming equitable relief does not in every instance disentitle that person to the relief. The illegality must have ‘an immediate and necessary relation to the equity sued for’.7 Where reliance is not placed upon the illegality-where the court is not asked to effectuate the illegal purpose but merely to recognise an interest admittedly in existence–there is not, in my view, an immediate and necessary relation between the illegality and the claim. The illegal purpose in those circumstances has been effectuated without any intervention by the court and the prop erty right has passed. If there is to be a correspondence between the rules at common law and in equity, then the property right ought to be recognised notwithstanding that it is the result of an illegal transaction. The relevance of the illegal transaction is confined to explaining how the
property right arose; to ‘providing the basis of[a] claim to a property right’.8
In the present case, the purchase of the first house by the mother and the placing of it in the names of the son and daughter took place a considerable time before the failure of the mocher to disclose her interest in her application for an advance. During the whole of that time the mother was in a position to rebut the presumption of advancement and to claim the beneficial interest in the house which had passed to her. Given the existence of that interest and the fllCt that, had it been a legal interest, it would have been recoverable notwithstanding the maxim IX turpi causa, I do not think that it should be concluded that the mother in her claim for equi table relief placed reliance upon her fraudulent conduct in any direct or neceuary way, Thi purchase of the house did not of itself involve any fraud and the relevance of the illegal purpose, which was at the time of the purchase yet to be carried into effect, was at most to explain why the purchase did not constitute a gift to the children. The amount of the subsidy paid asa result of the mother’s fraud is recoverable by the Commonwealth so that the mother cannot, without qualification, be said to be entitled to the benefit of having carried out her illegal purpose.
I would allow the appeal and make the declarations and order sought by the mother and son. The mother is, on the view which I have expressed, entitled to the relief which she seeks andI see no reason to place conditions upon granting it..
McHughJ: …
The Wide Principle and the Bowmakers Rule
I think that the majority speeches in the House of Lords in Tinsley were correct in denying the existence of the ‘wide principle’. I doubt that Lord Eldon intended to lay downa rule to the effect that, if the purpose of a transaction was to defeat the operation of an Act of Parliament, equity would always refuse its remedies to a person who had panicipated in that transaction. It is true that, in Muckleston v. Brown,9 Curtis v, Perry,1 Cottington v. Fletd1er11 and other cases,
the judges of the Court of Chancery were pealing with trusts and agreements whose objects were to defeat the operation of Acts of Parliament and that they concluded that those trusts and agreements were not enforceable in equity. But that was obviously because, in the circum stances of those cases, the policy of the Acts required the courts to firmly suppress the use of trusts and agreements to avoid the operation of the legislation. Those decisions say nothing about legislation whose policy does not require such drastic remedies, Nor do they requirea court of equity to disregard a circumstance that affects the real justice of the case and calls for the assistance of equitable remedies. It would be out of character for a court of equity to do so.
In Lord Stowell’s words: ‘A Coun of Equity … looks to every connected circumstance that ought to influence its determination upon the real justice of the case.•iz
With great respect to the view expressed by Lord Goff in Ti,ulty, I do not think that the clean hands doctrine constitutes or provides a sound basis for a special rule in equity. The ille gality principle is one of general application; it is not limited to proceedings in equity. To say that in the equitable context it derives from the clean hands doctrine is 10 wrongly deny its con ceptual links to the rule as it is applied in other areas. Funher, it fails to recognise that the ratio nale for the two doctrines is distinct: the clean hands doctrine arises from the relationship between the parties to the proceedings, the illegality doctrine derives from public policy con siderations. Accordingly, the majority of the House of Lords in Tinslty were correct in rejecting the ‘wide principle’ as governing cases of illegality in equity. But that said,I do not think that this Court should adopt the majority’s rule that a claimant cannot obtain relief in any court if that person must plead or rely on illegal conduct
The Bowmakers Rule
A doctrine of illegality that depends upon the state of the pleadings or the need to rely ona transaction that has an unlawful purpose is neither satisfactory nor soundly based in legal pol icy. The results produced by such a doctrine are essentially random and produce windfall gains as well as losses, even when the parties are in pari delicto. To demonstrate the random nature of the assignment of substantive relief under the Bo.,,,,,.ltm rule approved by the majority in Tinsley one has only to consider the application of that rule to the circumstances of the present case. If the rule were applied in this case, the determining factor would be whethera presumption of advancement arose. Only if it did, would Mrs Nelson need to answer the pre sumption of a resulting trust and rely on her illegal purpose. If the presumption of advance ment did not arise, there would be no need to rely on the illegal purpose to rebut the presumption and the result would be the reverse. Thus, if Mrs Nelson had had the property placed in the name of a friend or relative–or anybody other than her children–she could recover the proceeds of the sale of the Bent Street propeny, notwithstanding her illegal purpose.
The …. rule has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation. Regard is had only to the procedural issue; and it is that issue and not the pol icy of the legislation or the merits of the parties which determines the outcome. Basing the grant of legal remedies on an essentially procedural criterion which has nothing to do with the equitable positions of the parties or the policy of the legislation is unsatisfactory, particularly when implementing a doctrine that is founded on public policy. In Tinsley, Lord Goff recognised the perverse nature of the rule adopted by the minority in that case in words that apply equally to the BoT1Jfflakers rule adopted by the majority judges. Lord Goff said:13
‘It is important to observe that the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation.’
At least the position of the minority in Tinsley had the vinue that the indiscriminate nature of the rule which they adopted did not depend on procedural issues.
The policy justification for the rule adopted in the minority speeches in Tinsley is that the harsh and indiscriminate nature of the rule will deter people from entering into unlawful agree ments and trusts because they know that the courts will not provide them with equitable relief. Whether the rule adopted by the minority would be an effective deterrent is debatable. However, the notion of deterrence seems a weak argument to justify the BoT1Jfflaltm rule
adopted by the majority in Tinsley. The defendant in Tinsley, for example, succeeded in recov ering her property notwithstanding the unlawful purpose for which she transferred the prop erty. Moreover, while the B011Jtnakers rule may impose severe losses on those who are forced to rely on the illegality, it also gives windfall gains to those who rely on the defence of illegality, In so far as the Bo”ll)makers rule is a deterrent, it is also an incentive to illegality becauae it encourages those to whom property is conveyed to encourage transferors to carry out their unlawful purpose.
Furthermore, even if this random process of assigning losses and gains without regard to the substantive equities of a dispute is a disincentive to those who might enter illegal tranllCtiona, it does not follow that the Bowmalters rule is the most efficient rule to procect the community against the making of trusts and agreements for unlawful purposes. There are other naltl that could achieve the same goals of legal policy through a less extreme and a more jlllt pl’OONI,
A final criticism of the Boum,akers rule adopted by the majority in Tinsley is that i would defeat the intention of the legislature. Parliament almost invariably provides mechanisms dealing with breaches of its laws. Those mechanisms sometimes include a provillon that unlawful and unenforceable an agreement that defeats or evades the operation a law. If a particular enactment does not contain such a provision, the prima fide
be drawn is that Parliament regarded the sanctions and remedies contained In dll sufficient to deter illegal conduct and saw no need to take the drastic ol forceable an agreement or trust that defeats the purpose of the enactment. I
The Present Need for the Doctrine of Illegality
The doctrine of illegality expounded in Holman was formulated in a society that was vastly different from that which exists today. It was a society that was much less regulated. With the rapid expansion of regulation, it is undeniable that the legal environment in which the doctrine of illegality operates has changed. The underlying policy of Holman is still valid today-the courts must not condone or assist a breach of statute, nor must they help to frustrate the oper
ation15ofa statute. As Mason J put it in Yango Pastoral Co. Pty. Ltd v. First Chicago Australia Ltd, the courts must not ‘be instrumental in offering an inducement to crime or removinga
restraint to crime’. However, the Holman rule, stated in the bald dictum: ‘No court will lend its aid toa man who founds his cause of action upon an immoral or an illegalact’16 is too extreme and inflexible to represent sound legal policy in the late 20th century even when account is taken of the recognised exceptions to this dictum.
One of the most significant reasons for adopting a less rigid approach to illegality than the bald dictum in Holman or, for that matter, the Bowmaleers rule adopted in Tinsley is that stat utory illegality can arise in a number of different ways.17 First, the statute may directly prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or h-ust but the contract or trust may be associ ated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful the manner in which an otherwise lawful contract or trust is car riedout. It would be surprising if sound legal poJicy required each of these forms of illegality
to be treated in the same way. There is, for example, a vast difference between the performance ofa contract for carriage of goods by ship that is overloaded in breach of the law and the mak
ing ofa contract for the carriage of goods where the making of the contract is specifically pro- hibited.18 ‘
It is worth noting the approach in the cases in the Engljsh Court of Appeal whlch preceded, and were rejected by, the decision in Tinsley v. Milligan and which soughta less rigid and dog matic approach to illegality than is found in the Holman dictum.
… This approach confers a broad judicial discretion upon the judge to determine whether the grant of relief would affront ‘the public conscience’. While it provides a ready means for a judge to do what he or she thinks is just in the circumstances of the particular case, it does so by means of an unstructured discretion. The so called ‘public conscience’ test, although proyjding a flex ible approach, leaves the matter at large. Greater cerwnty in the application of the illegality doctrine will be achieved if the courts apply principles instead of a vague standard such as the ‘public conscience’. But what principles, consistent with the public policy underpinnings of the doctrine of illegality, should the courts apply?
If courts withhold relief because of an illegal transaction, they necessarily impose a sanction on one of the parties to that transaction, a sanction that will deprive one party of his or her prop erty rights and effectively vest them in another person who will almost always be a willing par ticipant in the illegality. Leaving aside cases where the statute makes rights arising out of the transaction unenforceable in all circumstances, such a sanction can only be justified if two con ditions are met.
…..
‘These authorities seem to me to establish that when applying the “ex turpi causa” maxim ina case in which a defence of illegality has been raised, the court should keep in mind that the underlying principle is the =lied public conscience test. The court must weigh, or balance, the adverse consequences of granting relief against the adverse conse quences of refusing relief. The ultimate decision calls for a value judgment. The detailed
principles summarised by Kerr LJ in the Euro-Diam case,23 and distinctions such as that between causes of action which arise directly ex turpi causa and causes of action to which the unlawful conduct is incidental, are valuable as guidelines. But they are no more than
guidelines. Their value and justification lie in the practical assistance they give to the courts by focusing attention on particular features which are material in carrying out the balancing exercise in different types of cases.’
. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially ilisclose an intention that the only sanctions.for breach·ofthe statute or its policy are to be those specifically provided for in the legislation.
Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equi table rights simply because they arose out of or were associated with an unlawful purpote unless: · ·
(a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or
(b)
(i) the sanction of refusing to enforce those rights is not disproportionate to the seriosusness of the unlawful conduct;
(ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and
(iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statue or or the frustration of its policies.
Cowern v. Nield
[1912] 2 KB 419
Phillinlore J: I am satisfied from the authorities which have been cited to us that the only contracts which, if for the infant’s benefit, are enforceable against him are contracts relating to the infant’s person, such as contracts for necessaries, food, clothing, and lodging, contracts of marriage, and contracts of apprenticeship and service. In my opinion a trading contract does not come within that category….Infants are not liable ex contractu, except in the casesI
have mentioned, but they always have been liable ex delicto. If an infant has acquired personal property to which he has no title an action of trover or detinue will lie against him, and in Bristow v. Eastman,1 which was an action against an infant for money had and received which he had embezzled, and which has, I think, an important bearing on the present case, Lord Kenyon said that ‘he was of opinion that infancy was no defence to the action; that infants were liable to actions ex dclicto, though not ex contractu; and though the present;action was in: its forin an action of the latter description, yet is was of the former in point of substance.’ That proposition shews that an action for money had and received can be maintained against an infant if the substance of the action is that the infant has obtained the money ex delicto. If, therefore, the plaintiff can prove in the present case that the defendant obtained his money by fraud the action can be maintained.
Stocks v. Wilson
[1913] 2 KB 235,
Lush J.: .. The next question, which is the one that has caused me some difficulty, is whether under the peculiar circumstances of this case the pla,intiff has a claim for equitable relief, and if so to what amount. That an infant who appears to be of full age, and who has made an express representation that he is of full age fraudulently and to deceive some other person, incurs an equitable liability under some circumstances is clear enourh. He cannot be sued for damages although he is generally speaking liable for a tort; the reason being that a temptation wouJd be offered both to the infant himself and to other persons to enter into contracts if the other party were able by obtaining a representation of majority by the infant to make the contract practically effective. For the more complete protection of the infant, the law prevents the other con tracting party not only from suing on the contract, but also from suing for damages, if the fraud is connected with and forms the inducement to the contract. Nor is the infant estopped from proving the true facts, which again, if such an estoppel were permitted, would deprive the infant of the protection necessary for his security. What the Court of Equity has done in cases of this kind is to prevent the infant from retaining the benefit of what he has obtained by reason of his fraud. It has done no more than this, and this is a very different thing from making him liable to pay damages or compensation for the loss of the other party’s bargain. If the infant has obtained property by fraud he can be compelled to restore it; if he has obtained money he can be compelled to refundit. Ifhe has not obtained either, but has only purported to bind himself by an obligation to transfer property or to pay money, neither in a Court of law nora Coun of Equity can he be compelled to make good his promise or to make satisfaction for its breach.
[
NowI am of opinion that she has a remedy, The jurisdiction which the Court exercises is not onlya jurisdiction over the property which the infant has acquired by his fraud, but also an infant has wrongfully sold the property which he acquired by a fraudulent misrepresenta tion as to his age, he must at all events account for the proceeds to the party he has defrauded. I can see no logical ground on which he can be allowed to resist such a claim in that case, ifhe is accountable for the money itself in a case where he has obtained money and not goods by means of a like fraud. It is not necessary for me to decide more than this in the present case because, assuming that an infant, who has wrongfully obtained goods in the way in which this defendant obtained them, and who wrongfully parts with them either as a gift or at an under value, must account for their real value, I must hold on the facts of this case that the defendant is only bound to account for what he aetually received, for the following reason: Some of the goods, as I have said, he sold for 30/., and I have no evidence to lead me to say that they were sold for too little. As to the remainder he gave a bill of sale over them which was assented to and even arranged by the plaintiff acting through Arthur St. Claire Stocks, her agent, It was, I think, known to all the parties to be very problematical whether the defendant would be able,
and in fact he has been unable, to redeem the goods. The adnnce made by the bill of sale holder was of course much less than the value of the goods (the jury found that the value of the whole collection was 300/,); but I do not think that under these circumstances the plaintiff ought to be permitted to say that the defendant should account for the aetual value or to say that the defendant obtained any other benefit from his fraud than the moneys he actually received. The defendant did not, except as to the 30/. worth of goods, wrongfully part with the goods at all; on the contrary, the plaintiff through her agent assented to his putting it out of his power to restore them, and she cannot therefore complain that he is not in a position to do so. There was a dispute as to whether the plaintiff’s agent, Arthur St. Claire Stocks received some of the mon eys advanced to the defendant by the bill of sale holder. It has been left to me to decide the amount for which the defendant is liable, and I accept, as the jury accepted, the evidence of Arthur St. Claire Stocks in preference to that of the defendant, and find that he did not receive any part of the money as alleged. The defendant received the benefit of the whole of the: advance, the plaintiff herself providing part of the money, namely, 50/. What the total advance was I am not clear and, if necessary, I must take an account in order to ascertain it, but no doubt
the parties will be able to agree the figures. For this sum, to which the 30/. for what was sold must be added, I hold the defendant liable.
R. Leslie Ltd. v. Sheill
[1914) 3 KB 607,
Lord Sumner: … To the claim for return of the principal moneys paid to the infant under the contract that failed, as money had and received to the plaintiffs’ use, there are at lest two answers: the infancy itself was an answer before 1874 at common law, and the Infants’ Relief Act, 1874, is an answer now. An action for money had and received against an infant has been sustained, where in substance the cause of action was ex delicto: Bristow v. Eastman,1 approved before 1874 in In re Seager,2 and cited without disapproval in Cowem v. Nield.3 Even this has been doubted, but where the substance of the cause of action is contractual, it is certainly other wise. To money had and received and other indebitatus counts infancy was a defence just as to any other action in contract: Alton v. Midland Ry. Co.,per WillesJ;4 In re Jones,per Jessel MR;5 Dicey on Parties, 284; Bullen and Leake’s Precedents of Pleadings, 3rd edn., 605. Further, under the statute the principle, which at common law relieved an infant from liability for a tort directly connected with a voidable contract, namely, that it was impossible to enforce in a roundabout way an unenforceable contract, equally forbids Courts of law to allow, under the name of an implied contract or in the form of an action quasi ex rontractu, a proceeding to enforce part of a contract, which the statute de<;lares to be wholly void. This has been recently illustrated in the closely analogous case of a claii’n on the footing of money had and received for moneys paid but irrecoverable under what in law was a lending and borrowing ultra vires: Sinclair v. Brougham.6
The ground on which Horridge J held the appellant liable was that by reason of his fraud he was compellable in equity to repay the money, actually received and professedly borrowed, and compellable too by a judgment in personam for the amount, not by any mere proprietary rem edy. [He then co,uidered the development of the “ile in equity and continued:] I think that the whole current of decisions down to 1913, apart from dicta which are inconclusive, went to shew that, when an infant obtained an advantage by falsely stating himself to be of full age, equity required him to restore his ill-gotten gains, or to release the party deceived from obligations or acts in law induced by the fraud, but scrupulously stopped short of enforcing against him a contrac tual obligation, entered into while he was an infant, even by means of a fraud. This applies even to In re King, Er parte Unity Joint Stock Mutual Banking Association.7 Restitution stopped where repayment began; as Kindersley V-C puts it in Vaughan v. Vantkrsttgen,8 an analogous case, ‘you take the property to pay the debt.’
Last year, in Stocks v. Wilson,an infant, who had obtained furniture from the plaintiff by falsely stating that he was of age and had sold part of it for 30/., was personally adjudged by Lush J to pay this 301. as part of the relief granted to the plaintiff. This is the case which more than any other influenced Horridge J in the Court below. I think it is plain that Lush J conceived himself to be merely applying the equitable principle of restitution. The form of the claim was that, by way of equitable relief, the infant should be ordered to pay the reasonable value of the goods, which he could not restore because he had sold them. The argument was that equity would not allow him to keep the goods and not pay for them, that if he kept the property he must discharge the burthen, and that he could not better his position by having put it out of his power to give up the property. LushJ expressly says ‘it is a jurisdiction to compel the infant to make satisfaction,’ and, at 246, ‘the remedy is not on the contract.’ At 242-3 he says ‘what the Court of Equity has done in cases of this kind is to prevent the infant from retain ing the benefit of what he has obtained by reason of his fraud. It has done no more than this, and this is a very different thing from making him liable to pay damages and compensation for the loss of the other party’s bargain. If the infant has obtained property by fraud he can be compelled to restore it’; butnow comes the proposition, which applies to the present case and is open to challenge, ‘if he has obtained money he can be compelled to refund it.’ The learned judge thought that the fundamental principle in In re King, Ex parte Unity JQint Stock Mutual Banking AssQciation was a liability to account for the money obtained by the fraudulent repre sentation, and that in the case before him there must be a similar liability to account for the pro ceeds of the sale oftbe goods obtained by this fraud. If this be his ratio decidendi, thoughI have difficulty in seeing what liability to account there can be (and certainly none is named in In re King, Ex parte Unity Joint Srock Mut11al Banking Association), the decision in Stocks v. Wilson is distinguishable from the present case and is independent of the above dictum, andI need expre,s no opinion about it. In the present case there is clearly no accounting. There is no fidu ciary relation: the money was paid over in order to be used as the defendant’s own and he has so used it and, Isuppose, spent it. There is no question of tracing it, no possibility of restoring the very thing got by the fraud, nothing but compulsion through a personal judgment to pay an equivalent sum out of his present or future resources, in a word nothing buta judgment in debt to repay the loan. I think this would be nothing but enforcing a void contract. So far asI can find, the Court of Chancery never would have enforced any liability under circumstances like the present, any more than a Court of law would have done so, andI think that no ground can be found for the present judgment, which would be an answer to the Infants’ Relief Act.
Commerzbank Ag v Price-Jones
[2003] EWCA Civ 1663
Lord Justice Mummery :
The Appeal
T
Change of Position and Disenrichment: the Law
As the Bank mistakenly made an overpayment of £250,000 to Mr Price-Jones on 15 December 2000 it is entitled to restitution of that sum, unless Mr Price-Jones can establish that his position so changed that it is inequitable in all the circumstances to require him to make full restitution to the Bank.
In Lipkin Gorman v. Karpnale Ltd [1991] 2 AC Lord Goff said that
” …Where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution… [at p. 579f]….
At present I do not wish to state the principle any less broadly than this: the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full.[ at p.580f]
Lord Goff added that it was not appropriate to “attempt to identify all those actions in restitution to which change of position may be a defence” and that “nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way.”
Since Lord Goff first formulated his great principle there have been other cases and a considerable body of academic writing, this being an area in which legal scholars have been very active and influential in recent years: see the judgments in Philip Collins Limited v. Davis [2000] 3 All ER 808; Scottish Equitable v. Derby [2001] 3 All ER 818; National Westminster Bank v. Somer International (UK) Limited [2002] 3 WLR 64; Dextra Bank and Trust Co Limited v. Bank of Jamaica [2002] 1 All ER (Comm) 193; and Niru Battery Manufacturing Co & anor v. Milestone Trading Limited & ors [2003] EWCA Civ 1446; and the commentaries in Goff & Jones The Law of Restitution (6th ed), Professor Andrew Burrows The Law of Restitution (2nd ed) (2002) and Professor Peter Birks, Unjust Enrichment (2003).
The scope of the defence is slowly taking shape. The decided cases steer a cautious course, aiming to avoid the dangers of a diffuse discretion and the restrictions of rigid rules.
Applying the current state of the case law to the facts found by the Deputy Judge, I am unable to agree with him that a defence is available to Mr Price-Jones in respect of the mistaken overpayment of £250,000 on 15 December 2000. He has not been disenriched. His position has not so changed as to make it inequitable in all the circumstances for him to repay the full amount of the overpayment
The Facts of the Defence
The relevant facts found by the Deputy Judge were based on his acceptance of the evidence of Mr Price-Jones, whom he regarded as a reliable witness. He reached two important conclusions on that evidence:
(1) Mr Price–Jones decided “to stay at the Bank as a result of 29th June 2000 letter and his understanding of it.” The letter “caused Mr Price–Jones to change his position.”
(2) If, in late June 2000, Mr Price–Jones had “decided to leave the Bank, he stood a very good chance of obtaining similar employment elsewhere.” Reference was made to his profile in the market and to the buoyant nature of the market in which he was working “in a vogue area.”
The Deputy Judge added that a detriment was suffered “notwithstanding the fact that there may have been no actual reduction of his assets.” It was of the kind falling within the broad category envisaged by Lord Goff in Lipkin Gorman. He explained his conclusions by reference to (a) the high opinion that Mr Price-Jones had of himself, which was encouraged by the Bank; (b) the fact that he was working in a key job in a specialist area when the investment banking business was still buoyant; (c) the belief formed by Mr Price-Jones that the 29 June 2000 package “as intended by the Bank” was a disincentive to stay, as £15,000 was in the scheme of things a very small sum and the postponement of £250,000 by three months was a significant detriment, which together “sent a signal” that he was not well regarded by the Bank; and (d) his belief that the merger had changed everything.
“[4]..…..As he put it, he had joined in peace time but it was now war. Accordingly, the existing compensation that had appeared generous in February 2000 was no longer so generous in June 2000 when merger talks were in the air. Mr Price-Jones would have been willing to forego the financial benefits of staying with the Bank in exchange for the certainty of employment and career development elsewhere. He expected that the benefits elsewhere would match those that he received from the Bank, but even if they did not he would nevertheless have been willing to accept a slightly lesser sum for the certainty of continued employment.
[5] Mr Price-Jones’ self regard is such that I have no doubt that he believed he would be able to obtain a similar job elsewhere.
I have no hesitation in finding that, if it had not been for 29th June 2000 letter, Mr Price-Jones would have taken steps in late June 2000 to seek employment with another investment Bank.
Three Points Discussed
A. Chronology
The first point is chronological. The change of position proposed by Mr Price-Jones occurred before the overpayment of £250,000 was received by him on 15 December 2000. In general and in practice a relevant change of position is more likely to occur after receipt of the overpayment. For example, a person receives payment in good faith and then spends it, gives it away, or loses it. Depending on the particular circumstances it can be said that the recipient has, to borrow the expression used by Professor Birks and Professor Burrows, suffered disenrichment, so as to make it inequitable to require restitution.
In this case the change of position pleaded by Mr Price-Jones was his decision not to move from the Bank. His decision was made after the letter of 29 June 2000, but before he received the £250,000 in December 2000. He made the decision in the mistaken belief that he would be entitled to receive two guaranteed bonuses totalling £515,000 for the performance year 2000. The additional lock-in payment of £265,000 sent him a signal that he was a valued employee. If, however, he would only be entitled to an additional bonus of £15,000 paid three months later than was originally agreed, that would have sent a signal to him from the Bank that he was not well regarded and so he would not have stayed.
In my judgment, the mere reversal of the normal order of events does not affect the availability of the defence. As was held by the Judicial Committee of the Privy Council in the Dextra Bank case at p.204, the question whether it would be inequitable to require restitution can arise in cases of “anticipatory reliance” where a recipient of an overpayment has already changed his position in good faith in the expectation of receiving a future benefit.
B.Change
The second point is whether there was, on the findings of fact made by the Deputy Judge, any relevant disenrichment or change of position on the part of Mr Price-Jones. It was for him to establish that, in all the circumstances, it would be inequitable to require him to make restitution. The obvious cases occur where there has been a reduction in the assets of the recipient of the overpayment. In those cases he must prove that there has been a reduction of assets, although it is unnecessary for him to produce precise financial calculations quantifying the amount of the reduction. Lord Goff did not, however, restrict the scope of the defence to cases in which there has been a reduction of assets. The defence would also be available, in my view, in various employment situations in which the recipient has made a relevant change of position as a result of the mistaken payment to him: for example, by giving up his current job to lead a life of leisure in circumstances where it would be difficult to find another job, or by turning down a firm offer of a better paid job.
In my judgment, however, it is not inequitable to require Mr Price-Jones in his circumstances to make restitution to the Bank of the full amount of the overpayment. There has been no disenrichment. He has still got the money. He has not spent it, given it away, or lost it. The fact that, but for his expectation of a very large additional bonus, he would have decided to seek similar employment elsewhere is not sufficiently significant, precise or substantial in extent to be treated as a change of his position, which would make full restitution inequitable. Even though the Deputy Judge found that he had a “very good chance of obtaining similar employment elsewhere”, his decision not to seek such employment falls outside the scope of the defence
C. Causation
On the facts of this case the defence runs into difficulties on another front. According to the cases the defence is not available to Mr Price-Jones unless he can show that there is a sufficient “causal link” between the change of position by him and the actual or anticipated payment under a mistake.
Mr Price-Jones’ case was that, but for his expectation of an additional bonus of £265,000 under the letter of 29 June, he would not have remained at the Bank and would have taken steps to seek employment with another investment bank. A bonus package of the kind intended by the Bank would have sent him a signal that he was not well regarded and so he would not have stayed. In those respects, it was contended, there was sufficient causal link entitling him to succeed in his defence.
There was discussion during oral argument about the approach to causation in cases of change of position. In my judgment, it is neither necessary nor desirable to carry across to the issue whether it is inequitable to require restitution and to impose on it all the mass of learning on causation questions generated by the cases on the recoverability of damages for tort. Change of position is based on a principle of justice. It is a broad defence to a claim for restitution, which is itself based on a broad principle of unjust enrichment. In deciding whether the particular circumstances render it inequitable to require the recipient of an overpayment to make full restitution, the need for a sufficient causal link should not be narrowly applied. The important point is that there should be a relevant connection between the change of position and the actual or anticipated payment. As was said by Jonathan Parker J in the Philip Collins case at p. 827 the change of position must in some way be “referable to” the actual or anticipated payment of money by which the recipient is enriched.
On the facts of this case there was no relevant connection between Mr Price-Jones’s decision to remain at the Bank and payment of the bonus actually promised by the Bank in the letter of 29 June 2000 for the performance year 2000. The true position is that Mr Price-Jones’s decision to stay at the Bank was not connected with what the Bank actually promised to pay him. It was based on his erroneous belief, for which the Bank was not responsible, that he would in the future receive two guaranteed bonus payments for the performance year 2000 and on a belief that the bonus package, as intended by the Bank, would send him a signal that he was not well regarded by the Bank.
Result
To sum up, Mr Price-Jones was unjustly enriched. There can be no doubt about that. He received £250,000 to which he was not entitled. The payment was a mistake. He has still got the money. There is no obstacle to repaying it. He has not been disenriched. A just man would recognise that it was unjust to keep it and that he ought to repay it. He would not rely on his decision at the end of June 2000 to remain with the Bank as making it inequitable to repay. That decision did not have a significant, precise or substantial adverse impact on him nor was it connected in a relevant way with the payment actually promised by the Bank at that time. His decision did not stem from the actual payment of the bonus or from the actual promise of payment. It stemmed from his erroneous belief that the Bank was promising to make two very large minimum guaranteed bonus payments for one performance year and that, in the absence of the additional bonus, the Bank would have sent a signal that he was not well regarded. That belief and the circumstances in which he formed it do not make it inequitable to require him to repay the money. I would allow the appeal.
Lord Justice Sedley
I agree.
Mr Justice Munby :
I agree with my Lord. I add some words of my own only because in one of its aspects this case raises important points of principle in relation to the still developing doctrine of change of position as a defence to a claim in restitution. I am emboldened to do so, in particular, because the very interesting arguments we have heard have tended at times to assume an approach as to how the law in this field should develop which I am not sure is either very helpful or indeed very desirable.
I start with a general point. Mr Hollander quite properly took us to Robert Walker LJ’s endorsement in Scottish Equitable plc v Derby [2001] EWCA Civ 369, [2001] 3 All ER 818, at para [34], of the point made by Professor Burrows (see now Burrows, The Law of Restitution (ed 2, 2002) p 514) that the defence of change of position should not “disintegrate into a case by case discretionary analysis of the justice of individual facts, far removed from principle”. In a field of law which has benefited more than most from much distinguished academic and other non–judicial writings it would be churlish not to acknowledge the huge debt we all owe to those whom Megarry J once described (Cordell v Second Clanfield Properties Ltd [1969] 2 Ch 9 at p 17A) as “fertilisers of thought”. But if I may be permitted to say so, we need to be on our guard against over–refined analysis which may look all very well on the scholar’s page but which may seem less convincing when exposed to “the purifying ordeal of skilled argument on the specific facts of a contested case.” I agree entirely with Robert Walker LJ when he said that “the court must proceed on the basis of principle, not sympathy”. But so long as we always keep the fundamental principles in mind this does not entail that we should allow ourselves to be beguiled into over subtle or over complicated attempts to refine or elaborate what is, after all, intended to be a broadly stated concept of practical justice. This is an area, it seems to me, in which technicality and black–letter law are to be avoided.
What are the fundamental principles? The starting point is obviously the speech of Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. The key passages have already been set out by my Lord but they bear repeating. They need to be read in the context of what Lord Goff had earlier said at p 578D:
“The claim for money had and received is not … founded upon any wrong committed by the club against the solicitors. But it does not … follow that the court has carte blanche to reject the solicitors’ claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle.”
The classic statements of principle follow at pp 579E and 580F:
“why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution … the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full.”
Lord Goff prefaced his statement of principle with these important words: “At present I do not wish to state the principle any less broadly than this”. Quite clearly, as it seems to me, Lord Goff saw his statement of principle as sufficiently meeting the standard of adequately defined legal principle.
The other important observation by Lord Goff that needs to be kept in mind was his emphatic statement at p 580C:
“I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way.”
Lord Bridge of Harwich said much the same thing at p 558H:
“I agree with my noble and learned friend, Lord Goff of Chieveley, that … in expressly acknowledging the availability of this defence for the first time it would be unwise to attempt to define its scope in abstract terms, but better to allow the law on the subject to develop on a case by case basis.”
Some ten years later that same approach still commended itself to the Judicial Committee of the Privy Council. In Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193 at para [36] Lord Bingham of Cornhill and Lord Goff of Chieveley referred with approval in their joint judgment to the fact that in Lipkin Gorman the House of Lords:
“appears to have adopted a broad approach based on practical justice, and to have avoided technicality”.
They went on at para [38] to say that:
“The defence should be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full.”
The focus of debate is accordingly to identify whether in the particular case it would in all the circumstances be an “injustice” or “inequitable” to require the overpaid recipient to make restitution of that which the payer is prima facie entitled to recover as of right. That is not, with all respect to those who might suggest otherwise, an exercise in judicial discretion. It is an exercise in judicial evaluation. The judge is required to make a value judgment in the light of all the relevant circumstances. And there is nothing particularly difficult or unusual about this. It is an exercise of a type familiar in many different areas of both law and more particularly equity. The pages of Snell’s Equity are replete with examples of situations where the essential question for the court is whether someone’s conduct has been, or whether some outcome would be, equitable or inequitable.
Now there may be advantage in the courts identifying on a case by case basis matters which are not determinative of the question or identifying on a case by case basis matters which do not have to be established in order to make good the defence of change of position. An important and beneficial application of that approach can be seen in this court’s acceptance in the Scottish Equitable case at paras [30]–[32] of the ‘wide’ in preference to the ‘narrow’ version of the defence (as to which see Burrows at pp 513–516). I respectfully agree that the wide version is to be preferred. The consequence is that, as a matter of law, the defence of change of position is not dependent upon proof of some representation by the payer, nor is it dependent upon proof of any detrimental reliance on the part of the payee. There will, no doubt, be certain factual circumstances where absent proof of detrimental reliance it will be unlikely, or perhaps even impossible, for the defence to be made out. But that is a long way from saying, and there is in law no warrant at all for saying, that proof of detrimental reliance is a prerequisite to making good a defence of change of position. Another example of this same approach can be seen in the rejection in the Dextra Bank case at para [45] of the concept of ‘relative fault’ in this branch of the law. In this context, as the Privy Council pointed out, good faith on the part of the recipient is sufficient.
What, though, is much more questionable, however tempting the exercise may seem, is to seek to define, in more qualified or restrictive terms than those used by Lord Goff, the requirements which, so it may be said, have to be established if the defence is to be made good. And there is, if I may say so, particular danger in seeking to elevate into general principles of law what are in truth no more than the particular factors which, in the particular circumstances of a specific case, have been judicially identified as more or less significant in leading to the conclusion that the defence in that case either is or is not made out.
We need, if I may say so, always to bear in mind that, at the end of the day, the simple question that has to be asked in every case, and in the final analysis it is the only potentially determinative question that ever has to be asked, is this: Has the position of the payee so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full? That is the test formulated by Lord Goff in the Lipkin Gorman case and reaffirmed by Lords Bingham and Goff in the Dextra Bank case. There is, in my judgment, no need to gloss or refine it. Indeed any attempt to do so is likely to be not merely unnecessary but fraught with potential difficulty.
This takes me to the first of the four specific points that I wish to make. It relates to the question of causation.
Our attention was drawn to the statement by Jonathan Parker J in Philip Collins Ltd v Davis [2000] 3 All ER 808 at p 827f that “there must be a causal link between the change of position and the overpayment.” And some emphasis was placed on the fact that in the Scottish Equitable case Robert Walker LJ referred no fewer than three times (at paras [30]–[32]) to the need to show a sufficient causal link. I have no particular difficulty with the general principle that some such kind of causal link has to be shown, though I note that there is no reference to any such requirement in Lord Goff’s statement of principle. But I should be very concerned to see this translated into a dogmatic legal rule, let alone into a legal analysis of the principles of causation of the kind that already bedevils too many areas of the common law or into a theoretical debate as to what particular test of cause and effect is appropriate or what particular kind of causal link has to be established.
For my own part I much prefer the way in which Jonathan Parker J put it in the Philip Collins case when, at p 827h, he said that the “change of position … must, on the evidence, be referable in some way to the payment of [the] money.” This is an approach familiar to any equity lawyer. It is the approach which we see in relation to the maxim that ‘he who comes into equity must come with clean hands’, where what has to be shown is misconduct which has “an immediate and necessary relation to the equity sued for”: see Snell’s Equity (ed 30) para 3–15 citing Eyre LCB in Dering v Earl of Winchelsea (1787) 1 Cox Eq 318 at p 319. And it is the approach which we see in the requirement of the doctrine of part performance that the acts of part performance relied upon must be “referable” to the contract sued on: see Snell at para 40–38 referring to the classic statement of principle by Lord Selborne LC in Maddison v Alderson (1883) 8 App Cas 467 at p 479. As my Lord has said (and the phrase captures the same essential concept) the important point is that there should be a relevant connection between the change of position and the actual or anticipated payment.
My second point relates to the much debated question of whether an anticipatory change of position can be a good defence to a restitutionary claim. In South Tyneside Metropolitan BC v Svenska International plc [1995] 1 All ER 545, Clarke J, following Hobhouse J in Kleinwort Benson Ltd v South Tyneside Metropolitan BC [1994] 4 All ER 972, said at p 565e that
“save perhaps in exceptional circumstances, the defence of change of position is in principle confined to changes which take place after receipt of the money … It does not however follow that the defence of change of position can never succeed where the alleged change occurs before the receipt of the money.”
Following on from this, Jonathan Parker J suggested in the Philip Collins case at p 827g that
“whether or not a change of position may be anticipatory, it must … have been made as a consequence of the receipt of, or (it may be) the prospect of receiving, the money sought to be recovered.”
Now with all respect this might be thought not to be particularly clear. And Clarke J’s reference to “exceptional circumstances” is potentially an invitation to the over–analytical to develop what is surely an entirely unnecessary jurisprudence of what can or cannot be an exceptional circumstance – a jurisprudence which, if allowed to flourish, would likely serve only to distract attention away from the true question identified by Lord Goff.
Clarke J’s decision was criticised in Goff & Jones, The Law of Restitution (ed 5, 1998) pp 822–824, criticisms repeated in the following edition (ed 6, 2002) para 40–004. By then, the Privy Council had decided the Dextra Bank case. Lord Bingham and Lord Goff in their joint judgment said this:
“[37] The response by the BOJ to Dextra’s argument has been that it is no less inequitable to require a defendant to make restitution in full when he has bona fide changed his position in the expectation of receiving a benefit which he in fact receives than it is when he has done so after having received that benefit. Of course, in all these cases the defendant will ex hypothesi have received the benefit, because the context is an action by the plaintiff seeking restitution in respect of that benefit. For those who support the distinction, however, their reply appears to be that, whereas change of position on the faith of an actual receipt should be protected because of the importance of upholding the security of receipts, the same is not true of a change of position in reliance on an expected payment, which does not merit protection beyond that conferred by the law of contract (including promissory estoppel).
[38] Their Lordships confess that they find that reply unconvincing. Here what is in issue is the justice or injustice of enforcing a restitutionary claim in respect of a benefit conferred. In that context, it is difficult to see what relevant distinction can be drawn between (1) a case in which the defendant expends on some extraordinary expenditure all or part of a sum of money which he has received from the plaintiff, and (2) one in which the defendant incurs such expenditure in the expectation that he will receive the sum of money from the plaintiff, which he does in fact receive. Since ex hypothesi the defendant will in fact have received the expected payment, there is no question of the defendant using the defence of change of position to enforce, directly or indirectly, a claim to that money. It is surely no abuse of language to say, in the second case as in the first, that the defendant has incurred the expenditure in reliance on the plaintiff’s payment or, as is sometimes said, on the faith of the payment. It is true that, in the second case, the defendant relied on the payment being made to him in the future (as well as relying on such payment, when made, being a valid payment); but, provided that his change of position was in good faith, it should provide, pro tanto at least, a good defence because it would be inequitable to require the defendant to make restitution, or to make restitution in full. In particular it does not, in their Lordships’ opinion, assist to rationalise the defence of change of position as concerned to protect security of receipts and then to derive from that rationalisation a limitation on the defence. The defence should be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full. In any event, since (as previously stated) the context of a restitutionary action requires that the expected payment has in any event been received by the defendant, giving effect to ‘anticipatory reliance’ in that context will indeed operate to protect the security of an actual receipt.”
Mr Hollander sought to explain – in truth he sought to explain away – the decision in the Dextra Bank case on the basis that the anticipatory change of position and the subsequent receipt were so close together in point of time that they could really be treated as part and parcel of one transaction. He sought to persuade us that no anticipatory change of position could be relied on unless it formed part of the res gestae. This, with all respect to him, will not do. It is not what the Privy Council said: it is in fact, as it seems to me, quite inconsistent with the emphatic rejection by Lords Bingham and Goff of the distinction with which they were pressed. It is contrary to principle. It is the kind of rule which may sound all very good in theory but which in reality sits most uncomfortably with a principle which seeks to distinguish what is equitable from what is inequitable. And it is, if I may be permitted to say so, a good example of the impermissible attempt to use the facts of a leading case to control the principles expounded by the judges in deciding the case. There is here no legal rule or principle of the kind for which Mr Hollander contends. The only point is that expressed by the learned editors of Goff & Jones at para 40-005:
“in Dextra Bank, the defendants had been enriched soon after they had changed their position. The facts led to the conclusion that BOJ had relied on the fact that the Dextra cheque, when cleared, would reimburse it. The burden of establishing the defence will become much greater if the evidence does not suggest a link with the anticipatory payment and the subsequent receipt of a payment, particularly if the receipts are received sometime after the anticipatory change of position. But in each case it will be a question of fact for the court to determine.”
Precisely so: there is no point of legal principle here, it is a question of fact.
Commenting on the decision in the Dextra Bank case the editors of Goff & Jones predicted at para 40–005 that “English courts will now follow the advice of the Privy Council, rather than the first instance decisions, … and will hold that anticipatory change of position is a good defence to a restitutionary claim.” We should follow that invitation. In my judgment this court should now take the opportunity to say, clearly and unequivocally, that an anticipatory change of position is in principle a perfectly good defence to a restitutionary claim. Whether or not an anticipatory change is actually a good defence will, of course, depend upon the facts of the particular case.
My third point arises out of Mr Hollander’s submission that there can be no change of position sufficient to found the defence in the absence of either financial detriment or, at the least, some detriment measurable in financial – by which I understood Mr Hollander really to mean pecuniary – terms. Perhaps not surprisingly, because in my judgment the point is completely unsound as a matter of principle, Mr Hollander was unable to point to any authority supportive of his submission. The passages in Burrows to which he directed our attention do not bear the weight of the argument any more than does the passage in Lord Goff’s speech in the Lipkin Gorman case at p 580H to which he also directed our attention.
In the Scottish Equitable case, Robert Walker LJ at para [32] gave as “the most obvious example” of the kind of decision made by a payee which, even though it involves no immediate expenditure, will nonetheless give rise to the defence of change of position, the voluntary giving up of a job at an age when it would not be easy to get new employment. Now if that decision can, as in appropriate circumstances it plainly can, give rise to the defence of change of position, why should not a decision for example to divorce? Can it really make any difference that in the first case it is possible to calculate the pecuniary cost to the payee of his decision to abandon his employment (that, after all, being the kind of exercise conducted in personal injury and fatal accident cases every day of the week) whilst in the second case it may not be possible to measure in pecuniary terms the cost to the payee of his decision to divorce? Surely not. It is, in my judgment, a distinction without a difference. It is, as it seems to me, a distinction which lacks any justification when tested by reference to the “broad approach based on practical justice” enshrined in Lord Goff’s formulation of the principle. And it is, moreover, a distinction which is hardly consonant with the approach of equity in other more or less analogous situations.
Consider, for example, the kinds of detriment which have been held to give rise to a proprietary estoppel (see Snell at para 39–14). Or consider, for example, Sutton v Sutton [1984] Ch 184, where a husband and his wife agreed that in consideration, inter alia, of the wife consenting to the husband divorcing her under section 1(2)(d) of the Matrimonial Causes Act 1973 (two years’ separation and consent), he would transfer the matrimonial home to her. A decree absolute was made on the husband’s petition but he refused to carry out his part of the bargain. It was held (at p 193C) that the wife’s consenting to the divorce as agreed was an act of part performance, being an act referable to the contract. As the judge put it, “her consent to the petition was in itself, in the circumstances, tied to the contract about the house”. The judge went on to say (at p 193F) that the husband “stood by and let her perform that part of her bargain irretrievably, and that raised an equity” in her favour.
Thus the approach of equity. But consider the facts which I recently had to consider, albeit in a wholly different legal context, in X v X (Y and Z intervening) [2002] 1 FLR 508: an agreement under which the quid pro quo for the payment of a sum of money was a husband’s agreement not to defend his wife’s petition for divorce grounded on his behaviour (even though he believed that he had grounds for divorcing her for adultery) and his agreement also to give her a Jewish religious divorce – a get. Now if, as Robert Walker LJ tells us, giving up a job is capable of giving rise to the defence of change of position, then why should not the husband’s actions in X v X equally be capable of giving rise to such a defence? And why should it make any difference that it is quite impossible to put any pecuniary value on what the husband did? For, as I remarked in X v X at paras [111]–[112]:
“[111] … A number of the factors in play are simply unquantifiable on any objective basis. How is a secular judge to evaluate the combination of the get and a decree based on the husband’s conduct rather than the wife’s adultery for a family apparently exercised by the possible religious and social ramifications? How am I to put a price on the cost to the husband of a divorce obtained by his wife against him on the ground of his behaviour rather than a divorce obtained by him on the ground of her adultery? …
[112] There are no means by which a secular judge, who may himself be an adherent of the same or a different faith or of no faith at all, can evaluate, let alone attribute some pecuniary value to, something as personal and of such religious significance as a get.”
As counsel submitted in that case, and I agreed, “the husband has wholly fulfilled his side of the bargain and … it would be grotesquely unfair if the wife were able now to walk away with the two things she desired whilst wholly avoiding her obligations under the agreement.” True it is that the legal context in which I there had to consider the matter was wholly different from that with which we are here concerned, but surely it would be just as grotesquely unfair not to allow a husband to rely on such conduct were the question to arise in the context of an asserted defence of change of position.
I do not believe that anything I am saying is in any way inconsistent with anything Robert Walker LJ said in the Scottish Equitable case. But equally there is, in my judgment, no support to be found in that case for Mr Hollander’s submissions. The point in Scottish Equitable at the end of the day was simply this: that if the circumstances do not otherwise justify a defence of change of position it makes no difference that the demand for repayment will come as a bitter disappointment, or even as a devastating blow, to the payee.
My fourth and final point arises out of the assertions by Fung & Ho, Change of Position and Estoppel (2001) 117 LQR 14 at p 17 that:
” … the defence of change of position only protects actual reduction of the recipient’s wealth. A recipient who acts upon a receipt (and representation) to forego a foreseeable and quantifiable opportunity to improve his wealth would not be protected. … change of position seeks to undo the overpayment – and nothing more – by measuring the precise extent of the defendant’s surviving enrichment … ”
That appears in what is in fact a case–note commenting on the decision at first instance in the Scottish Equitable case and thus ante–dates not merely the decision of this court in the Scottish Equitable case but also the decision of the Privy Council in the Dextra Bank case.
This article was mentioned in passing by Potter LJ giving the main judgment of this court in National Westminster Bank plc v Somer International (UK) Ltd [2001] EWCA Civ 970, [2002] QB 1286. At para [47] he said:
” … as pointed out by Fung and Ho … “change of position” only protects actual reduction of the transferee’s assets following receipt.”
It is to be noted that this observation, which I do not read as being any part of the ratio decidendi of the case, was made in the context not of a discussion of the defence of change of position but rather of a defence based on estoppel by representation. Moreover, as the editors of Goff & Jones bleakly comment at para 40–013, “The Lord Justice cites no authority for that statement, and we know of none.” In my judgment, and with all respect both to Potter LJ and to the learned authors he was citing, there is no authority for any of these propositions, and the assertions by Hung & Fo which I have quoted are not an accurate statement of the law.
So much for principle and law. I turn to the facts of the present case.
As set out in his witness statement the defendant’s case is that he had expected to receive a substantial ‘lock-in’, that he stayed with the Bank through what he calls “a period of extreme uncertainty” because of his lock-in, and that had he been offered only an additional £15,000 “I would not have shouldered that risk. I would have assumed that I was not a valued employee and I would have taken the opportunity to find alternative employment at a time when other employers in the market were still hiring. The current downturn has meant that most employers in the market are not now hiring”.
The Deputy Judge accepted the defendant’s evidence which, as set out by the judge in paragraphs [16] and [30] of his judgment, came to this:
i) The defendant was pleased to receive the letter of 29 June 2000, which he read as meaning that he had been awarded a lock-in payment of an additional £265,000. He was pleased not only because he was to receive an extra £265,000 but also because this was a ‘signal’ that he was a valued employee.
ii) If such a lock-in had not been offered the defendant would have decided to look for employment elsewhere, even though this would have meant him losing the £250,000 guaranteed bonus payable in December 2000 and the £250,000 guaranteed bonus payable in December 2001 and also having to repay the £150,000 buy-out payment that, although due on 15 October 2000, had been paid early on 23 June 2000.
iii) If he had understood the letter of 29 June 2000 as meaning that he was to receive only an additional £15,000, he would have treated it as being intended by the Bank to be a disincentive to stay because (a) £15,000 was in the scheme of things a very small sum, (b) the postponement of payment of £250,000 by three months was a significant detriment and (c) together these two features would have “sent a signal that he was not well regarded by the Bank.”
iv) The defendant would have been willing to forego the financial benefits of staying with the Bank in exchange for the certainty of employment and career development elsewhere, and would have been prepared to accept “slightly lesser” remuneration elsewhere for the certainty of continued employment.
The Judge accordingly held that:
i) The defendant decided to stay at the Bank as a result of the 29 June 2000 letter and his understanding of it.
ii) If it had not been for that letter the defendant would have taken steps in late June 2000 to seek employment elsewhere.
iii) If he had done so, the defendant stood a very good chance of obtaining similar employment elsewhere.
iv) Accordingly, the letter of 29 June 2000 caused the defendant to change his position, as a result of which he has suffered a detriment.
In opening his attack on the Deputy Judge’s reasoning, Mr Hollander rightly draws attention to the chronology and to the narrow and limited basis upon which the defendant – necessarily in the light of his own evidence – has to seek to found his defence. My Lord has set out the facts in some detail. All I need do here is to recall that the crucial letter was dated 29 June 2000, that it was counter-signed by the defendant on 5 August 2000, that the payment of £250,000 was made on 15 December 2000 and that the additional payment of £265,000 was made on 23 March 2001. The defendant’s change of position, according to his evidence, and accepted by the Deputy Judge, occurred in late June 2000, that is, long before either payment was made. And as Mr Hollander points out, although the defendant had earlier sought to mount a case based on change of position as a result of receipt of the additional money (namely, that he had used it to repay his mortgage) that case was abandoned at trial. As Mr Hollander puts it, what caused the defendant to change his position was not the receipt of the money but the ‘signal’ which the letter gave him.
It follows, says Mr Hollander, and I agree, that properly understood the defendant’s case comes down to this: By definition the issue only arises on the premise that the court has accepted – as in fact it has – that the letter of 29 June 2000 should be interpreted in the manner submitted by the Bank. It follows that the defendant’s case is – has to be – that he changed his position based on his mistaken interpretation of the letter. But, says Mr Hollander, that mistaken interpretation was neither shared by nor, more importantly, in any way contributed to by the Bank. It is at this point that, in the particular circumstances of this case, it is important to remember that at the relevant date the Bank had not even made the erroneous payment. So all the Bank had done at the crucial point at which the defendant changed his position was to send him the letter.
As a matter of law the letter of 29 June 2000 means what it would have conveyed to a reasonable person in the defendant’s position having all the background knowledge that would reasonably have been available to the defendant and the Bank in the situation which they were then in. And, judged by that standard, I agree with my Lord that the letter means not what the defendant believed but rather what, as the Deputy Judge found, the Bank believed and intended it to mean. So the mistaken interpretation which is thus the very foundation of the defendant’s case was not in any way shared or contributed to by the Bank. And as Mr Hollander points out, if the defendant had asked the Bank what its letter meant (which of course he never did) he would no doubt have been told that it meant £265,000 in total, for this, as the Deputy Judge found, is what the Bank believed and intended. Moreover, as Mr Hollander also points out, if the defendant had contacted the Bank he would have discovered that he had completely misread the position and that, far from the letter being a signal that he was not valued by his employers, he was in fact, as the Deputy Judge found, seen by the Bank as a valuable and valued employee. Furthermore, it necessarily follows that the defendant’s mistaken belief is not that which would have been held by a reasonable person in his position.
In these circumstances, says Mr Hollander, the defendant’s case on change of position amounts to no more than a decision by him not to seek to change his job based on his own mistaken interpretation of the effect of the letter. But, says Mr Hollander, the law does not permit those who rely upon mistaken interpretations of contracts to use their own error as a legal defence. For otherwise the defendant is being allowed to profit from his own error, nothing more and nothing less. On that simple point, says Mr Hollander, the defendant’s case breaks down.
The Deputy Judge held that in these circumstances it would be inequitable to require the defendant to make restitution. With all respect to the Judge, as also to Mr Englehart’s valiant attempts to persuade us that the Judge was correct, I profoundly disagree. Where is the justice, where is the equity, in allowing the defendant to retain, to the Bank’s detriment, the fruits of what is simply his own mistake – and a mistake which, as I have said, was in no way caused or contributed to by the Bank? What is there in any way inequitable or unjust in the Bank seeking to recover its own money – and, as Lord Goff has pointed out, seeking to do so as a matter of right – when the only matter that can be prayed in aid in resisting that claim is the defendant’s own mistake, a mistake which, to repeat, was not in any way caused or contributed to by the Bank and which, moreover, had nothing to do with anything either done or not done by the Bank? In my judgment, equity and justice are quite plainly in these circumstances on the side not of the defendant but rather of the Bank.
Mr Englehart says that Mr Hollander’s argument is based on a fallacy, namely that the objective interpretation by the reasonable man which is used to answer the question as to what the letter means as a matter of construction has a part to play in assessing the merits of a defence of change of position to a restitution claim. With all respect to him I cannot accept Mr Englehart’s submission. Why on earth, in an appropriate case, should Mr Hollander’s point not have a part to play in assessing where the balance of justice and equity lies? And why on earth is this not precisely the kind of case where the point has a part – and, as it seems to me, a significant part – to play in striking the balance? Mr Englehart further submits that Mr Hollander’s approach is ruled out by the Privy Council’s express condemnation in the Dextra Bank case of the concept of relative fault. I do not agree. I accept, as I have already said, that relative fault has no role to play in this branch of the law. But this does not mean that the court is required to blind itself to the fact, if fact it be, that someone seeking to make good the defence of change of position has only himself to blame for his predicament, having acted on a view which is not merely erroneous but which, moreover, fails to meet the standard of the reasonable man.
Mr Englehart submits that the inquiry here is simply whether or not the defendant bona fide believed that he was entitled to money he anticipated receiving and whether he changed his position in that belief. That, with respect to Mr Englehart, is not the relevant question. The question is whether or not it is inequitable to deny the defendant a defence based on change of position when his decision to change his position was not in any way caused or contributed to by anything done or not done by the Bank but, on the contrary, was based entirely on his own erroneous understanding of what the Bank’s letter meant. I can see nothing inequitable in denying the defendant such a defence. On the contrary, it would in my judgment be inequitable in the circumstances of this case to deny the Bank the right to recover its money.
I have not ignored the fact – and fact it is – that the Bank also made mistakes when it made the payments to the defendant on 15 December 2000 and 23 March 2001. The errors were thus not all on one side. But the Bank’s errors, egregious though they may have been, are largely irrelevant for present purposes. For, as I have said, they long post-dated and therefore cannot have been operating on the defendant’s mind at the time when, on his case, he changed his position.
Mr Hollander put forward various other arguments as to why, as he would have it, the defendant could not rely upon the defence of change of position. Those arguments were, in the final analysis, based upon propositions of law which, for the reasons I have already set out, I cannot accept. I say no more about his arguments. I should, however, make clear my agreement with Mr Englehart’s submission that there is no material difference in substance in this kind of case between voluntarily giving up a job (the situation postulated by Robert Walker LJ in the Scottish Equitable case) and voluntarily choosing to stay in a job (what the defendant did here). Either may, in appropriate circumstances, suffice to found a defence of change of position; in other circumstances, neither may suffice. It all depends on the facts.
There is one final point. When I prepared this judgment I was not aware of the decision of this court in Niru Battery Manufacturing Co and anor v Milestone Trading Ltd and ors [2003] EWCA Civ 1446, the judgments in which were handed down on 23 October 2003. As I read them there is nothing in those judgments which is in any way inconsistent with the views I have expressed. On the contrary, Clarke LJ made clear (see para [162]) that:
“the essential question is whether on the facts of a particular case it would in all the circumstances be inequitable or unconscionable, and thus unjust, to allow the recipient of money paid under a mistake of fact to deny restitution to the payer.”
Likewise my Lord, Lord Justice Sedley, emphasised more than once (see paras [180], [182], [192]) that the test is that of inequitability. I respectfully agree. Indeed that is, as it happens, precisely the view to which I had independently come. And I agree also with what my Lord said in para [192]:
” … courts … are not tied to a single rigid standard in deciding whether a defence of change of position succeeds. They are to decide whether it is equitable to uphold the defence. Since the doctrine of restitution is centrally concerned with the distribution of loss among parties whose rights are not met by some stronger doctrine of law, one is by definition looking for the least unjust solution to a residual problem.”
Order: 1. The appellant’s appeal be allowed and the judgment of the Deputy Judge herein dated 17 December 2002 be set aside;
2. Judgment be entered for the appellant on the respondent’s claim and on the appellant’s counterclaim, and on the appellant’s counterclaim, there be a declaration that the appellant is entitled to set off its claim against the respondent for unjust enrichment (by reason of the appellant’s payment of £250,000 to the respondent on or about 31 December 2000) against the respondent’s claim for £250,000 by way of a guaranteed bonus for the year 2001.
3. The respondent’s do repay to the appellant the sum of £250,000 and £19,232087 paid to the respondent pursuant to paragraph 1 of the judgment of the Deputy Judge, together in each case with interest at bank base rate plus 1% from 27 January 2003 to the date hereof calculator in the aggregate sum of £10, 276.94
4. The respondent do repay to the appellant the sum of £40,000 paid to the respondent in respect of the claimant’s costs of the claim and counterclaim, together with intrest at bank base rate plus 1% from 26 September to the date hereof calculated in the sum of £285.48
5. The respondents do pay the appellant’s costs here and below of the claim and counterclaim, such costs to be the subject of a detailed assessment if not agreed. a Certificate for two counsel.
Derby v Scottish Equitable Plc
[2001] EWCA Civ 369
LORD JUSTICE ROBERT WALKER:
Introduction
This is an appeal from an order of Harrison J made in the Queen’s Bench Division on 1 October 1999. He gave judgment in favour of the claimant, Scottish Equitable plc, for a principal sum of a little over £162,000, and accrued interest, in its claim against the defendant, Mr Gordon Derby. The judge’s judgment is reported at [2000] 3 AER 793. The case raises questions of some general interest and importance as to claims for money paid under a mistake and the defences of change of position and estoppel.
The facts
Neither the appellant’s notice nor the respondent’s notice attacks any of the judge’s findings of primary fact. There is however some criticism of his characterisation of some of the facts (for instance, whether Scottish Equitable was guilty of mere carelessness or, as Mr Derby contends, gross and repeated negligence) and there is an issue as to how broad a view the judge should have taken on change of position. It is therefore necessary to set out the facts as found by the judge in some detail. Further detail can be found in the reported first-instance judgment.
At the beginning of 1988 Mr Derby was aged 57. He was a married man with two stepchildren at fee-paying schools. He and his wife lived in Kent in a house then worth about £90,000 subject to a mortgage of about £35,000. He was employed by a company called Baltic Sawmills. His wife (who is fifteen years younger) had her own business, running two clothes shops, but the business was not prospering (and it was to get worse rather than better).
In the spring of 1988 Mr Derby was made redundant. On his redundancy he received a total sum of £125,000 of which £90,000 seems to have been a transfer payment under his occupational pension scheme. The transfer payment went into a single-premium pension policy with Scottish Equitable. As an alternative source of earned income Mr Derby went into partnership as a recruitment consultant to the timber trade but until 1998 (when the partnership came to an end) he never derived more than about £13,000 a year from it. In 1989 his wife’s business difficulties increased and he and his wife were under pressure from their bank.
In these circumstances Mr Derby considered, and eventually decided on, exercising an option to take early retirement benefits under his policy with Scottish Equitable. What happened (and it helps to explain, although it does not excuse, the mistakes which were later made) was that in August 1989 Mr Derby asked for figures to be quoted for the option, decided to take it, and then changed his mind; and then in February 1990 he again asked for a quotation, decided to take it, and this time did not change his mind. The option which he took was for a tax-free lump-sum payment of £36,588 and an immediate single-life pension of £4,655 a year, escalating at 3 per cent per annum. (I follow the judge in disregarding odd pence throughout.) In fact through another quite separate error the escalator was not applied for several years, but Mr Derby has been compensated for that and there is no issue on it. After exercising the option Mr Derby thought, correctly, that his remaining rights under the policy were worth about £50,000.
Mrs Derby’s retail business came to an end and in 1991 she took employment with the Kent Probation Service. She was still in that employment at the time of the trial although she had had nearly a year off with ill-health during 1993-4.
In April 1995 Mr Derby was approaching his 65th birthday (1 May 1995) and he telephoned Scottish Equitable (at its Customer Services Division in Edinburgh) to inquire what would happen to his pension when he became entitled to the state pension. On 22 May 1995 there was another more important telephone conversation which was recorded in a manuscript note made by an employee of Scottish Equitable (and subsequently annotated, it seems, by another employee). The judge’s findings about this were as follows:
“It would appear from the claimant’s memorandum of that conversation that the defendant probably told the claimant that he was already receiving an annuity from them. The defendant cannot recall that conversation although his telephone bills show that he made a call to the claimant on that day. Another entry on the memorandum contains an internal instruction that a quotation should be prepared. A subsequent annotation on the memorandum suggests that the defendant’s records were checked, but that it was concluded, wrongly, that the defendant had not received early retirement benefit, because the person checking the records had only looked at the defendant’s cancelled decision to take early retirement benefit in August 1989, without looking at the rest of the microfiche.”
On 25 May 1995 Scottish Equitable sent Mr Derby a print-out statement showing that his policy had a value of £201,938. Mr Derby’s evidence was that he was very pleasantly surprised by this (since the fund value appeared to have increased by a factor of four within five years) but that he was naive in pension matters. The judge said that he had initially been sceptical about Mr Derby’s evidence, especially as he had engaged a financial consultant, Mr Colin Donald of Fairmount Trust plc, to advise him. But having seen and heard Mr Derby give evidence the judge accepted him as an honest witness:
“I find, on the balance of probabilities, that he did inform the claimant that he was already receiving a pension from them, and that he was nevertheless assured by them that the figures quoted in the statement of retirement benefits were correct. I am surprised that the mistake was not discovered by Mr Donald, his financial advisor, but I feel I must accept the defendant’s evidence that Mr Donald did not tell him that a mistake had been made.”
Mr Donald raised various queries with Scottish Equitable and on 9 June 1995 Scottish Equitable issued a further statement of retirement benefits with four options. These were permutations on the choice between taking part of the benefits in the form of a tax-free lump sum or taking them all in the form of a retirement pension and widow’s pension, and the choice between taking the benefits from Scottish Equitable or from some other provider. On 16 June Mr Derby, acting on Mr Donald’s advice, chose option 3, which was to take a lump sum of £51,333 from Scottish Equitable and to have £150,604 (referred to as the ‘balance open market option’) paid to Norwich Union.
On 20 June 1995 Scottish Equitable sent Mr Donald a cheque for £51,333 in favour of Mr Derby and a separate cheque for £150,604 in favour of Norwich Union. The fact that there were two separate payments is relied on in the respondent’s notice. Norwich Union had quoted for a (non-escalated) pension of £13,521 for Mr Derby and a widow’s pension of half that amount. So from June 1995 Mr Derby was receiving a pension at the annual rate of £4,655 from Scottish Equitable (the 3 per cent escalator having been overlooked) and a pension at the annual rate of £13,521 from Norwich Union.
In quoting a fund value of £201,938 Scottish Equitable had made a serious error. It had not taken account of the early retirement benefits which Mr Derby had taken (after a false start) in 1990. Evidence about the mistake was given by Miss Phyllis Duncan, a project team manager in Scottish Equitable’s data quality department in Edinburgh. The judge’s findings were as follows:
” … when the defendant was paid his early retirement benefits in February 1990 his computer records should have been amended to show that only his residual fund necessary to pay his guaranteed minimum pension remained. That residual fund should have been £29, 486, producing the guaranteed minimum pension of £2,637. That had not been done, as a result of which the claimant mistakenly paid to the defendant the amount to which he would have been entitled had he not taken the early retirement benefits under the policy in February 1990.
The mistake should have come to light in December 1992, when Miss Duncan was working as an assistant manager in the claims department on a project to check that the files were correct for the end of year valuation. When she was carrying out that exercise, she noticed that the records did not tally, in so far as the annuity payment system for the defendant in 1992 showed that an annuity had been set up, but the VPR record did not show that a tax-free lump sum had been paid. As a result, Miss Duncan sent a memorandum dated 11 December 1992 to Mr Clark, her section manager, requesting his department to alter the VPR records for the defendant’s policy. If that had been done, the record would have been updated to show that the defendant had received early retirement benefit in 1990 and, therefore, show the true value of his remaining fund. Miss Duncan did not take any further action to check if the record had been corrected because she moved to another department. Mr Clark, in his evidence, said that he had no recollection of that memorandum, but it would have been his procedure to have passed such a memorandum to someone in his section to update the VPR records. However, for some reason, it was not allocated to a specific member of staff and he could not say why the instruction to update the records was not actioned.”
(No-one in court was able to tell the judge what ‘VPR’ stood for, but it was part of the computerised system. Paper records were stored on microfiche.)
It was common ground that the amount of the overpayment was £172,451 (being the difference between £201,938 and £29,486). It was also not in dispute that of the £51,333 received by Mr Derby himself, £41,671 was used to reduce (by about two-thirds) the mortgage on the matrimonial home. The disparity between the evidence as to the size of the mortgage in 1988 and 1995 is not fully explained either in the judgment or in the witness statements, but it appears that at some stage there was a further advance of £30,000 to Mrs Derby.
In his witness statement Mr Derby stated that between June 1995 and October 1996 (when Scottish Equitable discovered its mistake) he omitted to take various steps which he would or might have taken, had he realised the true financial position. But (as the judge recorded) his oral evidence was rather different:
” … he agreed in evidence that the only thing he did differently after receiving the monies was to pay off the sum of £41,671 from the mortgage, and to use the remaining £9,662 from the tax-free sum of £51,333, together with the increased income under the Norwich Union policy, to live a little better by improving the lifestyle of himself and his family in very modest ways, which he agreed were not irreversible commitments. The defendant accepted that, without those payments, he would not have been in any position to save any money. He was on the breadline, he had no spare cash and he was borrowed up to the hilt. He also accepted that his age precluded him from obtaining useful employment. He said: ‘Once you are 65, it’s impossible to get employment.’ When asked in re-examination what he could have done to improve his position, he said, ‘Not very much’, although he would have stayed in the recruitment business, but done less.”
When Scottish Equitable discovered the mistake in October 1996 it asked Mr Derby to repay the overpayment, but he declined to repay it. It is clear that without the co-operation of Norwich Union he could not possibly have repaid it, but Norwich Union has accepted in open correspondence with Scottish Equitable (copied to Mr Derby’s solicitors) that in the wholly exceptional circumstances of this case it would unwind the pension policy which it had granted. It would do so either completely or to the extent necessary to reduce Mr Derby’s pension to the annual rate of £2,637. This was confirmed at trial by the evidence of Mr John Evans, an actuary with Norwich Union.
Proceedings were commenced by Scottish Equitable on 13 March 1997. No repayment has been made by Mr Derby. It is unnecessary to comment on the course of the proceedings except to mention that on the last day before the hearing Mr Derby’s solicitors served a supplementary witness statement made by Mr Derby stating that he and his wife had decided to separate and to sell the matrimonial home, marketing it for £140,000. Mr Derby referred in the statement to his and his wife’s health problems. He also stated that the house belonged not to himself but to his wife, but the judge excluded that evidence (as being contrary to Mr Derby’s pleaded case, and impossible to investigate at that very late stage).
The issues
Scottish Equitable conceded at trial that if the judge found that Mr Derby did not know of the mistake when he received the payment, it would not seek to recover the sum of £9,662 spent by Mr Derby on modest improvements to the family’s style of life. The judge made such a finding, on the balance of probability, and so the total claim was reduced by £9,662. But for the purposes of some of the arguments it is necessary to look at the sequence of events as a whole.
In this court, as before the judge, the legal argument has been directed to three main issues. First, at what stage (if at all) does carelessness or recklessness on the part of the payer give the court a discretion to decline to order repayment? Second, how far does the defence of change of position (first unequivocally recognised in English law by the House of Lords in Lipkin Gorman v Karpnale [1991] 2 AC 548) assist the payee in the circumstances of this case? Third, what part (if any) has estoppel to play, now that the defence of change of position has been recognised?
The judge resolved all these issues (except in relation to the sum of £9,662) in favour of Scottish Equitable. His detailed reasoning is examined below. Consequently he gave judgment against Mr Derby for £162,790 with interest from 12 October 1996 at one per cent over base rate. He refused permission to appeal but it was granted by Otton LJ in open court on 3 April 2000.
Mere carelessness
On this issue the argument (in this court, as below) started with the well-known decision of the Court of Exchequer in Kelly v Solari (1841) 9 M&W 54, which Robert Goff J (in Barclays Bank v Simms Son & Cooke (Southern) [1980] QB 677, 686) described as providing the basis of the modern law. It was a case of a mistaken payment by a life office, Argus, on a life policy for £200 effected in 1836, which had lapsed shortly before the death of the life assured in 1840. A director of the company had written ‘lapsed’ on the policy but this was overlooked. Argus paid £987 to his widow, the executrix, on the lapsed policy and two other policies (presumably for a total of £800) which had not lapsed. After discovering the error Argus claimed £187 from the executrix as money paid under a mistake of fact.
The issue was whether the Chief Baron (who was himself a member of the court) had been right in ruling at trial that if the directors of the life office had knowledge, or the means of knowledge, of the policy having lapsed, the claim must fail. Lord Abinger C.B. accepted that he had put the matter too broadly at trial by using the expression ‘means of knowledge’, which he described as a very vague expression. He expressed his considered view as follows:
“The safest rule however is, that if the party makes the payment with full knowledge of the facts, although under ignorance of the law, there being no fraud on the other side, he cannot recover it back again. There may also be cases in which, although he might by investigation learn the state of facts more accurately, he declines to do so, and chooses to pay the money notwithstanding; in that case there can be no doubt that he is equally bound. Then there is a third case, and the most difficult one, – where the party had once a full knowledge of the facts, but has since forgotten them. I certainly laid down the rule too widely to the jury, when I told them that if the directors once knew the facts they must be taken still to know them, and could not recover by saying that they had since forgotten them. I think the knowledge of the facts which disentitles the party from recovering, must mean a knowledge existing in the mind at the time of payment.”
Parke B agreed and set out his view in a much-quoted passage:
“If, indeed, the money is intentionally paid, without reference to the truth or falsehood of the fact, the plaintiff meaning to waive all inquiry into it, and that the person receiving shall have the money at all events, whether the fact be true or false, the latter is certainly entitled to retain it; but if it is paid under the impression of the truth of a fact which is untrue, it may, generally speaking, be recovered back, however careless the party paying may have been, in omitting to use due diligence to inquire into the fact. In such a case the receiver was not entitled to it, nor intended to have it.”
Gurney B and Rolfe B also agreed, the latter mentioning two views of the facts which the jury might possibly reach at a retrial:
“first, that the jury may possibly find that the directors had not in truth forgotten the fact; and secondly, they may also come to the conclusion, that they had determined that they would not expose the office to unpopularity, and would therefore pay the money at all events.”
In his judgment the judge referred at some length to Kelly v Solari and he may be taken to have recognised that deliberate waiver of inquiry, where there are circumstances which put the payer on inquiry, will preclude recovery. Such cases are akin to cases of settlement of or deliberate submission to an honest claim (see Goff & Jones The Law of Restitution, 5th ed (1998) pp.53-5 and also the American cases mentioned at pp.198-9, including Meeme Mutual Home Protection Fire Insurance Co v Lorfeld (1927) 194 Wis 322). But deliberate waiver of inquiry or acceptance of risk is not to be equated with carelessness or negligence (even if it is termed gross negligence).
It is reasonably clear that when the judge referred ([2000] 3 AER at p.800 C) to the general rule that mere carelessness does not preclude recovery, he did not (by his use of the word ‘mere’) intend to make a contrast with some more heinous type of carelessness or negligence, since he had just quoted Parke B’s words, “however careless the party paying may have been”, and Robert Goff J’s comment (in the Simms case at p.687) that that conclusion has stood ever since. (Some of the most important cases in which it has been followed are mentioned in the speech of Lord Shaw in Jones v Waring and Gillow [1926] AC 670, 688-9). The judge was making a contrast between carelessness, however culpable, and the situation where the paying party is on inquiry but consciously decides to pay without making further inquiry. In this case Scottish Equitable did take steps to investigate the matter. Its investigation was inadequate, but there was no deliberate waiver of inquiry.
The judge was therefore right to follow the observations of Lord Goff in Lipkin Gorman [1991] 2 AC 548, 578,
“But it does not in my opinion follow that the court has carte blanche to reject the [claimants’] claim simply because it thinks it is unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court.”
Change of Position
The facts of Lipkin Gorman, in which the House of Lords recognised the defence of change of position, are well known. The gaming club had received large sums of money misappropriated by a solicitor who was addicted to gambling, but it had changed its position by paying out on his winning bets. Lord Goff (with whose speech Lord Bridge, Lord Griffiths and Lord Ackner agreed) noted that in the past, where change of position had been relied on by the defendant, it had been usual to treat the problem as one of estoppel (as in, for instance, Jones v Waring and Gillow [1926] AC 670 and Avon County Council v Howlett [1983] 1 WLR 605).
There were two main objections to that sort of approach. First, estoppel required there to have been a representation made by one party on which the other had placed reliance and had acted to his detriment: but in many cases involving a dishonest third party (such as Lipkin Gorman itself) the true owner had done nothing that could possibly be regarded as the making of a representation. (Jones v Waring and Gillow was another case involving a fraudster, a confidence man whose plan might have been frustrated by an unexpected contact between the two innocent parties; the House of Lords were divided as to whether that equivocal contact amounted to a representation.) Second, estoppel was (as this court had held in Avon, a case to which it will be necessary to return) an inflexible all-or-nothing defence. Lord Goff observed (at p.579 E):
“Considerations such as these provide a strong indication that, in many cases, estoppel is not an appropriate concept to deal with the problem.”
Lord Goff went on:
“In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position.”
He noted the general acceptance of the defence in other common law jurisdictions (his citations could now be supplemented by reference to the decision of the High Court of Australia in David Securities v Commonwealth of Australia (1992) 109 ALR 57).
Lord Goff said (at p.580 C, F-H):
“I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way … At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions. In this connection I have particularly in mind the speech of Lord Simonds in Ministry of Health v Simpson [1951] AC 251, 276.”
The judge noted the view, put forward by Andrew Burrows (The Law of Restitution (1993) pp.425-8) that there is a narrow and a wide version of the defence of change of position, and that the wide view is to be preferred. The narrow view treats the defence as “the same as estoppel minus the representation” (so that detrimental reliance is still a necessary ingredient). The wide view looks to a change of position, causally linked to the mistaken receipt, which makes it inequitable for the recipient to be required to make restitution. In many cases either test produces the same result, but the wide view extends protection to (for instance) an innocent recipient of a payment which is later stolen from him (see Goff & Jones, The Law of Restitution 5th ed (1998) p.822, also favouring the wide view).
In this court Mr Stephen Moriarty QC (appearing with Mr Richard Handyside for Scottish Equitable) did not argue against the correctness of the wide view, provided that the need for a sufficient causal link is clearly recognised. The fact that the recipient may have suffered some misfortune (such as a breakdown in his health, or the loss of his job) is not a defence unless the misfortune is causally linked (at least on a ‘but for’ test) with the mistaken receipt. In my view Mr Moriarty was right to make that concession. Taking a wide view of the scope of the defence facilitates “a more generous approach .. to the recognition of the right to restitution” (Lord Goff in Lipkin Gorman at p.581; and compare Lord Goff’s observations in Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 at p.385 A-F).
The criticisms of the judgment made by Mr Bernard Weatherill QC (appearing with Mr Paul Emerson for Mr Derby) were directed, not so much to the principles of law enunciated by the judge, as to the way in which he applied those principles to the facts as he found them. Before considering those criticisms in detail I think it may be useful to note that when a person receives a mistaken overpayment there are, even on the narrow view as to the scope of the defence, a variety of conscious decisions which may be made by the recipient in reliance on the overpayment. Some are simply decisions about expenditure of the receipt: the payee may decide to spend it on an asset which maintains its value, or on luxury goods with little second-hand value, or on a world cruise. He may use it to pay off debts. He may give it away. Or he may make some decision which involves no immediate expenditure, but is nevertheless causally linked to the receipt. Voluntarily giving up his job, at an age when it would not be easy to get new employment, is the most obvious example. Entering into a long-term financial commitment (such as taking a flat at a high rent on a ten-year lease which would not be easy to dispose of) would be another example. The wide view adds further possibilities which do not depend on deliberate choices by the recipient.
Mr Weatherill criticised the judge for looking simply at particular items of expenditure (the £9,662 which was conceded, the sum used to pay off the mortgage and the sum paid to the Norwich Union) and for paying insufficient attention to Mr Derby’s decision to slow down his work, and his omission to take alternative steps to provide for the future of himself and his family. I would readily accept that the defence is not limited (as it is, apparently, in Canada and some states of the United States: see David Securities Pty v Commonwealth Bank of Australia (1992) ALJR 768, 780, noted in Goff & Jones at p.819) to specific identifiable items of expenditure. I would also accept that it may be right for the court not to apply too demanding a standard of proof when an honest defendant says that he has spent an overpayment by improving his lifestyle, but cannot produce any detailed accounting: see the observations of Jonathan Parker J in Philip Collins v Davis [2000] 3 AER 808, 827, with which I respectfully agree. The defendants in that case were professional musicians with a propensity to overspend their income, and Jonathan Parker J took a broad approach (see at p.830).
In the present case, however, the judge made some clear findings of fact, set out in para 13 above, to the effect that the improvements which Mr Derby was able to make in his family’s lifestyle, between June 1995 and October 1996, were very modest and not irreversible, and that there was nothing that he could usefully have done to make provision for the future. Mr Weatherill has submitted that that seriously understates the devastating effect which the demand for repayment has had on Mr Derby, with his annual income after tax being reduced at a stroke from a sum of the order of £20,000 to a sum of the order of £12,000 (these figures do not include Mrs Derby’s earned income). It is easy to accept that Scottish Equitable’s demand for repayment must have come as a bitter disappointment to Mr Derby, and it is impossible not to feel sympathy for him, beset as he now is by financial problems, matrimonial problems and health problems. But the court must proceed on the basis of principle, not sympathy, in order that the defence of change of position should not (as Burrows puts it at p.426) “disintegrate into a case by case discretionary analysis of the justice of individual facts, far removed from principle”. Mr Weatherill took the court to various passages in the transcript of Mr Derby’s oral evidence but I am not persuaded that the judge erred in his findings of fact or that he failed to take advantage of seeing and hearing the witnesses.
Mr Weatherill submitted that the payment-off of the mortgage was a change of position, but I cannot accept that submission. In general it is not a detriment to pay off a debt which will have to be paid off sooner or later: RBC Dominion Securities v Dawson (1994) 111 DLR (4th) 230. It might be if there were a long-term loan on advantageous terms, but it was not suggested that that was the case here; and as the judge said (at p.803 f) the evidence was that the house was to be sold in the near future.
In relation to the Norwich Union policy it was argued below that Mrs Derby had certain rights or claims because of the impending divorce, and this argument is put forward again in paragraph 16 of the grounds of appeal and in oral argument. I found this argument rather surprising since it appears from the terms of the policy that Mrs Derby is named as a payee in respect of a reversionary annuity of £6,760 a year but that her right to the annuity ceases on divorce (although Mrs Derby may be able to take advantage of the new pension-sharing arrangements introduced by the Welfare Reform and Pensions Act 1999). However it was only by reference to the impending divorce that Mr Weatherill attacked the judge’s conclusion (at p.798 e) that Mrs Derby’s rights were no impediment to the unwinding of the policy to which Norwich Union is prepared to agree. Her potential rights on divorce do not depend on her having a power to veto the unwinding of the policy, nor do they have the effect of conferring such a power on her. They do not in my view assist Mr Derby’s argument on change of position.
For these reasons the judge was in my view correct to accept the defence of change of position only in relation to the sum of £9,662.
Estoppel
I have already quoted Lord Goff’s observation in Lipkin Gorman ([1991] 2 AC 548 at p.579) that estoppel is not an appropriate concept to deal with the problem, partly because of its ‘all or nothing’ operation. The same view has been widely expressed, both by academic writers and in the courts. The Newfoundland Court of Appeal (in RBC Dominion Securities v Dawson) has flatly rejected it. Jonathan Parker J (in Philip Collins v Davis [2000] 3 AER 808, 825-6) has described it as no longer apt. In doing so he referred to the judgment now under appeal, in which the judge avoided a general statement of principle but (on the facts of this case) distinguished Avon County Council v Howlett [1983] 1 WLR 605 and said (at p.807 c)
“In my judgment, the justice of the situation is met by the extent to which the defence of change of position has succeeded and it would be wholly unjust and inappropriate in those circumstances to allow estoppel to operate so as to provide a complete defence to the whole of the overpayment.”
In considering this part of the case the judge proceeded on the footing that Scottish Equitable had made to Mr Derby a representation that he really was entitled to the payment made to him in June 1995. It is not entirely clear whether the judge made a positive finding to that effect, or simply set out counsel’s submission (at p.804 f) and assumed for the purposes of argument that it was correct; but on any view there was ample evidential material to justify such a finding.
The decision of this court in Avon County Council v Howlett was discussed at length both below and in this court and it calls for detailed mention. Mr Howlett was a schoolteacher who had an accident at work and was off work (but still employed) for more than a year and a half. After his employment had been terminated the county council, his employer, found that during his time off work it had paid him for eight months (rather than six months) at the full rate of pay and for a further eleven months (rather than six months) at half-rate. It claimed £1,007 from him as money paid under a mistake of fact. In his defence Mr Howlett pleaded that he had spent £460 on a suit and a second-hand car and that he had refrained from claiming social security benefit of £86. He pleaded that this detrimental reliance estopped the employer from recovering any part of the £1,007.
At trial Mr Howlett’s evidence was that he had in fact spent all the money. But his counsel (who was instructed at a trade union’s expense and wished to treat the matter as a test case) declined to apply for permission to amend his pleadings. Judgment was given against Mr Howlett for the balance sum of £460 (which was, by a confusing coincidence, the same sum as Mr Howlett had spent on the suit and the car). In this court Cumming-Bruce LJ took an adverse view of counsel’s expedient. He was (at p.608) disinclined
“to give a judgment founded on estoppel on facts which exist only in the mind of the pleader. The law does not and should not develop by such a device, and the ratio of such a decision is liable to be seriously misleading. I do not consider that the decision of this court in the instant appeal is authority for the proposition that where, on the facts, it would be clearly inequitable to allow a party to make a profit by pleading estoppel, the court will necessarily be powerless to prevent it.”
Cumming-Bruce LJ thought that the judge should have refused to decide the case on a basis which was neither pleaded (that is, that it would be inequitable to allow the defendant to retain part or all of the benefit) nor supported by evidence.
Eveleigh LJ gave a fairly short judgment agreeing, with some hesitation, with Slade LJ. Slade LJ gave a fairly long judgment, approaching the matter by the established legal principles governing estoppel. He emphasised that estoppel by representation is in origin a rule of evidence, and that that is what confers its ‘all or nothing’ character. He referred to some well-known cases including Skyring v Greenwood (1825) 4 B&C 281 and Holt v Markham [1923] 1 KB 504, commenting that if estoppel by representation could operate in a limited and proportionate way the courts which decided those cases (at p.624)
“would have been bound to conduct a much more exact process of quantification of the alteration of the financial positions of the recipients, which had occurred by reason of the representations.”
However Slade LJ also said (at pp.624-5)
“I recognise that in some circumstances the doctrine of estoppel could be said to give rise to injustice if it operated so as to defeat in its entirety an action which would otherwise lie for money had and received. This might be the case for example where the sums sought to be recovered were so large as to bear no relation to any detriment which the recipient could possibly have suffered.”
Eveleigh LJ had made similar observations (at p.611), and I have already quoted the remarks of Cumming-Bruce LJ (para 41 above). Harrison J (at p.807 c) treated the present case as “just the sort of situation that the Court of Appeal must have had in mind in Avon County Council v Howlett when expressing reservations about the ambit of that decision”.
I would be content to follow the judge in refraining from attempting any general statement of principle and treating this case as comfortably within the exception recognised by all three members of this court in Avon County Council v Howlett. We cannot overrule that case but we can note that it was not seen, even by the court which decided it, as a wholly satisfactory authority, because of its fictional element.
I should record one further novel and ingenious argument addressed to us by Mr Moriarty (but generously attributed by him to his junior, Mr Handyside). That is that, since Lipkin Gorman, the defence of change of position pre-empts and disables the defence of estoppel by negativing detriment. Detriment must, it was correctly submitted, be judged at the time when the representor seeks to go back on his representation, since
” … the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment.”
(Dixon J in Grundt v Great Boulder Pty Gold Mines (1938) 59 CLR 641, 674-5, quoted in Spencer Bower and Turner, The Law Relating to Estoppel by Representation 3rd ed (1977) pp.110-1).
The argument can be simply explained by an illustration in the form of a dialogue. A pays £1000 to B, representing to him “I have carefully checked all the figures and this is all yours”. B spends £250 on a party and puts £750 in the bank. A discovers that he has made a mistake and owed B nothing. He learns that B has spent £250 and he asks B to repay £750.
B: “You are estopped by your representation on which I have acted to my detriment.”
A: “You have not acted to your detriment. You have had a good party, and at my expense, because I cannot recover the £250 back from you.”
The facts that B has spent £250 in an enjoyable way, and that A readily limits his claim to £750, put the argument in its most attractive form. But it seems to have some validity even if B had lost £250 on a bad investment, and A began by suing him for £1000.
I find this argument not only ingenious but also convincing. If I prefer to base my conclusion primarily on the grounds relied on by the judge it is partly because the argument is novel and appears not to have been considered by any of the distinguished commentators interested in this area of the law. But at present I do not see how the argument could be refuted.
Will estoppel by representation wither away as a defence to a claim for restitution of money paid under a mistake of fact? It can be predicted with some confidence that with the emergence of the defence of change of position, the court will no longer feel constrained to find that a representation has been made, in a borderline case, in order to avoid an unjust result. It can also be predicted, rather less confidently, that development of the law on a case by case basis will have the effect of enlarging rather than narrowing the exception recognised by this court in Avon County Council v Howlett. That process might be hastened (or simply overtaken) if the House of Lords were to move away from the evidential origin of estoppel by representation towards a more unified doctrine of estoppel, since proprietary estoppel is a highly flexible doctrine which, so far from operating as ‘all or nothing’, aims at “the minimum equity to do justice” (Crabb v Avon District Council [1976] Ch 179, 198). Paul Key has drawn attention (Excising Estoppel by Representation as a Defence to Restitution [1995] CLJ 525, 533) to two decisions of the High Court of Australia (Waltons Stores (Interstate) v Maher (1988) 164 CLR 387 and Commonwealth of Australia v Verwayen (1990) 170 CLR 394) which he describes as a fundamental attack on the traditional perception of estoppel as a complete defence.
The remarks in the last four paragraphs are no more than tentative observations on points which were not fully argued, as not being necessary for the determination of the appeal. For the reasons given earlier in this judgment – which are essentially the reasons given by the judge in his admirable judgment – I would dismiss this appeal.
LORD JUSTICE KEENE:
I agree.
LORD JUSTICE SIMON BROWN:
I too would dismiss this appeal for the reasons given by Lord Justice Robert Walker which, as he observes, are essentially those of the Judge below.
In doing so, however, I would not wish to be thought unsympathetic to Mr Derby’s position. He is now beset by grave financial problems albeit, on the Judge’s findings, that would have been so even without the mistaken over-payment. He has suffered in addition the great disappointment of being called upon to repay the bulk of this money some sixteen months after it was paid and after he had begun to accustom himself to a standard of living and a level of security beyond his true means. During those sixteen months not only was he spending the £9,662 now acknowledged to be irrecoverable, but also he was enjoying a pension from the Norwich Union at the rate of £10,884 p.a. more than it should have been (£13,521 p.a. instead of £2,637 p.a.) and having to service a mortgage debt which was £41,671 less than it should have been – short-term benefits of which, like the £9,662, it is not now sought to deprive him. These bald figures apart, one has here on the one hand an impoverished elderly man entering upon retirement who, having initially taken the trouble to question the extent of his entitlement, is then left for sixteen months honestly believing in his good fortune, and on the other a rich and incompetent insurance company who, despite Mr Derby’s “protestations”, carelessly pays out £172, 451 too much and then takes sixteen months to discover its mistake.
Tempting though it is, however, to take these additional factors into account with a view to mitigating the hardship of Mr Derby’s present plight, Mr Moriarty QC has satisfied me that strictly they fall to be ignored and that to give effect to them would simply involve what Scrutton LJ in Holt v Markham [1923] 1 KB 504, 513 called “well-meaning sloppiness of thought”. As Lord Goff observed in Lipkin Gorman (a firm) v Karpnale Limited [1991] 2 AC 548, 578:
“A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle.”
In my judgment there is no legal principle properly entitling the Court to disallow recovery here by Scottish Equitable to the extent ordered below. That leaves Mr Derby with the benefit of an enhanced standard of living for the sixteen months it took to notify him of the mistake – since to that extent he had changed his position by increased spending – but deprives him of any further benefit from the overpayment – since on the Judge’s findings, once he learned of the mistake, he would be no worse off having paid the amount ordered to be repaid than if the mistake had never been made.
ORDER: Appeal dismissed with a S 11 (1) costs order in respect of the appellant specifically that no sum is payable by him in respect of the respondent’s costs; and a provisional declaration that it is just, and equitable for the costs of the appeal to be paid out of public funds. Legal aid assessment of the appellants costs. Permission to appeal to the House of Lords refused.
(Order does not form part of approved Judgment)
Dextra Bank & Trust Company Ltd v. Bank of Jamaica
[2001] UKPC 50
Delivered by Lord Bingham of Cornhill
and Lord Goff of Chieveley]
——————
Dextra’s Restitutionary Claim
Their Lordships turn to the second part of the appeal. This relates to the alternative claim which Dextra has advanced against the BOJ, that it is entitled to recover from the BOJ the sum of J$2,999,000, the amount of the cheque, as money paid under a mistake of fact, viz. the mistaken belief that the money was paid as a loan. The trial judge, Paul Harrison J, held that the money was paid under a mistake of fact; but he also held that the BOJ had changed its position in that the cheque was purchased by Jones and Mitchell, the BOJ’s authorised agents, in good faith, and the BOJ reimbursed their accounts to the full value of the cheque. In these circumstances, he held that the defence of change of position was available to the BOJ, and that Dextra’s claim on the ground of mistake must fail. His decision on this point was affirmed by Forte JA and Patterson JA in the Court of Appeal, on the ground that the BOJ acquired the cheque in good faith and for value in that the agents of the BOJ paid Beckford for the cheque by a number of cheques drawn on the BOJ which BOJ duly honoured, and that in these circumstances the BOJ was not unjustly enriched. The point does not appear to have been considered by Bingham JA.
This alternative claim is based upon the premise that the BOJ did acquire the title to the cheque (otherwise Dextra would have been able to recover in the tort of conversion); it is not a proprietary claim. It is a claim for money had and received as being money paid by Dextra to the BOJ under a mistake of fact. Dextra have therefore to establish that it was so paid. That is the first issue. The second relates to whether the BOJ have a defence to the claim on the ground of change of position. Their Lordships have had the benefit of well researched argument from counsel on both sides in relation to these two issues for which they are grateful. The particular facts of the present case have complicated the resolution of the issues. In relation to the question of mistake the salient feature is that Dextra mistakenly trusted their agents, in particular Phillips, to carry out their instructions and were let down by them. In relation to the question of change of position, the complicating feature is one of timing. Jones and Mitchell did not wait until after they had received the Dextra US dollar cheque from Beckford before handing over the Jamaican dollar cheques drawn in favour of the various persons Beckford had specified. What they did also enabled the payees of the Jamaican dollar cheques to present them and obtain the payment of them by the BOJ before Jones had the Dextra US dollar cheque in his hands. The essential acts of change of position on which the BOJ would seek to rely as providing a defence to the claim of Dextra occurred earlier in time than BOJ’s receipt of the Dextra cheque or its proceeds and in anticipation of such receipt.
Mistake of Fact
Their Lordships turn to Dextra’s claim to recover its money as having been paid to the BOJ under a mistake of fact. To succeed in an action to recover money on that ground, the plaintiff has to identify a payment by him to the defendant, a specific fact as to which the plaintiff was mistaken in making the payment, and a causal relationship between that mistake of fact and the payment of the money: see Barclays Bank Ltd. v W J Simms, Son and Cooke (Southern) Ltd. [1980] 1 QB 677, 694. In the opinion of their Lordships, there are difficulties with regard to the second and third of these elements in the present case.
Their Lordships turn then to the second element, viz. that Dextra must have paid the money to the BOJ under a mistake of fact. It is the contention of Dextra that the money was paid under a mistake, in that Dextra had intended to make a loan. The difficulty with this proposition is that this does not appear to have been a mistake as to a specific fact, like for example a mistake as to the identity of the defendant, but rather a misprediction as to the nature of the transaction which would come into existence when the Dextra cheque was delivered to the BOJ, which is a very different matter: see Birks, Introduction to the Law of Restitution, pp. 147-8. In that passage, Professor Birks explains the rationale of this distinction in terms relevant to the present case, as follows:
“The reason is that restitution for mistake rests on the fact that the plaintiff’s judgment was vitiated in the matter of the transfer of wealth to the defendant. A mistake as to the future, a misprediction, does not show that the plaintiff’s judgment was vitiated, only that as things turned out it was incorrectly exercised. A prediction is an exercise of judgment. To act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …
The safe course for one who does not want to bear the risk of disappointment which is inherent in predictions is to communicate with the recipient of the benefit in advance of finally committing it to him. He can then qualify his intent to give by imposing conditions, or sometimes by making a trust …”
Here, unfortunately, Dextra failed to communicate directly with the BOJ to make sure that the BOJ understood that the money was being offered as a loan. Instead, it left the communication of this vital matter to its agent, Phillips. Dextra’s misplaced reliance on Phillips led it to assume that a loan would result; and this prediction proved to be mistaken. But a misprediction does not, in their Lordships’ opinion, provide the basis for a claim to recover money as having been paid under a mistake of fact.
Dextra did however argue that it suffered under a mistake of fact when it was deceived by Wildish into believing that the BOJ had previously agreed to take a loan from Dextra. In fact, the BOJ had not so agreed. But, although this can be regarded as a mistake of fact on the part of Dextra, it cannot be said to have caused Dextra’s payment to the BOJ. This is because it was overtaken by the specific instructions given by Dextra to Phillips that the cheque was not to be handed over to the BOJ except against the delivery to him of a promissory note evidencing the loan and its terms. It was upon the compliance by Phillips with this instruction that Dextra relied to ensure that a loan was made upon the terms acceptable to it. The significance of the earlier deception by Wildish was only that it contributed to Dextra instructing Phillips to ensure that the cheque was handed over as a loan. Dextra’s payment was not however caused by any such mistake of fact as that now alleged by Dextra; it was caused by a misprediction by Dextra that Phillips would carry out his instructions and that a loan would eventuate.
Their Lordships have however considered whether Dextra could recover its money as having been paid under a mistake of fact not at the time of delivery of the cheque to the BOJ, but at the time of payment of the cheque, on the basis that, if Dextra had known what had happened, it would have stopped payment of the cheque by its bank, the Royal Bank of Canada; but, since it did not know the true facts, it did not do so. Their Lordships have however been driven to the conclusion that there are insuperable objections to any such conclusion.
Beckford delivered the cheque to the BOJ which gave value for it in good faith and without notice of any want of authority on the part of Beckford or his associates. The BOJ then negotiated the cheque by endorsement and delivery to its bank, Citibank, for the purpose of collecting payment from the drawees, the Royal Bank of Canada. Citibank itself indorsed the cheque and presented it to the Royal Bank of Canada for payment. The Royal Bank of Canada paid the cheque and debited Dextra’s account. The payment of the cheque was authorised by Dextra, and indeed the Royal Bank of Canada was under a duty to Dextra to honour the cheque, the payment of which discharged the liability of Dextra under the cheque. Furthermore the BOJ, having (in the opinion of their Lordships) acquired a good title to the cheque and having given value for it, would have succeeded if it had had to sue Dextra on the cheque. The same of course applies to Citibank, which was a holder in due course. In presenting the cheque for payment Citibank was asserting its own rights under the cheque and received payment on its own behalf.
It follows that Dextra cannot succeed against the BOJ on a claim for money had and received based upon what happened at the time of the payment of the cheque. It can only succeed, if at all, on the basis of the circumstances in which the BOJ acquired the cheque; and these disclose not a relevant mistake of fact but a misprediction.
Change of Position
Even so their Lordships propose to consider whether, against this background, the BOJ would, if necessary, have been able to rely on the defence of change of position. The submission of the BOJ has been that it would have been entitled to do so because the Dextra cheque was purchased by the BOJ’s authorised agents on its behalf in good faith and the BOJ reimbursed their accounts in full, and that this rendered it inequitable for Dextra thereafter to recover the money so received by the BOJ as having been paid under a mistake of fact. Dextra has responded that the actions so relied on by the BOJ as constituting a change of position were performed by the BOJ before it received the benefit in question, and so amounted to what has been called “anticipatory reliance” and as such could not amount to a change of position by the BOJ for the purposes of the law of restitution. Dextra’s argument is that, for the act of the defendant to amount to a change of position, it must have been performed by the defendant in reliance on the plaintiff’s payment, which cannot be the case if it was performed by him before he received the relevant benefit.
Anticipatory Reliance
The question whether anticipatory reliance of the kind just described can amount to an effective change of position has been much debated in the books. Their Lordships have studied the relevant material with interest and profit, and have also been much assisted by the arguments of counsel.
Their Lordships start with the broad statement of principle by Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd. [1991] 2 AC 548 when he said, at p. 580:-
“At present I do not wish to state the principle any less broadly than this: that the defence [of change of position] is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full.”
Their Lordships add that, although the actual decision in that case does not provide any precise guidance on the question now under consideration, since it was based upon the peculiar nature of gaming transactions, nevertheless the Appellate Committee in that case appears to have adopted a broad approach based on practical justice, and to have avoided technicality: see in particular [1991] 2 AC at pp. 581-583, per Lord Goff of Chieveley.
The response by the BOJ to Dextra’s argument has been that it is no less inequitable to require a defendant to make restitution in full when he has bona fide changed his position in the expectation of receiving a benefit which he is fact receives, than it is when he has done so after having received that benefit. Of course, in all these cases the defendant will ex hypothesi have received the benefit, because the context is an action by the plaintiff seeking restitution in respect of that benefit. For those who support the distinction, however, their reply appears to be that, whereas change of position on the faith of an actual receipt should be protected because of the importance of upholding the security of receipts, the same is not true of a change of position in reliance on an expected payment, which does not merit protection beyond that conferred by the law of contract (including promissory estoppel).
Their Lordships confess that they find that reply unconvincing. Here what is in issue is the justice or injustice of enforcing a restitutionary claim in respect of a benefit conferred. In that context, it is difficult to see what relevant distinction can be drawn between (1) a case in which the defendant expends on some extraordinary expenditure all or part of a sum of money which he has received from the plaintiff, and (2) one in which the defendant incurs such expenditure in the expectation that he will receive the sum of money from the plaintiff, which he does in fact receive. Since ex hypothesi the defendant will in fact have received the expected payment, there is no question of the defendant using the defence of change of position to enforce, directly or indirectly, a claim to that money. It is surely no abuse of language to say, in the second case as in the first, that the defendant has incurred the expenditure in reliance on the plaintiff’s payment or, as is sometimes said, on the faith of the payment. It is true that, in the second case, the defendant relied on the payment being made to him in the future (as well as relying on such payment, when made, being a valid payment); but, provided that his change of position was in good faith, it should provide, pro tanto at least, a good defence because it would be inequitable to require the defendant to make restitution, or to make restitution in full. In particular it does not, in their Lordships’ opinion, assist to rationalise the defence of change of position as concerned to protect security of receipts and then to derive from that rationalisation a limitation on the defence. The defence should be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full. In any event, since (as previously stated) the context of a restitutionary action requires that the expected payment has in any event been received by the defendant, giving effect to “anticipatory reliance” in that context will indeed operate to protect the security of an actual receipt.
Before leaving this topic their Lordships think it right to refer to the decision of Clarke J in South Tyneside B C v Svenska International [1955] 1 All ER 545. There the defendant bank had entered into ultra vires swap transactions with the plaintiff local authority, but the bank had also entered into hedging transactions which would substantially cancel out its potential liability to the local authority under the swap transactions. In the result the local authority was the net payer under the void swap transactions, and claimed repayment of the money so paid by it. The bank was held liable to make restitution, but claimed to be entitled to set off the losses incurred by it under the hedging transactions on the ground that it had changed its position in good faith in reliance on the validity of the original swap contract by committing itself to the hedging transactions and by maintaining them thereafter. The local authority submitted that the bank should not be entitled to set off those losses, because it changed its position before receiving the payments in question. Clarke J’s conclusion on this point was as follows (see p. 565d-g):-
“In my judgment in circumstances such as these the bank is not entitled to rely upon the underlying validity of the transaction either in support of a plea of estoppel or in support of a defence of change of position. That is because the transaction is ultra vires and void. It is for that reason that in a case of this kind, save perhaps in exceptional circumstances, the defence of change of position is in principle confined to changes which take place after receipt of the money. Otherwise the bank would in effect be relying upon the supposed validity of a void transaction … It does not however follow that the defence of change of position can never succeed where the alleged change occurs before receipt of the money …”
It follows that the exclusion of anticipatory reliance in that case depended on the exceptional facts of the case; though it is right to record that the decision of Clarke J has been the subject of criticism – see, eg, Goff and Jones, Law of Restitution, 5th ed, 823-4.
The relevance of fault to the defence of change of position
It was a further submission of Dextra that, in cases in which the defendant invokes the defence of change of position, it is necessary to balance the respective faults of the two parties, because the object of the defence is to balance the equity of the party deprived with that of the party enriched.
Their Lordships approach this submission as follows. First, they cannot help observing that the courts below appear to have formed the view that the fault of Dextra greatly outweighed the fault, if any, of the BOJ. If that is right, this submission will, if successful, do little to advance Dextra’s case. Even so, their Lordships turn to consider the point as a matter of principle.
They take as their starting point the statement of the law in Lipkin Gorman v Karpnale Ltd. [1991] 2 AC 548, where it was explained by Lord Goff of Chieveley that, for a defendant to be able to rely on his own conduct as giving rise to a change of position, he must have changed his position in good faith – see [1991] 2 AC 548 at pp. 579F-G, and 580C. No mention was made by him of the relevance of fault. On the other hand Lord Goff was careful to state (see p. 580C) that “nothing should be said at that stage to inhibit the development of the defence of change of position on a case by case basis, in the normal way”, which left it open to the courts to consider matters such as the relevance of fault on a subsequent occasion. Their Lordships make the initial comment that, if fault is to be taken into account at all, it would surely be unjust to take into account the fault of one party (the defendant) but to ignore fault on the part of the other (the plaintiff). The question therefore is whether it should be relevant to take into account the relative fault of the two parties.
In support of its submission, Dextra was able to invoke the law in two common law jurisdictions. First, in the United States of America, the Restatement of Restitution provides, in paragraph 142(2), that:
“Change of circumstances may be a defense or a partial defense if the conduct of the recipient was not tortious and he was no more at fault for his receipt, retention or dealing with the subject matter than was the claimant.”
The Restatement of Restitution is a remarkable work, of which the Reporters were two much respected jurists, Professor Warren A Seavey and Professor Austin W Scott. It was however a pioneering work, and much water has flowed under the bridge since its publication in 1937. In particular another much respected American expert in the law of restitution, Professor J P Dawson, was later to express his regret at the inclusion in paragraph 142(2) of the provision relating to relative fault: see (1981) 61 Boston U L Review 565, 571 et seq., referred to by Professor Birks at page 41 of his account of Change of Position and Surviving Enrichment in The Limits of Restitutionary Claims: A Comparative Analysis, ed. by William Swadling. Professor Dawson’s comment on the relevant part of paragraph 142(2) of the Restatement is as follows:-
“The introduction of these complex themes would have been, I believe, a real disservice. Fortunately they have been disregarded in court decisions.”
Second, in New Zealand a defence of change of position was introduced by statute, in section 94B of the Judicature Act 1908, introduced into that statute in 1958. The statutory provision requires the court to have regard to all possible implications in respect of other persons when considering whether to deny relief, on the ground of change of position, in an action for the recovery of money paid under a mistake of law or fact. That provision was considered by the Court of Appeal of New Zealand in Thomas v Houston Corbett & Co [1969] NZLR 151, in which the Court held that it was entitled to look at the equities from both sides (see p. 164, lines 13-14, per North P) and, taking a number of matters into account including, it appears, matters going beyond “fault or neglect in the strict sense” on the part of the respondents (see p. 178, line 4, per McGregor J), held that the claim must be reduced. The quantum of the relief was treated as a matter of discretion on which opinions might differ (see p. 178, line 26, also per McGregor J). More recently, in National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211 (on which see the valuable note by Professor Grantham and Professor Rickett in [1999] RLR 158) the Court of Appeal of New Zealand has given further consideration to section 94B. Following the decision of the Judicial Committee of the Privy Council in Goss v Chilcott [1996] 3 NZLR 385, the Court of Appeal concluded that section 94B did not exclude the operation of the common law defence of change of position, but went on to conclude that the common law defence was, like the defence under section 94B, an “equitable” defence which required the court to undertake a “balancing of the equities” by assessing the relative fault of the parties and apportioning the loss accordingly.
Their Lordships are however most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as a sufficient requirement in this context. In forming this view, they are much influenced by the fact that, in actions for the recovery of money paid under a mistake of fact, which provide the usual context in which the defence of change of position is invoked, it has been well settled for over 150 years that the plaintiff may recover “however careless [he] may have been, in omitting to use due diligence”: see Kelly v Solari (1841) 9 M & W 54 at p. 59, per Parke B. It seems very strange that, in such circumstances, the defendant should find his conduct examined to ascertain whether he had been negligent, and still more so that the plaintiff’s conduct should likewise be examined for the purposes of assessing the relative fault of the parties. Their Lordships find themselves to be in agreement with Professor Peter Birks who, in his article already cited on Change of Position and Surviving Enrichment at p. 41, rejected the adoption of the criterion of relative fault in forthright language. In particular he stated (citing Thomas v Houston Corbett & Co. [1969] NZLR 151) that the New Zealand courts have shown how hopelessly unstable the defence [of change of position] becomes when it is used to reflect relative fault. Certainly, in the case of Thomas, the reader has the impression of judges struggling manfully to control and to contain an alien concept.
For these reasons their Lordships are unable to accept the arguments advanced by Dextra in answer to the reliance by the BOJ on the defence of change of position.
Bona fide purchase
In the Court of Appeal, both Forte JA and Patterson JA dismissed Dextra’s appeal not on the ground of change of position by the BOJ, but on the ground that the BOJ was a bona fide purchaser of the Dextra cheque. It is commonly accepted that the defence of bona fide purchaser is only available to a third party, which includes an indirect recipient, ie a person who received the benefit from somebody other than the plaintiff or his authorised agent. Here the BOJ received the cheque from Beckford who was acting without authority from Dextra in selling the cheque to the BOJ, so that the BOJ can properly be described as an indirect recipient; and the BOJ, through its agents Jones and Mitchell, paid for the cheque in accordance with the directions of Beckford. In so doing, the agents of the BOJ acted in good faith. In agreement with the majority of the Court of Appeal, their Lordships can see no reason why the BOJ should not be entitled to invoke the defence of bona fide purchase in answer to Dextra’s restitutionary claim; though, on the view which their Lordships have taken of the case, it is not necessary for the BOJ to do so.
Conclusion
For the reasons they have given, their Lordships will humbly advise Her Majesty that the appeal of Dextra from the decision of the Court of Appeal of Jamaica should be dismissed with costs.
Minshall v HM Revenue and Customs & Ors
[2015] EWCA Civ 741
Lord Justice Sales:
Introduction
This is an appeal from the judgment of Mr L. Blohm QC, sitting as a Deputy Judge of the High Court, by which he struck out the appellant’s claim for a payment under the law of restitution of £80,000 and damages for false imprisonment in relation to a period of two days which he spent in prison. The claim in restitution relates to payments totalling that amount which he made in 2007 (when £75,000 was paid) and 2009 (when £5,000 was paid) pursuant to a confiscation order made by the court in 2000 in criminal proceedings against the appellant. The claim for false imprisonment relates to a period spent in prison in 2009 when the appellant was committed to prison for failing to pay the sum due under the confiscation order; he was released when he paid the balance of the sum due under the order. Many of the matters relied on happened long ago, before various organisational changes affecting the respondents. For ease of reference I refer to the first respondent and their predecessor bodies as “HMRC” and to the second respondent and its predecessor bodies as “the CPS”.
Prior to making the payments, the appellant brought an appeal against the confiscation order. His principal argument was that by virtue of section 72A of the Criminal Justice Act 1988 and the lapse of time after his conviction before the confiscation order was made, it had been made without jurisdiction. The appeal was stayed behind other cases on appeal to the House of Lords which raised the same issue. In July 2005, the House of Lords decided the point of law in a way adverse to the appellant: see R v Soneji [2005] UKHL 49; [2006] 1 AC 368 and R v Knights [2005] UKHL 50; [2006] 1 AC 340. The appellant’s appeal against the confiscation order was then dismissed by the Court of Appeal (Criminal Division) in February 2006: R v Minshall [2006] EWCA Crim 987. That Court declined to certify a point of law of general public importance, so the appellant was unable to pursue his appeal any further within the domestic legal system.
The appellant promptly exercised his right of application to the European Court of Human Rights (“ECtHR”) to complain that his rights under Article 6 and Article 7 of the European Convention on Human Rights (“ECHR”) had been violated in certain ways, including by the delay in achieving that result at the domestic level. In December 2011 the Fourth Section of the ECtHR delivered a judgment in which it found that the United Kingdom had violated the appellant’s Convention rights under Article 6(1) of the ECHR so far as concerned his right to a determination within a reasonable time, by reason of the delay of about two years while the appellant’s appeal was stayed pending the decision of the House of Lords in R v Soneji: Minshall v United Kingdom (2012) 55 EHRR 36. His other complaints were dismissed.
Meanwhile, after permission to appeal to challenge the making of the confiscation order in the appellant’s case had been refused, the CPS took steps in the magistrates’ court to enforce it. The appellant commenced further proceedings in the domestic courts in the form of an application for judicial review to challenge the enforcement of the confiscation order. His claim for judicial review was dismissed by Pitchford J in 2008: R (Minshall) v Marylebone Magistrates’ Court [2008] EWHC 2800 (Admin); [2010] 1 WLR 590. In the course of his judgment, delivered well before the judgment of the ECtHR in Minshall v United Kingdom, Pitchford J expressed the view that there had been no breach of the reasonable time requirement under Article 6(1) by reason of the delay in waiting for the final decisions of the House of Lords in R v Soneji and R v Knights. Permission to appeal was refused. As a result of Pitchford J’s ruling enforcement of the confiscation order could proceed.
In 2009, having failed to pay the balance due under the confiscation order, the appellant was committed to prison and detained for two days. He then paid the balance due and was released.
In 2013 the appellant commenced the present proceedings in the Chancery Division. In these proceedings he claims that the decision of Pitchford J to allow enforcement of the confiscation order to proceed was made in error, by reason of the difference of view between the judge and the ECtHR regarding the significance of the delay before the House of Lords decisions in R v Soneji and R v Knights; that the appellant paid the sum due under the confiscation order by reason of a mistake of law that the order was being enforced without violation of his Convention rights; and that by reason of the error of the domestic court as to the enforceability of the confiscation order, he could not lawfully have been imprisoned in enforcement of the order and therefore is entitled to claim damages for false imprisonment.
The deputy judge found that the claim disclosed no arguable claim in law and so struck it out. Vos LJ granted permission to appeal. At the hearing before us, we heard full argument from Mr Clayton QC for the appellant in opening the appeal. At the end of the opening, we considered that the claim and the appeal were unsustainable and indicated that we did not need to hear from counsel for the respondents. We reserved judgment to explain our reasons.
Factual background
On 3 February 2000, at Wood Green Crown Court, the appellant pleaded guilty to conspiracy fraudulently to evade excise duty on alcoholic liquor contrary to section 170 of the Customs and Excise Act 1979. On 28 February 2000 Newman J made a restraint order against the appellant to prohibit disposal by him of his assets, in contemplation of the making by HMRC and the CPS of an application for a confiscation order against him. On 5 May 2000 the appellant was sentenced to two-and-a-half years’ imprisonment.
Section 72A of the Criminal Justice Act 1988 provides that, absent exceptional circumstances, a confiscation order should be made within six months of conviction. There were directions hearings in relation to the application by HMRC and the CPS for such an order on 5 June and 3 August 2000 before the judge in the Crown Court. At the second hearing, the judge gave directions (to which the appellant did not object) for a substantive trial of the issue whether a confiscation order should be made, to take place in October 2000.
On 2 October 2000, the Human Rights Act 1998 (“the HRA”) and the Convention rights set out in that Act came into effect at the domestic level in the United Kingdom.
On 13 October 2000 the Crown Court judge made a confiscation order against the appellant to pay £80,000 by 30 April 2001, with 18 months’ imprisonment in default of payment.
The appellant sought leave to appeal against the confiscation order, on the ground that it had been made more than six months after his conviction in breach of section 72A. At the time, there was uncertainty about the effect of section 72A in such circumstances. On 19 July 2001 permission to appeal was granted and enforcement of the confiscation order was suspended pending the outcome of the appeal (with the restraint order remaining in place in the meantime).
Other test cases on the effect of section 72A in such circumstances were heard by the Court of Appeal, which on 16 December 2002 gave judgment holding that a failure to comply with the statutory six month time limit in that provision did not deprive the courts of jurisdiction to make a confiscation order. The appellant in one of these cases, R v Soneji, sought and obtained permission to appeal to the House of Lords. Permission was also granted in the case of R v Knights.
In a distinct development, on 15 April 2003 the appellant issued an out of time notice of appeal against conviction on the grounds of alleged non-disclosure by the prosecution at his trial. This went nowhere: on 24 June 2004 the Court of Appeal refused the appellant permission to appeal his conviction out of time.
Meanwhile, on 2 March 2004 the Court of Appeal continued the stay of the appellant’s appeal against the confiscation order in his case, pending the judgment of the House of Lords in R v Soneji and R v Knights.
On 21 July 2005 the House of Lords handed down its judgments in R v Soneji and R v Knights. The House of Lords affirmed the judgment of the Court of Appeal that breach of the time limit in section 72A would not necessarily deprive a court of jurisdiction to make a confiscation order.
The appellant sought permission to amend his grounds of appeal in respect of the confiscation order to add two new grounds: (i) that the confiscation order was unlawful because made in respect of a conspiracy to commit another substantive offence, rather than in relation to the substantive offence itself; and (ii) that the duration of the proceedings up to the date of the appeal had been unreasonably long, in breach of the appellant’s Convention rights under Article 6(1) of the ECHR. By a judgment dated 14 February 2006, the Court of Appeal (Criminal Division) refused permission to amend the grounds of appeal and, by application of the reasoning of the House of Lords in R v Soneji and R v Knights, dismissed the appeal based on non-compliance with section 72A. The stay against enforcement of the confiscation order in respect of the appellant was brought to an end.
On 15 February 2006, the appellant applied to the House of Lords for permission to appeal. On 16 February 2006, the House of Lords dismissed that application.
The same day, 16 February 2006, since his domestic remedies in relation to the making of the confiscation order had been exhausted, the appellant commenced proceedings against the United Kingdom before the ECtHR.
On 20 February 2006, the CPS wrote to the appellant to demand that he pay the sum stated in the confiscation order. The CPS refused a request by the appellant to stay enforcement pending the outcome of the proceedings in the ECtHR. Since the appellant made no proposals to satisfy the confiscation order, the CPS commenced enforcement proceedings in the magistrates’ court.
At a hearing on 23 August 2006, the magistrates’ court rejected the submission for the appellant that to proceed to enforce the confiscation order would constitute an abuse of process and would violate the appellant’s rights under Article 6. The enforcement proceedings were adjourned to 31 October 2006 to allow for an inquiry in respect of the appellant’s means.
The appellant commenced a claim for judicial review of the magistrates’ court decision to allow the enforcement proceedings to continue.
At the adjourned hearing on 31 October 2006, the district judge sitting in the magistrates’ court dismissed an application by the appellant for a stay of the enforcement proceedings pending determination of his application for judicial review. However, the means inquiry was adjourned to 19 December 2006.
In the event, the appellant was granted permission by the High Court to apply for judicial review and a stay of the enforcement proceedings pending the hearing of the claim for judicial review (at hearings on 23 January 2007 and 19 December 2006, respectively). However, on 25 January 2007, Langstaff J found the appellant in contempt of court in relation to breaches of the restraint order and ordered him to pay £75,000 in respect of the confiscation order within 28 days. The appellant paid this sum on 21 February 2007.
By his judgment in R (Minshall) v Marylebone Magistrates’ Court handed down on 21 November 2008, Pitchford J dismissed the appellant’s application for judicial review. Pitchford J noted the delay which had occurred in relation to enforcement of the confiscation order, in particular to allow for the conclusion of the proceedings in the House of Lords in R v Soneji and R v Knights. However, he dismissed the appellant’s argument that enforcement of the confiscation order would be in breach of his rights under Article 6. Pitchford J held that, whilst Article 6 was applicable in relation to the enforcement proceedings, it had been reasonable for the enforcement proceedings to be stayed pending resolution of the legal issue regarding the effect of section 72A which was ultimately determined by the judgments of the House of Lords in those cases. On 21 January 2009, he refused the appellant’s application to certify a point of law of general public importance for consideration by the House of Lords. The stay in respect of enforcement of the confiscation order came to an end.
The appellant failed to pay the balance of £5,000 due under the confiscation order. A warrant of commitment was issued for the imprisonment of the appellant pending payment. The court which issued the warrant was the magistrates’ court which was responsible for enforcement of the confiscation order. On 22 September 2009 the appellant was imprisoned on the authority of this warrant. The balance due was paid the following day and he was released.
After some delay, the ECtHR eventually delivered its judgment on the appellant’s application in Strasbourg on 11 December 2011: Minshall v United Kingdom (2012) 55 EHRR 36. The judgment makes it clear that the ECtHR had been informed about the progress of all the domestic proceedings in relation to the appellant, including about his imprisonment and the enforcement of the confiscation order against him: paras. [16]-[22]. However, the judgment also makes it clear that the appellant’s application to the ECtHR was limited to the question whether there had been a violation of Article 6(1) in the period down to the final dismissal of his appeal against the confiscation order by the decision of the House of Lords dated 16 February 2006 to refuse him permission to appeal. According to the appellant’s application, this was the end of the relevant period of delay in the domestic proceedings against the appellant, since it was on that date that the question of the validity of the confiscation order was finally determined in those proceedings: see para. [31] (“[The appellant]… accepts that the relevant proceedings began on 3 February 2000 when he was convicted of conspiracy fraudulently to evade excise duty and were determined on 16 February 2006, when he was refused leave to appeal to the House of Lords”) and para. [37]. In the proceedings in Strasbourg, the appellant did not complain about time taken in relation to the enforcement proceedings against him after 16 February 2006. He claimed compensation for aggravation and anguish and for interest paid by him by reason of the late payment of the sum due under the confiscation order, but specifically accepted that the capital sum due under the confiscation order “was properly upheld and enforceable”: para. [66].
By its judgment, the ECtHR held that there had been unreasonable delay in the domestic proceedings, in violation of Article 6(1), down to 16 February 2006, by reason of the unexplained delay in the determination of the proceedings in R v Soneji and R v Knights in the House of Lords: paras. [51]-[56]. The ECtHR held that compensation in the sum of €2,000 was payable as just satisfaction for the violation, covering both pecuniary and non-pecuniary damage: para. [70]. In due course the United Kingdom paid the appellant this sum. The ECtHR rejected other complaints by the appellant, namely that he had not had a fair trial and that there had been a violation of Article 7.
A considerable time later, on 23 February 2013 the appellant issued his claim in the present proceedings in the Chancery Division. His particulars of claim were drafted by himself, as a litigant in person. They are diffuse, but for present purposes can be summarised as a claim for restitution and a claim for damages for false imprisonment. The appellant relies on the different conclusion of the ECtHR on the issue of unreasonable delay pending the decision of the House of Lords in February 2006, contrary to Article 6(1), as compared with the reasoning of Pitchford J on that issue in his judgment in the domestic proceedings. The appellant says that, because there had been unreasonable delay contrary to Article 6(1) in determining whether the confiscation order was rightly made, it was likewise contrary to Article 6(1) on grounds of delay (and hence unlawful) for the confiscation order to be enforced against him subsequently in the domestic proceedings. His restitution claim in the present proceedings relates to the total capital sum of £80,000 (plus additional interest) paid by him under the confiscation order. His false imprisonment claim is in respect of the two days he spent in prison on 22 and 23 September 2009, as a measure to enforce the confiscation order.
At the hearing below the appellant was represented by different counsel from those who appear for him in this court. At that hearing there was debate about whether, in addition to the restitution claim and the false imprisonment claim, the appellant might have a claim for damages under the HRA in relation to the steps taken after 16 February 2006 to enforce the confiscation order against him. The appellant would have required permission to amend his claim form to add such a claim. Also, since the usual time limit for a claim under the HRA is one year, the appellant would have required an extension of time pursuant to section 7(5)(b) of the HRA. In the event, however, no draft pleading seeking to add such a claim was placed before the judge; no application to amend was made; and no application was made for an extension of time to bring such a claim.
By an order dated 12 November 2013 the judge struck out the appellant’s claim on the grounds that it did not disclose any viable cause of action. The appellant now appeals to this court.
Discussion
Although I have reservations about parts of the judge’s reasoning, some of which I explain below, the main part of his reasoning based on Isaacs v Robertson [1985] AC 97 and the enforceability of valid court orders is in my judgment correct and this appeal should be dismissed.
Article 6(1) of the ECHR, which is set out in Schedule 1 to the HRA as a Convention right for the purposes of the Act, provides in relevant part as follows:
“In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.”
The judge began his legal analysis by saying that the proceedings before the ECtHR were in the nature of an appeal from the domestic proceedings: para. [4]. In a similar way, in his speaking note for this appeal, Mr Clayton maintained that “the decision of Pitchford J was reversed by the decision of the ECtHR”.
This is not an accurate characterisation of the position. The part of the domestic proceedings by which the appellant challenged the enforcement of the confiscation order (as distinct from the making of it in the first place) came to an end with the judgment of Pitchford J on 21 November 2008 and the refusal of permission to appeal in respect of it. After that, the appellant had no remaining valid objection in the domestic courts to enforcement of the confiscation order. At the latest, the enforcement process in fact came to an end on 23 September 2009 when the appellant paid the outstanding balance due under the order and was released from prison.
The appellant’s application to the ECtHR does not constitute an appeal against the judgment or the order of Pitchford J, which is a final and conclusive decision for the purposes of domestic law that the enforcement of the confiscation order was compatible with Article 6 and in no way unlawful. The appellant’s application to the ECtHR was a step taken on the plane of international law, not domestic law. It was an application to an international court (the ECtHR) made at a time when relevant domestic remedies with respect to the making of the confiscation order had been exhausted. The fact that the ECtHR eventually came to a different conclusion than Pitchford J regarding the compatibility with Article 6(1) of the period of delay due to the wait for the House of Lords decisions in R v Soneji and R v Knights is a finding relevant to the appellant’s claim under international law (which has been fully satisfied by the payment of the sum of €2,000 found by the ECtHR to be due to him as just satisfaction), but is not relevant to the appellant’s current claims under domestic law in restitution and for false imprisonment.
So far as those claims are concerned, the insuperable difficulty facing the appellant is that the relevant orders made in relation to him in the domestic proceedings are all valid and conclusive orders for the purposes of domestic law. The confiscation order was validly made, as the appellant himself conceded in his submissions on just satisfaction in the proceedings before the ECtHR. The enforcement proceedings in the magistrates’ court were validly pursued despite the element of delay in the House of Lords, as Pitchford J determined. The warrant for the appellant’s committal to prison to enforce the confiscation order was validly issued and the lawfulness of it was not challenged by the appellant in domestic proceedings at the time; nor could it have been, in view of the decision by Pitchford J.
The appellant’s claim is contrary to two important principles of domestic law, which have combined effect in this case. First, the very issue which the appellant now seeks to raise in these proceedings (whether enforcement of the confiscation order was incompatible with Article 6) has been determined against him in legal proceedings to which he was party. At the level of domestic law it is res judicata that there has been no violation of Article 6(1) in respect of the enforcement proceedings against him in relation to the confiscation order. He is not entitled to seek to re-open that issue in the present proceedings.
Secondly, the appellant was subject to a direct order of a court against him personally that he should pay the confiscation sum. Even if he doubted the validity of the order, he came under an obligation to comply with it: see Isaacs v Roberts. This obligation was reinforced by the order made by Pitchford J to dismiss the appellant’s claim for judicial review of the magistrates’ court decision to enforce the confiscation order. The judge below correctly identified the rule in Isaacs v Robertson as a rule to which the appellant has no answer in the present case: see paras. [19]-[21] of the judgment. Under the confiscation order the appellant’s obligation was to pay the £80,000; if he wished to reverse the effect of the confiscation order or the enforcement proceedings against him, it was necessary for him to obtain an order of a court of relevant jurisdiction and authority to discharge the orders which had been made against him. This he has failed to do. The ECtHR is not a court with such jurisdiction and authority. Nor is the judge in the present proceedings: he had no authority to question whether the Crown Court was correct to issue the confiscation order in the first place nor whether Pitchford J was correct to decide that enforcement of that order by the magistrates’ court was lawful and compatible with Article 6(1).
There is scope for the interpretation of Convention rights in domestic law to be informed by case law of the ECtHR, especially where there is clear and constant jurisprudence of that court: see section 2(1) of the HRA and Pinnock v Manchester City Council v Pinnock (Nos. 1 and 2) [2010] UKSC 45; [2011] UKSC 6; [2011] 2 AC 104, [48]. In some cases where the ECtHR later comes to a different conclusion about the interpretation or application of a Convention right in a particular context, after it has been ruled upon by the domestic courts, it may be proper for an application to be made to the appropriate domestic court to seek to obtain an order to reverse orders previously made by the domestic court. (I observe that the same might equally be true if a later decision of the Supreme Court required the lower courts to revisit some established interpretation of Convention rights or domestic law). If such an order can be obtained, the individual who had been bound by relevant previous orders made by the domestic courts will no longer be subject to any principle of res judicata or the rule in Isaacs v Robertson.
In the circumstances of the present case, the appropriate domestic court in relation to the confiscation order itself would have been the Court of Appeal (Criminal Division): after the judgment in Minshall v United Kingdom the appellant could have sought to apply out of time for permission to appeal in respect of that order. And the appropriate court in relation to the decision of Pitchford J, which was in a “criminal cause or matter”, would have been the Supreme Court of the United Kingdom (which has replaced the House of Lords): again, the appellant could have sought to apply out of time for permission to appeal, giving as a reason the new judgment of the ECtHR. But the appellant has not sought to follow either of these courses and remains bound by the orders made against him.
I am far from saying that, if the appellant had tried to obtain permission to appeal, he would have been successful or that, if he had been granted permission, he would have been successful in any appeal. In fact, all the indications are that he would not have been. He did not apply promptly after the judgment of the ECtHR was handed down. The judgment did not say that the making of the confiscation order was contrary to any Convention right of the appellant (indeed, he accepted that he could not complain about this). In his application to the ECtHR the appellant did not complain about the enforcement of the confiscation order after 16 February 2006: his complaint was only that the delay in getting to the point when the House of Lords decided that it was a valid order had been too great: see para. [31] of the ECtHR’s judgment (it is true that the appellant made his application to the ECtHR as soon as that point was reached, but if he had wanted to complain about the steps taken to enforce the order it would have been a simple matter for him to amend the application to cover that complaint). It follows from the limited way in which the appellant put his complaint that the ECtHR has not determined that the domestic courts contravened Article 6 in taking the steps they did to enforce the confiscation order. There is simply no ruling from the ECtHR to say that the decision made by Pitchford J that it was proper for enforcement of the confiscation order to proceed in 2008 was contrary to any Convention right of the appellant.
In fact, the ECtHR was well aware of his decision and of the enforcement steps which followed from it, since it referred to them in its judgment. Having done so, the ECtHR said nothing to indicate that there was in its opinion anything contrary to the Convention in what had happened regarding the enforcement of the confiscation order (as distinct from what had happened before it was finally decided that the order was a valid one) – and in fact the steps to enforce the order had all been taken within a reasonable time once that final decision as to its validity was arrived at. The ECtHR plainly considered that the compensation of €2,000 it awarded for the distress suffered by the appellant until that final decision was made (also covering an element of interest in relation to the period up to 16 February 2006), was appropriate and sufficient just satisfaction for any delay that had occurred. The United Kingdom has made the payment required, and there is no other element of just satisfaction appearing from the judgment of the ECtHR which requires further action from the United Kingdom. It cannot be inferred from any of this that the ECtHR thought that the far more radical conclusion should be drawn, that the confiscation order should not have been enforced at all; in fact, the proper inference is the opposite of this. Hence Mr Clayton’s suggestion that Article 46 of the ECHR, relating to the international law obligation on the United Kingdom to comply with judgments of the ECtHR, somehow creates an obligation on the domestic courts to treat any previous domestic court order in the appellant’s case as reversed goes nowhere.
It should also be noted that in other situations the mere fact that there has been some delay contrary to Article 6(1) in the course of criminal proceedings does not have the effect that substantive enforcement of the criminal law (by a trial of the charges against the accused) becomes impermissible under Article 6(1): see Attorney-General’s Reference (No. 2 of 2001) [2003] UKHL 68; [2004] 2 AC 72. Similarly, there is no reason to think that, if the position had been analysed on a relevant application by the appellant, the proper conclusion would have been any different, namely that the confiscation order could be enforced despite the delay that had occurred. The reasonable time obligation in Article 6(1) does not operate as some sort of limitation period: compliance with it is not a pre-condition for the authorities to be entitled to enforce the substantive law in an appropriate case.
However, having made all these points, I emphasise that no application was made to us or to any other appropriate court to try to discharge the confiscation order or the decision of Pitchford J. Thus it is that, in my view, the outcome of this appeal turns on the binding and conclusive effect of that order and that decision on the appellant.
It follows that the appellant’s claim in restitution must fail. He paid £80,000 pursuant to a valid order of the Crown Court, the lawful enforceability of which was confirmed by the decision of Pitchford J, in respect of which there has been no appeal. There is no unjust factor present in these circumstances which could sustain a claim for its restitution under the law of unjust enrichment: cf Banque Financière de la Cité v Parc (Battersea) Ltd [1999] AC 221, 227 (Lord Steyn), 234 (Lord Hoffmann). A payment pursuant to a lawful order of a court is not made in circumstances which are “unjust” for these purposes. The appellant made payment not by reason of any relevant mistake of law – in the sense discussed by Lord Hoffmann in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49; [2007] 1 AC 558 in a passage of his speech at para. [23] on which Mr Clayton particularly relied (see below) – but rather because he understood, correctly, that in domestic law the money was owed. Unlike the position as analysed by Lord Hoffmann in Deutsche Morgan Grenfell, in which on a true analysis “the money was not owing”, the later decision of the ECtHR in Minshall v United Kingdom in this case did not show that, in domestic law, the money “was not owing.”
In the Deutsche Morgan Grenfell Group case the claimant (“DMG”) paid an excessive amount of advance corporation tax (“ACT”) on the basis of statutory provisions which were subsequently found by the European Court of Justice to be contrary to EC law and hence were, on a correct understanding of the position, unenforceable. DMG claimed to recover the excess amount paid as money paid under a mistake of law. The House of Lords held that this claim was established and was not statute-barred. Lord Hoffmann said this at para. [23]:
“I come back, therefore, to the question of whether DMG made a mistake, against the consequences of which the action seeks relief. The first point to make is that the alleged mistake was one of a very special kind. If DMG had known for certain what the Court of Justice was going to say in the Metallgesellschaft/Hoechst case [2001] Ch 620 on 8 March 2001, it is very unlikely that it would have paid ACT. But it had no means of knowing that. It was only in retrospect that it became clear that the ACT could not lawfully have been exacted. Professor Birks said that this was not a mistake at all. It was merely an inability to predict what the Court of Justice was going to say, just as one cannot predict with certainty what the weather is going to be like. And Sir Jack Beatson, writing extrajudicially in the volume to be published in memory of Professor Birks (“Unlawful Statutes and Mistake of Law: Is there a Smile on the Face of Schrödinger’s Cat?” in Mapping the Law (ed Burrows and Rodger) (2006), pp 163–180) describes the majority decision in the Kleinwort Benson case to treat a similar failure of prediction as a mistake as an “emphatic endorsement … of the declaratory theory of judicial decision-making” and “abstract juridical correctitude”. This seems to me, with respect, to muddle two different questions. One is whether judges change the law or merely declare what it has always been. The answer to this question is clear enough. To say that they never change the law is a fiction and to base any practical decision upon such a fiction would indeed be abstract juridical correctitude. But the other question is whether a judicial decision changes the law retrospectively and here the answer is equally clear. It does. It has the immediate practical consequence that the unsuccessful party loses, notwithstanding that, in the nature of things, the relevant events occurred before the court had changed the law: see In re Spectrum Plus Ltd [2005] 2 AC 680. There is nothing abstract about this rule. So the main question in the Kleinwort Benson case [1999] 2 AC 349 was whether a person whose understanding of the law (however reasonable and widely shared at the time) is falsified by a subsequent decision of the courts should, for the purposes of the law of unjust enrichment, be treated as having made a mistake. The majority view in the Kleinwort Benson case was that he should. The effect of the later judgment is that, contrary to his opinion at the time, the money was not owing. It is therefore fair that he should recover it. It may be that this involves extending the concept of a mistake to compensate for the absence of a more general condictio indebiti and perhaps it would make objectors feel better if one said that because the law was now deemed to have been different at the relevant date, he was deemed to have made a mistake. But the reasoning is based upon practical considerations of fairness and not abstract juridical correctitude.”
This reasoning does not assist the appellant in the present case. In Deutsche Morgan Grenfell Group there had been no court decisions or orders directed against DMG and requiring it to pay the money it did. There was no scope for the operation of the principle of res judicata or the rule in Isaacs v Robertson, which apply in the present case. Moreover, EC law (now EU law) is capable of having direct effect so as to modify domestic law, as had been found to be the position in relation to the enforceability of the domestic law in relation to ACT, and since the European Court of Justice has jurisdiction to pronounce authoritatively on the meaning and effect of EU law it is able to produce direct effects on the plane of domestic law by its judgments. This is not the position in relation to the rulings of the ECtHR, which have no direct effect upon domestic law (albeit they may be influential when a domestic court comes to interpret the Convention rights set out in the HRA).
For the reasons set out above, the appellant has no case in restitution and the judge was right to strike out that part of the appellant’s claim.
For similar reasons the appellant’s claim in false imprisonment also fails. In fact, the analysis here is, if anything, even more strongly against the appellant’s claim. The appellant has not sued the person who detained him (the prison governor), but the person who went to court to obtain the issue of a warrant for the committal and detention of the appellant. The relevant body which procured the appellant’s detention was the court which issued the warrant for his committal: it acted on the basis of an application by the CPS, but it made its own judgment that the warrant should be issued. So far as concerns any person detaining the appellant on the authority of the warrant issued by the court, the fact of the warrant provides a complete defence: see, e.g., Zenati v Commissioner of Police of the Metropolis [2015] EWCA Civ 80; [2015] 2 WLR 1563, [49]-[56]. A claim for false imprisonment does not lie where the imprisonment is pursuant to lawful authority provided by an order of a court, which is what happened in this case.
Mr Clayton sought to avoid the implications of this very basic proposition of law by referring to R v Governor of Brockhill Prison, ex p. Evans (No 2) [2001] 2 AC 19. But that authority does not assist him. It was a very different case and the reasoning in it is in fact contrary to Mr Clayton’s submission.
In Evans (No. 2) a court order had been issued authorising the imprisonment of the claimant. The actual release date for the claimant was not specified in the order itself, but had to be calculated by reference to the general law. A prison governor made a mistake about the effect of the relevant general law and as a result calculated a later release date for the claimant than was the lawful one pursuant to the order made in his case, so that the claimant was detained for longer than he should have been. The excess period of detention had not been authorised by the order of the court and so constituted a period of false imprisonment for which damages were payable. Admittedly the governor had been misled by court rulings in other cases which seemed to say that the method of calculation he chose was the correct and indeed obligatory one, but the House of Lords held that this background was not such as to allow the assimilation of the position of the governor with that of a gaoler who detains a prisoner on the basis of a clear and direct order of a court to do so. In other words, the House of Lords endorsed the correctness of the basic proposition referred to above (i.e. that detention on the authority of a direct order of a court does not constitute false imprisonment), but held that on the facts of the case that proposition did not assist the governor. As Lord Slynn said, at p. 26C, deprivation of liberty may be shown to be lawful or justified “where it is pursuant to an order of a court”. In the present case, by contrast with the position in Evans (No. 2), the appellant was detained on the authority a specific court order in the form of a warrant issued for his committal to prison, and the ordinary proposition of law which was accepted by the House of Lords covers the case.
Finally, at the hearing of the appeal there was again reference to a possible claim for damages under the HRA. Mr Clayton accepted that this did not feature in the appellant’s claim as currently pleaded, but he floated the idea that it might be amended. However, no application was actually made to amend the claim form; no notice was issued to seek permission for such an amendment; nor did Mr Clayton have any formulated amended pleading available to place before us to provide the basis for any such application.
Therefore, the position in relation to this hypothetical HRA damages claim is this: there is no such claim in the proceedings. No application was made to the judge below to amend the claim to introduce an additional claim for damages under the HRA, and he gave no permission for any amendment. There is no ground of appeal relating to any such HRA claim. No application was made to us to seek permission to amend to introduce such a claim. The judge was right that the appellant’s claims in the case should be struck out, and reference to a different and hypothetical HRA damages claim does not provide any basis for questioning the judge’s decision or order.
I ought, however, to mention that even though no application was made to him to amend the claim to introduce a HRA damages claim, the judge expressed the view that if an application had been made to introduce such a claim he thought this would be an appropriate case in which to extend time for the making of such a claim pursuant to section 7(5)(b) of the HRA. I am very doubtful that is right, but it is not necessary to say anything further about it, because the question does not arise.
Conclusion
For the reasons set out above, I consider the appeal should be dismissed. The judge was right to strike out the appellant’s claim.
Lady Justice Gloster DBE:
I agree.
Lord Justice McCombe:
I also agree.
Goss and Others v. Laurence George Chilcott
as Liquidator of Central Acceptance Limited (in liquidation)(New Zealand
[1996] UKPC 17 (23rd May, 1996)
·[Delivered by Lord Goff of Chieveley]
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1. This appeal is concerned with an action brought by the respondent (as liquidator of a finance company, Central Acceptance Ltd.) to recover from the appellants, Mr. and Mrs. Goss, the amount of an advance made by the company to the appellants which was secured by a mortgage over their property. (For the purposes of this appeal, their Lordships will for convenience treat the action as having been brought by the company itself.) The mortgage instrument was subsequently altered by a solicitor, Mr. Haddon, in circumstances in which, on the authority of a line of cases stretching back to Pigot’s Case (1614) 11 Co.Rep. 26b, the effect was that (as is now accepted) the appellants were discharged from liability under the instrument from the date of the alteration; and the central question in the case has been on what basis, if any, in these circumstances the company is entitled to recover the amount of the advance from the appellants. At first instance Neazor J. held that the company was not entitled to recover the money, but his decision was reversed by the Court of Appeal. From that decision the appellants now appeal to the Privy Council.
The claim in restitution.
As their Lordships have already recorded, Neazor J. held that the company could not succeed on its claim in restitution, because he considered that there had been no total failure of consideration for the loan, the appellants having furnished consideration for it in the form of the mortgage instrument. With this conclusion, their Lordships are unable to agree.
7. The advance was in fact paid by the company to Haddon Marshall & Co., as solicitors, but, having regard to the terms on which they received it from the company, was retained by them in their trust account until after the appellants had executed the mortgage instrument. It was then available to the appellants but was in fact received by Mr. Haddon, as agreed between him and the appellants. In these circumstances the loan appears in fact to have been advanced to the appellants pursuant to the terms of the mortgage instrument, the consideration for the advance being expressed to be the personal covenants by the appellants to repay the advance upon those terms. Even if (which their Lordships doubt) the loan had been paid pursuant to a preceding oral agreement between the company and the appellants, it must have been paid in consideration for the appellants’ promise to repay it, though the ensuing loan contract would (as their Lordships have already indicated) have become merged in and superseded by the contract contained in the mortgage instrument.
8. But the consideration there referred to, necessarily implicit if not explicit in every loan contract, was the consideration necessary for the formation of the contract; and, as Viscount Simon L.C. observed in a much-quoted passage in his speech in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32, 48:-
“… when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise … If this were not so, there could never be any recovery of money, for failure of consideration, by the payer of the money in return for a promise of future performance, yet there are endless examples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled.”
9. Of course, in the case of a loan of money any failure by the borrower to repay the loan, in whole or in part, by the due date, will in ordinary circumstances give rise to a claim in contract for repayment of the part of the loan which is then due. There will generally be no need to have recourse to a remedy in restitution. But in the present case that course is, exceptionally, not open to the company, because the appellants have been discharged from their obligations under the mortgage instrument; and so the company has to seek recovery in restitution. Let it however be supposed that in the present case the appellants had been so discharged from liability at a time when they had paid nothing, by way of principal or interest, to the company. In such circumstances their Lordships can see no reason in principle why
the company should not be able to recover the amount of the advance made by them to the appellants on the ground that the money had been paid for a consideration which had failed, viz. the failure of the appellants to perform their contractual obligation to repay the loan, there being no suggestion of any illegality or other ground of policy which precluded recovery in restitution in such circumstances.
10. In the present case however, although no part of the principal sum had been repaid by the appellants, two instalments of interest had been paid; and the question arises whether these two payments of interest precluded recovery on the basis that in such circumstances the failure of consideration for the advance was not total. Their Lordships do not think so. The function of the interest payments was to pay for the use of the capital sum over the period for which the loan was outstanding, which was separate and distinct from the obligation to repay the capital sum itself. In these circumstances it is, in their Lordships’ opinion, both legitimate and appropriate for present purposes to consider the two separately. In the present case, since it is unknown when the mortgage instrument was altered, it cannot be known whether, in particular, the second interest instalment was due before the appellants were discharged from their obligations under the instrument. Let it be supposed however that both interest payments had fallen due before that event occurred. In such circumstances, there would have been no failure of consideration in respect of the interest payments rendering them recoverable by the appellants; but that would not affect the conclusion that there had been a total failure of consideration in respect of the capital sum, so that the latter would be recoverable by the company in full on that ground. Then let it be supposed instead that the second interest payment did not fall due until after the avoidance of the instrument. In such circumstances the consideration for that interest payment would have failed (at least if it was payable in advance), and it would prima facie be recoverable by the appellants on the ground of failure of consideration; but that would not affect the conclusion that the capital sum would be recoverable by the company also on that ground. In such a case, therefore, the capital sum would be recoverable by the lender, and the interest payment would be recoverable by the borrower; and doubtless judgment would, in the event, be given for the balance with interest at the appropriate rate (see Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1994] 1 W.L.R. 938). In either event, therefore, the amount of the loan would be recoverable on the ground of failure of consideration. In the present case, since no part of the capital sum had been repaid, the failure of consideration for the capital sum would plainly have been total. But even if part of the capital sum had been repaid, the law would not hesitate to hold that the balance of the loan
outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which apportionment can be carried out without difficulty, the law will allow partial recovery on this ground (see David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 C.L.R. 353, 383).
11. Before their Lordships, it was submitted by Mr. Walshaw for the appellants that they should not be required to make restitution in respect of the advance. First, it was said that they never received the advance; but their Lordships agree with the judge that they received it when it was paid, with their agreement, direct to Mr. Haddon. Second, it was submitted that the company could not recover the amount of the advance in restitution, because the appellants had changed their position by reason of their having allowed the money to be paid to Mr. Haddon, from whom in the event they were unable to recover it.
12. Under the New Zealand Judicature Act 1908, section 94B, a statutory defence of change of position is made available in the case of payments made under a mistake, whether of law or fact. In such cases, if the defendant has received the payment in good faith and has “altered his position in reliance on the validity of the payment”, he will be protected by the defence if “in the opinion of the Court, having regard to all possible implications in respect of other persons, it is inequitable to grant relief, or to grant relief in full, as the case may be”. That provision may be relevant to the present case, for the company might never have made the payment if aware of the arrangement between Mr. Haddon and the appellants. Their Lordships will however consider the question on the basis that, with the development of a law of restitution founded upon the principle of unjust enrichment, the defence of change of position is widely applicable at common law. Even so, their Lordships are unable to accept that, in the circumstances of the present case, there was a change of position on the part of the appellants which rendered it inequitable to require them to make restitution.
13. From the beginning, the appellants were under an obligation to repay the advance once it had been paid to them or to their order; and this obligation was of course unaffected by the fact that they had allowed the money to be paid over to Mr. Haddon. The effect of the alteration of the mortgage instrument was that their contractual obligation to repay the money was discharged; but they had nevertheless been enriched by the receipt of the money, and prima facie were liable in restitution to restore it. They had however allowed the money to be paid over to Mr. Haddon in circumstances in which, as they well knew, the money would nevertheless have to be repaid to the
company. They had, therefore, in allowing the money to be paid to Mr. Haddon, deliberately taken the risk that he would be unable to repay the money, in which event they themselves would have to repay it without recourse to him. Since any action by them against Mr. Haddon would now be fruitless they are seeking, by invoking the defence of change of position, to shift that loss onto the company. This, in their Lordships’ opinion, they cannot do. The fact that they cannot now obtain reimbursement from Mr. Haddon does not, in the circumstances of the present case, render it inequitable for them to be required to make restitution to the company in respect of the enrichment which they have received at the company’s expense.
14. Finally, it was sought to suggest that restitution should not be ordered in the present case, because it was a case of “ministerial receipt”, in which the appellants had paid the money over to Mr. Haddon as their principal. The short answer to that submission is that Mr. Haddon was not their principal. As the judge held, there were two separate loans, one by the company to the appellants, and one by the appellants to Mr. Haddon. No question of ministerial receipt therefore arises in this case.
15. It remains to consider what order should be made on the appeal. Prima facie, the company is entitled to restitution in a sum equal to the amount of the advance, viz. $30,000. The question of restitution in respect of the interest payments in theory depends upon whether one or both payments were made before the date when the contractual obligation of the appellants to repay the loan was discharged, i.e. the date of the alteration of the instrument by Mr. Haddon – a date which, as their Lordships have already recorded, is unknown. However the Court of Appeal, in giving judgment in favour of the company for the sum of $26,460.75, deducted both interest payments from the amount of the advance; and, since there is no cross-appeal by the company against the judgment on that point, their Lordships need not consider whether the judgment should be varied in this respect. There is no appeal as to the amount of interest awarded under section 87 of the Judicature Act 1908.
16. For the above reasons their Lordships will humbly advise Her Majesty that the appeal should be dismissed. The appellants must pay the respondent’s costs before their Lordships’ Board.
Haugesund Kommune & Anor v Depfa ACS Bank & Anor
[2010] EWCA Civ 579 (27 May 2010)
Lord Justice Aikens :
Synopsis of the case so far
History repeats itself, at least with variations. In the 1990s there was much litigation in the English courts arising from English local government authorities concluding “interest-rate swaps” contracts with banks. The contracts were disastrous for the local authorities and eventually district auditors questioned whether the local authorities had the power to conclude such transactions. The House of Lords held they did not in Hazell v Hammersmith LBC.[1] The fact that local authorities had entered into speculative transactions to make money caused a stir in some circles at the time. The resulting litigation also led to great developments in the English law of restitution, particularly at the hands of Lord Goff of Chieveley.
In the early years of this century a number of Norwegian local authorities entered into so-called “swaps” transactions, on the advice of a Norwegian financial adviser, with the aim of making money from investments in order to provide better local services or reduce taxes. These contracts went disastrously wrong and the episode has been regarded as somewhat of a scandal in Norway. The English courts have become involved in the aftermath. The present case gives rise to interesting and novel questions on the conflict of laws and the law of restitution.
This appeal from the judgment of Tomlinson J dated 4 September 2009 and his order of 1 October 2009 concerns so – called “zero coupon swaps agreements” between two particular Norwegian municipalities and an Irish bank, which is an indirect subsidiary of a German bank. I will refer to the two individual municipalities, who are the appellants, as “Haugesund” and “Narvik”, and to them collectively as “the Kommunes”. I will refer to the respondent bank as “Depfa”.
The other party to the appeal is a firm of Norwegian lawyers, called Wikborg Rein & Co. It is both well-known and highly respected. I will refer to it as “WR”. It advised Depfa on various aspects of the “swaps” contracts before they were concluded. For present purposes the key issue on which WR advised was whether the Kommunes had the legal power and authority to enter into the “swaps” contracts in the light of the terms of section 50 of the Norwegian Local Government Act 1992 (“the 1992 Act”), which deals with the purposes for which Norwegian local authorities can raise loans. (The text of section 50 is set out in the Appendix to this judgment.) WR advised Depfa that the proposed zero coupon “swaps” contracts were not “loans” within section 50 of the 1992 Act and that the Kommunes had the power and authority to enter into the agreements, which would therefore create valid and binding obligations on them.
The “swaps” contracts were arranged through a Norwegian financial adviser called Terra Fonds AS, later named Terra Securities ASA (“Terra”), which has since gone into insolvent liquidation. The contracts were concluded in June 2004 (with Haugesund) and September 2005 (with Narvik). Essentially, Depfa agreed to advance to the Kommunes a capital sum, which was equivalent to the net present value of income that each of the Kommunes expected to receive from certain sources[2] over an eight or twelve year period. Under the contracts Depfa advanced NOK 231,300,000 to Haugesund and NOK 190,000,000 to Narvik. Payment of those “Fixed Amounts” was the full extent of Depfa’s liability in each case. Under each of the “swaps” contracts the Kommunes were obliged to make fixed quarterly payments over the period of the agreement. The payments consisted mainly of interest but included a small amount of amortisation. Then at the end of the fixed period of the agreement, the Kommunes had to make a “bullet” repayment, which comprised the outstanding interest and principal. Depfa’s payment and the Kommunes’ quarterly and “bullet” repayments were respectively described in the contracts as the “first” and “second” “Fixed Amount”. The agreements were called “zero coupon swaps agreements” because Depfa paid no interest, so its “coupon” was zero.
The Kommunes, upon the advice of Terra, invested the sums advanced by Depfa in financial instruments. The investments proved disastrous. Eventually, in January 2008, the resolutions of the Kommunes to make the investments were annulled by superior Norwegian administrative authorities and, effectively, the Kommunes were ordered to sell off the investments, which they did at a considerable loss. Haugesund’s loss on its sale was about NOK 125 million; Narvik’s loss was about NOK 142 million. At current exchange rates the combined losses of the Kommunes on their investments total about £26.7 million. Shortly after the Kommunes were directed to sell the investments, the Norwegian Ministry of Justice published its opinion that “swaps” such as the contracts the Kommunes had concluded did constitute loans within section 50 of the 1992 Act.
It will be immediately obvious that none of the parties involved in this débacle has anything to do with England and Wales. But the terms of the “swaps” contracts concluded between the Kommunes and Depfa contained English law and English jurisdiction clauses. The Kommunes invoked the jurisdiction clause in the agreements and brought proceedings in the Commercial Court for declarations of non-liability to Depfa on the “swaps” contracts, alleging that they had been concluded ultra vires the powers of the Kommunes by reason of the terms of section 50 of the 1992 Act, with the consequence that the contracts were void. Before the judge, it was common ground that the issue of the “capacity” or “power” of the Kommunes to conclude the “swaps” contracts in the light of the provisions of the1992 Act, especially section 50, involved questions of Norwegian law, as well as English law. It was (and is) agreed that all questions of the actual authority[3] of officers of the Kommunes to conclude the contracts are governed by Norwegian law.
Depfa counterclaimed, alleging that the “swaps” contracts were valid and enforceable. But if they were not, then Depfa claimed in restitution for the return of the sums advanced to the Kommunes. It is common ground that the restitution counterclaims are governed by English law.
Depfa joined WR as a Third Party to the litigation. WR did not contest the jurisdiction of the English court. Depfa claimed damages against WR for any losses it suffered as a result of what it claimed was WR’s negligent advice in relation to the capacity or power of the Kommunes to enter the “swaps” contracts. Although that claim is governed by Norwegian law, it was agreed before the judge that the relevant Norwegian law is no different from that of England and Wales, save that Depfa could only bring a claim for breach of a contractual duty to give careful advice. There is no Norwegian equivalent to a parallel tortious duty to take care, at least not on the facts of this case.
The trial on liability was expedited and took place before Tomlinson J over 11 days in April and May 2009. The judge heard evidence from witnesses of fact and also three experts on Norwegian law. He handed down his reserved judgment on 4 September 2009.
The relevant conclusions of Tomlinson J in his judgment of 4 September 2009 are: (1) the “swaps” contracts constituted loans within the meaning of section 50 of the 1992 Act.[4] (2) The effect of section 50 of the 1992 Act was that the Kommunes lacked the substantive power under Norwegian law to enter into the “swaps” contracts. That lack of substantive power was to be characterised, in English legal terminology, as a lack of capacity to conclude the “swaps” contracts.[5] (3) Accordingly, the “swaps” contracts were void according to their putative applicable law, viz. English law.[6] (4) The “swaps” contracts were also void for want of authority on the part of the individuals of the Kommunes who entered into the contracts.[7] (5) Depfa had not taken the risk that the “swap” contracts might be void; instead Depfa had relied on the advice of WR.[8] (6) Therefore, the Kommunes were entitled to declarations that the “swaps” contracts were void.[9] (7) However, this was, as the judge put it, a Pyrrhic victory, because Depfa was entitled to recover, in restitution, the full amount of the principal sums that had been advanced by Depfa under the “swaps” contracts, plus interest.[10] (8) The Kommunes could not rely on a defence of “change of position”, based on their bona fide investment of the sums advanced under the “swaps” contracts and the losses suffered on those investments by the adverse turn in the markets.[11] (9) The Kommunes were therefore legally obliged to make restitution in full of the sums that they had received from Depfa, although they were given credit for the sums that they had received upon redemption of the investments and which the Kommunes had actually repaid to Depfa.[12] (10) The advice that WR had given to Depfa was advice that no reasonably competent Norwegian lawyers could have given.[13]
In a further judgment of 1 October 2009, Tomlinson J held that Depfa had not been contributorily negligent with regard to the advice given by WR or its consequences. Issues of damages between Depfa and WR were reserved for a further trial, if necessary.
The judge’s order of the same date declared: (1) the “swaps” contracts were void; (2) the Kommunes must repay the sums advanced plus interest; and (3) WR was liable to Depfa for damages which were to be assessed. The judge gave WR permission to appeal his decision that the Kommunes lacked capacity to agree the “swaps” contracts. I will call this first issue “the validity issue”.[14] The judge also gave permission to the Kommunes to appeal his conclusion that they could not rely on a “change of position” defence to Depfa’s claim in restitution. I will call that “the change of position issue”.
There was a trial of the WR/Depfa damages issue in January 2010 and Tomlinson J handed down his judgment on that issue on 12 February 2010. By the time of the second trial it was made clear that Depfa claimed from WR the whole of the losses it suffered as a result of WR’s negligent advice, not just any sums Depfa was unable to recover from the Kommunes. This was because there was doubt on whether Depfa could enforce its judgment against the Kommunes. Depfa said that it was not obliged to pursue its rights against the Kommunes and was entitled to recover its outstanding loss in full against WR. The parties agreed in principle that Depfa was entitled to recover from WR the principal sum paid over to the Kommunes plus compound interest; those damages represented the cost and therefore loss to Depfa of funding the sums advanced to the Kommunes. It was also agreed that WR was liable to pay Depfa its costs of the action and its counterclaim against the Kommunes. The remaining issue in dispute was therefore whether Depfa was legally obliged to give WR credit for the value of its rights in restitution against the Kommunes as found by the judge. Tomlinson J held that it was not. Depfa was thus entitled to judgment against WR for the full amount of the sums advanced to the Kommunes plus compound interest. However, as the Kommunes had already paid over to Depfa the net sums recovered from the sale of the investments, Depfa agreed that it should, in practice, give WR credit for those sums.
The appeal and the cross-appeal were heard by us on 15, 16 and 17 February 2010. We reserved judgment.
The issues that arise on this appeal.
………
Issue Two: Restitution in Loan Contracts?
It is common ground that if the “swaps” contracts are void, then the only remedy available to Depfa to recover the money advanced to the Kommunes is one in restitution. The basis must be that the Kommunes became “unjustly enriched” by being paid the money under void contracts. There was little analysis of the precise basis on which the restitutionary claim is put, but I think it was common ground that it is a common law claim for money had and received, in circumstances where there had been a total failure of consideration. That was certainly the basis on which banks sought the return of money advanced to local authorities in the English local authorities “swaps” litigation.[62] In those cases there was some debate on whether the basis of recovery was different in an “open” swaps contract, ie. one that was still being worked out and a “closed” swaps contract where all the transactions were supposedly fulfilled. In the latter case it was argued that the correct analysis was that there had been an “absence of consideration” in the first place. However, this distinction is a question of which is the more apt terminology; it does not have any legal significance.[63]
Nevertheless, there remains a threshold question in relation to Depfa’s restitutionary claim to be repaid the money advanced to the Kommunes under the “swaps” contracts. It is whether or not there is still a principle or policy of English law, as stated by the House of Lords in Sinclair v Brougham,[64] that a person (A) who has paid away money to another (B) under a contract of loan which is held to be void for lack of capacity of (B) to conclude that contract is unable to recover that money in a restitutionary claim at law. [65] I think that there were two bases for that rule. First, the ultra vires doctrine is there to protect the public.[66] Secondly, if a claim to recover the money could be made in restitution, it would circumvent the rule that contracts made ultra vires are void. Therefore, as a matter of public policy, there can be no claim for restitution at law.
There is no doubt that, by a majority, the House of Lords decided in WLG, departing from Sinclair v Brougham, that a claim to recover money paid under an ultra vires borrowing contract could not normally be made in equity. The question remains whether their Lordships in WLG departed from the House’s previous decision in Sinclair v Brougham[67] that such a claim cannot be maintained in an action at law for money had and received for a consideration that has totally failed. That depends upon a close analysis of their Lordships’ speeches in WLG.
The decision in Sinclair v Brougham and its treatment by the House of Lords in the Westdeutsche Landesbank case (WLG).
I should start with Sinclair v Brougham. The facts are simple. The Birkbeck Permanent Benefit Building Society, an unincorporated body, decided to set up a banking business, called the Birkbeck Bank, although it was not a separate legal entity. The banking business took deposits. It was held that the banking business was ultra vires the objects of the building society. The building society became insolvent and there was much litigation on how its remaining assets, which included deposits by customers, were to be distributed. The issue of whether the depositors were entitled to recover their deposits arose in the context of an application to the court by the liquidator on how he was to distribute the Building Society’s assets in its winding up.
Because the banking business was held to be ultra vires the objects of the building society, the contracts between the depositors and the building society were void. The depositors therefore could not recover their deposits in an action in contract. Instead they attempted recovery on the basis of a common law claim that the building society held their deposits as “money had and received” to the use of the depositors. The House of Lords rejected this claim. Viscount Haldane LC said that a claim “quasi ex contractu” was effectively a claim based on a fictitious promise. Such a claim in this case would strike at the root of the doctrine of ultra vires, because no form of promise can be imputed when one of the parties to it does not have the capacity to conclude it.[68] Lord Dunedin said that the common law “works by way of a fiction which becomes inapplicable when the money has been received under an ultra vires contract”.[69] Lord Parker of Waddington said that a claim for money “had and received” could not succeed because “…the implied promise on which the action for money had and received is based would be precisely that promise which the company or association could not lawfully make”.[70] Lord Sumner said that a common law action for the money deposited would “…be indirectly to sanction an ultra vires borrowing”. But, because the cause of action rested upon a notional or imputed promise to repay, “…the law cannot de jure impute promises to repay, whether for money had and received or otherwise, which, if made de facto, it would inexorably avoid”.[71]
I have already set out the background to WLG and noted that the sole issue with which the House of Lords was concerned was whether the bank could claim compound interest on money recovered from the council. The decision in Sinclair’s case was examined in detail by some members of the Appellate Committee. Lord Goff of Chieveley summarised the reason for the rejection of the depositors’ claim by the House of Lords in Sinclair’s case as being that “…to allow such a claim would permit an indirect enforcement of the contract which the policy of the law had decreed should be void”.[72] Lord Goff noted that the reasoning of the House of Lords was based on “the language of implied contract”.[73] However, the House of Lords in Sinclair’s case resorted to equity to provide a remedy for the hapless depositors. Lord Goff’s view in WLG was that the House was attempting to provide a solution to a particular practical problem, rather than laying down any general principle. Thus Lord Goff said that (leaving Lord Parker of Waddington’s speech on this point to one side as being difficult to reconcile with the facts) he “…did not discern in the speeches of the Appellate Committee [in Sinclair’s case] any intention to impose a trust carrying with it the personal duties of a trustee”.[74]
Lord Goff then stated his view on how Sinclair v Brougham should be dealt with in the context of the case then before them, which was that of an interest rates swap agreement and so was not, therefore, a borrowing contract pure and simple. Lord Goff emphasised this distinction. He also said that because Sinclair’s case did not intend to create any principle of general application it had no relevance to the present case. Lord Goff then said why, in his opinion, it would not be right for the House of Lords in WLG to depart from Sinclair v Brougham. I think it is best if I quote the whole relevant passage of Lord Goff’s speech:[75]
“For present purposes. I approach this case in the following way. First, it is clear that the problem which arose in Sinclair v. Brougham, viz. that a personal remedy in restitution was excluded on grounds of public policy, does not arise in the present case, which is not of course concerned with a borrowing contract. Second, I regard the decision in Sinclair v. Brougham as being a response to that problem in the case of ultra vires borrowing contracts, and as not intended to create a principle of general application. From this it follows, in my opinion, that Sinclair v. Brougham is not relevant to the decision in the present case. In particular it cannot be relied upon as a precedent that a trust arises on the facts of the present case, justifying on that basis an award of compound interest against the council.
But I wish to add this. I do not in any event think that it would be right for your Lordships’ House to exercise its power under the Practice Statement (Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234) to depart from Sinclair v. Brougham. I say this first because, in my opinion, any decision to do so would not be material to the disposal of the present appeal, and would therefore be obiter. But there is a second reason of substance why, in my opinion, that course should not be taken. I recognise that nowadays cases of incapacity are relatively rare, though the swaps litigation shows that they can still occur. Even so, the question could still arise whether, in the case of a borrowing contract rendered void because it was ultra vires the borrower, it would be contrary to public policy to allow a personal claim in restitution. Such a question has arisen in the past not only in relation to associations such as the Birkbeck Permanent Benefit Building Society, but also in relation to infants’ contracts. Moreover there is a respectable body of opinion that, if such a case arose today, it should still be held that public policy would preclude a personal claim in restitution, though not of course by reference to an implied contract. That was the opinion expressed by Leggatt L.J. in the Court of Appeal in the present case (see [1994] 1 W.L.R. 938, 952E-F), as it had been by Hobhouse J.; and the same view has been expressed by Professor Birks (see An Introduction to the Law of Restitution (1985), at p. 374). I myself incline to the opinion that a personal claim in restitution would not indirectly enforce the ultra vires contract, for such an action would be unaffected by any of the contractual terms governing the borrowing, and moreover would be subject (where appropriate) to any available restitutionary defences. If my present opinion were to prove to be correct then Sinclair v. Brougham will fade into history. If not, then recourse can at least be had to Sinclair v. Brougham as authority for the proposition that, in such circumstances, the lender should not be without a remedy. Indeed, I cannot think that English law, or equity, is so impoverished as to be incapable of providing relief in such circumstances. Lord Wright, who wrote in strong terms (“Sinclair v. Brougham” (1938) 6 C.L.J. 305) endorsing the just result in Sinclair v. Brougham, would turn in his grave at any such suggestion. Of course, it may be necessary to reinterpret the decision in that case to provide a more satisfactory basis for it: indeed one possible suggestion has been proposed by Professor Birks (see his An Introduction to the Law of Restitution, pp. 396 et seq.). But for the present the case should in my opinion stand, though confined in the manner I have indicated, as an assertion that those who are caught in the trap of advancing money under ultra vires borrowing contracts will not be denied appropriate relief.”
Lord Goff went on to hold that there was no basis for imposing any trust in the WLG case. But he concluded nevertheless that the court had jurisdiction to award compound interest when ordering the recovery of money by (A) which it had paid to (B) under a void (non-borrowing) contract and the recovery was on the basis of a personal, as opposed to a proprietary, claim in restitution.[76]
Lord Goff obviously accepted as incorrect the theory that a restitutionary claim, at law, for money advanced under a borrowing contract which was void because ultra vires the borrower, was based on an “implied contract”.[77] But, equally clearly, Lord Goff regarded the issue of whether there could be such a restitutionary claim at law in such circumstances as an open question. He was in favour of recognising such a right.
Lord Woolf, who gave a separate opinion, agreed with Lord Goff on the two major points, viz. that the bank did not have an equitable proprietary claim in respect of the money paid to the authority, but, nonetheless, compound interest could be awarded by a court where one party was under a duty to make restitution to another.[78] Lord Woolf did not analyse in detail the decision in Sinclair’s case, nor did he say whether he agreed or disagreed with the views of Lord Goff on that case which I have quoted above. On the other hand, Lord Woolf certainly did not say that he believed that Sinclair v Brougham should be departed from, either in whole or in part. I therefore agree with the position, adopted by all parties before us, that Lord Woolf joined Lord Goff in the view that Sinclair’s case was not to be departed from on the issue which concerns us now.
Lord Browne –Wilkinson gave the leading majority speech in WLG. At the outset of his analysis of Sinclair v Brougham, he noted that the bank relied on the case for the proposition that a resulting trust arose when a payment had been made under a void contract.[79] Lord Browne-Wilkinson dealt first with the decision in Sinclair v Brougham on the claim advanced by the depositors in “quasi-contract”, on the footing that their money was “had and received” by the building society. He observed that the House of Lords in Sinclair’s case regarded the claim in “quasi-contract” as being based on an implied contract and that to imply a contract to repay would be to imply a contract to exactly the same effect as the express ultra vires contract of loan and that any such implied contract must, itself, be void as being ultra vires.
Lord Browne-Wilkinson then continued:
“Subsequent developments in the law of restitution demonstrate that this reasoning is no longer sound. The common law restitutionary claim is based not on implied contract but on unjust enrichment: in the circumstances the law imposes an obligation to repay rather than implying an entirely fictitious agreement to repay: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] 63-64, per Lord Wright; Peavey & Matthews Pty Ltd v Paul [1987] 162 CLR 221, 227, 225; Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 578C: Woolwich Equitable Building Society v IRC [1993] AC 70. In my judgment, Your Lordships should now unequivocally and finally reject the concept that the claim for monies had and received is based on an implied contract. I would overrule Sinclair v. Brougham on this point.
It follows that in Sinclair v. Brougham the depositors should have had a personal claim to recover the moneys at law based on a total failure of consideration. The failure of consideration was not partial: the depositors had paid over their money in consideration of a promise to repay. That promise was ultra vires and void: therefore the consideration for the payment of the money wholly failed. So in the present swaps case (though the point is not one under appeal) I think the Court of Appeal were right to hold that the swap moneys were paid on a consideration that wholly failed. The essence of the swap agreement is that, over the whole term of the agreement, each party thinks he will come out best: the consideration for one party making a payment is an obligation on the other party to make counter-payments over the whole term of the agreement.”
I would respectfully make two comments on that passage. In the first paragraph Lord Browne-Wilkinson was being specific in identifying the precise point on which he would “overrule” Sinclair v Brougham. It is the concept that the common law claim for money had and received, as advanced in that case, is based on an implied contract. But, secondly, Lord Browne-Wilkinson says, in the next paragraph, that it follows from this conclusion that the depositors in Sinclair’s case “should have had a personal claim to recover the moneys at law based on a total failure of consideration”. In other words, he appears to be rejecting the possible opinion expressed in the passage in Lord Goff’s speech, at page 688-9, that I have quoted above, viz. that the recovery at law of money paid out in a borrowing contract rendered void because it was ultra vires the borrower, should not be recoverable as a matter of public policy. If so, Lord Browne-Wilkinson must, by implication at least, be departing from Sinclair v Brougham on this point as well.
Lord Browne-Wilkinson then went on to analyse how the House of Lords had dealt with the equitable claim of the depositors in Sinclair v Brougham. He concluded[80] that “…the decision in rights in rem in Sinclair v Brougham should also be overruled…”. He then summarised the position:
“If Sinclair v Brougham, in both its aspects, is overruled, the law can be established in accordance with principle and commercial common sense: a claimant of restitution of moneys paid under an ultra vires and therefore void, contract has a personal action at law to recover the moneys paid as on a total failure of consideration; he will not have an equitable proprietary claim which gives him either rights against third parties or priority in an insolvency; nor will he have a personal claim in equity, since the recipient is not a trustee.”
Once again, Lord Browne-Wilkinson does not specifically state that he is either dealing with or excluding from his remarks the specific case of borrowing contracts rendered void because ultra vires the borrower. Nor does he comment on the remarks of Lord Goff. The passage is quite general. But looked at overall, it seems to me that Lord Browne-Wilkinson’s speech overruled, at least implicitly, the House of Lord’s decision in Sinclair v Brougham that a lender cannot recover money lent under a borrowing contract which has been rendered void because it is ultra vires the borrower.
Lord Slynn of Hadley stated at the start of his speech:[81]
“My Lords, for the reasons given by my noble and learned friend Lord Browne-Wilkinson I agree that Sinclair v. Brougham [1914] AC 398 should be departed from and that it should be held that in this case the local authority was neither a trustee of, nor in a fiduciary position in relation to, the moneys which it had received from the bank, nor had it improperly profited from the use of those moneys. For the reasons which he gives no resulting trust could arise on the present facts.”
The statement of Lord Slynn is not qualified in any way. If I have correctly analysed the effect of Lord Browne-Wilkinson’s speech, then, in my view, that wording of Lord Slynn’s speech demonstrates that he intended to follow Lord Browne-Wilkinson in relation to Sinclair v Brougham. In short, he agreed that it should be departed from on the right of a borrower to make a restitutionary claim, at law, for money lent under a borrowing contract which is rendered void because ultra vires the borrower.
Lord Lloyd of Berwick made the following statement about the decision in Sinclair v Brougham:[82]
“Both parties, therefore, came before your Lordships on the basis that Sinclair v. Brougham was correctly decided, for whatever it did decide. But in the course of the argument your Lordships indicated that the House would be willing to reconsider the correctness of that decision. For the reasons given by my noble and learned friend, Lord Browne-Wilkinson, I agree that Sinclair v. Brougham was wrongly decided on both the points discussed in his speech, and should be overruled. I understand that all your Lordships are agreed that the bank has failed to make good its claim that it has an equitable cause of action against the local authority for breach of duty as trustee or fiduciary. It follows that the ground on which the courts below awarded compound interest cannot be supported. The local authority has succeeded on the only issue on which the parties came before your Lordships. Accordingly, I would be content to allow the appeal, and leave it at that.”
Although Lord Lloyd talks of “both the points” mentioned in Lord Brown-Wilkinson’s speech, I would respectfully suggest that an analysis of his speech shows that Lord Browne-Wilkinson decided that Sinclair v Brougham should be overruled on more than two points. First, there was the “implied contract” theory as the basis for a restitutionary claim to recover money that had been paid under a void contract. Secondly, there was the right to make a restitutionary claim at all for such money at law. Thirdly, there was the right to make such a claim in equity on the basis of a resulting trust. But I think, nonetheless, that it is implicit that Lord Lloyd agreed that Sinclair v Brougham should be overruled in whatever respects Lord Browne-Wilkinson had decided it should be. Therefore Lord Lloyd was agreeing that Sinclair v Brougham should be overruled on the principle that money advanced under a borrowing contract which is rendered void because ultra vires the borrower, cannot be recovered in a claim at law, as money had and received, as a matter of public policy.
Subsequent cases
The House of Lords delivered its opinions in WLG on 22 May 1996. The next day the Judicial Committee of the Privy Council handed down its advice in Goss v Chilcott.[83] A finance company had lent money to Mr and Mrs Goss, on the security of a mortgage over their property. The Gosses had agreed with Mrs Goss’ brother, Mr Haddon, that they would pass on the money to him, on condition that he would repay it to the company in accordance with the terms of the mortgage instrument between the company and the Gosses. The money was paid directly to Mr Haddon, who did not repay it to the company. But he did purport to alter the terms of the mortgage instrument, without the knowledge of Mr and Mrs Goss, by extending the time for repayment of the loan. That alteration was held to have been done by Mr Haddon as agent for the finance company of which he was a director.
The finance company went into liquidation and the liquidator sought to recover the outstanding principal sum from Mr and Mrs Goss. The Privy Council held, on authority going back to Pigot’s case,[84] that the unauthorised but material alteration of the mortgage instrument, made on behalf of the lender, (ie. the company) rendered it unenforceable. However, the Privy Council also held that because the Gosses had totally failed to perform their personal obligation under the mortgage instrument of repaying the capital sum advanced, there had been a total failure of consideration for the money advanced. Accordingly, the liquidator, on behalf of the finance company, could recover the principal sum in restitution. Moreover, the Gosses could not rely on any defence of “change of position” as a result of handing the money over to Mr Haddon.
I will have to consider the case again in relation to “change of position” under Issue Three. For present purposes the case is important for two reasons. First, it is clear that this was a claim to recover on a “borrowing contract”. It must be accepted, of course, that the reason that the contract was unenforceable was not that it was ultra vires the borrower; it was because of an unauthorised alteration of the contract terms on behalf of the lender. But it was not argued that the finance company was precluded, on policy grounds, from making a restitutionary claim for the principal sum lent as money “had and received”, even though the borrowing contract was unenforceable. Moreover, Lord Goff, who gave the advice of the Privy Council, did not mention the controversy surrounding Sinclair v Brougham that had occupied him and others of their Lordships so much in WLG.[85]
We were told that there have been no subsequent cases in which that part of the decision of the House of Lords in WLG with which we are concerned has been analysed. There was some discussion of the ambit of the House of Lord’s decision in WLG by the Court of Appeal in Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council.[86] The main issues there were, first, whether there was a distinction between “open” swaps contracts and “closed” ie. completed ones and, secondly, whether there is a relevant distinction between the concepts of a “failure of consideration” and an “absence of consideration” and whether this made any difference to the right to recover in restitution. Morritt LJ noted that the doctrine of ultra vires existed for the protection of the public.[87] But he also stated[88] that, subject to the defence of “change of position”, a recipient of money under an ultra vires contract has no right to it and if he keeps it he will be “…enriched”. Further, if the recipient does not then or subsequently obtain a right to keep the money “…such enrichment will be unjust”. Morritt LJ also stated the general proposition that payments made in purported performance of a contract which is ultra vires are “..necessarily made for a consideration which has totally failed and are therefore recoverable as money had and received”.[89] Morritt LJ does not draw a distinction between borrowing contracts that are ultra vires and other types of contract. Therefore he appears to accept that recovery of money under all forms of ultra vires contracts is possible, notwithstanding the public policy behind the doctrine of ultra vires.
Waller LJ did not add anything on this aspect. Robert Walker LJ noted that, in WLG, Lords Browne -Wilkinson, Slynn, Woolf and Lloyd all thought that Sinclair v Brougham should be departed from on the issue of the right to make an equitable proprietary claim.[90] But he does not comment on the issue with which we are concerned. He expresses the view that there is no real distinction between a restitutionary claim based on a “total failure” of consideration and one based on an “absence of consideration”. He said: “The choice between the two expressions may be no more than a matter of which is the apter terminology”.[91] I would respectfully agree.
The text books
We were referred to several text books on this point. The latest edition of Goff & Jones: The Law of Restitution states, when discussing public policy restrictions on personal (as opposed to proprietary) restitutionary claims, that the “…much criticised decision [of Sinclair v Brougham] has now been overruled”.[92] The late Professor Peter Birks stated in his book Unjust Enrichment[93] that the House of Lords in WLG overruled “both limbs” of Sinclair v Brougham. I take that to mean the decisions that there could not be a claim for money had and received in the case of an ultra vires borrowing contract and that there could be a claim in equity. Professor Burrows states in The Law of Restitution[94] that the majority in WLG (viz. Lords Browne-Wilkinson, Slynn and Lloyd) held that Sinclair v Brougham had been wrongly decided in rejecting the depositors’ action for money had and received. Lastly, I have also looked at Professor Virgo’s book The Principles of the Law of Restitution,[95] in which he states (citing Lord Goff’s speech in WLG), that “it now appears that” that “…even where the transaction involves a loan…” there can be restitution of money lent because it is now recognised that the obligation to make restitution is imposed by law and is independent of the contractual obligation to repay the loan.
Restitution in borrowing contracts: conclusion.
My conclusion is that the majority of the House of Lords in WLG did depart from the decision in Sinclair v Brougham that a lender under a borrowing contact that is void because ultra vires the borrower, cannot recover the sum lent in a restitutionary claim at law. As a result of the decision of the majority of the House of Lords in WLG such a claim can be advanced. It is, of course, not a claim based on any implied contract or promise and it does not indirectly enforce an ultra vires contract, for the reasons given by Lord Goff at page 688G-H of WLG. Moreover, I respectfully agree with him that any such restitutionary claim must be subject, where appropriate, to any available restitutionary defences, including any that can legitimately be based on public policy. If I am correct then Sinclair v Brougham can “fade into history” as Lord Goff hoped it would.
It follows that Depfa is not prevented by authority from advancing its claim for restitutionary recovery of the sums advanced to the Kommunes. But, in Mr Milligan’s submission, the right to make such a claim is defeated, at least in part, either by a public policy argument or by the defence of “change of position”. Those are the subject of Issue Three.
Issue Three: the defences to a restitutionary claim: (i) the “public policy issue”.
The argument
Under this issue, I understand Mr Milligan to accept that Depfa is entitled to some measure of restitution for the money it has advanced to the Kommunes. However, he submits that Depfa is only entitled to recover in restitution so far as that is consistent with the policy inherent in section 50 of the 1992 Act. He emphasises that the judge found, at [139] of his judgment, that “one of the purposes of section 50 is to protect the citizens from the consequences of the municipality borrowing for other than a permitted purpose”. Mr Milligan submits that the judge should have given full force to the policy of section 50 and the 1992 Act. This would be done by holding that the English law of restitution would, as a matter of policy or comity, acknowledge the public policy of the Norwegian statute and give it effect in relation to the restitutionary claim which arises as a result of the finding that the “swaps” contracts are invalid because the Kommunes lacked the substantive power to conclude them. Therefore, Mr Milligan argues, because the right to restitution only arises where there has been unjust enrichment, the citizens of the Kommunes (through the Kommunes as legal entities) should not be liable to repay to Depfa any balance after the Kommunes have repaid to Depfa all the sums recovered upon the liquidation of the Kommunes’ investments of the sums advanced by Depfa to them. In other words, Depfa’s right to restitution should, as a matter of public policy, be limited to the “value surviving” of the amount of money advanced by Depfa under the “swaps” contracts. Mr Milligan therefore submits that the judge was wrong to conclude at [166] that “public policy does not defeat the personal claim in restitution for such an action is unaffected by the contractual terms governing the borrowing and is subject, where appropriate, to any restitutionary defences”.
Is the “public policy” argument part of the “change of position” argument?
Mr Milligan described this argument as giving effect to the defence of “change of position” to a restitutionary claim, based upon public policy or based upon the policy of the Norwegian 1992 Act. With respect, I think this is the wrong analysis. In my view the English cases show that these are two distinct defences to a restitutionary claim. Thus, in Kleinwort Benson Ltd v Lincoln City Council,[96] Lord Goff of Chieveley referred to “appropriate defences…together with the defence of change of position” and also to “…particular sets of circumstances which, as a matter of principle or policy, may lead to the conclusion that recovery [in restitution] should not be allowed…”. The first defence (that is relevant here) is that recovery should not be permitted, either in whole or part, on public policy grounds. The second defence is that recovery should not be permitted, in whole or in part, because the defendant to the claim has suffered a “change of position”. The legal basis for each is different and I think that the two need to be kept apart.
Mr Milligan submits that Tomlinson J erred in four respects in rejecting the “public policy” argument. First, he submits that the judge misunderstood what Lord Goff had said in WLG at page 688.[97] Secondly, he submits that the judge’s conclusion was wrong in principle. Thirdly, he submits it is contrary to authority. Lastly, he submits that such a result produces injustice.
The scope of the “public policy” defence to a restitutionary claim.
There is no doubt that in English law a restitutionary claim for the return of money may be defeated on grounds of public policy where, on the correct construction of a statute or regulation, recovery in restitution would be contrary to the objective of the statute. Mr Milligan referred us to a number of examples. An important decision in this line is Boissevain v Weil.[98] It held that a sum of foreign currency which had been borrowed by a British subject in the Netherlands during the Second World War, on condition that it should be repaid in sterling after the war as soon as the law permitted, could not be recovered either in contract or in restitution, because the Defence Regulations forbade the very act of borrowing. The court could not, via a restitutionary claim, indirectly enforce what the regulations had forbidden.
This principle has been confirmed in the recent decisions of the House of Lords in Dimond v Lovell[99] and Wilson v First County Trust Ltd (No 2).[100] Thus where a consumer credit agreement has been improperly executed in contravention of the consumer credit regulations and the statute or regulations provide that the debtor does not have to repay in consequence because the debt is unenforceable, the creditor cannot recover the money in restitution. To permit such a claim would be inconsistent with the intent of Parliament, which sets the public policy in the statutory provisions. As both Lord Nicholls and Lord Hope emphasised in the First County Trust case, the question is: what did the statute intend? If it is clear that the statute intended that the creditor should not recover money advanced, then the court cannot attempt to override or outflank the statutory provision by substituting a common law remedy such as restitution. The application of that rule, which is undoubtedly a public policy rule, must depend on the construction of the relevant statutory provisions. Thus, in Wilson v First County Trust Ltd (No 2), Lord Hope said that it would be “.. inconsistent with the statute to provide [First County Trust] with a common law remedy [of restitution] to redress the enrichment which Mrs Wilson [the borrower] received at [First County’s] expense”.[101]
Mr Milligan also relied on the statement of Lord Goff in WLG, at page 688, that if a case of a borrowing contract that was void because ultra vires arose today there was still a respectable body of opinion that “…it should still be held that public policy would preclude a personal claim in restitution, though not of course by reference to an implied contract”. Lord Goff’s remarks which immediately follow that statement, as quoted at paragraph [68] above, clearly demonstrate that he did not regard himself as part of that body of opinion. If my analysis of the decision of the House of Lords in WLG is correct, the majority did depart from the decision in Sinclair v Brougham on the question of whether a claim in restitution could be made, at law, for the return of money under a void borrowing contract. Therefore, even if there may still be a body of opinion as Lord Goff suggests, it would seem that the Supreme Court would now see no reason, on general public policy grounds, to prevent a restitutionary claim for the return of money advanced under a borrowing contract.
Mr Milligan also referred us to text books in support of his argument that it would be consistent with public policy to restrict the right to restitution in the case of a void borrowing contract to the “surviving value”. This argument was advanced by the late Professor Birks in An Introduction to the Law of Restitution, published in 1985, ie. long before the House of Lords’ decision in WLG. His proposition was apparently advanced as a means of circumventing what Professor Birks saw as a wrong decision of the House of Lords in Sinclair v Brougham on the personal claim for restitution by the depositors in that case.[102] In Unjust Enrichment,[103] Professor Birks argued that the majority decision in WLG to depart from Sinclair v Brougham endorsed the view that the public policy argument against allowing a restitutionary claim to recover money advanced on a void borrowing contract is met by confining the claim to just the “enrichment” which survives. It is fair to note that he regarded this as part of the “change of position” defence. But the proposition is not supported by any particular case law. In The Principles of the Law of Restitution,[104] Professor Virgo comments that a restitutionary claim in the case of a void contract “…should lie only when it is an appropriate way of fulfilling the policy which made the contract void in the first place. It may be particularly difficult to determine when such a restitutionary response is appropriate…”. The example he gives concerns failures to comply with statutory formalities in relation to annuity contracts.
I draw two conclusions from this discussion. First, there is no longer any general public policy rule of English law that either prevents or restricts the right to claim restitution of money advanced under a borrowing contract that is void as being ultra vires the borrower. Secondly, however, it is well established that if such a claim is inconsistent with the express provisions of a statute or, I would say, its clear intention, then English law will not permit the claim as a matter of public policy. That is because a common law claim for restitution cannot be allowed to circumvent legislation whose object and effect is to bar such a recovery. I agree with Etherton LJ that the question of whether there is any other category of public policy (wide or narrow) that is capable of defeating a restitution claim for unjust enrichment, separate from the defence of “change of position”, has not previously been decided.
How should the English court deal with a public policy defence to a restitutionary claim based on a foreign statute?
Mr Milligan did not advance any other specific basis on which public policy could restrict Depfa’s right to make its restitutionary claim. This therefore leaves open two groups of questions which arise from Mr Milligan’s argument that effect should have been given to the judge’s finding at [139] of his judgment, quoted above. The first group is whether English law should, in principle, give effect to the provisions of the statute of another state which expressly provides or clearly intends that money advanced under a borrowing contract that is void, because ultra vires or invalid through a lack of substantive power, should not be recovered. If so, does that have the effect that a claim under English law for restitution can thereby be prevented or reduced in some way? The second arises if the answer to that question is “yes”. It is: on the findings of the judge, does section 50 of the 1992 Act expressly provide or clearly intend that money advanced to a Kommune under a “loan contract” should not be recovered by the borrower if the Kommune lacked “substantive power” to conclude the contract? And if so, how does English law give effect to that in an English law restitutionary claim?
Neither of these questions are dealt with in any detail in the judgment of Tomlinson J, doubtless because they were not argued in detail before him. Mr Milligan seemed somewhat reluctant to be drawn in to the question of whether English law should, in dealing with a restitutionary claim, somehow give effect to any provisions in a foreign statute that barred recovery of money advanced under what English law would regard as a void borrowing contract. Mr Pollock submits that it is not the job of an English court to give effect to public policy as stated in another state’s statutes, at least so far as concerns a claim for restitution in English law based on a void contract which was, potentially, to be governed by English law. He submits that there is no case that holds that an English court must give effect to the foreign state’s public policy in these circumstances.
On this point we were not referred to any cases. Usually it is the reverse situation that is examined in the English cases, ie. whether a foreign statute or rule of law or decision is contrary to English public policy. In the absence of authority to guide us, I have attempted to examine the question from first principle. Two approaches seem possible. The first is that the English court should take account of the express or clearly implied intention of the foreign statute in deciding whether and to what extent a restitutionary remedy should be available, even though the restitutionary claim is governed by English law. It should do so as a matter of comity and should only refuse to consider the effect of the foreign statute if it would be contrary to English public policy notions to do so. In short, this would be an English domestic law public policy approach. The second approach is to draw an analogy with the rule that an English law contract will not be regarded as unenforceable if prohibited by a foreign law, unless the contract requires performance in the place of that law or it is proved that it is the common intention of the parties to the contract to violate the law of the place of performance of the contract.[105] That also would be applying a rule of domestic English law, as the cases recognise.
In the circumstances of the present case, my inclination is towards the first approach. Although the restitutionary claim is governed by English law and no English statute is involved, the reason a restitutionary claim has arisen is that the putative contract is void because of the lack of substantive power and so capacity of the foreign corporation to conclude the contract. The key element in the lack of substantive power is the relevant foreign statute, viz. the 1992 Act. Under the English conflict of laws rule the English court has to take account of that when deciding on the issue of the foreign corporation’s capacity to conclude a contract putatively governed by English law. If the consequence is that the contract is void and so, in English law, a restitutionary claim may arise, it seems logical and consistent with comity to take account of the same foreign statute to see whether, as a matter of English public policy, the right to a restitutionary claim should be restricted in some way. If this approach is correct, then it must be for the party claiming to rely on the foreign statute to do two things. First, it must prove, by evidence of the foreign law if need be, that the statute expressly or by clear implication bars recovery of money advanced under a void contract. Secondly, it must satisfy the English court that there is no countervailing English public policy reason not to give effect to the foreign statute.
Mr Milligan attempted to demonstrate that the express or implied effect of section 50 of the 1992 Act was to bar the right to any restitutionary claim beyond the sums recovered by the Kommunes upon liquidation of the investments obtained with the advances made by Depfa. He relied on the judge’s finding at paragraph 139, already quoted. He also relied on passages in Professor Dr Graver’s report and Professor Woxholth’s report and answers given by Professor Bräthen in cross-examination.
In my view the short answer to this point is that there are no findings of fact by the judge that the effect of the 1992 Act is (either expressly or implicitly) that recovery of money paid under a contract which is held invalid is barred or would be contrary to the statutory intent. There is, in my view, no evidence on which the judge could have made such a finding. Therefore, there is no factual basis on which Mr Milligan can mount an argument that, as a matter of public policy, Depfa’s right to a restitutionary claim must be limited to the value of the redeemed investments made with the sums advanced under the void contracts.
The “public policy” point: conclusions
My conclusions on the “public policy” issue are therefore as follows: first, the judge did not misunderstand what Lord Goff stated in WLG at page 688. Moreover, what Lord Goff there stated accords with the effect of the majority decision to depart from the decision in Sinclair v Brougham on the relevant point. Secondly, the way that Mr Milligan now puts the case on public policy is not as it was put before the judge. It is therefore unjust to complain that the judge’s decision was wrong in principle. In any event, it is not. Thirdly, the judge’s decision is not contrary to authority. The truth is that there is no authority directly in point. Fourthly, the judge has not made findings of fact on whether the express or implied effect of the 1992 Act is to bar any claim to recover money paid under an invalid contract with the Kommunes or that such a recovery would be contrary to the statutory intent. It appears to me that he was not invited to do so; I am confident that if he had been, he would have taken care to record his conclusions.
Lastly, this is not an unjust result. The judge concluded, at [141] that Depfa acted in good faith in purporting to enter the “swaps” contracts. He also found that Depfa did not take the risk that the “swaps” contracts were invalid or that they intended that the Kommunes should keep the sums advanced if it should turn out that Depfa was mistaken as to the validity of the contracts: see [143] to [153] of the judgment. If the Kommunes were entitled not to repay what Depfa had advanced to them then, subject to the defence of “change of position”, they would indeed have been enriched and, I would say, unjustly so.
Accordingly, I would reject the Kommunes’ arguments that they are not liable to repay to Depfa the full amount of the sums advanced on the basis of “public policy”.
Issue Three: The defences to the restitutionary claim: (ii) “change of position”
Before Tomlinson J the Kommunes’ argument was that they had changed their position by using the sums advanced by Depfa to buy, first, “CLNs”[106] and then “CDOs”[107] on the advice of Terra. However, the judge found[108] that the Kommunes knew that, “…irrespective of the outcome of the investments, they would have to repay the loans …… the municipalities knew from the start that the amounts advanced by Depfa were to be repaid”. He also found that, in investing the money as they did, the Kommunes “…plainly assumed the risk of the success of the investment…” and insofar as the Kommunes intended to look to the sums advanced by Depfa as a source for repayment of the loans, the Kommunes “…deliberately took the risk that the investments into which they entered would lead to a shortfall”.[109] The judge regarded those facts as fatal to the “change of position” defence. He regarded the case as indistinguishable from Goss v Chilcot.[110] Tomlinson J commented, in conclusion that:
“…the notion of the extent of success of a restitutionary defence of change of position depending upon the outcome of a speculative investment with borrowed money entered into by the payee at his own risk is to my mind quite extraordinary”.[111]
Before us Mr Milligan first emphasises the fact that the Kommunes would not have made any investments in the CLNs and CDOs if they had not been advanced sums by Depfa. Secondly, he criticises the judge’s approach of looking at the Kommunes’ acceptance (at the time the “swaps” contracts were apparently concluded) that they realised that they would have to repay the loans.[112] Mr Milligan submits that the judge erred because this approach assumes that the loans were the result of valid contracts, whereas the premise is that they were not. Therefore the judge should have examined the position the Kommunes would have been in had the loans not been made at all. If so, then no investments would have been made. As it was, they received the money, in good faith, and made the investments and thereby changed their position, all in good faith. Lastly, Mr Milligan submits, relying in particular on statements of Lord Templeman in Lipkin Gorman v Karpnale Ltd,[113] that the test of whether there has been a change of position for the purposes of establishing a defence to a restitutionary claim is: did the recipient of the money (A) do something with the money (in good faith) that A would not have done but for the money being advanced under what was, in fact, a void contract. If A has so behaved, then he has changed his position and, to the extent that A has suffered a loss as a result of what he has done with the money, he does not have to make restitution of the sum lost, because A has not been “unjustly enriched” to the extent of the loss thereby suffered.
In my view, this topic needs to be considered under three heads. First, what are the general principles of the defence of “change of position” in the law of restitution? Secondly, how are those applicable to the facts of this case? Thirdly, has Tomlinson J erred in his analysis or conclusions on this issue?
“Change of position”: The principles
The law has been developed by the cases. As the judge stated,[114] a general principle of the defence of “change of position” to a claim for restitution of money where there had been “unjust enrichment” was first recognised in the House of Lords’ decision in Lipkin Gorman v Karpnale.[115] In that case a firm of solicitors sued a gaming club for the return of money that one of the firm’s partners, a compulsive gambler, had stolen from the firm’s client account and used at the club, where he made some winnings but a net loss. The gaming club argued that it should not have to repay any money because it had changed its position each time the gambler made a bet and it accepted the bet. The House of Lords held the firm could recover money gambled by the errant partner, but only to the extent that the gaming club had “won” the bets. To the extent that the club had “lost” to the gambler, it had changed its position in good faith.
Lord Bridge and Lord Goff both emphasised that the argument of “change of position” as a defence to actions in restitution must be allowed to develop on a case by case basis.[116] Lord Goff based the defence firmly on a broad principle of justice. So, in answer to the question of when would it be unjust to allow restitution, he responds: “.. where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, [so that] the injustice of requiring him to repay outweighs the injustice of denying the plaintiff restitution”.[117] Lord Goff said that the change of position had to be bona fide. But the defence was not confined to cases where the claim to restitution rested upon parting with money under a mistake of fact.[118] It was also available in cases where there had been a total failure of consideration, such as payment under a void contract, where there had therefore been a total failure of consideration.[119]
Mr Milligan relied heavily on the examples of change of position that were given by Lord Templeman in his speech. Lord Templeman said that a person who received money as a gift from a thief would be unjustly enriched because “…a donee of stolen money cannot in good conscience rely on the bounty of the thief to deny restitution to the victim of the theft”. [120] But, Lord Templeman said, complications arose if the donee innocently expended the stolen money in reliance on the validity of the gift before the donee receives notice of the victim’s claim for restitution. He continued:
“Thus if the donee spent £20,000 in the purchase of a motor car which he would not have purchased but for the gift, it seems to me that the donee has altered his position on the faith of the gift and has only been unjustly enriched to the extent of the secondhand value of the motor car at the date when the victim of the theft seeks restitution. If the donee spends the £20,000 on a trip around the world, which he would not have undertaken without the gift, it seems to me that the donee has altered his position on the faith of the gift and that he is not unjustly enriched when the victim of the theft seeks restitution.”[121]
The next case to consider is Goss v Chilcott.[122] I have already set out the facts. In the advice of the Privy Council given by Lord Goff, he stated that the effect of the unauthorised alteration of the mortgage deed by Mr Haddon was that Mr and Mrs Goss were discharged from their contractual liability to repay the sum advanced by the company and that was at a time when they had repaid nothing by way of principal or interest. Lord Goff concluded that in that circumstance the company was, in principle, entitled to recover the amount of the advance on the ground that the money had been paid for a consideration that had wholly failed, “…viz. the failure of the defendants to perform their contractual obligation to repay the loan”.
But that left the defence of change of position. The case was heard by the Privy Council on appeal from the Court of Appeal of New Zealand. The New Zealand Judicature Act 1908, section 94B, provides a statutory defence of change of position in cases of payments made under a mistake of fact or law. In such a case, if the defendant has received the payment in good faith and he has “altered his position in reliance on the validity of the payment”, then he will be protected by the defence if “in the opinion of the court, having regard to all possible implications in respect of other persons, it is inequitable to grant relief, or to grant relief in full, as the case may be”. The Board also noted that the development of the common law of restitution, based upon the principle of unjust enrichment, was such that there was now a widely recognised common law defence of change of position, which went beyond cases of mistake.
However, the Board rejected the argument that Mr and Mrs Goss had changed their position such that they had a defence to the claim for restitution. First, they were under an obligation to repay, which was not affected by the fact that the money had been paid (with the Goss’ authorisation) to Mrs Goss’ brother, Mr Haddon. Secondly, although the unauthorised alteration of the mortgage deed meant that there was no contractual obligation to repay the money advanced, they had still been enriched. Furthermore, they had paid over the money to Mr Haddon “…in circumstances in which, as they well knew, the money would nevertheless have to be repaid to the company. They had, therefore, in allowing the money to be paid to Mr Haddon, deliberately taken the risk that he would be unable to repay the money….”. Lord Goff concluded:
“The fact that [Mr and Mrs Goss] cannot now obtain reimbursement from Mr Haddon does not, in the circumstances of the present case, render it inequitable for them to be required to make restitution to the company in respect of the enrichment which they have received at the company’s expense”.[123]
As Mr Milligan pointed out in argument, the facts are different from the present case. First, it was a case of subsequent discharge of liability by virtue of the unauthorised alteration of the mortgage deed by Mr Haddon. Secondly, the money was paid to Mr Haddon before the alteration was made by Mr Haddon and the alteration was made without the Goss’ knowledge or consent. Thirdly, it was found as a fact that the receipt of the money to Mr Haddon was a receipt by Mr and Mrs Goss, who had authorised him to receive it. Mr Milligan submits that the case is distinguishable and so Tomlinson J was wrong to say it applied to the present case.
In his book Unjust Enrichment,[124] Professor Birks argued that Goss v Chilcott is a “problematic” decision which may have to be “reviewed” because, arguably, it fails to separate the cause of action in unjust enrichment from the nullified contract. It was argued that it is the defence of “disenrichment” which chiefly differentiates the action in unjust enrichment from an action in contract. The suggestion is, it seems, that because Mr and Mrs Goss had been “objectively honest” when they had parted with the money advanced to them by agreeing it should be paid direct to Mr Haddon, they were therefore in the position of having changed their position in good faith.
In Kleinwort Benson Ltd v Lincoln CC,[125] one of the English “swaps” cases, Lord Goff rejected the idea that when a claim for restitution of money was made there could be a general defence of “honest receipt”, when at the time the money had been received by the defendant he honestly believed he was entitled to receive and retain the money.[126] Instead, Lord Goff said that “the proper course” was to identify particular sets of circumstances which, as a matter of principle or policy, may lead to the conclusion that recovery should not be allowed.
In Dextra Bank & Trust Co Ltd v Bank of Jamaica,[127] Dextra drew a cheque on its bankers, in favour of the Bank of Jamaica. Both banks were deceived by intermediaries as to the intention of the other and the intermediaries made off with the amount of the cheque. Dextra sued the Bank of Jamaica for the return of the sum paid by its bankers, claiming amongst other things, payment under a mistake of fact. The Bank of Jamaica resisted that claim on the basis (amongst other things) that it had changed its position, basing its argument on facts that had occurred prior to it actually receiving the cheque from Dextra; it said that it had changed its position in the expectation of receiving a benefit which it did, in fact, receive.
The advice of the Privy Council was given jointly by Lords Bingham and Goff. When dealing with the change of position defence, they said that there was no difference, in principle, between the case where a defendant expends money on an extraordinary expenditure in the expectation of receiving a sum from the plaintiff which he does receive and the case where such expenditure is made from a sum already received. In both cases the defendant will have “…incurred the expenditure in reliance on the plaintiff’s payment, or, as is sometimes said, on the faith of the payment”.[128] The key was whether the change of position was made in good faith such that it would be inequitable to require the defendant to make restitution either in whole or part.[129]
The last case I should refer to on change of position is the Court of Appeal’s decision in Niru Battery Manufacturing Co v Milestone Trading Ltd.[130] The case concerned a lead purchase contract, which was financed by a letter of credit. The only part of the case that is relevant is the claim by the second claimant, Bank Sepah, which had opened the letter of credit, against the fourth defendant bank, Credit Agricole Indosuez, (“CAI”), which had received money under the letter of credit from Bank Sepah. CAI then paid the money received to third parties upon the instructions of those parties. It was common ground that Bank Sepah had paid CAI under a mistake of fact. CAI could only avoid a liability to repay in restitution if it could establish the defence of change of position. That, in turn, depended on whether the payment to the third parties had been made in good faith. Moore-Bick J had held that the defence was not available to CAI on the facts.
Clarke LJ gave the first judgment in the Court of Appeal. On this point he first referred to the speech of Lord Goff at pages 579-580 of Lipkin Gorman. Clarke LJ said that the emphasis in Lord Goff’s speech is upon whether it would be unjust or inequitable or unconscionable to allow restitution; not whether the defendant had been dishonest.[131] He concluded, on the facts, that the employee of CAI knew that Bank Sepah had paid the money under the letter of credit by reason of a mistake. Accordingly, good faith required that employee to enquire of Bank Sepah before paying away (on the instructions of another) the money CAI had received from Bank Sepah. The employee’s failure to make any enquiries of Bank Sepah meant that CAI had not acted in good faith and so could not rely on the defence of change of position.[132] Sedley LJ emphasised that the touchstone of the defence of change of position was whether it was inequitable to allow the claimant to have restitution. There was not a simple good faith/bad faith dichotomy.[133]
I think that the following propositions are obvious from the foregoing analysis of the cases. First, the defence of change of position is a general defence to all restitution claims (for money or other property) based on unjust enrichment. Secondly, the question is always whether it is unjust to allow the claimant to have restitution in whole or in part. Thirdly, that itself depends on whether the defendant has so changed his position that the injustice of requiring him to repay outweighs the injustice of denying the claimant restitution (in whole or part). That can only be decided on the facts of each individual case. Fourthly, a defendant cannot rely on this defence if he has acted in bad faith or has failed to show good faith, which is not the same thing as having acted dishonestly.
I have concluded also that the cases draw a clear distinction between two different types of circumstance, at least where money is concerned. The first is where the defendant obtains (or as in the Dextra case, is about to obtain) money in circumstances where he understands, in good faith, that it is his to keep and do what he likes with. Then that defendant spends the money, in good faith, on the basis of that understanding. The second type of case is where a defendant obtains money and, at the time of receipt, he understands that he will have to repay that sum at some stage in the future, which point has usually been identified between the payer and the payee, usually in a contract or what was, at the time, thought to be a valid contract.
How are the principles on change of position to be applied to the facts of this case?
This case is concerned with the second of the two situations I have identified. The Kommunes understood when they took the money from Depfa that they had to repay it, ultimately in the last, “bullet”, repayment at the end of what were thought at the time to be valid agreements. Admittedly those agreements were always void, but that cannot change the understanding on which the Kommunes received the money. At no stage did they think they had received a gift that would never have to be repaid. Furthermore, if the “swaps” contracts were void, then the cause of action for the claim in restitution for a consideration that had wholly failed must have arisen at the moment the money was paid over to the Kommunes.
I would accept that the Kommunes would not have made the investments via Terra that they did, “but for” the receipt of the sums from Depfa. I also accept that the Kommunes acted in good faith in making the investments and that any question of negligence or other criticism of those investments is irrelevant to this defence. But the Kommunes made those investments without any involvement by Depfa and the Kommunes made them on the understanding, at that stage in the history, that they had to repay the principal and interest to Depfa whatever happened to the investments. As Professor Virgo puts it in his book The Principles of the Law of Restitution, it is a question of “risk allocation”.[134] The Kommunes took the risk in this case. There is no basis on which the defence of change of position can succeed.
So, it seems to me that the question here is: where lies the justice of the case; in favour of the party that received the money and took the risk (in good faith) that the investments might go down rather than up; or in favour of the party that paid over the money and had nothing to do with it thereafter, but thinking it was to be repaid in due course. Like the judge, I think that the answer to this question is obvious. The scales fall heavily in favour of Depfa recovering the full amount that it paid over to the Kommunes.
Is the judge to be criticised for his conclusion and for following Goss v Chilcott?
In my view Tomlinson J was clearly correct in saying that this case was indistinguishable from Goss v Chilcott on the application of the principle of the defence of change of position. The fact that in that case the contract only subsequently became unenforceable is not a valid distinction; the claim was in restitution on the basis of a total failure of consideration just as in this case. The Gosses allowed a third party, Mr Haddon, to take the money, in good faith, just as the Kommunes bought investments through Terra with the money paid by Depfa. In neither case was the money paid to the recipients as if a gift and then disposed of on the faith of an understanding (in good faith) that they were entitled to do with it what they wished.
Furthermore, I do not accept the criticisms of Goss v Chilcott made in Professor Birks’ book. Once it is accepted that, so far as the highest tribunal in England and Wales is concerned, there is no public policy reason to prevent restitution of sums paid under an ultra vires borrowing contract, there is no need to create an artificial restriction upon recovery to accommodate a distaste for permitting recovery of money paid under such a contract. Of course, if there has been a change of position that would make it inequitable or unjust to permit full (or even partial) recovery by the claimant lender, that defence will apply. But, on the facts of this case, there is no basis for doing so.
As before the judge, Mr Milligan argues that this means that the Kommunes have to bear losses now rather than in some years’ time if they have to repay the balance above the value of the investments sold. Like Tomlinson J, I have little sympathy for this argument. The Kommunes are responsible bodies who went into these transactions of their own accord. They hoped to benefit from the sums loaned. They took the risk by investing those sums. As the judge found, Depfa did not take the risk that the investments would fail.
Accordingly, I reject the Kommunes’ arguments on the change of position defence.
Conclusions and disposal
I have rejected WR’s arguments on the validity point. I have rejected the Kommunes’ arguments on their three lines of defence to the restitution claim. I would therefore dismiss both the appeal and the cross appeal.
Lord Justice Etherton
I agree that the Kommunes’ appeal should be dismissed because they have no defence to the restitution claim of Depfa ACS Bank (“Depfa”), although my analysis differs in some respects from that of Aikens LJ. I would allow the cross-appeals on the validity of the swaps contracts to the extent of holding that the Judge applied the wrong test as to capacity, and, if Depfa or Wikborg Rein & Co (“WR”) wished to pursue the point, I would remit to the Judge for further findings the issue of the ostensible authority of the officials of the Kommunes to enter into those contracts. Before setting out my views below, I wish to pay tribute to the clear and comprehensive judgment of the Judge and to the excellent arguments addressed to us by all counsel.
Capacity
There is no authority binding on this Court or, indeed, the Judge which requires the conclusion that the swaps contracts in the present case are to be treated in English law as void. That issue turns on the way in which English law chooses to interpret and apply Rule 162 in Dicey, Morris and Collins on The Conflict of Laws (14th ed) (“Dicey’s Rule 162”). At the end of the day, however sophisticated the analysis and the arguments, that is a matter of policy. To say, as did Auld LJ in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1996] 1 WLR 387 at page 407, that the underlying purpose of classification for settling a conflict of laws rule is “to strive for comity between competing nations” says nothing as to what the limits of such comity should be as a matter of policy. The analysis of the Judge and Aikens LJ in the present case as to the application of Dicey’s Rule 162 leads, in my respectful judgment, to a result which is counter-intuitive to an English lawyer and judge, is in marked contrast to the English law concept of corporate capacity, is not consistent with a sound policy objective, and is capable of producing bizarre consequences.
The English “ultra vires” concept of capacity makes a clear distinction between acts which are beyond the capacity of the corporation and are necessarily a complete nullity and acts which are beyond the power of the corporation and may or may not be valid according to the circumstances. The classic exposition is that of Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246, 304-305, as follows:
“The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not he had notice that the transaction was in excess or abuse of the powers of the company. As between the shareholders and the directors, for most purposes it makes no practical difference whether the transaction is beyond the capacity of the company or merely in excess or abuse of its power: in either event the shareholders will be able to restrain the carrying out of the transaction or hold liable those who have carried it out. Only if the question of ratification by all the shareholders arises will it be material to consider whether the transaction is beyond the capacity of the company since it is established that, although all the shareholders can ratify a transaction within the company’s capacity, they cannot ratify a transaction falling outside its objects.
In this judgment I therefore use the words “ultra vires” as covering only those transactions which the company has no capacity to carry out, i.e., those things the company cannot do at all as opposed to those things it cannot properly do.
The two badges of a transaction which is ultra vires in that sense are (1) that the transaction is wholly void and (consequentially) (2) that it is irrelevant whether or not the third party had notice. It is therefore in this sense that the transactions in In re David Payne & Co. Ltd [1904] 2 Ch 608 and Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch. 62 were held not to be ultra vires. The distinction between the capacity of the company and abuse of powers was also drawn by Oliver J. In re Halt Garage (1964) Ltd [1982] 3 All ER 1016, 1034.”
There is no difference as to the application of those principles to a company or any other corporation which has limited legal capacity: see, for example, in relation to local authorities, Hazell v Hammersmith and Fulham LBC [1990] 2 WLR 1055H-1056A, and Credit Suisse v Allerdale Borough Council [1997] QB 307. In English law the ultra vires concept of corporate capacity is inextricably linked with nullity: they are two sides of the same coin. The concept is simply that it is legally impossible for a corporation to give or do more than it has or is legally constituted to do, and no doctrine of deemed authority or estoppel can achieve a different result. If there are circumstances in which an unauthorised or otherwise unlawful transaction is capable of being enforced or is otherwise not a nullity, it cannot be beyond the legal capacity of the corporation to enter into it. In that sense our law has no concept of “partial” ultra vires incapacity: cf. para [43] of Aikens LJ’s judgment.
It is clear that Norwegian law has no general concept of corporate capacity equivalent to that in English law. It is also clear that, if English domestic law was applied to the facts of the present case, the swaps contracts would not be regarded as beyond the capacity of the Kommunes. The decisions of the Kommunes to enter into the swaps contracts do not fall within the Norwegian law concept of “nulliteter” which corresponds (in the context of certain administrative orders imposing obligations on citizens) closely to the nullity consequent on an English local authority acting without authority. They fall, rather, within the Norwegian law concept of “ugyldighet” or “assailable”: judgment para. [115]. The Norwegian court has a choice in the case of such an assailable resolution whether to declare the invalidity “ex tunc” (that is, from the date of the resolution itself) or “ex nunc” (that is, from the date of the declaration of invalidity); and a contract made in reliance on such a resolution remains in existence until struck down: ibid. Critically, a counter-party to a loan contract in breach of section 50 of the Norwegian Local Government 1992 (“the 1992 Act”) who has contracted with the local authority without notice and in good faith may enforce the contract: judgment paras. [118] and [121].
Fundamental to the reasoning of the Judge that, notwithstanding those matters, the swaps contracts are to be treated as beyond the capacity of the Kommunes for the purposes of Dicey’s Rule 162 was a distinction he drew between public and private law. In paragraph [114] he quoted part of the following passage from the judgment of Hobhouse LJ in Credit Suisse v Allerdale BC [1997] QB 306 at page 350:
“Where a statutory corporation purports to enter into a contract which it is not empowered by the relevant statute to enter into, the corporation lacks the capacity to make the supposed contract. This lack of capacity means that the document and the agreement it contains do not have effect as a legal contract. It exists in fact but not in law. It is legal nullity. The purported contract which is in truth not a contract does not confer any legal rights on either party. Neither party can sue upon it. This conclusion gives rise to no conflict between public law and private law principles. The role of public law is to answer the question: what is the capacity of the local authority to contract? The role of private law is to answer the question: when one of the parties to a supposed contract lacks contractual capacity, does the supposed contract give rise to legal obligations? When a plaintiff is asserting a private law right – a private law cause of action, typically a claim for damages for breach of contract or tort – the plaintiff must establish his cause of action. Any defence raised by the defendant must be one which is recognised by private law. Lack of capacity to contract is a defence recognised by private law.”
On the basis of that reasoning, the Judge concluded that the proper characterisation of the relevant Norwegian rule of public law was that the Kommunes “lacked the substantive power to conclude the swap agreements”; and the fact that a third party who had acted in good faith could enforce such a contract “is simply to be regarded as an incident of the Norwegian private law of contract, of itself having no significance in [that characterisation]”: judgment para.[122].
The Judge appears to have derived comfort, in reaching that conclusion, from a submission of Mr Milligan, which the Judge accepted, that “a useful analogy is to be found in Article 9(2) of the First Company Law Directive and in section 40(1) and (2) of the Companies Act 2006”: judgment para. [123]. Those provisions are as follows:
“Article 9.2
The limits on the powers of the organs of the company, arising under the statutes or from a decision of the competent organs, may never be relied on as against third parties, even if they have been disclosed.
Section 40
(1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.
(2) For this purpose—
(a) a person ‘deals with’ a company if he is a party to any transaction or other act to which the company is a party,
(b) a person dealing with a company—
a. is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,
b. is presumed to have acted in good faith unless the contrary is proved, and
c. is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution.”
The Judge said the following in relation to those provisions in paragraph [123] of his judgment:
“In those circumstances where the company cannot rely on its lack of capacity, the contract is valid. However the existence of the superimposed rule does not change the nature of the underlying lack of competence. In those circumstances where the company can invoke its lack of capacity, the contract is invalid and the reason for the invalidity is the lack of capacity.”
Leaving aside fundamental changes to the ultra vires doctrine in relation to companies resulting from provisions of the Companies Act 2006, the Judge was wrong in the conclusion he drew from Article 9.2 and section 40 of that Act. Those provisions do not validate acts of directors which are outside the capacity of the company. They are concerned with the validation of acts outside the authority of the directors, but within the capacity of the company itself. They are therefore consistent with the general approach of English law on ultra vires corporate capacity, and are no support for the Judge’s interpretation and application of Dicey’s Rule 162.
In Credit Suisse Hobhouse LJ spent much of his judgment addressing the relationship between private law remedies and public law remedies in the context of the arguments of counsel both before the first instance judge and the Court of Appeal as to the relevance of discretionary remedies of judicial review (in the case, for example, of irrationality or improper motive) to a private law claim. The theme of his extensive analysis was that private law civil claims against a public law body must be decided in accordance with private law, and administrative law remedies are irrelevant to such a claim. The point that he was making in the passage quoted above was simply that a public body’s lack of capacity provides a defence to a civil law private claim because, and only because, lack of capacity is a private law defence. I do not see that this provides any assistance as to the application of Dicey’s Rule 162, and in particular whether it is the domestic English law concept of capacity, inextricably linked to nullity, which applies for the purpose of the conflict of law principle embodied in that Rule.
Turning to the analysis of Aikens LJ, I fully recognise and endorse the proposition that our conflict of laws rules are designed to strive for comity between competing legal systems, and, for that purpose, they may have to be formulated or applied in ways that do not slavishly reflect our own domestic law. The conflict of laws rule with which we are concerned is a rule of our common law. There is no authority which requires an interpretation and application of Dicey’s Rule 162 in such a way as to give the word “capacity” in that Rule any meaning other than its meaning in domestic English jurisprudence, namely one inextricably linked to nullity. I do not consider that the analysis of Mance LJ in Raiffeisen Zentralbank Osterreich AV v Five Star Trading LLC [2001] QB 825, especially at paragraphs [26] to [33], endorsing and following the approach of Staughton LJ in Macmillan, requires the Court to do so. It seems particularly inappropriate to do so in the context of an agreement, like the swaps contracts, which the parties have expressly agreed should be governed by English law.
The present case provides a good illustration of the difficulties to which the Judge’s approach gives rise: since Norwegian law really has no legal principle like our domestic law concept of ultra vires, the Court has to engage in a difficult and wholly artificial exercise in legal contortion to try to marry Norwegian law and the concept of legal capacity. According to the Judge’s analysis, the swaps contracts are outside the capacity of the Kommunes because they are loans in breach of section 50 of the 1992 Act, with the consequence that they are void because as a matter of English domestic law, which has been chosen by the parties as the law of the contract, that is the consequence of corporate incapacity, and even though they would be regarded as valid if capacity as well as the consequences of incapacity was also determined under English domestic law. They would still be void, applying the Judge’s approach, even if the circumstances were that they would be enforceable under Norwegian law by a counter-party which had acted in good faith. In the latter circumstance, as the Judge himself acknowledged in paragraph [127] of his judgment, the swaps contracts would be bound to be treated as void in the English courts, under a contract governed by English law, even though English domestic law would treat them as valid and enforceable and even though Norwegian private law would also treat them as valid and enforceable. That bizarre result is in the supposed interest of “comity”.
For those reasons, I consider that “capacity” in Dicey’s Rule 162 means capacity in the ultra vires sense of English domestic law.
In view of the decision of the Judge on capacity, the Judge did not have to deal with the question whether the officers of the Kommunes had authority to enter into the swaps contracts or the amendments to them, and so he addressed that issue very briefly in paragraph [124] of his judgment. He said:
“This conclusion renders it unnecessary to give separate consideration to the question of the actual authority of the individual officers of the municipalities to enter into the loan agreements. The officers obviously lacked such authority. However in case it is relevant I should state that I can in any event see no basis upon which the officers concerned had authority to enter into the amendments to the loan agreements. They may have had authority to correct an error or to change a minor detail in a manner consistent with the original resolution. Neither amendment falls into this category. The Haugesund resolution authorises a zero coupon swap whereunder Haugesund paid a fixed amount annually over eight years. An extension to nine years, in the context of legislation specifically seeking to protect future taxpayers against liabilities incurred in prior years, is obviously material. The Narvik resolution was to restructure property tax deriving from electricity generating stations over the next twelve years, the basis for the calculation being the net present value of the current level of the property tax and a trend projection. The amendment simply provided for a further loan quantified as the loss incurred on an investment. It bore no relation to anything authorised by the resolution.”
It is to be noted that the Judge only dealt there with actual authority, which is governed by Norwegian law, and not with ostensible authority, which is governed by English law. I can see no proper basis for disturbing the Judge’s conclusion as to the absence of actual authority to make the amendments to the swaps contracts. Nor can I see any reason why, in relation to those amendments, the position as to ostensible authority should be any different. So far as concerns the original swaps contracts, there was expert evidence before the Judge on which he was entitled to rely in concluding that, under Norwegian law, the Kommunes’ officers had no actual authority to make them. As I have said, the Judge did not consider, because he did not need to do so, whether the officers had ostensible authority. Counsel have made extensive submissions to us on ostensible authority, and what inferences relevant to that issue can and should be drawn from other findings and statements of the Judge, including issues as to what notice Depfa had of the unlawfulness of the Kommunes’ resolutions, whether the Depfa relied on those resolutions and the significance of the Judge’s express finding that Depfa acted in good faith. If Depfa or WR wished to pursue the point, notwithstanding the dismissal of the Kommunes’ appeal, I consider that, in all the circumstances, the best course would be to remit the case to the Judge for further findings on the question of ostensible authority.
Restitution and change of position
I entirely agree with the masterly analysis of Aikens LJ in paragraphs [62] to [88] above on whether Sinclair v Brougham [1914] AC 398 remains authority that there can be no claim in restitution for money loaned to a corporation which had no capacity to enter into the loan agreement and which was void for that reason. I agree with his conclusion, for the reasons he gives, that Sinclair v Brougham was, in that respect, overruled by Westdeutsche Landesbank Girozentrale v Islington BC [1996] AC 669.
I also agree with Aikens LJ’s conclusion that the Judge was right to reject the Kommunes’ defence to Depfa’s restitutionary claim on the ground of change of position and, insofar as it is different, public policy. I would, however, make the following points, some of which differ from his analysis, in that connection.
Mr Milligan submitted that the Court should not permit restitution in full from the Kommunes because that would undermine the Norwegian public policy underlying section 50 of the 1992 Act. I had originally understood his argument in that regard to be part of a change of position defence. By the end of his oral submissions in reply, however, I was not entirely clear whether that remained the case or he was advancing a quite independent defence based on public policy, that is to say a principle of English public policy that restitution would never be ordered if to do so would be contrary to the policy under the applicable law (whether English or foreign) which declares the transaction legally invalid. As Aikens LJ has pointed out, there is clear authority that a restitutionary claim for the return of money may be defeated where, on the correct interpretation of primary or secondary legislation, recovery in restitution would be contrary to the objective of the legislation: Boissevain v Weil [1950] AC 327, Dimond v Lovell [2002] 1 AC 384, Wilson v First County Trust Ltd (No. 2) [2004] 1 AC 816. I agree with Aikens LJ that this line of authority is quite distinct from a change of position defence. Those cases are best viewed, in my judgment, as examples of United Kingdom legislation which, on its correct interpretation, implicitly excludes any civil restitutionary remedy whether for unjust enrichment or otherwise. Whether there is a wider category of public policy capable of defeating a restitution claim for unjust enrichment, separate from the change of position defence, has not previously been decided.
Aikens LJ has placed Mr Milligan’s public policy argument based on section 50 of the 1992 Act, that is foreign legislation, squarely within an English public policy defence, distinct and separate from the defence of change of position. For my part, I can see no reason why policy issues, outside the line of authorities to which I have referred concerning the proper interpretation of United Kingdom legislation, should be excluded from consideration as one of the circumstances relevant to the defence of change of position; and I would be inclined to treat the Kommunes’ argument on Norwegian policy in that way. I agree with Aikens LJ, however, that, whether viewed as a separate English public policy defence or as a factor in a change of position defence, the Kommunes’ policy point faces the insuperable difficulty that there are no findings of fact by the Judge, and indeed there was no expert evidence, as to whether a restitutionary claim for the recovery of money paid under a contract invalid pursuant to section 50 of the 1992 Act would be regarded as precluded by the 1992 Act itself or in consequence of some wider principle of Norwegian public policy.
The broad principles underlying the change of position defence are well established. The defence is not fixed in stone, and has developed and can be expected to develop further over time on a case by case basis. Broadly speaking, the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require them to make restitution or alternatively to make restitution in full: Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at p. 580 (Lord Goff). Concepts of relative fault are not applicable; good faith being a sufficient requirement in this context: Dextra Bank and Trust Company v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER Comm 193 at [38]. The defence is to be regarded as founded on a principle of justice designed to protect the defendant from a claim to restitution in respect of a benefit received by him in circumstances in which it would be inequitable to pursue that claim or to pursue it in full: ibid, and also Niru Battery Manufacturing v Milestone Trading Ltd [2003] EWCA Civ 1446 at [160] – [162] (Clarke LJ) and [190]-[192] (Sedley LJ).
I respectfully disagree with the Judge and Aikens LJ that the present case is indistinguishable in principle from Goss v Chilcott [1996] AC 788. On the unusual facts of that case, the policy which caused the loan agreement to be void (i.e. the line of cases stretching back to Pigot’s Case (1614) 11 Co. Rep. 26b) was triggered by an act which, on the face of it, was more to the disadvantage of the lender than the borrowers since it extended the time for repayment; that wrongful act was of someone who took under the borrowers and sought to benefit personally (albeit he was also legally the agent of the lender, and for that reason was able wrongfully to commit the act for his personal advantage); and (possibly for those reasons) no policy argument was advanced by the borrowers. I agree, however, that in the present case, as in Goss, the fact that the obligation and risk of repayment was assumed by the borrower, that is the Kommunes, is a relevant factor to be weighed in the balance in the change of position defence. So, in addition, is the fact that Depfa had no responsibility at all for the choice of investments made by the Kommunes, and whose performance and realisation (by redemption or sale) by the Kommunes caused the huge financial loss suffered by them.
In the light of those considerations, the fact that the onus of establishing the defence of change of position lies on the Kommunes, and that, for the reasons I have given, no weight can properly be given to the policy arguments advanced by them in respect of section 50 of the 1992 Act, the Judge was plainly entitled, and right, to reject the Kommunes’ invocation of the defence of change of position, and the appeal against that part of his judgment should be dismissed.
Lord Justice Pill
I agree with the conclusions and reasoning of Aikens LJ and consider only the question of the capacity of the Kommunes, as to which Aikens LJ and Etherton LJ disagree. They agree that Dicey Rule 162, cited by Aikens LJ at paragraph 27, is accurate and applicable. The Rule, as stated in the Third Edition of Dicey, at page 511, attracted an “inclination to agree” from a formidable source, Scrutton LJ, in Banque Internationale de Commerce de Petrograd v Goukassov [1923] 2 KB 682, at page 690.
Etherton LJ has found, at paragraph 143, that the word “capacity” in that Rule should not have “any meaning other than its meaning in domestic English jurisprudence, namely one inextricably linked to nullity”. Etherton LJ adds, at paragraph 145, that “capacity” in the Rule “means capacity in the ultra vires sense of English domestic law”.
I respectfully disagree. Once it is accepted that the capacity of the Kommunes is governed by Norwegian law, the English court should consider Norwegian notions of capacity even if they do not correspond with those in the law of England and Wales. I agree with the analysis of Norwegian law by the judge and Aikens LJ. In Norwegian terms, the acts of the Kommunes were “in excess of the capacity” of the Kommunes within the meaning of that expression as used by Browne-Wilkinson LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246, at page 304C.
The judge was in my view correct to have regard to the evidence of Norwegian law before him and to conclude, at paragraph 123, that “a lack of substantive power to enter into an agreement can only properly be characterised as going to capacity”. I agree with the conclusions of Aikens LJ at paragraph 58 to 60.
English notions of ultra vires should not be imposed on the legal system which, under the English Rule, is the appropriate system for deciding on capacity. As Mance LJ stated in Raiffeisen Zentralbank Osterreich AG v Five Star Trading LLC [2001] 1 QB 825, at paragraph 33:
“National courts must clearly strive to take a single, international or ‘autonomous’ view of the concept of contractual obligations that is not blinkered by conceptions – such as perhaps consideration or even privity – that may be peculiar to their own countries.”
With respect, I find nothing incongruous or illogical in a Rule which provides that the capacity of a Corporation is governed by its constitution and that all matters concerning its constitution are governed by the law of the place of incorporation. Once that is accepted in this case, analysis of Norwegian law is required and there is nothing artificial about it. I do not accept that, because that law does not incorporate English concepts of capacity, the analysis involves legal contortions. Norwegian concepts of capacity should be accepted in the English court. In the case of a particular contract, even one governed by English law, what may follow from the decision on the prior question of capacity does not determine the principle to be applied in deciding upon capacity.
I would dismiss both the appeal and the cross-appeal.