Mistake Remedies
Cases
Kelly v. Solari
(1841) 9 M & W 54, Court of Exchequer
Lord Abinger, CB.: .. 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 backagain. 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 notwith standing; in that case there can be no doubt that he is equally bound. Then there isa third case, and the most difficult one,-where the party had once a full knowledge of the facts, but has since forgottenthem.I certainly laid down the rule too widely to the jury, whenI 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.I have little doubt in this case that the directors had forgotten the fact, otherwise
I do not believe they would have brought the action; but as [counsel for the defendant] certainly hasa right to have that question submitted to the jury, there must bea new trial.
Parke, B:I entirely agree in the opinion just pronounced by my Lord Chief Baron, that there ought to bea new trial.I think that where money is paid to another under the influence ofa
mistake; that is, upon the supposition that a specific fact is true, which would entitle the other to themoney, but which fact is untrue, and the money would not have been paid if it had been known to the payer that the fact was untrue, an action will lie to recover it back, and it is against conscience to retain it; though a demand may be necessary in those cases in which the party receiving may have been ignorant of the mistake 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.
Rolfe, B: I am of the same opinion. With respect to the argument, that money cannot be recov ered back except where it is unconscientious to retain it, it seems to me, that wherever it is paid under a mistake of fact, and the party would not have paid it if the fact had been known to him, it cannot be otherwise than unconscientious to retain it. But I agree that [counsel for the defen dant] has a right to go to the jury again, upon two grounds: 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 which case I quite agree that they could not recover it back.
Aiken v. Short
(1856) 1 H & N 210
Pollock, CB: … The defendant’s testator, Short, had a claim on Carter,–a bond and a secur ity on property which Carter afterwards mortgaged to the Bank. The defendant, who was the executrix of Short, applied to Carter for payment. He referred her to the Bank, who, conceiving that the defendant had a good equitable charge, paid the debt, as they reasonably might do, to get rid of the charge affecting their interest. In consequence of the discovery of a later will of Edwin Carter, it turned out that the defendant had no title. The Bank had paid the money in one sense without any consideration, but the defendant had a perfect right to receive the money from Carter, and the bankers paid for him. They should have taken care not to have paid over the money to get a valueless security; but the defendant has nothing to do with their mistake. Suppose it was announced that there was to be a dividend on the estate of a trader, and persons to whom he was indebted went to an office and received instalments of the debts due to them, could the party paying recover back the money if it turned out that he was wrong in supposing that he had funds in hand? The money was, in fact, paid by the Bank, as the agents of Carter.
Platt, B:I am of the sameopinion. The action for money had and received lies only for money which the defendant ought to refund ex a:quo et bono. Was there any obligation here to refund? There wasa debt due to Short, secured by a bond and a supposed equitable chargeby way of collateral security. The property on which Short had the charge was conveyed by Carter to the Bank. Short having died, the defendant, his executrix, applied to George Carter for payment of the debt due to her husband, the testator. Carter referred her to the Bank, who paid the debt, and the bond wassatisfied. The money which the defendant got from her debtor was actually due to her, and there can be obligation to refund it.
Bramwell,B: My brother Martin, before he left the Court, desired me to say that he was of the same opinion, and so amI. Inorder to entitle a person to recover back money paid under
a mistake of fact, the mistake must be as to a fact which, if true, would make the person pay ing liable to pay themoney; not where, if true, it would merely make it desirable that he should pay the money. Here, if the fact was true, the bankers were at liberty to pay or not, as they pleased. But relying on the belief that the defendant hada valid security,they, havinga subsequent legal mortgage, chose to pay off the defendant’s charge. It is impossible to say that this case falls within the rule. The mistake of fact was, that the Bank thought that they could sell the estate fora betterprice. It is true that if the plaintiff could recover back this money from the defendant, there would be no difijculty in the way of the defendant suing Cart.er… But that does not shew that the plaintiffs can maintain this action, andI am of opinion they cannot, having voluntarily parted with their money to purchase that which the defendant had etoxpseecllt,edth. ough no doubt it turned out to· be different to, and of less value than, what they
Morgan v. Ashcroft
[1938] I KB 49
Sir Wilfrid Greene MR: … The plaintiff’s claim is for money had and received, and it is based upon what the learned county court judge found to be a mistake of fact. The question which arises is, Can such a claim succeed in the circumstances of this case? In my opinion it cannot. The nature of the claim to recover money paid under a mistake, and the limits within which it can be made, have been the subject of much controversy and the difficulties involved in providing a comprehensive solution to these problems have not as yet been overcome. Two propositions can, I think, be put forward with certainty. The first is that the claim cannot now be said to be based on some rule of aequum et bonum by virtue of which a man must not be allowed to enrich himself unjustly at the expense of another. Lord Mansfield’s views upon those matters, attractive though they be, cannot now be accepted as laying the true foundation of the claim. The second proposition is that the claim is based upon an imputed promise to repay…. So much is I think clear. But the question still remains, In what circumstances will the law impute a promise to repay where the payment was made under a mistake? That it will not do so in all circumstances is manifest. In general, no such promise can be imputed where the pay ment is made under a mistake of law. Nor can a promise to repay be imputed which, to quote Lord Sumner’s words in Sinclair v. Brougham,1 ‘if made de facto’ the law ‘would inexorably
avoid.’ …
A great part of the argument was concentrated on the words used by Bramwell Bin Aiken v. Short.2 [He considered the judgment of Bramwell Band continued:] Now it is to be observed that in that case the bank, although contractually bound to its supposed grantor to pay off the charge, was under no such liability towards the holder of the charge herself; and although the payment was thought by the bank to be beneficial to itself in that it was, as it thought, dis charging a contractual obligation and freeing its property from an incumbrance, yet it was not under any mistaken belief that the payee could demand payment. In other words, the payment was in any event, whether or not the supposed facts were true, a voluntary payment as between payer and payee.
The passage which I have quoted from Bramwell B.’s judgment has been referred to with approval by several learned judges, but always I think by way of dictum. [He cited a number of cases and continued:] The last case in which the matter was considered was NoT11Jich Union Fire Insurance Society v. William H. Price, Ld.,3 decided by the Privy Council, and I will quote two passages from the judgment of the Judicial Committee in that case, which was delivered by Lord Wright:4 ‘The facts which were misconceived were those which were essential to liability and were of such a nature that on well-established principles any agreement concluded under such mistake was void in law, so that any payment made under such mistake was recoverable. The mistake, being of the character that it was, prevented there being that intention which the common law regards as essential to the making of an agreement or the transfer of money or property.’ Later on he said:5 ‘It is true that in general the test of intention in the formation of contracts and the transfer of property is objective; that is, intention is to be ascertained from what the parties said or did. But proof of mistake affirmatively excludes intention. It is, how ever, essential that the mistake relied on should be of such a nature that it can be properly described as a mistake in respect of the underlying assumption of the contract or transaction or as being fundamental or basic.’
… It is, I think, instructive to consider the words of Bramwell B referred to above in the
light of these authorities. In the first case which he mentions, namely, that where the supposed fact if true would have made the person paying liable to pay the money, the mistake is a mis take as to the nature of the transaction. The payer thinks that he is discharging a legal obliga tion whereas in truth and in fact he is making a purely voluntary payment. Such a mistake is to my mind unquestionably fundamental or basic and may be compared, at least by way of analogy, with the class of case in which mistake as to the nature of the transaction negatives intention in the case of contract. But the second case which he mentions, namely, that where the supposed fact would, if true, merely make the payment desirable from the point of view of the payer, is very different. In that case the payment is intended to be a voluntary one and a voluntary payment it is whether the supposed fact be true or not. It appears to me that a per son who intends to make a voluntary payment and thinks that he is making one kind of volun tary payment whereas upon the true facts he is making another kind of voluntary payment, does not make the payment under a mistake of fact which can be described as fundamental or basic. The essential quality of the payment, namely its voluntary character, is the same in each case. If a father, believing that his son has suffered a financial loss, gives him a sum of money, he surely could not claim repayment if he afterwards discovered that no such loss had occurred; and (to take the analogous case of contract) if instead of giving him money, he entered into a contract with his son, he surely could not claim that the contract was void. To hold the con trary would almost amount to saying that motive and not mistake was the decisive matter.
I come therefore to the conclusion that the observations of Bramwell B., supported as they are by much weight of judicial opinion, are, so far as regards the class of mistake with which he was dealing, in agreement with the more recent authorities, and I propose to follow them. It was said on behalf of the respondent that these observations do not correctly state the law. I do not agree, although I am disposed to think that they cannot be taken as an exhaustive statement of the law but must be confined to cases where the only mistake is as to the nature of the trans action. For example, if A makes a voluntary payment of money to B under the mistaken belief that he is C, it may well be that A can recover it. Bramwell B, was not dealing with a case such as that, since he was assuming that there was no such error in persona. If we are to be guided by the analogous case of contract, where mistake as to the person contracted with negatives the intention to contract, the mistake in the case which I have mentioned ought to be held to neg ative the intention to pay the money and the money should be recoverable.
But it is not necessary to pursue this matter further. It is sufficient to say that in my opinion the present case falls within principles laid down both by Bramwell B. and in the more recent authorities. In making the payment the respondent was, it is true, under a mistake as to the nature of the transaction. He thought that a wagering debt was due from himself to the appel lant, whereas in fact it was not. But if the supposed fact had been true, the respondent would have been under no liability to make the payment which therefore was intended to be a volun tary payment. Upon the true facts the payment was still a voluntary payment; and there is in my opinion no such fundamental or basic distinction between the one voluntary payment and the other that the law can for present purposes differentiate between them and say that there was no intention to make the one because the intention was to make the other….
Scott LJ: … In none of the … cases … not even in Aiken v. Short, was there a decision of the Court that the action failed simply because the mistake did not induce a belief of liability. And indeed in Kerrison v. Glyn, Mills, Currie (5 Co.6 it was definitely decided by Hamilton] and by the House of Lords that the plaintiff was entitled to recover a payment made to the defendants for the purpose of meeting an anticipated liability although he then knew that no actual liability had yet attached to him. The decision of the House of Lords seems to me con clusive that the rule as stated in Aiken v. Short cannot be regarded as final and exhaustive in the sense that no mistake, which does not induce in the mind of the payer a belief that payment will discharge or reduce his liability, can ground an action for money had and received. It is, of course, obvious that such a belief must in fact have been induced in a very high percentage of mistaken payments giving rise to.a dispute; in human affairs the vast majority of payments made without any fresh consideration are made to perform an obligation or discharge a liability; and I doubt not that performance of an obligation would be accounted discharge of a liability for the purpose of the Aiken v. Short proposition. For this reason of human nature, that proposition is very often–and perhaps usually–a crucial test of the question whether the payment was in truth made by reason ofa mistake or was merely voluntary and thereforeirrecoverable. ButI agree with the view of the Master of the Rolls that the final demarcation of the boundaries of the old action of money had and received has not yet been achieved, and that their final delin eation can only be worked out as concrete cases arise and bring up new points for decision. And in refusing assent to the appellant’s argument that the Aikenv. Short proposition is of itself nec essarily sufficient to fix the boundary, I desire to keep clearly open the possibility of the com mon law treating other types of payment in mistake as falling within the scope of the action for money had and received. Without expressing any opinion, I recognize, for instance, the possi bility that there may be cases of charitable payments or other gifts made undera definite mis take of person to be benefited, or of the substantial nature of the transaction, where on consideration the old principles of the action might still, in spite of limiting decisions, be held to cover such circumstances….
An additional reason for keeping the door open is the very heterogeneous list of causes of action which unquestionably fall within this field of impliedcontracts. They are so various in kind as almost irresistibly to invite the inference that there may be one or more unifying prin ciples upon which theyrest. If one takes the action for money had and received by way of illus tration of this point, one finds assembled under that heading the following wholly different types of causes: (1.)money paid in mistake of fact; (2.) money paid fora consideration which has failed; (3.) money paid because it was extorted colore officii, or by duress, etc.; (4.) cases where the plaintiff has had an actionable wrong done him by the defendant, and ‘waiving the tort’ sues in assumpsit-whether any of his money has actually passed from himself to the defendant or not. In this context I venture humbly and respectfully to doubt whether the cri terion suggested by Viscount Haldane LC in Sinclair v. Brougham’ that ‘the fiction’ (i.e., the common law fiction of an implied contract) ‘can only be set up with effect if sucha contract would be valid if it really existed’ is consistent with the common law history of these implied contracts; for some of them are quite incapable of formulation asreal-i.e., consensual–con-
traBctus.tI am in complete agreement with the Master of the Rolls that there isa plain principle applicable to all those cases of payments in mistake of fact, and that is that the mistake must be in some aspect or another fundamental to the transaction. On the facts of this case there was no fundamentalmistake. To pay24/. for a betting debt is just as much in the eye of the lawa purely voluntary gift asa wedding present of 24/.: the law prevents the plaintiff from saying that he
intended anything but a present. I agree that the appeal must be allowed.
Barclays Bank Ltd v. W. J. Simms Ltd
[1980] I QB 677, Queen’s Bench Division
Robert Goff J: .
The principles upon which money is recoverable on the ground that it has been paid under a mistake of fact.
Nearly 40 years ago, Asquith J. stated that ‘it is notoriously difficult to harmonise all the cases dealing with payment of money under a mistake of fact,’: see Weld-Blundell v. Synott [1940]2 KB 107, ll2. This is indeed true, and it does not make easy the task of the trial judge, whose duty it is both to search for guiding principles among the authorities, and to pay due regard to those authorities by which he is bound. I have however come to the conclusion that it is possi ble for me, even in this field, to achieve both these apparently irreconcilableobjectives. The key to the problem lies, in my judgment, in a careful reading of the earliest and most fundamental
authorities, and in giving full effect to certain decisions of the House of Lords. It is necessary therefore for me to review the leading authorities.
I shall go straight to three early cases, the first of which provided the basis of the modern law on thistopic. That is Kelly v. Solari (1841) 9 M & W 54. [He set out the facts of the case, quoted from the judgments of ParkeB (above, 100) and Rolfe B (above, 101) and continued:] [l]t would not, in my judgment, be right to infer that Parke B was stating that money paid undera mis take of fact was only recoverable in cases where the plaintiff’s mistake led him to believe that he was undera liability to the defendant to pay the money to him. There is nothing to indicate that the first part of his statement of principle was intended so to restrict the right of recovery; indeed later in his judgment he stated the principle of recovery in broader terms, as did Rolfe
B, which appears to indicate that it is sufficient to ground recovery that the plaintiff’s mistake has caused him to make the payment.
The second of these cases is Aiken v. Short (1856) 1 H & N 210. [He set out the facts and con tinued:] It isa crucial fact in the case that, the payment having been authorised by Carter, it was effective to discharge the debt which was in fact owed by Carter to the defendant; the defen dant therefore gave consideration for the payment which was, for that reason, irrecoverable. This was the basis of the decision of both Pollock CB and Platt B; it seems likely, from inter ventions in the argument, that Martin B (who was absent when judgment was given) would have decided the case on the same basis Thcease is however remembered principally for an obiter dictum of Bramwell B. He said, at p. 215:
‘In order to entitle a person to recover back money paid under a mistake of fact, the mis take must be as to a fact which, if true, would make the person paying liable to pay the money; not where, if true, it would merely make it desirable that he should pay the money.’
. . . It appears from the rather fuller report in 25 LJ Ex. 321, 324 that Bramwell B did not nec essarily regard his statement of principle as comprehensive. But, strictly construed, it appears to restrict the right of recovery more narrowly than did Parke B in Kelly v. Solari. It purports to exclude recovery in cases where the plaintiff’s mistake did not lead him to believe that he was liable to pay the money to the defendant; and it appears in particular to exclude recovery in a case where the plaintiff had paid the money to the defendant in the mistaken belief, not that he was liable to the defendant to pay it, but that he was under an obligation to a third party to pay it to the defendant, even when the payment did not discharge a debt owing to the defen dant who therefore gave no consideration for it….
Ththeird of the early cases to which I must refer is Chambers v. Miller (1862) 13 CBNS 125.
[He considered the case and continued:]
Such are the early cases most frequently cited on this topic. I propose to go next to three cases in the House of Lords, in which the law on this subject was authoritatively established….
… Thefirst is Kleinwort, Sons fS Co v. Dunlop Rubber Co (1907) 97 LT 263. A firm called Messrs. Kramrisch were rubber merchants, who were financed both by the appellants Messrs. Kleinworts, and by another merchant bank, Messrs. Brandts. Kramrisch supplied the respon dents, the Dunlop Rubber Co., with a quantity of rubber, directing them to pay the price to Brandts, who had an equitable mortgage upon it. The respondents mistakenly paid it to the appellants, who received it in good faith. Messrs. Kramrisch failed and the respondents were subsequently held liable to pay the money to Messrs. Brandts. They claimed to recover from the appellants the money they had mistakenly paid to them. It was held that they were entitled to recover it as having been paid under a mistake of fact. The main question in the case was whether the appellants could rely upon the defence of change of position; but that plea was con clusively negatived by the answers of the jury at the trial. For present purposes, the interest of the case lies in two matters. First, there was no question of the respondents mistakenly believ ing that they were under any liability to the appellants to pay the money to them. Second, Lord Loreburn LC stated the principle of recovery in very broad terms. He said, at p. 264:
‘ itis indisputable 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.’
The second of these cases is Kerrison v. Glyn, Mills, Currie fS Co. (19ll) 81 LJKB 465. The appellant paid a sum of money to the respondents, for the account of a New York bank called Kessler & Co., in anticipation of a liability to recoup Kessler & Co. for advances made by them to a mining company in Mexico in which the appellant was interested. Unknown to the appel lant or the respondents, Kessler & Co. were insolvent at the time of the payment. The money was not paid over by the respondents to Kessler & Co.; but since Kessler & Co. were indebted to them, the respondents claimed to be entitled to retain the money and declined to refund it to the appellant. It was held that the appellant was entitled to recover the money from the respondents. Two questions arose in the case. First, whether the arrangements between the appellant and Kessler & Co. were such that he was indebted to Kessler & Co. in the sum of money; it was held by the House of Lords (differing from the Court of Appeal on this point) that he was not, and that the money was paid only in anticipation of a future liability. Had the appellant been so indebted, it was recognised by the House of Lords that the money would have been paid in discharge of an existing debt and would have been irrecoverable, despite the fact that the appellant had paid it under the misapprehension that Kessler & Co. were solvent. Lord Atkinson, who delivered the leading speech, said, at p. 470:
‘[The appellant) lodged the money in the belief that Kessler & Co. were a living com mercial entity able to carry on their business as theretofore, that they were in a position to honour and would honour the drafts of the Bote Mining Co. up to the sum which he, in anticipation, sent to recoup them for their repeated advances. Kessler & Co. had, in fact, ceased to be in that position.’
The second question was whether the fact that the respondents w«e bankers enabled them to resist the appellant’s claim, on the ground that money once paid in to a bank ceases altogether to be the money of the payer. That was held to be irrelevant.
This decision, too, is therefore inconsistent with the proposition that the only mistake which will ground recovery is a mistake which leads the payer to believe that he is liable to the payee to pay it to him. But the case is also of interest for present purposes because of statements in the speeches of their Lordships relating to the type of mistake which will ground recovery. These are in very broad terms. Lord Atkinson said, at p, 470:
‘I cannot doubt but that on general principles … [the appellant) would be entitled to recover back money paid in ignorance pf these vital matters as money paid in mistake of fact.’
Lord Shaw of Dunfermline said, at p. 471:.
‘The money was paid … under the mistake of fact-which was material, and was indeed the only reason for payment-that Kessler & Co. could perform their obligations.’
Lord Mersey said, at p. 472, that the facts brought the case directly within the terms of the judgment of Lord Loreburn LC in Kleinwort, Sons fS Co. v. Dunlop Rubber Co., and then quoted the passage from that judgment wHich I have set out above. He went on to dismiss an attempt by the respondents ‘to take the case out of this plain and simple rule of law.’ It is to be observed that Lord Loreburn LC was a member of the Judicial Committee in Kerrison v. Glyn, Mills, Currie. fS Co., and concurred, as did the Earl ofHalsbury.
It thus appears that, provided the plaintiff’s mistake is ‘vital’ or ‘material,’ which I under stand to mean that the mistake caused the plaintiff to pay the money, the money is prima facie recoverable; but that if the payment discharged an existing debt owing to the payee (or to a prin cipal on whose behalf the payee is authorised to receive the payment), it is irrecoverable. Such a conclusion is, if I may say so with respect, entirely consistent with the decision in Aiken v. Short, though not with the dictum of Bramwell B in that case.
The third decision of the House of Lords to which I must refer is R. E. Jones Ltd v. Waring and Gil/ow Ltd [1926] AC 670. The facts of the case are complicated and somewhat unclear, due in part to the curious way in which they were found, since they appear to have been taken by the trial judge from the opening speech of the plaintiff’s counsel. In summary, a rogue named Bodenham obtained from the respondents furniture and other effects to a value of over£13,000 on hire purchase terms, under which the down payment was to be £5,000. It appears that Bodenham defaulted in making the down payment, and that the respondents then repossessed the goods. Bodenham then approached the appellants, informing them that he represented a firm of motor manufacturers called International Motors who had control of a car called the ‘Roma’ car, and he persuaded the appellants to accept an appointment as agents for the sale of the car in certain parts of this country, one term of the agency being the payment of a deposit of £5,000 (£10 for each of 500 cars). Bodenham told the appellants that the people who were financing the thing and who were the principals behind him in the matter were the respondents, and that the deposit might be paid to them. The appellants then made out two cheques payable to the order of the respondents, one for £2,000 and one for £3,000, and handed them to Bodenham; he handed them to the respondents, who received them from him in respect of his deposit under the hire purchase agreement. The respondents’ accountant observed that the cheques bore the signature of only one director; he then arranged with the appellants to exchange them for one cheque for £5,000, duly signed. This exchange was effected in good faith, nothing being said about the nature of the transaction. The cheque for £5,000 was cashed by the respondents, who then restored to Bodenham the furniture they had seized, and let him have some more. Subsequently, the fraud came to light, and it transpired that there was no International Motors and no ‘Roma’ car. The respondents resumed possession of the furniture. The appellants claimed repayment of the sum of £5,000 from the respondents.
The trial judge gave judgment for the appellants; but his judgment was reversed by the Court
of Appeal [1925)2 KB 612. The reasons given by the members of the court vary; but for pres ent purposes the significant judgment is that of Pollock MR. He held that the appellants’ claim to recover the money as paid under a mistake of fact must fail, because the mistake was nota mistake as between the appellants and the respondents. He referred to the dicta of ParkeB in Kelly v.Solari, and ofBramwell Bin Aiken v. Short; he also referred to the decision in Chambers
v. Miller, 13 CBNS 125, and to the dictum of Erle CJ in that case (in the version reported in 32 LJ CP 30, 32). He concluded, at p. 632: ‘The plaintiffs and the defendants were each of them under misapprehensions.- ..-
and different mistakes of fact. It appears to me, therefore, that it is not possible for the plaintiffs to recover the money as having been paid under a mistake of fact.’
The House of Lords were however unanimous in concluding that the appellants’ mistake of fact was sufficient to ground recovery, though a minority considered that the respondents hada good defence to the claim because they had changed their position in good faith. The House accordingly allowed the appeal. For present purposes, I am only concerned with the nature of the mistake which will ground recovery. Viscount Cave LC (with whose speech Lord Atkinson agreed) stated the principle in very broad terms, which show that he considered it sufficient for the plaintiff to show that he suffered under a mistake of fact which caused the payment. He said, at pp. 679-680:
‘The plaintiffs were told by Bodenham that he represented a firm called International Motors which was about to be formed into a company, that the firm had control ofa car called the “Roma” car which he described as an existing car, and that the defendants were financing the firm and were the principals behind him and behind International Motors in the matter. Believing these statements to be true, the plaintiffs entered into an agreement which bound them to pay a deposit of £5,000 on 500 Roma cars; and still believing them to be true, and that the respondents as the nominees of International Motors could givea good receipt for the£5,000, they paid that sum to the respondents. In fact the statements were untrue from beginning to end; and the money was, therefore, paid undera mistake of fact induced by the false statements of a third party and, apart from special circum stances, could berecovered. As to the general principle, it is sufficient to refer to the well known case of Kelly v. Solari, and to the more recent decisions in Colonial Banlt v. Exchange Bank of Yarmouth, Nova Scotia and Kerrison v. Glyn,Mills, Curres (5 Co.’
It is significant that Viscount Cave LC did not consider it necessary to identify the precise capacity in which the appellants supposed that the respondents received the money; it was enough for him that the appellants supposed that the respondents were ‘nominees’ of International Motors who could give a good receipt for the money–a purely neutral term. It follows that he did not regard it as necessary that the appellants should have supposed that they were liable to the respondents to pay the money to them, as is borne out by his citation of Colonial Bankv. Exchange Bank of Yarmouth, Nova Scotia, 11 App. Cas. 84 and of Kerrison v. Glyn,Mills, Currie fSCo. It is scarcely surprising that Lord Atkinson, who delivered the lead ing speech in Kerrison’s case, agreed with Viscount Cave LC on this aspect of the case. Lord Shaw of Dunfermline also agreed with Viscount Cave LC that the money was paid undera mis take of fact. He concluded, at p. 686, that it seemed quite clear that the appellants would never have parted with the money if they had had any knowledge of the real truth, and that the money wasrecoverable. It appears from his statement of the facts that he did not consider that the appellants mistakenly believed that they were liable to the respondents to pay the money to them. Lord Sumner, at pp. 691-692, stated the facts in terms which show that he considered that the appellants supposed that, in paying the money, they were discharging an obligation to International Motors, not an obligation to the respondents. Lord Carson, in agreeing with Viscount Cave LC that the money was paid under a mistake of fact, cited and relied upon both the dictum of Parke Band the very broad dictum of Rolfe Bin Kelly v. Solari, of which at least the latter requires only that the plaintiff’s mistake should have caused him to pay the money.
I wish to make three comments on the decision of the House of Lords in R.E. Jones Ltd v. Waring and Gil/ow Ltd. First, the House of Lords must have rejected the view, expressed by Pollock MR, that to ground recovery the mistake must have been ‘as between’ payer and payee, in the sense of having been a mistake shared by both parties. Second, it is implicit in the speeches of all their Lordships that it is not a prerequisite of recovery that the plaintiff must have mistakenly believed that he was liable to the defendant to pay the money to him. Third, asI understand their Lordships’ speeches, in particular the speech of Viscount Cave LC (with which Lord Atkinson agreed) and the speeches of Lord Shaw and Lord Carson, it is sufficient
to ground recovery that the plaintiff’s mista should have caused him to pay the money to the payee.
From this formidable line of authority certain simple principles can, in my judgment, be deduced: (1) Ifa person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid undera mistake of fact.
(2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does dis chargea, debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or
(c) the payee has changed his position in good faith, or is deemed in law to have doneso.
Tothese simple propositions, I append the following footnotes: (a) Proposition I. This is founded upon the speeches in the three cases in the’ House of Lords, to whichI havereferred. It is also consistent with the opinion expressed by Turner Jin Thomas v. Houston Corbett (5 Co.
[ 1969] NZLR 151, 167. Of course, if the money was due under a contract between the payer and the payee, there can be no recovery on this ground unless the contract itself is held void for mistake (as in Norwich Union Fire Insurance Society Ltd v. Wm. H. Price Ltd [l 934] AC 455) or is rescinded by the plaintiff. (b) Proposition 2 (a). This is founded upon the dictum of ParkeB in Kelly v.Solari.I have felt it necessary to add the words ‘or is deemed in law so to intend’ to accommodate the decision of the Court of Appeal in Morgan v. Ashcroft [1938]l KB 49a, case strongly relied upon by the defendants in the present case, the effect of whichI shall have to consider later in thisjudgment. (c) Proposition 2 (b). This is founded upon the decision in Aiken
v. Short, and upon dicta in Kerrison v. Glyn, Mills, Cuffie (5 Co. However, even if the payee has given consideration for the payment, for example by accepting the payment in discharge of a debt owed to him bya third party on whose behalf the payer is authorised to discharge it, that transaction may itself be set aside (and so provide no defence to the claim) if the payer’s mis take was induced by the payee, or possibly even where the payee, being aware of the payer’s mistake, did not receive the money in good faith: cf. Ward (5 Co. v. Wallis [1900]l QB 675, 678-679, per Kennedy J. (d) Proposition 2 (c). This is founded upon the statement of principle of Lord Loreburn LC in Kleinwort, Sons (5 Co. v. Dunlop Rubber Co. I have deliberately stated this defence in broad terms, making no reference to the question whether it is dependent upon
a breach of duty by the plaintiff or a representation by him independent of the payment, because these matters do not arise for decision in the present case…. (e)I have ignored, in stating the principle of recovery, defences of general application in the law of restitution, for example where public policy precludes restitution. (t) The following propositions arc inconsis tent with the simple principle of recovery established in the authorities: (i) That to ground recovery, the mistake must have induced the payer to believe that he was liable to pay the money to the payee or his principal. (ii) That to ground recovery, the mistake must have been
‘as between’ the payer and the payee. Rejection of this test has led to its reformulation (notably by Asquith J in Weld-Blundell v. Synott and by Windeyer J in Porter v. Latec Finance (Q./d.)
Pty. Ltd(l964) Ill CLR 177,204) in terms which in my judgment mean no more than that the mistake must have caused the payment.
In the case before me, Mr. Evans Lombe submitted on behalf of the defendants that I could not proceed on the basis of the simple principles I have stated, because I was precluded from so doing by binding authority, viz. the decision of the Court of Appeal in Morgan v. Ashcroft Mr. Evans Lombe relied in particular on a passage in the judgment of Sir Wilfrid Greene MR, in which he stated, at p. 66:
‘ a person who intends to make a voluntary payment and thinks that he is making one
kind of voluntary payment whereas upon the true facts he is making another kind of vol untary payment, does not make the payment under a mistake of fact which can be described as fundamental or basic.’
That passage Mr. Evans Lombe identified as being the crucial passage in Sir Wilfrid Greene MR’s judgment on this point; and he submitted further that the expression ‘voluntary payment’ must here be understood as a payment made without legal obligation, so that, generally speak ing, a person who makes a payment without the intention of discharging a legal obligation can not recover the money from the payee although it has been paid under a mistake of fact except possibly in circumstances where the mistake can be described as fundamental, for example where the mistake is as to the identity of the payee.
It is legitimate to observe the consequences of Mr. Evans Lombe’s submission. Ifhe is right, money would be irrecoverable in the following, by no means far-fetched, situations. (1) A man, forgetting that he has already paid his subscription to the National Trust, pays it a second time.
(2) A substantial charity uses a computer for the purpose of distributing small benefactions. The computer runs mad, and pays one beneficiary the same gift one hundred times over. (3) A shipowner and a charterer enter into a sterling charterparty for a period of years. Sterling depreciates against other currencies; and the charterer decides, to maintain the goodwill of the shipowner but without obligation, to increase the monthly hire payments. Owing to a mistake in his office, the increase in one monthly hire payment is paid twice over. (4) A Lloyd’s syndi cate gets into financial difficulties. To maintain the reputation of Lloyd’s, other underwriting syndicates decide to make gifts of money to assist the syndicate in difficulties. Due to a mistake, one syndicate makes its gift twice over. It would not be difficult to construct other examples. The consequences of Mr. Evans Lombe’s submission are therefore so far-reaching that it is nec essary to examine the ratio decidendi of this part of the decision in Morgan v. Ashcroft to ascer tain whether it produces the result for which Mr. Evans Lombe contends.
Only two judges sat to hear the appeal in Morgan v. Ashcroft-Sir Wilfrid Greene MR and Scott LJ. Furthermore, there are considerable differences between their two judgments on this part of the case. [He set out the differences and continued:] [I)t is by no means easy to determine the ratio decidendi of this part of the case. It may well be found in the opinion of both judges that an overpayment of betting debts by a bookmaker is not made under a mistake of fact suf ficiently fundamental to ground recovery, apparently on the basis that the payment is in any event intended to be a purely voluntary gift, because ‘the law prevents the plaintiff from say ing that he intended anything but a present’ (see p. 77, per Scott LJ), and the plaintiff is there fore deemed in law to intend that the payee shall be entitled to retain the money in any event. That the ratio decidendi is not to be found in the passage from Sir Wilfrid Greene MR’s judgment on which Mr. Evans Lombe relied is shown by the fact that the subsequent decision of the Court of Appeal in Larner v. London County Council [1949) 2 KB 683 is, in my judgment, inconsistent with that passage. In that case, the London County Council had resolved to pay all their employees who went to the war the difference between their war service pay and their civil pay until further order. Mr. Larner was an ambulance driver employed by the council, who was called up in 1942. As a result of his failure to keep the council accurately informed about changes in his war service pay, the council overpaid the difference. In contending that the over payment was irrecoverable, Mr. Lamer’s counsel relied upon the dictum of Bramwell B in Aiken v. Short. The Court of Appeal however held that the money was recoverable. Denning LJ who delivered the judgment of the court, declined to follow that dictum, because he said, at p. 688, ‘… that dictum, as Scott LJ pointed out in Morgan v. Ashcroft, cannot be regarded as an exhaustive statement of the law.’ He pointed out that the council
r ‘made a promise to the men which they were in honour bound to fulfil. The payments made under that promise were not mere gratuities. They were made as a matter of duty: …’
but he went on to state that it was irrelevant that the council’s promise was unsupported by consideration or unenforceable by action. It was enough that the council would never have paid the money to Mr. Larner had they known the true facts: seep. 688 of the report. It is doubtful if the decision in Larner v. London County Co ncil is one of which Sir Wilfrid Greene MR would have approved; but, if I may say so with respect, it is entirely consistent with the prin ciples of recovery established in the earlier decisions of the House of Lords to which I have referred. Accordingly it is those principles whi_ch I intend to apply in the present case.
·
It is a basic obligation owed by a bank to its customer that it will honour on presentation cheques drawn by the customer on the bank, provided that there are sufficient funds in the cus tomer’s account to meet the cheque, or the bank has agreed to provide the customer with over draft facilities sufficient to meet the cheque. Where the bank honours such a cheque, it acts within its mandate, with the result that the bank is entitled to debit the customer’s account with the amount of the cheque, and further that the bank?s payment is effective to discharge the obligation of the customer to the payee on the cheque, because the bank has paid the cheque with the authority of the customer.
In other circumstances, the bank is under no obligation to honour its customer’s cheques. If however a customer draws a cheque on the bank without funds in his account or agreed over draft facilities sufficient to meet it, the cheque on presentation constitutes a request to the bank to provide overdraft facilities sufficient to meet the cheque. The bank has an option whether or not to comply with that request. If it declines to do so, it acts entirely within its rights and no legal consequences follow as between the bank and its customer. If however the bank pays the cheque, it accepts the request and the payment has the same legal consequences as if the pay ment had been made pursuant to previously agreed overdraft facilities; the payment is made within the bank’s mandate, and in particular the bank is entitled to debit the customer’s account, and the bank’s payment discharges the customer’s obligation to the payee on the cheque.
In other cases, however, a bank which pays a cheque drawn or purported to be drawn by its customer pays without mandate. A bank does so if, for example, it overlooks or ignores notices of its customer’s death, or if it pays a cheque bearing the forged signature of its customer as drawer, but, more important for present purposes, a bank will pay without mandate if it over looks or ignores notice of countermand of the customer who has drawn the cheque. In such cases the bank, if it pays the cheque, pays without mandate from its customer; and unless the customer is able to and does ratify the payment, the bank cannot debit the customer’s account, nor will its payment be effective to discharge the obligation (if any) of the customer on the cheque, because the bank had no authority to discharge such obligation.
It is against the background of these principles which were not in dispute before me, that I have to consider the position of a bank which pays a cheque under a mistake of fact. In such a case, the crucial question is, in my judgment, whether the payment was with or without man date. The two typical situations, which exemplify payment with or without mandate, arise first where the bank pays in the mistaken belief that there are sufficient funds or overdraft facilities to meet the cheque, and second where the bank overlooks notice of countermand given by the customer. In each case, there is a mistake by the bank which causes the bank to make the pay ment. But in the first case, the effect of the bank’s payment is to accept the customer’s request for overdraft facilities; the payment is therefore within the bank’s mandate, with the result that not only is the bank entitled to have recourse to its customer, but the customer’s obligation to the payee is discharged. It follows that the payee has given consideration for the payment; with the consequence that, although the payment has been caused by the bank’s mistake, the money is irrecoverable from the payee unless the transaction of payment is itself set aside. Although the bank is unable to recover the money, it has a right of recourse to its customer. In the second case, however, the bank’s payment is without mandate. The bank has no recourse to its cus tomer; and the debt of the customer to the payee on the cheque is not discharged. Prima facie, the bank is entitled to recover the money from the payee, unless the payee has changed his posi tion in good faith, or is deemed in law to have done so.
In the light of the above principles, it is plain that in the present case the plaintiff bank is entitled to succeed in its claim. First, it is clear that the mistake of the bank, in overlooking the drawer’s instruction to stop payment of the cheque, caused the bank to pay the cheque. Second, since the drawer had in fact countermanded payment, the bank was acting without mandate and so the payment was not effective to discharge the drawer’s obligation on the cheque; from this it follows that the payee gave no consideration for the payment, and the claim cannot be defeated on that ground. Third, there is no evidence of any actual change of position on the part of either of the defendants or on the part of the National Westminster Bank; and, since notice of dishonour is not required in a case such as this, the payee is not deemed to have changed his position by reason of lapse of time in notifying them of the plaintiff’s error and claiming repayment.
I must confess that I am happy to be able to reach the conclusion that the money is recover
able by the plaintiff bank. If.the bank had not failed to overlook its customer’s instructions, the cheque would have been returned by it marked ‘Orders not to pay,’ and there would have fol lowed a perfectly bona fide dispute between the association and the receiver on the question, arising on the terms of the building contract, whether the association was entitled to stop the cheque–which ought to be the real dispute in the case. If the plaintiff bank had been unable to recover the money, not only would that dispute not have been ventilated and resolved on its merits but, in the absence of ratification by the association, ·the plaintiff bank would have had no recourse to the association. Indeed, if under the terms of the building contract the money had not been due to the defendant company, non-recovery by the plaintiff bank would have meant quite simply a windfall for the preferred creditors of the defendant company at the plain tiff bank’s expense. As however I have held that the money is recoverable, the situation is as it should have been; nobody is harmed, and the true dispute between the association and the receiver can be resolved on its merits.
David Securities Pty Ltd v. Commonwealth Bank of Australia
(1992) 175 CLR 353, High Court of Australia
Mason CJ, Deane, Toohey, Gaudron and McHughJJ: It has been suggested that Bilbie v. Lumley is authority for the limited proposition that payment made in settlement of an honest claim is irrecoverable.1 However, rather than being confined to its facts, Bilbie v. Lumley became recognised as a where a man demands money of another as a matter of right, and that other, with a full knowledge of the facts upon which the demand is founded, has paid a sum, he never can recover back the sum he has so voluntarily paid.’
Bilbie v. Lumley was distinguished in Kelly v. Solari, a case allowing recovery of moneys paid undera mistake of fact. It thereby became entrenched as a decision denying recovery because the mistake of the plaintiff was one of law. Despite its dubious foundation, the principle gained
such acceptance that Croom-Johnson J said of it that it was ‘beyond argument at this period in our legal history’. The respondent claims that the principle has also been accepted in this court; however, an examination of the relevant cases, apart from the statement of Williams J in York Air Conditioning,4 suggests that they may also be reconciled with the narrower principle of volun tary submission. [Their Honours then examined Werrin v. Commonwealth (1938) S9 CLR 1S0; South Australia Cold Stores Ltd v. Electricity Trust of South Australia (19S7) 98 CLR 6S; J & S Holdings Pty Ltd v. NRMA Insurance Ltd (1982) 41 ALR 439.]
An important feature of the relevant judgments in these three cases is the emphasis placed on voluntariness or election by the plaintiff. The payment is voluntary or there is an election if the plaintiff chooses to make the payment even though he or she believes a particular law or contractual provision requiring the payment is, or may be, invalid, or is not concerned to query whether payment is legally required; he or she is prepared to assume the validity of the obliga tion, or is prepared to make the payment irrespective of the validity or invalidity of the obliga tion, rather than contest the claim for payment. We use the term ‘voluntary’ therefore to refer to a payment made in satisfaction of an honest claim, rather than a payment not made under any form of compulsion or undue influence. If such qualifying, factual circumstances are con sidered relevant, the sweeping principle that money paid under a mistake of law is irrecover able or even the [Federal Court’s] modification of that principle to the effect that mistake oflaw does not on its own found an action for the recovery of money paid is broader and more preclu sive than is necessary. As the authorities cited earlier in explanation of the term ‘mistake oflaw’ make clear, the concept includes cases of sheer ignorance as well as cases of positive but incor rect belief. To define ‘mistake’ as the supposition that a specific fact is true, as Parke B did in Kelly v. Solari, which was a mistake of fact case, leaves out of account many fact situations. A narrower principle, founded firmly on the policy that the law wishes to uphold bargains and enforce compromises freely entered into, would be more accurate and equitable.
The identification and acceptance of such a narrow principle is strongly supported by the dif ficulty and illogicality of seeking to draw a rigid distinction between cases of mistake of law and mistake of fact. The artificiality of this distinction and the numerous exceptions to it lie behind many of the calls for abolition of the traditional rule. Learned Hand J called it ‘that most unfor tunate doctrine’.5 The Supreme Court of Canada indicated its willingness to abolish the rule in its recent decision of Air Canada v. British Columbia, following the ‘thorough, scholarly and damning analysis of the mistake of law doctrine’6 by Dickson J in his dissenting judgment in the earlier case of Hydro Electric Commission of Nepean v. Ontario Hydro.1 Western Australia and New Zealand have abolished the rule by legislation. The Law Reform Committee of South Australia and the Law Reform Commissions of New South Wales and British Columbia have recommended abolition of the rule, as has most recently the English Law Commission. Also very recently, the House of Lords has had occasion to refer to the strong criticism to which the traditional rule has been subjected.8
Commentators have been highly critical of both the fact versus law distinction and the tra ditional rule precluding recovery. Goff and Jones reject the r.ule and seek to reconcile the cases with a narrower principle. Palmer is unable to find any reason to support treating restitution in cases of mistake of law any differently from cases of mistake of fact. Birks considers that the old rule cannot be justified and that recovery should be permitted in certain cases where there is a mistake of law. In Canada, the authors of a recent text on the law of restitution condemn the traditional rule and conclude that it is unnecessary to distinguish between mistakes of law and of fact in order to fulfil the policy in favour of the finality of dispute resolution. As the same authors say, it ‘would be difficult to identify another private law doctrine which has been so uni versally condemned’.The criticism gains added impetus in Australia by virtue of the recognition by this court in Pavey (S Matthe11JsPty. Ltd v. Paul of the ‘unifying legal concept’ of unjust enrichment.11 As Dickson] stated in Ontario Hydro:
‘Oncea doctrine of restitution or unjust enrichment is recognised, the distinction as to mistake of law and mistake of fact becomes simply meaningless.’
If the ground for ordering recovery is that the defendant has been unjustly enriched, there is no justification for drawing distinctions on the basis of how the enrichment was gained, except in so far as the manner of gaining the enrichment bears upon the justice of the case.
In the light of our view that the decision in South Australian Cold Stores can in this court be justified ona narrower basis and that the traditional rule was not necessary to the decision, there is no other decision of this court which constrains us to adopt the traditional rule. For the reasons stated above, the rule precluding recovery of moneys paid under a mistake oflaw should be held not to form part of the law in Australia. In referring to moneys paid undera mistake of law, we intend to refer to circumstances where the plaintiff pays moneys to a recipient who is not legally entitled to receive them. It would not,/or example, extend to a case where the mon
eys were paid under a mistaken belief that they were legally due and owing undera particular
clause ofa particular contract when in fact they were legally due and owing to the recipient under another clause or contract.
Having rejected the so-called traditional rule-denying recovery in cases of payments made undera mistake of law, it is necessary to consider what principle should be put in its place. It would be logical to treat mistakes of law in the same way as mistakes of fact, so that there would bea prima facie entitlement to recover moneys paid when a mistake of law or fact has caused thepayment. Jurisdictions which have abolished the traditional rule by legislation have done so by stating that recovery should be allowed in cases of mistake of law in the same circumstances as it would be were the mistake one of fact (Western Australia and New Zealand).
The proposition that there should be a prima facie entitlement to recover moneys paid whena mistake of fact or law has caused the payment has not been universally accepted. Two alternative formulations of the basis of recovery have been proposed: first, that the person making the mis taken payment must have supposed that he or she was legally liable to make the payment; and, secondly, that the mistake of the person making the payment must have been a fundamentalone. Thefirst of these formulations can be subjected to the same criticism levelled at the traditional rule denying recovery in cases of mistake of law, namely, that it is illogical to concentrate upon the type of mistake made when the crucial factor is that the recipient has been enriched. To over turn the traditional rule and then replace it with a proposition incorporating the classic formula tions of the liability approach by Parke Bin Kelly v. Solari13 and Bramwell Bin Aikenv.Short
would be counter-productive. In Barclays Bank Ltd v. W.J. Simms Son (S Cooke (Southern) Ltd,
GoffJ illustrated15 how existing authority had moved beyond the narrow liability approach. In Australia and Ne11J Zealand Banking Group Ltd v. Westpac Banking Corp, this court implicitly accepted that view16 and we see no reason now to doubt that conclusion.
The second alternative fommlation asserts that, in addition to being causative, the mistake must also be fundamental. This raises the question expressly left open in Westpac Banking Corp.
In that case, the court stated:17
‘[I]t is unnecessary, for the purposes of the present case, to investigate what constitutesa “fundamental mistake” for the purposes of the principle that money payable undera fundamental mistake of fact is prima facie recoverable by the payer: see, eg, Porter v. Late& Finance (Qjd.) Pty. Ltd.18 It can, however, be said that we can see no reason to doubt the correctness of the view expressed or implicit in the judgments in the courts below to the effect that the notion of “fundamental mistake” does not require either that the payer’s mis take be shared by the payee or that the mistake be as to the existence of a fact which, if it had existed, would have resulted in the payee being under a legal obligation to make the pay
ment: see Commercial Bank of Australia Ltd v. Younis;19 Barclays Bank Ltd v. W.J. Simms
Son (S Cooke (Southern) Ltd;20 Bank of Ne11J South Wales v. Murphett.21 That having been said, it is preferable to leave for another day consideration of the question whether the requirement that the mistake be fundamental involves any more than that it appears that, without the mistake on the part of the payer, the payment would not have been made: cf,
eg, Porter22 and Barclays Bank Ltd v. W. J. Simms Son (S Cooke (Southern) Ltd.’23
The requirement that the mistake be fundamental as well as causative is not as restrictive as the liability approach considered above, but it has been suggested that the requirement is still a worthwhile precaution against a potential flood of claims and consequent insecurity of receipts.24 The notion of fundamentality is, however, extremely vague and would seem to add little, if anything, to the requirement that the mistake cause the payment. If the payer has made the payment because of a mistake, his or her intention to transfer the money is vitiated and the recipient has been enriched. There is therefore no place for a further requirement that the causative mistake be fundamental; insistence upon that factor would only serve to focus atten tion in a non-specific way on the nature of the mistake, rather than the fact of enrichment. If a strict approach is taken towards the issue of mistake so that a plaintiff bears the burden of estab lishing on the balance of probabilities that a causative mistake has been made, there would also be no need to appeal to the element offundamentality as a limiting factor. So, the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment.
The respondent’s submission that the appellants must independently prove ‘unjustness’ over and above the mistake cannot … be sustained. The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to cir cumstances which the law recognises would make an order for restitution unjust There can
be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust. The two ‘defences’ upon which the respondent relies in this Court are, first, that the pay ments by the appellants were made for good consideration and, secondly, that in reliance upon receipt of the payments the respondent, in good faith, changed its position to its detriment. In the context of a mistake case, these ‘defences’ were included in the well-known formulation of
Goff J in Barclays Bank.
… Therespondent argues that this is a case where the appellants, having accepted the bene fit of performance by the respondent, now seek to recover part of the consideration promised for that performance, namely, the payments made referable to withholding tax. This argument and the respondent’s attempt to analyse the facts on the broader basis of unjust enrichment rather than mistake specifically, already discussed, echo the view expressed by some writers that ‘the true basal principle which enables recovery of money paid under a mistake, whether of fact or law, is “failure of consideration” ‘.25 It is unnecessary in the present context to assess the merits of this argument because, as we have stated, the more traditional approach, exemplified by the judgment of Goff J in Barclays Bank and the decision of this Court in Westpac Banking Corporation specifically provides for the ‘defence’ of valuable consideration.
The respondent submits that it agreed to lend money to the appellants at the rate named in the loan agreements because of the appellants’ agreement to pay the additional amounts pur suant to cl. 8(b). If it had known that these additional amounts were not payable, the respon dent argues, it would have negotiated a different interest rate to ensure that its net return reached the required level. By not being charged this higher interest, the appellants have received consideration for the bargain. In the circumstances, they should not be allowed to take advantage of the chance to recover some of the money they had agreed to pay.
The difficulty in evaluating this argument lies in the fact that it depends primarily upon an assessment of the intention and purpose of the appellants at the time of entering the loan agree ments and paying the additional amounts pursuant to cl. 8(b). By stating that the appellants contracted to pay the additional amounts without adverting to the question of whether they could legally be forced to pay, the respondent effectively submits that the appellants voluntar ily submitted to payment. This entails the conclu,ion that the appellants either cannot truly be said to have made a mistake, as they knew what tliey were agreeing to–a proposition discussed
above-or waived inquiry into the issue and paid the additional amounts with the intention to effect an absolute transfer. ·
It is necessary to examine closely the terms of the loan agreement and the course of events preceding its signing in order to discover what the payer gave and expected to receive by way of consideration. It is only by doing this that it can be ascertained whether the payment of the additional amounts was absolute or conditional. ,If the payment was conditional, it was subject to the original or continued existence of a particular subject matter, such as an existing or future indebtedness or other obligation owed to the payee Inthis case, the evidence suggests that
the appellants agreed to pay and actually paid the amounts representing withholding tax because the respondent represented that the withholding tax on interest payments must be met by the appellants. Such representations may have caused the appellants to believe that cl. 8(b) took its form because of a general obligation on borrowers to pay the particular tax. When the matter is looked at in this light, it can be argued that the appellants agreed to pay the nominated interest rate as the price of the loan and further agreed to pay the additional amounts with which
… the appellants, discharged what the appellants considered to be their own tax liability. However, the true situation was, of course, that the liability for payment of withholding tax fell upon the lender and thats. 261 avoided any attempt to pass this burden on to a borrower in cir cumstances such as the present. The appellants thus had no indebtedness in respect of with holding tax, the discharge of which could form consideration for the payments under cl. 8(b). Those payments were therefore not made for good consideration within the terms of the defence outlined in Barclays Bank and Westpac Banking Corporation.
[The judgments then went on to consider the traditional insistence that a failure of consideration he total and continued:] In cases where consideration can be apportioned or where counter-restitu tion is relatively simple, insistence on total failure of consideration can be misleading or con fusing. In the present case, for instance, it is relatively simple to relate the additional amounts paid by the appellants to the supposed obligation under cl. 8(b) of the loan agreements. The appellants were told that they were required to pay withholding tax and the payments that they made were predicated on the fact that, by so doing, they were discharging their obligation. Such an approach is no different in effect from the cases under the old statutes of usury whereby a borrower could recover from the lender the excess interest which the lender was prohibited from stipulating or receiving …
Inthis case, the Bank must prove that the appellants are not entitled to restitution because they have received consideration for the payments which they seek to recover. It does not avail the Bank to argue that the appellants were provided with the loan moneys agreed. Indeed, the sev erability of the loan agreement into its relevant parts would seem to be accepted by the Bank for it submitted that the appellants’ consideration for agreeing to pay the additional amounts under cl. 8(b) was the Bank’s agreement not to charge a higher interest rate. In circumstances where both parties have impliedly acknowledged that the consideration can be ‘broken up’ or apportioned in this way, any rationale for adhering to the traditional rule requiring total failure of consideration disappears.
It might be said that to order restitution in the present case would, in the absence of any other defences, confer something in the nature of a windfall upon the appellants at the expense of the respondent. This possible result flows from the fact that, having proven mistaken, the appel lants are prima facie entitled to recovery and the respondent bears the onus of proving why an order for restitution would be unjust. Given the conclusion we have reached upon the issue of mistake and consideration, we need not examine the appellants’ argument, based upon Lord Denning’s judgment in Kiriri Cotton Co. Ltd v. Dewani26 that the Bank was primarily respon sible for the mistaken payment or the argument that the payment should be recoverable because it was made pursuant to a contractual obligation rendered void by statute. However, factors of the kind outlined in Kiriri reinforce our conclusion as to the purposes of the parties when enter ing the loan agreement. The respondent knew of the existence of s. 261 and understood its potential reach even if it was not aware that it invalidated cl.8(b). It acknowledged drafting cl. 8(b) with s. 261 in mind. In circumstances where the party in the best position to order its affairs in the light of specialist advice has deliberately chosen to charge a particular interest rate and seek additional amounts by virtue of separate provision in the loan agreement, there is no injustice to that party in ordering recovery. Otherwise the policy of s. 261 would be defeated.
The respondent next submits that an order for restitution would be unjust because it has
changed its position. The defence of change of position has not been expressly accepted in this country. In Westpac Banking Corporation, the Court referred to the displacement of prima facie liability by ‘some adverse change of position by the recipient in good faith and in reliance on the payment’.27 The issue did not, however, arise for decision in that case. In this country, con flicting views have been expressed. In Bank of NSWv. Murphett28 Crockett] thought change of position was a defence. However, in National Mutual Life Association v. Walsh29 Clarke J con cluded that the English Court of Appeal decision in Baylis v. Bishop of London30 ruled out the acceptance of such a defence in the case before him. In England, there is strong authority in favour of acceptance of the defence, viz the judgment of Kerr LJ in Rover International Ltd,31 Barclays Bank and most importantly the recent decision of the House of Lords in Lipkin Gorman v. Karpnale Ltd. In the last case, Lord Bridge of Harwich, Lord Ackner and Lord Goff of Chieveley held that English law should recognise the defence, although they declined to define its scope. Text writers … such as Goff and Jones and Birks, also support the existence of the defence, particularly in view of the inflexibility of the related doctrine of estoppel, as evi denced by Avon CC v. Howlett32 where the Court of Appeal held that estoppel could not oper ate pro tanto. And, in Canada33 and the United States,34 the defence of change of position has been recognised. Section 125(1) of the Property Law Act 1969 (WA) ands. 94B of the Judicature Act 1908 (NZ) also provide for this defence.
If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt.35 In the jurisdictions in which it has been accepted (Canada and the United States), the defence operates in different ways but the common element in aU cases is the requirement that the defendant point to expenditure or financial commitment which can be ascribed to the mistaken payment InCanada and in some United States decisions,
the defendant has been required to point to specific expenditure being incurred because of the
payment. Other cases in the United States aUow a wider scope to the defence, such that a defendant can rely upon it even though he or she cannot precisely identify the expenditure caused by the mistaken payments. In no jurisdiction, however, can a defendant resort to the defence of change of position where he or site has simply spent the money received on ordin- ary living expenses. •
The difficulty lying in the path of acceptance or detailed explication of the defence in this case is that the facts which might give rise to a plea of the defence and thus require a decision by this Court were not adduced in the courts below….
We would remit the case to the trial judge for determination, in accordance with the judg ment of this Court, of the following issues:
(a) whether the appellants should be permitted to call evidence on the issue of mistake;
(b) whether the appellants paid the additional amounts because of their mistaken belief that their contractual arrangements with the Bank required the payments;
(c) whether the Bank changed its position on the faith of receipt of the payments by the appellants.
Brennan J..
The tax equivalent may have been paid by the respective borrowers under a mistake oflaw, but it cannot be recovered as a payment made for a consideration that has totally failed. A con sideration in this context is ‘the benefit bargained for under the contract or purported con tract’.36 The benefit for which the respective borrowers bargained by promising to pay the tax equivalent was the right to renew advances during the availability period and they have had the benefit of that right to the full. Section 261 did not nullify cl. 2(d) and the performance of that obligation by the bank was therefore good consideration. The only consequence of the respec tive borrowers having had the benefit of renewal is to focus attention on the category of resti tution into which this case must fall if the respective borrowers are entitled to any relief. Payments made under a mistake and payments made for a consideration that has totally failed are distinct categories but both are subsumed under the heading of unjust enrichment as Lord Wright pointed out in Fibrosa Spo/ka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd.37 ••• If, under a mistake, money is paid to and unjustly enriches a payee, the payer’s right to recover the amount paid accrues at the moment when the payee received the money. By contrast, a pay ment made for a consideration that totally fails is not affected by any operative mistake: it is made in order to obtain the consideration bargained for. The payer acquires no right to recover when the payment is received, but only when the consideration totally fails. The very hypothesis which makes it unjust for the payee to retain the payment when the consideration fails is that the payer has received no part of the contractual benefit for which the payment was made. There are cases which appear to fall into both categories-for example, where money is paid as the price of goods sold in ignorance of the fact that the goods have perished-but, on analysis, cases of that kind will reveal one mistake affecting the formation of the contract under which the payment is purportedly made and a mistake as to the existence of the contract pursuant to which the payment is made. If a case should occur where a payment is recoverable as having been made both under a mistake and for a consideration that has totally failed, the facts would reveal both a receipt which unjustly enriches the payee and a failure by the payer to acquire the contractual benefit for which the payment was made. The point of distinguishing the two cat egories of unjust enrichment is this: ‘consideration’, when given for a payment made under a mistake, is a benefit given at or prior to the receipt by the payee: at that moment it can be deter mined whether and to what extent the payee has been unjustly enriched. On the other hand, ‘consideration which has totally failed’ refers to a benefit under a contract or purported con tract that the payee has totally failed to give during the period available for contractual perfor mance. It is therefore a fallacy to conflate the two categories and to find a total failure of consideration to be an element common to both.
Assuming … that the respective borrowers paid the bank the tax equivalent because, as the Full Court found, ‘they regarded themselves as legally obliged to make pursuant to the contractual and security arrangements with the bank’, the proposed category of restitu tion to be considered is not payment for a consideration thJt has totally failed. The considera tion bargained for was renewal of the advances when an interest period expired during the currency of the availability period. As it turned out, the respective borrowers were not obliged in law to pay for that consideration: s. 261 so operated. But that is not to the point. The point is that the respective borrowers got precisely what they bargained for but they were not obliged to pay for it. The payment of the tax equivalent was not for a consideration that totally failed; it was paid under the mistake that it was due and payable. The mistake, if mistake there was, arose from ignorance of the operation of s. 261 of the Income Tax Assessment Act. The cat egory of restitution proposed for consideration in this case is payment under a mistake of law. To determine whether it is right to admit a remedy in restitution for payments made under a mistake oflaw, it is relevant to consider the conception of unjust enrichment which is present in all cases in which the common law action for moneys had and received lies to recover money paid by a plaintiff to a defendant.
When a defendant receives a payment which he has no right to receive and which the plain tiff has paid to him by mistake, the injustice of the defendant’s enrichment does not depend on the nature of the mistake that caused the payment to be made. Whether the plaintiff made a mistake of law or a mistake of fact, the defendant, having no right to receive the payment, is unjustly enriched by its receipt. Then should the distinction between the two categories of mis take make any difference to a finding of unjust enrichment? In Hydro Electric Commission of Nepean v. Ontario Hydro38 Dickson], in a notable dissenting judgment, said:
‘Once a doctrine of restitution or unjust enrichment is recognised, the distinction as to mistake of law and mistake of fact becomes simply meaningless.’
The statement may be too broad but I respectfully agree with the reasons of their Honours in the majority in the present case for rejecting the distinction between a mistake of fact and a mistake oflaw as critical to the question whether the defendant has been unjustly enriched. But that is not to say that the distinction is immaterial to the question whether there has been a mis take of the kind which entitles the plaintiff to restitution. The distinction between mistakes of fact and mistakes of law is material to the question whether a payment is ‘voluntary’ and, on that account, is irrecoverable.
… To admit mistake of law as a ground for restitution in any case in which a mistake of fact would ground such a remedy would render many payments insecure even in cases where both parties expected the payment to be final: the uncertainty of the law and the overruling of deci sions by later cases or on appeal would infect many payments with a provisional quality incom patible with orderly commerce. Moreover, while mistakes of fact are specific to particular relationships, the revealing of a mistake of law in one case could throw into uncertainty the finality of payments made in a great variety of cases. Although payments made under a mistake of law should not be excluded entirely from the categories of cases in which restitution may be ordered, something more than a mere mistake of law is required before the remedy is avail able….
Thperoblem, of course, is to articulate the elements additional to a mere mistake oflaw that entitlea plaintiff to restitution or preclude recovery of the money paid under a mere mistake of law. That problem, it should be said immediately, does not affect payments made in compro mise of contested claims. When a claim is settled by accord and satisfaction, a payment made in satisfaction is made in discharge of an obligation created by the accord: it is unaffected by any mistake as to the validity of the claim compromised.
Regretfully,I am unable to accept the propoial in the majority judgment that payments made in satisfaction of an honest claim should be clas!.ified as ‘voluntary’ and, on that account, be held to be irrecoverable Thfeallacy in this approach is that many payments, without conscious
adversion to the relevant law, would not have been made had the payer known the true legal position. Such payments are no more voluntary than payments made under a mistake of fact when the payer does not have full knowledge of the facts when the payment is made. Many cases of payments that turn out to have been made under a mistake of law are made simply by an omission to consider the law: they cannot realistically be treated as payments made in sub- mission to a claim. . . . ‘
If it be desirable to introduce a principle to protect the finality of payments made undera mistake of law in satisfaction of what, to the mind of the payee, is an honest claim of right, it is not satisfactory to press into service the concept of voluntary payments. The principle should be dressed in modern attire rather than in an older garb that will not fit.
The reason for introducing any limitation on restitution of payments made under a mistake of law should be identified: it is to achieve a degree of certainty in past transactions. Unless some limiting principle is introduced, the finality of any payment would be as uncertain as the governinglaw. How should the limiting principle be stated? The Restatement of the Law of Restitutiion proposes a rule of ‘honest claim’ in these terms:
‘It is not essential to retention that the transferee demand performance; he is entitled to retain what he has received if, because of a mistake oflaw, he does not know when he learns of the transfer and for what it was given, that he was not entitled to it. On the other hand, if he has no substantial doubt as to the law and believes that the transfer is made because
of the other’s ignorance of the law, his non-disclosure is fraudulent and he is not entitled to retain what is given.’
Whether the principle be stated positively (an honest claim) or negatively (does not know that he was not entitled), it is right in my opinion to state it in terms of the state of mind of the payee at the time when he learns of the receipt of the payment. Then (or, at the latest, shortly thereafter) the payee acquires title to the money paid or property transferred and becomes enriched by the receipt.
The limiting principle will be applicable only in cases where the plaintiff has madea pay ment undera mistake of law and the defendant has no right to receive it. The principle will therefore be invoked to rebut a prima facie right to restitution. Stated in terms of the defendant’s state of mind, the onus of establishing the applicability of the principle must rest on the defendant. If the principle be seen as a defence to a claim in restitution for a payment made under a mistake of law, it is unnecessary to consider whether the payer has made the payment in submission to the payee’s demand or not Iwould therefore state the principle thus:
‘It is a defence to a claim for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to receive and retain the money or property.’
The defence of receipt in satisfaction of an honest claim of right is necessarily subject to the operation of any relevant statute. Where the mistake under which the payment is made consists in the payer’s ignorance of a statute which, in protection of a class of which the payer is a mem ber, absolves the payer of the obligation to pay, the mistake of the payee who receives the pay ment honestly claiming it to be his due does not entitle the payee to retain it. If it were otherwise, an honest but mistaken claim by the payee would frustrate the operation of the statute Itfollows that, if the tax equivalent was paid by the respective borrowers under the
mistake that they were obliged to do so by the applicable loan agreement, they are entitled now to recover the money so paid.
In the present case, there remains for determination by a trial judge only this issue: Did the respective borrowers pay the tax equivalent to the Bank under the mistake that they were obliged to do so by the loan agreements?
If the answer is in the affirmative, judgment should be for the respective borrowers; if in the negative, for the bank. Had the bank received the tax equivalent in satisfaction of its honest claim to receive it and had the mistake under which the payment was made been a mistake of law that arose otherwise than by operation of a statute enacted for the protection of a class including the payers, there would have been a second issue to be found: Was payment received by the payee in satisfaction of an honest claim of right?
I would join in making the orders proposed by their Honours in the majority judgment, but
I would limit the questions to be remitted to those identified in the proposed order as (a) arid (b).
County of Carleton v. City of Ottawa
(1965) 52 DLR (2d) 220,
Hall J The amounts claimed by the County of Carleton from the City of Ottawa totalling $9,833.01 for the period from January I, 1950, until October 31, 1962, are not disputed and if the City of Ottawa is liable the county is entitled to judgment for the amount claimed plus the cost for care and maintenance subsequent to October 31, 1962. The County of Carleton bases its claim against the City of Ottawa on the doctrine of resti tution. Lord Wright, MR, in Brook’s Wharf and Bull Wharf, Ltdv. Goodman Bros., (1937) I KB 534, discussed this doctrine at p. 544 as follows:
The principle has been applied in a great variety of circumstances. Its application does not depend on privity of contract. Thus in Mou/e v. Ga”ett, L.R. 7 Ex. IOI, which I have just cited, it was held that the original lessee who had been compelled to pay for breach of a repairing covenant was entitled to recover the amount he had so paid from a subsequent assignee of the lease, notwithstanding that there had been intermediate assignees. In that case the liability of the lessee depended on the terms of his covenant, but the breach of covenant was due to the default of the assignee, and the payment by the lessee under legal compulsion relieved the assignee of his liability.
That class of case was discussed by Vaughan Williams LJ in Bonner v. Tottenham and Edmonton Permanent Investment Building Society, (1899] I QB 161, where Moule v. Ga”ett, LR 7 Ex. IOI was distinguished. The essence of the rule is that there is a liability for the same debt resting on the plaintiff and the defendant and the plaintiff has been legally com pelled to pay, but the defendant gets the benefit of the payment, because his debt is dis charged either entirely or pro tanto, whereas the defendant is primarily liable to pay as between himself and the plaintiff. The case is analogous to that of a payment by a surety which has the effect of discharging the principal’s debt and which, therefore, gives a right of indemnity against the principal.
And, at p. 545:
These statements of the principle do not put the obligation on any ground of implied contract or of constructive or notional contract. The obligation is imposed by the Court simply under the circumstances of the case and on what the Court decides is just and rea sonable, having regard to the relationship of the parties. It is a debt or obligation consti tuted by the act of the law, apart from any consent or intention of the parties or any privity of contract.
And again in Fibrosa Spo/ka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd [1943) AC 32 at
p. 61.
Lord Wright’s statement in Fibrosa was approved by Cartwright,], in Deg/man v. Guaranty Trust Co. of Canada and Constantineau [I 954) 3 DLR, 785, where at p. 794, he quotes from Fibrosa as follows:
‘It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retain ing the money of or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution.’
And again:
‘Lord Mansfield does not say that the law implies a promise. The law implies a debt or obligation which is a different thing. In fact, he denies that there is a contract; the obligation is as efficacious as if it were upon a contract. The obligation is a creation of the law, just as much as an obligation in tort. The obligation belongs to a third class, distinct from either contract or tort, though it resembles contract rather than tort.’
Norah Baker was an indigent for whose care the appellant was responsible prior to January I, 1950, when the area in question was annexed by the respondent. The respondent by the act and fact of annexation … assumed responsibility for the social service obligations of the appel lant to the residents of the area annexed, and the fact that one welfare case was inadvertently omitted from the list cannot permit the respondent to escape the responsibility for thatcase. To paraphrase Lord Wright, it is against conscience that it should do so.
I am in agreement with the conclusion reached by the learned trial Judge that the appellant is entitled to recover from the respondent the sum of $9,833.01, being the amount claimed to October 31, 1962. The appellant is also entitled to recover from the respondent the cost of maintaining the said Norah Baker from November I, 1962 Thaeppeal will, accordingly, be allowed and the judgment of Grant J, varied accordingly.
Liggett (Liverpool) Ltd v. Barclays Bank Ltd
[1928] 1 KB 48, King’s Bench Division
Wright J. It is contended by the defendant bank that they are entitled to credit for the amounts so paid-that is to say, for all those cheques-in dis charging the debts of the company, and they rely upon the equitable doctrine under whicha person who has in fact paid the debts of another without authority is allowed to take advantage of his payme.nt Thquestion which has been debated, and which is not at all aneasy ques
tion, is whether on the facts of this case that equity applies. It was said by [counsel for the bank]
that in law the position here would simply be this, that the bank for this purpose is in the posi tion ofa stranger who without the authority of the plaintiff company has paid off the debts of the plaintiff company, and that being so, the payment was a purely voluntary payment so far as the company was concerned, and hence the company, even if it took the benefit, could not be in any way made responsible for the payments so made. For that rule of common lawa, rule of common law which cannot be questioned, reliance is placed, amongst others, on the authority of Exa/1v.Partridge.1 But the matter must now be decided in a Court which takes cognizance of principles of both law and equity, and the question is whether the equitable principle does apply to the facts of this case. The equitable principle has been applied beyond question over and over again to cases where an agent not having the authority of his principal has borrowed money as on behalf of his principal. Under those circumstances at common law the principal cannot be sued and cannot be made to repay the amount so borrowed, but in equity it has been held that to the extent that the amount so borrowed has been applied in payment of the debts of the principal, the quasi lender is entitled to recover from the quasi borrower. The rule is very clearly stated by Lord Selborne in the case of Blackburn Building Society v. Cunliffe, Brooke £S Co.2 The noble and learned Lord said: ‘And I think the consistency of the equity allowed in the Cork and Youghal Ry. Co.’s case3 with the general rule of law that persons who have no bor rowing powers cannot, by borrowing, contract debts to the lenders, may be shown in this way. The test is: has the transaction really added to the liabilities of the company? If the amount of the company’s liabilities remains in substance unchanged, but there is, merely for the conve nience of payment, a change of the creditor, there is no substantial borrowing in the result, so far as relates to the position of the company. Regarded in that light, it is consistent with the general principle of equity, that those who pay legitimate demands which they are bound in some way or other to meet, and have had the benefit of other people’s money advanced to them for that purpose, shall not retain that benefit so as, in substance, to make those other people pay their debts. I take that to be a principle sufficiently sound in equity; and if the result is that by the transaction which assumes the shape of an advance or loan nothing is really added to the liabilities of the company, there has been no real transgression of the principle on which they are prohibited from borrowing.’ That principle is well established in respect of borrowings made without authority, and I may refer to the cases of the Baroness Wenlock v. River Dee Co.4 and Bannatyne v. Maclver,5 in which latter case the principle was applied to a case where the agent who had purported to borrow without authority was the agent, not of the company, but of a private individual. The ground is sometimes put in this way, that the lender or the quasi lender is subrogated to the rights of the creditor who has been paid off. That, obviously, is not precisely true, because no question of subrogation to securities can arise in such a case. The principle has also been applied in Reversion Fund and Insurance Co. v. Maison Cosway, Ld.6 to the case where the plaintiff, the quasi lending company, actually knew that the quasi borrow ing company had no authority to borrow. If this were a case in which the plaintiff’s account was in debit throughout to the defendant bank, then each of the cheques in question when presented would constitute a request for a loan, and the payment of that cheque would constitute the granting of that loan, and as the cheque and the request were unauthorized the case would be precisely within those authorities I have just referred to. There was some evidence in this case that at the relevant dates the position of the plaintiff company’s account at the defendant bank was that it was in debit and that there was an overdraft; to the extent that that is so, the posi tion will be, in my judgment, exactly as in the cases I have referred to, and the position will be precisely covered by the authority of those cases. But it is not clear that that was so throughout or, indeed, at all. I have to consider, therefore, what the position·would be if when each one of those cheques or any one of these cheques was presented the account was in credit. The posi tion then would be that in paying one of those cheques without authority the defendant bank was taking money which belonged to its customer and paying that away without authority. In other words, the defendant bank would be in possession of a credit balance belonging to the customer, and without the customer’s authority it would be misapplying that credit balance. Does the equity which I have referred to extend to a case of that character?
In principle it seems to me that ought to be so [and] I cannot see why the same result should not apply in a case like the one before me, where the banker does not handle actual cash or notes, chattels capable of conversion, but by reason of the present system of banking facilities everything is done by way of credit or debit balances. In such a case there is obviously no conversion, but there is is application, under an honest mistake as to the validity of the authority, of the credits which constitute the medium of exchange in place of cash. Under these circumstances I think that the equity I have been referred to ought to be extended even in the case where the cheque which was paid was paid out of the credit balance, and was not paid by way of overdraft, so that the banker will be entitled to the benefit of that payment if he can show that that payment went to discharge a legal liability of the customer. The customer in such a case is really no worse off, because the legal liability which has to be discharged is discharged, though it is discharged under circumstances which at common law would not entitle the bank to debit the customer.
The result is that I must order an inquiry, because I have not the facts before me sufficiently to come to a conclusion whether the rule of equity which I have stated does apply, and if so to what extent. The inquiry I order will be addressed to some referee who will report to me. I shall retain seisin of the case and shall deal with all questions of costs and make such final order as the report which follows on the inquiry may seem to require. The inquiry will be as to the exact circumstances under which each one of the cheques and bills complained of was paid, that is to say, what was the state of the plaintiff company’s account with the defendant bank at the date of each payment? Was it made in respect of goods supplied and was it made in the ordinary course of business?
Newbigging v. Adam
(1886) 34 Ch. D 582
Cotton LJ: The plaintiff, then, is entitled to be put back into his old position. How is that to be done? … [T]he moneys brought in by the Plaintiff were brought in to assist and support the business, and even if they did not go directly to pay any liabilities of the old business, the Plaintiff would be entitled, on the contract of partnership being set aside, to have paid back to him the sum which under that contract he brought into the business. But the Vice-Chancellor has given more. He has directed that there siiould be an indemnity given by the Adams to the Plaintiff, and the question is, Was he right in so doing?
Undoubtedly the statements made, as I have already stated, by the Adams were not such as would enable the Plaintiff to recover damages in an action of deceit, and Mr. Rigby [Counsel for the defendants] contended that it would not be right in an action of this kind to make the Defendants, whose misstatement had enabled the Plaintiff to set aside the contract, undertake liabilities for which they were never subject antecedently to the contract, for that this was really giving damages in another way. I differ frdm that proposition. In my opinion it is not giving damages in consequence of the deceit, it is working out the proper result of setting aside a con tract in consequence of misrepresentation. This is a very different thing, because although the damages which would have been obtained in an action of deceit if the misstatement had been made fraudulently, or with such reckless negligence as to bring about the same consequences, might have been the same as what the Plaintiff will get under the indemnity, they might have been much more. The Plaintiff here does not recover damages as in an action of deceit, but gets what is the proper consequence in equity of setting aside the contract into which he has been induced to enter. In my opinion it cannot be said that he is put back into his old position unless he is relieved from the consequences and obligations which are the result of the contract which is set aside. That is a very different thing from damages. The Plaintiff may have been induced by these misstatements to give up a commission in the army, and if the misstatements had been such that an action of deceit would lie he could have recovered damages for the loss of his com mission, but he could not in such an action as the present obtain any relief in respect of it. The indemnity to which he is entitled is only an indemnity against the obligations which he has con tracted under the contract which is set aside, and, in my opinion, the requiring the Defendant whose misstatements, though not fraudulent, have been the cause of setting aside the contract, to indemnify the Plaintiff from those obligations, is the only way in which the Plaintiff can be
restored to·his old position in an action like this, but I entirely disclaim any intention of giving damages in an action of this nature.
The case of Redgrave v. Hurd [20 Ch. D l] was relied upon by Mr. Haldane [junior Counsel for the defendants] in support of the contention of himself and Mr. Rigby on this point, but in my opinion that case does not support it. What was there claimed by the defendant in his counter-claim was not merely to have the contract rescinded, and the deposit of £100 returned to him, but also to have £100 damages for his loss and trouble in removing from Stroud to Birmingham, and £200 damages for having given up his practice at Stroud, and for further relief. Now those two last items were simply damages. If an action had been brought for damages on intentional misrepresentation they might have been considered as coming within the proper rule as to damages-that the damages should be such as to indemnify the party against loss, but they could not be claimed in a proceeding to set aside a contract on the ground of misrepre sentation not so made as to support an action for deceit….
Bowen, LJ: Equity will set aside this contract, and the only question remaining is, upon what terms, and what is the extent and nature of the relief which ought to be given to the Plaintiff. The Vice-Chancellor has in the first place ordered repayment of the sum of £9700 brought by the Plaintiff into the partnership, and also of the sum of £324, which, although not brought in eo nomine into the partnership, was in substance brought into it, because it was applied by the Plaintiff in discharge of debts of the firm. He has ordered these sums to be repaid after deducting certain moneys received by the Plaintiff, the balance being £9279 6s., and he has further declared that the Defendants Messrs. Adam, as well as Mr. Townend, are bound to indemnify the Plaintiff against all outstanding debts, claims, demands, and liabilities which the Plaintiff has become or may become subject to, or be liable to pay, for or on account of or in respect of the dealings and transactions of the partnership. I dwell at some length on this part of the case, because I conceive it to be important that we should lay down exactly the line on which our judgment proceeds, and decide nothing more than is necessary for the decision of the case, leaving open any points which it is not necessary to decide.
Now, in the first place, in considering the question to what extent Mr. Newbigging is entitled
to demand an indemnity from Adam (S Co., one must consider the doctrine of equity as to the relief which will be given in cases of fraud and misrepresentation. A contract obtained by fraud, being voidable and not void, remains until it is set aside, and when it is set aside it is treated both at law and in equity as non-existing. It appears that equity, as has been pointed out in the case of Peek v. Gurney [LR 13 Eq. 79], has a concurrent jurisdiction with law to give relief in cases of fraud. Common law recognised a rescission if the case shaped itself so that a Court of Common Law had jurisdiction to decide whether there should be a rescission or not, but, besides this, the common law gave damages for deceit, and in my opinion gave them, not as an alternative remedy, but as an alternative or cumulative remedy as the case might be. The Court of Chancery had a concurrent jurisdiction, and in cases of fraud, so far as I know, there can be no doubt that complete indemnity could be given by a Court of Equity to the person who had been defrauded, so as to protect him as fully in equity as he could have been protected in law. If we turn to the question of misrepresentation, damages cannot be obtained at law for mis representation which is not fraudulent, and you cannot, as it seems to me, give in equity any indemnity which corresponds with damages. If the mass of authority there is upon the subject were gone through I think it would be found that there is not so much difference as is gener ally supposed between the view taken at common law and the view taken in equity as to mis representation. At common law it has always been considered that misrepresentations which strike at the root of the contract are sufficient to avoid the contract on the ground explained in Kennedy v. Panama, New Zealand, and Australian Royal-Mai/ Company [LR 2 Q!3 580], but when you come to consider what is the exact relief to which a person is entitled in a case of mis representation it seems to me to be this, and nothing more, that he is entitled to have the con tract rescinded, and is entitled accordingly to all the incidents and consequences of such rescission. It is said that the injured party is entitled to be replaced in statu quo. It seems to me that when you are dealing with innocent misrepresentation you must understand that proposi tion that he is to be replaced in statu quo with this limitation-that he is not to be replaced in exactly the same position in all respects, otherwise he would be entitled to recover damages, but is to be replaced in his position so far as regards the rights and obligations which have been cre ated by the contract into which he has been induced to enter. [Bowen LJ then discussed the judg ment of Sir George Jessel MR in Redgrave v. Hurd (1881) 20 Ch. D 1, 12-13 and, after pointing out that the Master of the Rolls treated the relief as being the giving back by the party who made the misrepresentation of the advantages he obtained by the contract, he continued:] Now those advantages may be of two kinds. He may get an advantage in the shape of an actual benefit, as when he receives money; he may also get an advantage if the party with whom he contracts assumes some burthen in consideration of the contract. In such a case it seems to me that com plete rescission would not be effected unless the misrepresenting party not only hands back the benefits which he has himself received-but also re-assumes the burthen which under the con tract the injured person has taken upon himself. Speaking only for myself I should not like to lay down the proposition that a person is to be restored to the position which he held before the misrepresentation was made, nor that the person injured must be indemnified against loss which arises out of the contract, unless you place upon the words ‘out of the contract’ the lim ited and special meaning which I have endeavoured to shadow forth. Loss arising out of the contract is a term which would be too wide. It would embrace damages at common law, because damages at common law are only given upon the supposition that they are damages which would naturally and reasonably follow from the injury done. I think Redgrave v. Hurd shews that it would be too wide, because in that case the Court excluded from the relief which was given the damages which had been sustained by the plaintiff in removing his business, and other similar items. There ought, as it appears to me, to be a giving back and a taking back on both sides, including the giving back and taking back of the obligations which the contract has cre ated, as well as the giving back and the taking back of the advantages. There is nothing in the case of Rawlins v. Wickham [3 Deb & J 304) which carries the doctrine beyond that. In that case, one of three partners having retired, the remaining partners introduced the plaintiff into the firm, and he, under his contract with them, took upon himself to share with them the liabilities which otherwise they would have borne in their entirety. That was a burthen which he took under the contract and in virtue of the contract. It seems to me, therefore, that upon this prin ciple indemnity was rightly decreed as regards the liabilities of the new firm. I have not found any case which carries the doctrine further, and it is not necessary to carry it further in order to support the order now appealed from. A part of the contract between the Plaintiff and Adam (S Co. was that the Plaintiff should become and continue for five years partner in a new firm and bring in £10,000. By this very contract he was to pledge his credit with his partners in the new firm for the business transactions of the new firm. It was a burthen or liability imposed on him by the very contract. It seems to me that the £9000 odd, and, indeed, all the moneys brought in by him or expended by him for the new firm up to the £10,000, were part of the actual moneys which he undertook by the true contract with Adam (S Co. to pay. Of course he ought to be indemnified as regards that. I think, also, applying the same doctrine, he ought to be indemnified against all the liabilities of the firm, because they were liabilities which under the contract he was bound to take upon himself.
Fry, LJ: …
The only other point upon which I will say anything is with regard to the indemnity, and in this case it is obvious that my learned Brothers, although arriving at the same conclusion, have arrived at that conclusion by different roads. It is perhaps enough to say that I agree in their conclusion, and so escape from an inquiry of a very nice and subtle kind. I will only say this, that the inclination of my opinion is towards the view of Lord Justice Cotton; that I am inclined to hold that the Plaintiff is entitled to an indemnity in respect of all obligations entered into under the contract when those obligations are within the necessary or reasonable expectation of both of the contracting parties at the time of the contract. I hesitate to adopt the view of Lord Justice Bowen, that the obligations must be created by the contract, and I feel a little doubt whether the obligation in question in the present suit can be said to have been so created.
It appears to me, however, to be plain that the Plaintiff having been induced by the Defendants to enter into the contract of partnership, it must have been in the contemplation of the contracting parties that the new partner would under that new contract of partnership become liable to the ordinary partnership obligations, and the obligations against which indem nity is sought are such ordinary partnership obligations.
Whittington v. Seale-Hayne
(1900) 82 LT 49, Chancery Division
Farwell, J: … The plaintiffs’ action is one for the rescission of a lease on the ground of inno cent misrepresentation, and the claim also asks for damages and an indemnity against all costs and charges incurred by the plaintiffs in respect of the lease and the insanitary condition of the premises. The suggestion was made that I should assume for the purpose of argument that innocent misrepresentations were made sufficient to entitle the plaintiffs to rescission. The question then arises to what extent the doctrine, that a plaintiff who succeeds in an action for rescission on the ground of innocent misrepresentation is entitled to be placed in statu quo ante, is to beapplied. Counsel for the plaintiffs say that in such a case the successful party is to be placed in exactly the same position as if he had never entered into the contract. The defendant admits liability so far as regards anything which was paid under the contract, but not in respect of any damages incurred by reason of the contract; and I think the defendant’s view is the
correct one. The question is one of some difficulty, because the various authorities have left the point to be decided rather at large. Lord Watson, in Adam v. Newhigging (13 App. Cas. 308, at p. 324), stated it to be one of great nicety and some difficulty. When the plaintiffs say they are entitled to have the misrepresentations made good, it may mean one of two things. It may mean
that they are entitled to have the whole of the injury incurred by their entering into the con tract made good, or that they are entitled to be repaid what they have paid under their con tract–e.g., to make good in the present case would mean to have the drains put right, but to make good by way of compensation for the consequences of the misrepresentations is the same thing as asking for damages. Having regard to Derry v. Peek (1889) 14 App. Cas. 337, it is doubtful whether the old doctrine that damages occasioned by misrepresentation should be made good can be enforced now This bring me back to the case of Newhigging v. Adam (34 Ch. Div. 582), and the difficulty which I have is that the judgments in the Court of Appeal do not agree, andI have therefore to choose between them. I think Bowen LJ’s is the correct view. [FarwellJ discussed the judgments of Bowen and Cotton LJJ in Newbigging v. Adam and contin ued:] Having regard to the fact that it was only a question of indemnity which was being con sidered in Newhigging v. Adam, I do not think that Cotton LJ intended to go further than Bowen
LJ. If he did,I prefer to agree with Bowen, LJ. But Fry, LJ certainly went further. [FarwellJ cited the first paragraph of Fry LJ’s judgment extracted above, 144, and continued:] Fry, LJ was pointing at cases under the head of damages. His is an entirely different proposition to what Bowen, LJ puts, and he says so. This being so, the point I have here to consider is what is the limit of the liabilities which are within the indemnity. [Counsel for the defendant] admits that the rents, rates, and repairs under the covenan s in the lease ought to be made good; but he dis putes, andI agree with him, that the plaintiff is entitled to what is claimed by paragraph 11 of the statement of claim which is really damages pure and simple.
Bilbie v. Lumley
(1802) 2 East 469, Court of King’s Bench
Lord Ellenborough CJ asked the plaintiff’s counsel whether he could state any case where if a party paid money to another voluntarily with a full knowledge of all the facts of the case, he could recover it back again on account of his ignorance of the law? [No answer being given, his Lordship continued;] Every man must be taken to be cognizant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case. In Lowrie v. Bourdieu,1 money paid under a mere mistake of the law (was endeavoured to be recovered back), and there Buller J observed that ignorantia juris non excusat, &c.
Air Canada v. British Columbia
(1989) 59 DLR (4th) 161,
La Forest J (with whom Lamer and L’Heurreux-Dube JJ concurred): … Counsel for Canadian Pacific Airlines invited us to do away with the mistake of law rule. As she noted, the common law has largely permitted recovery of payments made under a mistake of fact. The same approach should, she contended, be followed in the case of a mistake oflaw. The distinc tion between the two, she stated, has resulted in confusion, ambiguity and injustice, and should no longer be recognized. She urged us to adopt the dissenting reasons of Dickson J as he then was, in [Nepean Hydro Electric Comm. v. Ontario Hydro (1982) 132 DLR (3d) 193.]
I do not intend to regurgitate what was said by Dickson J in his judgment. Suffice it to say that it constitutes a thorough, scholarly and damning analysis of the mistake of law doctrine from its beginning and through the egregious error of Lord Ellenborough CJ in the case of Bilbie v. Lumley (1802), 2 East. 469, to the present day: see Goff and Jones, The Law of Restitution, 3rd ed. (1986), at p. 117. What the judgment reveals is a rule built on inadequate foundations, lacking in clarity (the distinction between a mistake of fact and mistake oflaw can best be described as a fluttering, shadowy will-o’-the-wisp), and whose harshness has led to a luxuriant growth of exceptions (twelve perhaps, though the identity and scope of the exceptions I am told has led to considerable learned esoteric debate). Despite this, and despite almost uni versal criticism, the doctrine has spread from its original place in contract law into other areas, including public law (such as in Nepean itself), and it now even more ambitiously threatens to invade the domain of constitutional law. This explosion has, as Corbin has observed, probably occurred because of the temptation under the pressure of work for judges to seize upon the first plausible rule that becomes handy to dispose of a case that has no merit: Corbin on Contracts (1960), vol. 3, para. 617 at p. 756. The result is that while the rule undoubtedly serves some useful functions, these could be achieved by other means. As Dickson J himself put it at p. 205:
The modern justification for the existence of the rule against recovery of moneys paid under a mistake of law has been the stability of contractual relations. The rule though is often used as a handy means of disposing of cases where, in fact, recovery of money should be barred, and would be, under a more searching analysis of the case.
From his analysis, Dickson J concluded that the judicial development of the law of restitu tion or unjust (or as Dickson J noted, ‘unjustified’) enrichment renders otiose the distinction between mistakes of fact and mistakes oflaw. He would abolish the distinction, and would allow recovery in any case of enrichment at the plaintiff’s expense provided the enrichment was caused by the mistake and the payment was not made to compromise an honest claim, subject of course to any available defenses or equitable rea;,ons for denying recovery, such as change of position or estoppel. Dickson J considered the finality of transactions to be an important, but not an absolute value, and its weight in a particular context was best assessed within the con text of the principles of the law of restitution. He preferred to do this rather than by engraft ing new exceptions to a rule that has over the years been variously described as ‘most unfortunate’, ‘monstrous’, ‘decrepit’ and ‘unjust’.
I am aware that Dickson J was speaking in minority (for himself and Laskin CJC), but it can scarcely be maintained that the three judges who formed the majority rejected this position. Indeed, they never really faced this issue at all. The case … was argued on the basis that it fell within one of the exceptions to the mistake of law rule, that the parties were not in pari delicto, and they dealt with it accordingly. After having read Dickson J’s judgment, Estey J was at pains to note that in the argument unjust enrichment had only been tangentially mentioned and that the distinction between mistake of fact and mistake of law was not raised; indeed, it was accepted. ‘Accordingly,’ he concluded [at p. 243), ‘my considerations have been confined to the operation of the doctrine of mistake of law as argued’.
This can hardly constitute an expression of opinion-let alone a definitive one by this court
on the issues raised by Dickson J, and I therefore have no hesitation in following his lead in these matters. In my view the distinction between mistake of fact and mistake of law should play no part in the law of restitution. Both species of mistake, if one can be distinguished from the other, should, in an appropriate case, be considered as factors which can make an enrich ment at the plaintiff’s expense ‘unjust’ or ‘unjustified’. This does not imply, however, that recovery will follow in every case where a mistake has been shown to exist. If the defendant can show that the payment was made in settlement of an honest claim, or that he has changed his position as a result of the enrichment, then restitution will be denied.
[La Forest J ,vent on to discuss a defence of ‘passing on’, which in his view was one reason for deny ing restitution in this case. He then went on to a second reason:]
It is clear that the principles of unjust enrichment can operate against a government to ground restitutionary recovery, but in this kind of case, where the effect of an unconstitutional or ultra vires statute is in issue, I am of the opinion that special considerations operate to take this case out of the normal restitutionary framework, and require a rule responding to the specific under lying policy concerns in this area [T]here are solid grounds of public policy for not accord
ing to a general right of recovery in these circumstances, This policy was forcefully stated
by Logan Jin the Kentucky Court of Appeal (where it will be remembered there is no general mistake of law doctrine) in Coleman v. Inland Gas Corp., 21 SW 2d 1030 at p. 1031, 231 Ky. 637 (1929):… all state governments have been slow indeed to open the doors of their treasuries and allow money to pass therefrom after it has once found lodgment within the governmental vaults. This is as it should be. The state is the sovereign and its affairs must be conducted for the best interest and welfare of the people. That calls for the expenditure of large sums of money for governmental affairs, and such sums of money can be obtained only through taxation. The state should determine the amount which it will spend by the probable income it will receive. When the income is collected it is allocated to different funds. The state uses the funds nearly always during the current year. It has been universally held, unless a contrary conclusion was forced by an ironclad statute, that no taxpayer should have the right to disrupt the government by demanding a refund of his money, whether paid legally or otherwise.
… Such a rule is sensible. The only practical alternative as a general rule would be to impose a new tax to pay for the old, which is another way of saying that a new generation must pay for the expenditures of the old. At best it is simply inefficient.
A related concern, and one prevalent through many of the authorities and much of the aca demic literature is the fiscal chaos that would result if the general rule favoured recovery, par ticularly where a long-standing taxation measure is involved….
Those who favour recovery of ultra vires taxes concede that an exception would be required
where this would disrupt public finances: see John D. McCamus, ‘Restitutionary Recovery of Moneys Paid to Public Authority Under a Mistake of Law: lgnorantia Juris in the Supreme Court of Canada’ (1983), 17 UBC L Rev. 233. But how would a court determine this? Among other complications is the fact that what can make recovery against the state impractical is the length of time during which an invalid tax has been collected. Equitable !aches could be brought into service, but these ordinarily involve some discernible act of acquiescence to trigger their operation. The obvious remedy is a period of limitations, but it would be inappropriate for courts at this late date of legal development to define such periods which, to be effective, may have to differ from one type of tax to another.
All in all, I have become persuaded that the rule should be against recovery of ultra vires taxes, at least in the case of unconstitutional statutes. It seems best to function from the basis of that rule with exceptions where the relationship between the state and a particular taxpayer resulting in the collection of the tax are unjust or oppressive in the circumstances. However, this case does not call for departure from the general rule. The tax levied in this case, though unconstitutional, comes close to raising a mere technical issue. Had the statute been enacted in proper form there would have been no difficulty in exacting the tax as actually imposed. Though specific evidence was not led on this point, were recovery to be allowed, the airlines would receive a windfall, and fiscal chaos could well result. Many others could well bring suit, for this is a general tax applying to all purchases of gasoline in the province. It is true that many of these would not be in a position to establish their claims but it would be odd if this factor were taken into account since its general effect would be to favour the strong against the weak. Finally, there is not the element of discrimination, oppression or abuse of authority which would warrant recovery.
This rule against the recovery of unconstitutional and ultra vires levies is an exceptional rule, and should not be construed more widely than is necessary to fulfil the values which support it. Chief among these are the protection of the treasury, and a recognition of the reality that if the tax were refunded, modern government would be driven to the inefficient course of reim posing it either on the same, or on a new generation of taxpayers, to finance the operations of government. Though the drawing of lines is always difficult, I am persuaded that this rule should not apply where a tax is extracted from a taxpayer through a misapplication of the law. Thus, where an otherwise constitutional or intra vires statute or regulation is applied in error to a person to whom on its true construction it does not apply, the general principles of restitution for money paid under a mistake should be applied, and, subject to available defenses and equitable considerations discussed earlier, the general rule should favour recovery. In exceptional cases public policy considerations may require a contrary holding, but those excep tional cases do not justify extending the general rule of non-recovery of unconstitutional or ultra vires levies. As Professor Palmer has noted (The Law of Restitution, vol. III, at p. 247):
The effect of restitution in dislocating the fiscal affairs of the governmental unit in such isolated instances of mistake is nothing like it would be where many payments have been made under a tax law which is unconstitutional or invalid for some other reason.
In my view no distinction should be drawn between those cases which would traditionally be considered as mistakes of fact, as for example where a tax assessment is based on a misappre hension of the facts which attract the tax, or where an error has been made in calculation, and those cases where the taxing statute is construed in error so as to impose liability on a party not liable on the true construction of the statute. In both cases recovery should be available.
Wilson J: …
My colleague expresses the vii;w that moneys paid under a mistake of law should, despite the traditional rule to the contt’ary, be in general recoverable unless there is some specific reason why they should not be. My colleague reaches this conclusion by discard ing the traditional common law distinction between mistake of fact and mistake of law in favour of the equitable doctrine of unjust enrichment-. Whatever the nature of the mistake, the key question, my colleague suggests, should be whether the respondent has been unjustly enriched at the appellants’ expense or whether there is some specific reason which makes restitution inappropriate in the circumstances. My collea e concludes that there was unjust enrichment in this case but he finds two reasons why restitution is inappropriate. The first is that the appel lants in all likelihood passed on the burden of the ultra vires tax to their customers; the unjust enrichment of the respondent was therefore not shown to be at the expense of the appellants. The second is that the general rule of recovery should, as a matter of policy, be reversed where the person unjustly enriched is a governmental body.
Before dealing with the suggested exceptions to the general rule I would like to address the underlying rationale for the traditional rule that moneys paid under a mistake oflaw are irrecov erable. I think it is clearly and succinctly expressed by Lord Ellenborough CJ in Bilbie v. Lumley (1802), 2 East. 469 at p. 472, 102 ER 448 at pp. 449-50, as follows:
Every man must be taken to be cognizant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case.
In other words, the underlying premise on which the rule is based is that ignorance of the law is no excuse. The citizen is deemed to know the contents of legislation. The appellants in this case knew the law, i.e., that the moneys were payable under the statute then in force and they paid. What they did not know was that the law was unconstitutional. It seems to me, however, that the appellants were entitled in making their payments to rely on the presumption of valid ity of the legislation and that, if the presumption was not by itself enough, they were entitled to rely on the representation as to its validity by the legislature enacting and administering it. It would be my view that the mistake of law doctrine (if it is to be retained) should certainly not be extended to moneys paid under unconstitutional legislation. Otherwise taxpayers will be obliged to check out the constitutional validity of taxing legislation before they pay their taxes in pain of being unable to recover anything paid under unconstitutional laws. In my opinion, this is to place the onus of inquiry as to constitutionality in the wrong place.
If a valid distinction is to be made between payments made in error under perfectly valid legislation (as to which the mistake oflaw doctrine would seem clearly to apply) and payments made under unconstitutional legislation quite properly presumed by the taxpayer to be consti tutional (as to which the doctrine of mistake of law has no application), it is unnecessary for me to consider whe her the traditional rule as to the irrecoverability of moneys paid under a mis take oflaw should be abolished. However, I am in complete agreement with what my colleague has to say on this subject and, were it necessary for me to do so in order to dispose of this case, I would support the minority view expressed by Dickson J in Hydro Electric Com’n of Nepean
v. Ontario Hydro (1982), 132 DLR (3d) 193.
It is, however, my view that payments made under unconstitutional legislation are not ‘voluntary’ in a sense which should prejudice the taxpayer. The taxpayer, assuming the validity of the statute as I believe it is entitled to do, considers itself obligated to pay. Citizens are expected to be law-abiding. They are expected to pay their taxes. Pay first and object later is the general rule. The payments are made pursuant to a perceived obligation to pay which results from the combined presumption of constitutional validity of duly enacted legislation and the holding out of such validity by the legislature. In such circumstances I consider it quite unrealistic to expect the taxpayer to make its payments ‘under protest’. Any taxpayer paying taxes exigible undera statute which it has no reason to believe or suspect is other than valid should be viewed as hav ing paid pursuant to the statutory obligation to do so.
Based on the foregoing reasoning, I conclude that payments made under a statute subsequently found to be unconstitutional should be recoverable and I cannot, with respect, accept my colleague’s proposition that the principle should be reversed for policy reasons in the case of payments made to governmental bodies. What is the policy that requires such a dramatic rever sal of principle? Why should the individual taxpayer, as opposed to taxpayers as a whole, bear the burden of government’s mistake? I would respectfully suggest that it is grossly unfair that X, who may not be (as in this case) a large corporate enterprise, should absorb the cost of gov ernment’s unconstitutional act. If it is appropriate for the courts to adopt some kind of policy in order to protect government against itself (and I cannot say that the idea particularly appeals to me), it should be one which distributes the loss fairly across the public. The loss should not fall on the totally innocent taxpayer whose only fault is that it paid what the legislature improp erly said was due. I find it quite-ironic to describe such a person as ‘asserting a right to disrupt the government by demanding a refund’ or ‘creating fiscal chaos’ or ‘requiring a new genera tion to pay for the expenditures of the old’. By refusing to adopt such a policy the courts are not ‘visiting the sins of the fathers on the children’. The ‘sin’ in this case (if it can be so described) is that of government and only government and government has means available to it to protect against the consequences of it. It should not, in my opinion, be done by the courts and certainly not at the expense of individual taxpayers.
Car and Universal Finance Co. Ltd v. Caldwell
[1965] I QB 525, Court of Appeal
Sellers LJ: This appeal raises a primary point in the law of contract. The question has arisen whether a contract which is voidable by one party can in any circumstances be terminated by that party without his rescission being communicated to the other party. Lord Denning MR has held in the circumstances of this case that there can be rescission without communication where the seller of a motor car, who admittedly had the right to rescind the contract of sale on the ground of fraudulent misrepresentation, terminated the contract by an unequivocal act of election which demonstrated clearly that he had elected to rescind it and to be no longer bound by it. The general rule, no doubt, is that where a party is entitled to rescind a contract and wishes to do so the contract subsists until the opposing party is informed that the contract has been terminated. The difficulty of the seller in this case was that, when he learnt of the fraud and, therefore, ascertained his right to terminate the bargain, he could not without considerable delay find either the fraudulent buyer or the car which had been sold. Such circumstances would not appear to be so rare in transactions in motor cars (or horses in earlier days) that they would not, it might be thought, have given rise to litigation and an authoritative decision, but it seems that over the years the point in issue has not been decided in any reported cases in sim ilar or comparable circumstances.
The position has to be viewed, as I see it, between the two contracting parties involved in the particular contract in question. That another innocent party or parties may suffer does not in my view of the matter justify imposing on a defrauded seller an impossible task. He has to estab lish, clearly and unequivocally, that he terminates the contract and is no longer to be bound by it. If he cannot communicate his decision he may still satisfy a judge or jury that he had made a final and irrevocable decision and ended the contract. I am in agreement with Lord Denning MR who asked ‘How is a man in the position of Caldwell ever to be able to rescind the contract when a fraudulent person absconds as Norris did here?’ and answered that he can do so’ if
he at once, on discovering the fraud, takes all possible steps to regain the goods even though he cannot find the rogue nor communicate with him.
‘
Upjohn LJ: Ifone party, by absconding, deliberately puts it out of the power of the other to communicate his intention to rescind which he knows the other will almost certainly want to do, I do not think he can any longer insist on his right to be made aware of the election to deter mine the contract. In these circumstances communication is a useless formality. I think that the law must allow the innocent party to exercise his right of rescission otherwise than by com munication or repossession. To hold otherwise would be to allow a fraudulent contracting party by his very fraud to prevent the innocent party from exercising his undoubted right. I would hold that in circumstances such as these the innocent party may evince his intention to disaf firm the contract by overt means falling short of communication or repossession.
Davies LJ: On the facts of this case Norris must be taken to have known that the defen
dant might, on ascertaining the fraud, wish to rescind the contract. Norris disappeared; and so did the car. The defendant could, therefore, neither communicate with Norris nor retake the car. It must,therefore, I think, be taken to be implied in the transaction between Norris and the defendant that in the event of the defendant’s wishing to rescind he should be entitled to do so by the best other means possible. Lex non cogit ad impossibilia. It is true that it was con ceivably possible that the defendant might decide not to rescind but to sue on the cheque instead; but it is most doubtful whether on the facts of this case such a possibility could have occurred to Norris as a real one. The fact that Norris knew that he was a rogue and that, there fore, the defendant was likely to be after him distinguishes this case from that of an innocent misrepresentor. It would not occur to the latter that the other party to the contract would have
any right or desire to rescind, so that there would be no such implication as that whichI have suggested arose in the present case.
It was argued that the defendant’s action in going to the police and the Automobile Association was not an unequivocal act, since it was open to him to have changed his mind on the nextday if, to use [Counsel for the plaintiffs’] phrase, Norris had suddenly wona football pool and so have become a worthwhile defendant to an action on the cheque. That again, in my opinion, is anunrealistic view of the facts. The defendant was, as I think, declaring to the world:
‘I have been swindled and I want my car back.’ He was declaring his intention as clearly as if he had seen the car in the street and seized it.
=
Banque Beige pour L’Etranger v. Hambrouck
[1921] 1 KB 321, Court of Appeal
Bankes LJ: … The action was brought against the London Joint City and Midland Bank as well as against Hambrouck and the appellant, but by an order made in the action proceedings were stayed against the Bank on their paying the 3151. into Court. No evidence was given in the Court below as to the exact means by which Hambrouck defrauded M. Pelabon. The statement of claim alleges that he obtained payment of the cheques by fraudulently representing that they were drawn by M. Pelabon’s authority. For the purposes of my judgment I will assume that Hambrouck obtained a voidable title to the proceeds of the cheques. Whatever the position of the plaintiff Bank may have been in relation to their customer, M. Pelabon, in the event of the Bank being unable to recover the moneys which they had paid out when the cheques were pre sented to them for payment, it is I think clear that the moneys which were so paid out were the moneys of the plaintiff Bank which they were entitled to recover if they could. This conclusion disposes of the point raised by [counsel for the appellant] that the action would not lie, because the Bank were, at the time of the trial, claiming that as between themselves and M. Pelabon the loss must fall upon him.
Had the claim been for the recovery of a chattel sold instead of for a sum of money alleged to be given, the appellant’s counsel do not dispute that, in order to retain the chattel, the appel lant must establish that she gave value for it without notice that it had been obtained by the vendor by fraud; but they attempt to distinguish the present case from the case of the sale of a chattel by saying: (a) that the appellant, who had no notice of Hambrouck’s fraud, obtained a good title to the money, because it was a gift to her from Hambrouck; (h) that the rule applic able to a chattel has no application to currency; (c) that the fact that the appellant had paid the money into her banking account prevented any following of the money by the plaintiff Bank, and that an action for money had and received would therefore not lie.
In my opinion the first contention cannot be supported either upon the facts or in law. The facts show that the payments made by Hambrouck to the appellant were made without valuable consideration, and for an immoral consideration. Even if they could be appropriately described as gifts, a gift without valuable consideration would not give the appellant any title as against the plaintiff Bank. The second contention also cannot be supported in law. It rests upon a misconception as to the meaning which has been attached to the expression ‘currency’ in some of the decisions which have been referred to. In Miller v. Race1 Lord Mansfield in dealing with the question whether money has an earmark says: ‘The true reason is upon account of the currency of it; it cannot be recovered after it has passed in currency.’ The learned judge is there using the expression in the same sense at that in which Channell J uses it in Moss v. Handcock2 where he says: ‘If the coin had been dealt with and transferred as current coin of the realm, as, for instance, in payment for goods purchased or in satisfaction of a debt, oi: bona fide changed as money for money of a different denomination.’ Where the word ‘currency’ is use_d merely as the equivalent of coin of the realm, then for present purposes the difference between currency and a chattel personal is one of fact and not of law. This was the view of Lord Ellenborough in Taylor v. Plumer,3 in the passage in which he deals with the difficulty of tracing money which has become part of an undivided and undistinguishable mass of current money, and which in this respect differs from marked coins or money in a bag. With regard to the latter he says that the rule for the purpose we are considering in this appeal is the same as that which applies to every other description of personal property. Dealing with this point in Sinclair v. Brou1ham4 Lord Haldane says: ‘The common law, which we are now considering, did not take cognizance of such duties. It looked simply to the question whether the property had passed, and if it had not, for instance, where no relationship of debtor and creditor had intervened, the money could be followed, notwithstanding its normal character as currency, provided it could be earmarked or traced into assets acquired with it.’ To accept either of the two contentions with which I have been so far dealing would be to assent to the proposition that a thief who has stolen money, and who from fear of detection hands that money to a beggar whom he happens to pass, gives a title to the money to the beggar as against the true owner-a proposition which is obviously impos sible of acceptance.
The last contention for the appellant cannot in my opinion be supported. The law on the subject has been so fully discussed recently in Sinclair v. Brougham that I need only point out . that the law as laid down by Lord Ellenborough in Taylor v. Plumer as to the right of an owner to recover property in the common law Courts from a person who can show no title to it, where the property was capable of being traced, whether in its original form or in some substituted form, was fully accepted, and it was explained that the rule in equity which was applied in Hallett’s Case5 was only introduced to meet cases where the money sought to be traced could no longer be identified owing to its having become merged in the Bank’s assets, and the rela tionship of debtor and creditor, between the customer who had paid the money into the Bank and the Bank into which the money had been paidj having intervened.
The facts in the present case in my opinion remove any difficulty in the way of the plaintiff Bank recovering, without having recourse to the equity rule. The money which the Bank seeks to recover is capable of being traced, as the appellant never paid any money into the Bank except money which was part of the proceeds of Hambr6uck’s frauds, and the appellant’s Bank have paid all the money standing to the appellant’s credit into Court, where it now is. Even if it had been necessary to apply the rule in Hallett’s Case to enable the plaintiff Bank to establish their right to the money they claim, I see no difficulty ,in applying the rule to the facts as found by the learned judge in the Court below.
In my opinion the appeal fails.
Scrutton LJ: …Thgeround of the decision below is that the 3151. is traced to the money which Hambrouck obtained by fraud from the Bank; that this money was never Hambrouck’s property, and as Mlle Spanoghe gave no legal consideration of past or future cohabitation, she cannot acquire a title to the money as a purchaser for value without notice of any defect in the transferor’s title.
The first objection taken is that the Bank are not the proper plaintiffs, as Pelabon is not now objecting to the Bank’s debiting his account with the cheques. It is clear, however, that the money actually obtained by Hambrouck was the Bank’s money, even if they might debit their payments to the account of another, and the Bank therefore can sue for the money if it was obtained by fraud on them. Secondly, it was said that as Hambrouck paid the stolen money into a bank, he had only a creditor’s right to be paid with any money, not the particular money he paid in; so that when he drew some money out of the bank and paid it to Mlle Spanoghe, he did not make her the recipient of the money he had obtained from the Banque Beige, and there fore an action for money had and received would not lie. It was further said that Mlle Spanoghe received the money as a gift without notice of any defect in title and that therefore no action would lie against her.
This last objection is, I think, bad. At common law, a man who had no title himself could give no title to another. Nemo potest dare quod non habet. To this there was an exception in the case of negotiable chattels or securities, the first of which to be recognized were money and bank notes: Miller v. Race; and if these were received in good faith and for valuable considera tion, the transferee got property though the transferor had none. But both good faith and valu able consideration were necessary, as Lord Mansfield says:6 ‘in the case of money stolen, the
true owner cannot recover it after it has been paid away fairly and honestly upona valuable and bona fide consideration’; but before money has passed in currency an action may be brought for the money itself. In the present case, it is clear that this money came to Mlle Spanoghe either as savings out of house-keeping allowance, or as a gift to a mistress for past or future cohabitation. In the first case she would hold it as agent for Hambrouck; in the second for no consider ation that the law recognized. If then the money that came to her was the money of the Banque Beige, she got no title to it, as Hambrouck against the Banque Beige had no title. The defence is that it was not the money of the Banque Beige, for payment into Hambrouck’s bank, and his drawing out other money in satisfaction, had changed its identity.
I am inclined to think that at common law this would be a good answer to a claim for money had and received, at any rate if the money was mixed in Hambrouck’s bank with other money. But it is clear that the equitable extension of the doctrine as based on In re Hallett’s Estate and explained in Sinclair v. Brougham enables money though changed in character to be recovered, if it can be traced. As Lord Parker says in the latter case7 on equitable principles, the original owner would be entitled ‘to follow the money as long as it or any property acquired by its means could be identified.’ In that case there was an equitable charge on the substituted fund or prop erty, if it could be traced to the stolen money. As Bramwell JA puts it in Ex parteCooke: ‘A difficulty in tracing money often arises from the circumstance that payments now are not usu ally made in gold, but by cheques which go into a banking account, so that the sum is mixed up with the other moneys of the customer. But if this payment were made by a bag of gold which the broker put into his strong box, and then misapplied part of the money, leaving the rest in the bag, there would be no doubt that what was so left could be claimed as the money of the client. The use of cheques may make difficulties in tracing money, but that, so far as it can be traced, it may be claimed as the property of the client, appears to me to be covered both by the reason of the thing and by the authority of Taylor v. Plumer.’ If that is the test to apply it is clear that the 315l in Mlle Spanoghe’s account and now in Court, can all clearly be traced to the money obtained by Hambrouck by fraud or forgery from the Bank, and as she gave for it no valuable consideration, she cannot set up a title derived from Hambrouck, who had no title against the true owner.
For these reasons, in my opinion the appeal fails..
Atkin LJ.: .. Thmoeney was obtained from the plaintiff Bank by the fraud of Hambrouck. It does not appear to be necessary for this case to determine whether Hambrouck stole the money or obtained it by false pretences. At present it appears to me that the plaintiff Bank intended to pass the property in and the possession of the cash which under the operations of the clearing house they must be taken to have paid to the collecting bank. I will assume therefore that this isa case not of a void but of a voidable transaction by which Hambrouck obtaineda title to the money until the plaintiffs elected to avoid his title, which they did when they made their claim in thisaction. The title would then revest in the plaintiffs subject to any title acquired in the meantime by any transferee for value without notice of the fraud. ·
The appellant however contends that the plaintiffs cannot assert their title to the sum of money which was on a deposit account: 1. because it has passed through one if not two bank
accounts and therefore cannot be identified as the plaintiffs’ money; 2. because in any casea transfer to an innocent donee defeats the original owner’s claim. The course of the proceedings in this case is not quite clear. The statement of claim alleges specifically that the money is the property of the plaintiffs which they are entitled to follow, and the relief asked is not fora money judgment against the defendants, but an order that the sum paid into Court by the defendant Bank should be paid out to the plaintiffs. In giving judgment however, the learned judge has treated the claim as one for money had and received, and the judgment entered is an ordinary judgment against the appellant on a money claim for 315/. together with an order that the sum in Court should be paid out to the plaintiffs in part satisfaction. The two forms of relief are different, and though in this case there is no substantial difference in the result, the grounds upon which relief is based might have been material.
First, does it make any difference to the plaintiffs’ rights that their money was paid into Farrow’s Bank, and that the money representing it drawn out by Hambrouck was paid to the defendant Bank on deposit? If the question be the right of the plaintiffs in equity to follow their property, I apprehend that no difficulty arises. The case of In re Hallett’s Estate makes it plain that the Court will investigate a banking account into which another person’s money has been wrongfully paid, and will impute all drawings out of the account in the first instance to the wrongdoer’s own moneys, leaving the plaintiff’s money intact so far as it remains in the account at all. There can be no difficulty in this case in following every change of form of the money in question, whether in the hands ofHambrouck or of the appellant, and it appears to me that the plaintiffs were, on the grounds alleged in the statement of claim, entitled to a specific order for the return of the money in question, and, as it is now represented by the sum in Court, to pay ment out of Court of that sum.
The question whether they are entitled to a common law judgment for money had and received may involve other considerations. I am not without further consideration prepared to say that every person who can in equity establish a right to have his money or the proceeds of his property restored to him, can, as an alternativd, bring an action against the person who has been in possession of such money or proceeds foroney had and received; still less that he can always bring trover or detinue. But the common law rights are large and are admirably stated in Taylor v. Plumer,9 which was a case stated for tne opinion of the Court of King’s Bench after trial before Lord Ellenborough at the London Sittings. The facts are significant. Sir Thomas Plumer wishing to invest in exchequer bills gave his broker, Walsh, a draft on his bankers for 22,2001. to be invested accordingly. Walsh cashed the draft, receiving bank notes. He bought 6500/. exchequer bills. With the balance he bought certain American securities, paying for them with the actual notes received from the bank. But he gave one of the notes to his brother-in law, from whom he received a draft on the brother-in-law’s bankers for 5001. With this draft he bought bullion-namely 71Yz doubloons-intending to abscond to North America via Lisbon. Sir Thomas Plumer’s attorney overtook Walsh at Falmouth, and secured from him a return of the American securities and the bullion. Walsh, who was afterwards indicted, tried, found guilty subject to the opinion of the judges and pardoned without judgment having been passed, was made bankrupt on an act of bankruptcy alleged to have been committed before he returned the property. His assignees in bankruptcy brought trover against Sir Thomas Plumer. It was held by Lord Ellenborough delivering the judgment of the Court that the defendant was enti tled to succeed, for he had repossessed himself of that which he never ceased to be the lawful proprietor. ‘The plaintiff,’ he says,’… is not entitled to recover if the defendant has succeeded in maintaining these propositions in point of law-viz., that the property of a principal entrusted by him to his factor for any special purpose belongs to the principal, notwithstand ing any change which that property may have undergone in point of form, so long as such prop erty is capable of being identified, and distinguished from all other property Itmakes no
difference in reason or law into what other form, different from the original, the change may
have been made, whether it be into that of promissory notes for the security of the money which was produced by the sale of the goods of the principal, as in Scott v. Surman,10 or into other merchandise, as in Whitecomb v. Jacob,11 for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description.’ I notice that in Sinclair v. Brougham12 Lord Haldane LC in dealing with this decision says: ‘Lord Ellenborough laid down, as a limit to this proposition, that if the money had become incapable of being traced, as, for instance, when it had been paid into the broker’s general account with his banker, the principal had no remedy excepting to prove as a creditor for money had and received,’ and proceeds to say ‘you can, even at law, follow, but only so long as the relation of debtor and creditor has not superseded the right in rem.’ The words above ‘as for instance’ et seq. do not represent and doubtless do not purport to represent Lord Ellenborough’s actual words; and I venture to doubt whether the common law ever so restricted the right as to hold that the money became incapable of being traced, merely because paid into the broker’s general account with his banker. The question always was, Had the means of ascertainment failed? But ifin 1815 the common law halted outside the bankers’ door, by 1879 equity had had the courage to lift the latch, walk in and examine the books: In re Hal/ell’s Estate. I see no reason why the means of ascertainment so provided should not now be available both for common law and equity proceedings. If, following the principles laid down in In re Hallell ‘s Estate it can be ascer tained either that the money in the bank, or the commodity which it has bought, is ‘the prod uct of, or substitute for, the original thing,’ then it still follows ‘the nature of the thing itself.’ On these principles it would follow that as the money paid into the bank can be identified as the product of the original money, the plaintiffs have the common law right to claim it, and can sue for money had and received. In the present case less difficulty than usual is experienced in tracing the descent of the money, for substantially no other money has ever been mixed with the proceeds of the fraud. Under the order of the Court in this case I think the money paid into Court must be treated as paid in on behalf of the defendant Spanoghe, and the money judg ment, together with the order for payment out to the plaintiffs, effectually secures their rights. Secondly, so far as it is contended that the bankers are entitled to retain possession where they have not given value, I think that has been concluded by what I have already said as to valuable consideration.
I agree that the appeal should be dismissed.
Agip (Africa) Ltd v.Jackson
[1991] Ch 547, Court of Appeal
Fox LJ: …
The right to sue
Agip’s claim was for money paid under a mistake of fact. The defendants’ contention was that Agip had disclosed no title to sue. The basis of that contention was that the relationship between banker and customer was one of debtor and creditor. When the customer paid money into the bank, the ownership of the money passed to the bank. The bank could do what it liked with it. What the bank undertook to do was to credit the amount of the money to the customer’s account, and to honour his drafts or other proper directions in relation to it. Thus, it was said, when Banque du Sud paid Baker Oil it had no authority to do so on behalf of Agip because the order for payment was forged. Further, the Banque du Sud paid with its own money.
In terms of the mechanism of payment, what happened was no different from what would have happened if the order was not forged but genuine. Banque du Sud paid the collecting bank and debited Agip’s account at Banque du Sud. In practical terms the Banque du Sud paid with Agip’s money in both cases and, indeed, in both cases intended to do so. In both cases the sub stance of the matter was that money standing to the credit of Agip’s account was paid to a third party in accordance with the order or supposed order, as the case may be, of Agip. The direc tion was to pay from Agip’s account. To say that the payment was made out of the Banque du Sud’s own funds, while true as far as it goes, only tells half the story. The banker’s instruction is to pay from the customer’s account. He does so by a payment from his own funds anda cor responding debit. The reality is a payment by the customer, at any rate in a case where the cus tomer has no right to require a re-crediting of his account. Nothing passes in specie. The whole matter is dealt with by accounting transactions partly in the paying bank and partly in the clearing process.
It does not advance the matter to say that the Banque du Sud had no mandate from Agip to make the payment at Agip’s expense. What actually happened was that Banque du Sud did so. Moreover, when Agip sued Banque du Sud in the Tunisian courts-and I take it that Tunisian law was the proper law of the banking relationship between Agip and Banque du Sud-to have its account re-credited, it failed to obtain that relief. In those circumstances, to regard Agip as not having paid Baker Oil is highly unreal. Banque du Sud had no intention of paying with its own money. The substance of its intention, which it achieved, was to pay with Agip’smoney.
The order, after all, was an order to pay with Agip’s money. I agree, therefore, with the view of MillettJ [1990) Ch. 265, 283H that ‘the fact remains that the Banque du Sud paid out the plaintiffs’ money and not its own.’ If Banque du Sud paid away Agip’s money, Agip itself must be entitled to pursue such remedies as there may be for its recovery. The money was certainly
paid under a mistake of fact.
It was said that the difference between this case and a case where the bank paid with the authority (though given under a mistake of fact) of the customer, was that, in the latter case, the bank paid as agent of the customer and that, accordingly, either the principal or agent could sue. Thus, it was contended that where, as here, there was a claim to recovery money paid by mistake of fact, the mistake must be that of the plaintiff or of his agent. That, it was contended, could not be established here. There was no mistake by Agip, which was simply the victim of a fraud. The only mistake was that of Banque du Sud, which paid in the mistaken belief that it had Agip’s authority to do so. Banque du Sud, it was said, did not pay as the agent of Agip because it had no authority to pay. In Westminster Bank Ltd v. Hilton (1926) 43 TLR 124, 126,Lord Atkinson said:
‘It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and pay ment of the customer’s cheques as against money of the customer’s in the banker’s hands the relation is that of principal and agent. The cheque is an order of the principal’s addressed to the agent to pay out of the principal’s money in the agent’s hands the amount of the cheque to the payee thereof.’
The defendants, as I understand it, would accept the proposition as to agency but say that Banque du Sud did not pay as agent of Agip because oflack of authority. The order was forged. It seems to me, however, Banque du Sud plainly intended to pay as agent of Agip. Thus, it paid in accordance with the order as presented to it and debited Agip’s account accordingly. There was no reason why it should do anything else. The order as presented to it appeared perfectly regular.
But, accepting the intention, can the Banque du Sud properly be regarded as having paid agent of Agip? The defendants say the absence of authority concluded the point against Agip. The judge met that by saying that Banque du Sud had general authority from Agip to debit the account in accordance with instructions. That is correct but it was said that there were no instructions because the order was bad. I do not feel able to accept that. The order emanated from within Agip; it was properly signed and the amount had not been altered. Banque du Sud had no reason at all to doubt its authenticity. The Tunisian court refused to order Banque du Sud to re-credit Agip’s account. For practical purposes, therefore, the order was given effect to according to its tenor as if it were a proper order. Everything that was done (i.e. the payments and the debit) stands good so far as the banking transaction is concerned. Agip cannot recover from Banque du Sud. And Banque du Sud does not seek to recover from Baker Oil. It seems to me, therefore, that the order must be regarded as having been paid by Banque du Sud as agent for Agip. That, however, does not alter the circumstance that it was money paid un!ier a mistake of fact. The defendants accepted that a principal could recover where there was either
(i) mistaken payment by an authorised agent within his instructions or (ii) mistaken payment in breach of instructions by using money entrusted to the agent by the principal. The present case can be brought within, at any rate, the first of these.
The judge referred to the decision in Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App. Cas. 84, 91. In that case it was held that the bank had a sufficient inter est to recover the money, if only to obtain relief from the consequences of its liability to its cus tomer. Millett] thought the decision was inconsistent with any suggestion that, far from being the wrong plaintiff, the bank was the only plaintiff. The present point, however, was not before the Privy Council in that case and I think the,decision gives only limited assistance.
Looking at the whole matter, however, it seems to me that the judge correctly concluded that Agip’s right to sue was made out.
The judge held that Agip was not entitled to trace at law. Tracing at law does not depend upon the establishment of an initial fiduciar,Yrelationship. Liability depends upon receipt by the defendant of the plaintiff’s money and the extent of the liability depends on the amount received. Since liability depends upon receipt the fact that a recipient has not retained the asset is irrelevant. For the same reason dishonesty or lack of inquiry on the part of the recipient are irrelevant. Identification in the defendant’s hands of the plaintiff’s asset is, however, necessary. It must be shown that the money received by the defendant was the money of the plaintiff. Further, the very limited common law remedies make it difficult to follow at law into mixed funds. The judge’s view [1990) Ch. 265,286 of the present case was that the common law rem edy was not available. He said:
‘The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. It remained throughout in the possession of the Banque du Sud. No copy was sent to Lloyds Bank or Baker Oil or presented to the Banque du Sud in exchange for the money. It was normally the plaintiff’s practice to forward a copy of the payment order to the supplier when paying an invoice but this was for information only. It did not authorise or enable the supplier to obtain payment. There is no evidence that this practice was followed in the case of forged payment orders and it is exceedingly unlikely that it was. Nothing passed between Tunisia and London but a stream of elec trons. It is not possible to treat the money received by Lloyds Bank in London or its cor respondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money.’
[After examining the facts and reasoning of the Court of Appeal in Banque Beige pour L’Etranger
v. Hambrouck (above, ()()()), which was relied on by Agip, Fox LJ continued:] Now, in the pres ent case, the course of events was as follows. (1) The original payment order was in December signed by an authorised signatory. (2) The name of the payee was then altered to Baker Oil. (3) The altered order was then taken to Banque du Sud who complied with it by debiting the account of Agip with $518,822.92 and then instructing Lloyds Bank to pay Baker Oil. Banque du Sud also instructed Citibank in New York to debit its account with Gtibank and credit Lloyds Bank with the amount of the order. (4) Lloyds Bank credited the money to Baker Oil’s account on the morning of 7 January. (5) On 8 January, Lloyds Bank in pursuance of instruc tions from Baker Oil transferred the $518,822.92, which was the only sum standing to the credit of Baker Oil’s account, to an account in the name of Jackson & Co. (6) Immediately before the transfer from Baker Oil,Jackson & Co.’s account was $7,911.80 in credit. In consequence of the transfer it became $526,734.72 in credit.
The inquiry which has to be made is whether the money paid to Jackson & Co.’s account ‘was the product of, or substitute for, the original thing.’ In answering that question I do not think that it matters that the order was not a cheque. It was a direction by the account holder to the bank. When Atkin LJ referred in the Banque Beige case to the ‘original money’ he was,I assume, referring to the money credited by Banque Beige (the plaintiff) to Hambrouck’s account. Money from that account was the only money in Mlle Spanoghe’s deposit account. It
was not, therefore, difficult to say that the money in issue (i.e. the residue of Mlle Spanoghe’s account) could be identified as the product of the original money. There were no complexities of tracing at all. Everything in Mlle Spanoghe’s account could be identified as the product of the original money. There were no complexities of tracing at all. Everything in Mlle Spanoghe’s account came from Hambrouck’s account and everything in Hambrouck’s account came from the credit in respect of the fraudulent cheque.
The position in the present case is much more difficult. Banque du Sud can be regarded as having paid with Agip’s money but Lloyds Bank, acting as directed by Banque du Sud, paid Baker Oil with its own money. It had no other and, accordingly, took a delivery risk. It was, in the end, put in funds, but it is difficult to see how the origin of those funds can be identified without tracing the money through the New York clearing system. The money in the present case did get mixed on two occasions. The first was in the New York clearing system and the second was in Jackson & Co.’s own account. The judge held that the latter was of no con sequence. I agree. The common law remedy attached to the recipient of the money and its sub sequent transposition does not alter his liability. The problem arises at an earlier stage. What did Jackson & Co. receive which was the product of Agip’s asset? Baker Oil was controlled for present purposes by Jackson & Co. but Baker Oil was paid by Lloyd’s Bank which had not been put in funds from New York. It was subsequently recouped. But it is not possible to show the source from which it was recouped without tracing the money through the New York clearing system. The judge said [1990] Ch. 265,286:
‘Unless Lloyds Bank’s correspondent bank in New York was also Citibank, this involves tracing the money through the accounts of Citibank and Lloyds Bank’s correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud.’
I respectfully agree with that view. Accordingly, it seems to me that the common law remedy is not available. I should add this. Atkin LJ’s approach in the Banque Beige case amounts virtually to saying that there is now no difference between the common law and equitable remedies. Indeed, the common law remedy might be wider because of the absence of any requirement of a fiduciary relationship. There may be a good deal to be said for that view but it goes well beyond any other case and well beyond the views of Bankes and Scrutton L JJ. And in the 70 years since the Banque Beige decision it has not been applied. Whether, short of the House of Lords, it is now open to the courts to adopt it I need not consider. I would in any event feel difficulty in doin1 so in the present case where, as I indicate later, it seems to me that the established equitable rules provide an adequate remedy in relation to this action….
Carl-Zeiss Stiftung v. Herbert Smith & Co (No 2)
[1969] 2 Ch. 276, Court of Appeal
SachsLJ.:..I now turn to the issues raised by the plaintiffs’ claim. When so doingI propose
to assume that the plaintiffs will in the main action succeed in establishing that the relevant moneys are either their own property or held in trust for them by the West German founda tion. The initial issue then for consideration is as follows. Upon the facts as alleged in the pres ent statement of claim, had the defendant solicitors at the date of action brought such
cognisance of the true ownership of the property or of the trusts as would make an ordinary stranger a constructive trustee of the relevant moneys?
The rule, as I understand it, is that no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properlyassess.
Here it has been rightly conceded that no one can foretell the result of the litigation even if the plaintiffs were to prove all the facts they allege.
Thus, to my mind, the plaintiffs fail at an early stage in their attempt to fix the defendant solicitors with appropriate cognisance. It seems to me, however, that in order to succeed they would also have to overcome further obstacles which are insurmountab.le…
Thfirset obstacle emerges upon an examination of the submission for the plaintiffs that to fixa stranger with the appropriate responsibility it is sufficient to show that he has notice of the type exemplified by the terms of section 199 of the Law of Property Act, 1925; that is to say, to show that the existence of the trusts would have come to his knowledge if such inquiries had been made as ought reasonably to have been made by him. On the assumption that this is the right test (a point to which I will return) it is to be noticed that in many cases, and in particu lar in the present case, knowledge of the existence of a trust depends on knowledge first of the relevant facts and next of the law applicable to that set of facts. As to facts alleged ina state ment of claim,Mr. Kerr [counsel for the defendants] was, to my mind, correct in submitting thata defendant’s solicitor is under no duty to the plaintiffs to inquire into their accuracy for the purposes urged byMr. Harman [counsel for the plaintiff], nor, where there isa likelihood ofa conflict of evidence between his client’s witnesses and those of the plaintiffs is he under any such duty to assess the result As to the law, they were similarly under no duty to the plaintiffs in sucha complex matter either to make inquiries or to attempt to assess the result. Thus the plaintiffs fail again at this point to show that the defendant solicitors should be deemed to be cognisant of the trusts….
Thenext point strongly pressed by Mr. Kerr was that in order to succeed the plaintiffs would have had to allege either fraud, or improper conduct as a solicitor, or wilful use of the moneys in breach of trust. In this behalf it has been Mr. Harman’s case that once it was shown that the moneys were in law being used in breach of trust the section 199 test was once more decisive when considering whether a stranger is fixed with liability.
It does not, however, seem to me that a stranger is necessarily shown to be both a construc tive trustee and liable for a breach of the relevant trusts even if it is established that he has such notice. As at present advised, I am inclined to the view that a further element has to be proved, at any rate in a case such as the present one. That element is one of dishonesty or of consciously acting improperly, as opposed to an innocent failure to make what a court may later decide to have been proper inquiry. That would entail both actual knowledge of the trust’s existence and actual knowledge that what is being done is improperly in breach of that trust-though, of course, in both cases a person wilfully shutting his eyes to the obvious is in no different posi tion than if he had kept them open….
If,…itwere right that the plaintiffs must establish fraud or improper dealing or wilful breach of trust in the sense that I have used those words, then, of course, they are bound to fail also on that point….
Ihave thus come to the conclusion that the plaintiffs could not possibly … succeed in their claim against the defendant solicitors: they cannot establish that the defendant solicitors were cognisant either of the relevant trusts or of the moneys being employed in breach thereof….
Edmund Davies LJ: The basic question raised by this appeal is whether the defendant solic itors hold the moneys of the plaintiffs as constructive trustees. The American Restatement of the Law of Restitution (1937) sets out to define a constructive trust by declaring in paragraph 160, p. 640, that:
‘Where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitte·d to retain it, a constructive trust arises.’
English law provides no clear and all-embracing definition of a constructive trust. Its bound aries have been left perhaps deliberately vague, so as not to restrict the court by technicalities in deciding what the justice of a particular case may demand. But it appears that in this coun try unjust enrichment or other personal advantage is not a sine qua non Nevertheless, the
concept of unjust enrichment has its value as providing one example among many of what, for lack of a better phrase, I would call ‘want of probity,’ a feature which recurs through and seems to connect all those cases drawn to the court’s attention where a constructive trust has been held to exist. Snell’s Principles of Equity expresses the same idea by saying, 26th edn. (1966) at p. 201, that: ‘A possible definition is that a constructive trust is a trust which is imposed by equity in order to satisfy the demands of justice and good conscience, without reference to any express or presumed intention of the parties.’
It may be objected that, even assuming the correctness of the foregoing, it provides no assist ance, inasmuch as reference to ‘unjust enrichment,’ ‘want of probity’ and ‘the demands of just ice and good conscience’ merely introduces vague concepts which are in tum incapable of definition and which therefore provide no yardstick. I do not agree. Concepts may defy defin ition and yet the presence in or absence from a situation of that which they denote may be beyond doubt. The concept of ‘want of probity’ appears to provide a useful touchstone in con sidering circumstances said to give rise to constructive trusts, and I have not found it mislead ing when applying it to the many authorities cited to this court. It is because of such a concept that evidence as to ‘good faith,’ ‘knowledge’ and ‘notice’ plays so important a part in the reported decisions. It is true that not every situation where probity is lacking gives rise to a con structive trust. Nevertheless, the authorities appear to show that nothing short of it will do. Not even gross negligence will suffice. [Edmund Davies LJ then referred to Williams v. Williams 17 Ch. D 437; In re Blundell 40 Ch. D 370] The foregoing cases are but two illustrations among
many to be found in the reports of that want of probity which, to my way of thinking, is the hall-mark of constructive trusts, however created.
The proposition which the plaintiffs’ counsel described as fundamental to his case was stated in these terms: that a man who receives property which he knows (or ought to know) is trust prop erty and applies it in a manner which he knows (or ought to know) is inconsistent with the terms of the trust is accountable in a suit by the beneficiaries of the trust. Although the soundness of that proposition was from the beginning accepted without qualification by the defendant solici tors, countless cases were cited to demonstrate its validity. But it turned out that their citation was far from being a sleeveless errand, for it emerged that in not one of those cases was there any room for doubt that a trust already existed. None of them dealt with the fundamental assertion which has here been so strongly contested, and which Pennycuick J summarised by saying that:
‘Counsel for the [plaintiffs] contends that [the defendant solicitors] have notice of the trust and if, at the end of the day, the trust is established in the main action, they will be accountable as constructive trustees for all moneys comprised in that trust which they have received from the West German company.’
But, as admittedly the West German foundation hold nothing for the plaintiffs under an express trust, and as, even despite the 13 long years that litigation between them has been pr<> ceeding, there has been no determination tha): any trust does exist, Mr. Harman has found him self compelled to go further if this appeal is to be put on its feet. He asserts, in effect, that for present purposes claims are the same as facts. More amply stated, he submits that it is suffi cient to render the defendant solicitors accountable to the plaintiffs that they have (a) know ledge that the plaintiffs are claiming that the West German foundation holds all their assets in trust for them; (b) knowledge of the nature of the allegations advanced by the plaintiffs which (if established) are said to justify that claim; and (c) knowledge that all sums paid to them by the West German foundation must be and are derived solely and entirely from those assets which are the subject-matter of the plaintiffs’ claim to be beneficial owners. Such knowledge on the part of the defendant solicitors being established, submits Mr. Harman, the preliminary issue raised by this appeal must here and now be determined in favour of the plaintiffs, and it matters not that, as he concedes, the defendant solicitors do not and cannot know for some time to come whether the plaintiffs will succeed in the main action in establishing their claim to a trust. He submits that it is equally immaterial that the plaintiffs accept that the defendant solic itors have throughout acted honestly as solicitors of the West German foundation and received fees, costs and disbursements solely in that capacity and proper in amount.
Like Sachs LJ, I am prepared for present purposes to assume that the plaintiffs will ultimately and at some unknown date succeed in establishing in the main action that the moneys in ques tion are either their own property or are held in trust for them by the West German foundation. Nevertheless, in my judgment, none of the cases cited affords support for the contention that in the present circumstances the defendant solicitors are accountable to the plaintiffs, and it would be supererogation for me to attempt to add to my Lord’s analysis of those cases.
Mr. Kerr gave the court a helpful distillation of the numerous authorities to which reference has already been made by my Lords. Their effect, he rightly submits, may be thus stated. (A). A solicitor or other agent who receives money from his principal which belongs at law or in equity to a third party is not accountable as a constructive trustee to that third party unless he has been guilty of some wrongful act in relation to that money. (B). To act ‘wrongfully’ he must be guilty of (i) knowingly participating in a breach of trust by his principal; or (ii) intermed dling with the trust property otherwise than merely as an agent and thereby becomes a trustee de son tort; or (iii) receiving or dealing with the money knowing that his principal has no right to pay it over or to instruct him to deal with it in the manner indicated; or (iv) some dishonest act relating to the money. These are, indeed, but variants or illustrations of that ‘want of pro bity’ to which I have earlier referred.
Do the demands of justice and good conscience bring the present case within any of the fore going categories? In my judgment, the question is one which demandsa negative answer. The law being reluctant to make a mere agent a constructive trustee, as Lord Selbome LC put it in Barnes v. Addy, 9 Ch. App. 244, 251-2, mere notice of a claim asserted bya third party is insuf ficient to render the agent guilty of a wrongful act in dealing with property derived from his principal in accordance with the latter’s instructions unless the agent knows that the third party’s claim is well-founded and that the principal accordingly had no authority to give such
instructions. The only possible exception to such exception arises where the agent is undera duty to inquire into the validity of the third party’s claim and where, although inquiry would have established that it was well-founded, none is instituted. But, as it is conceded by the plain tiffs that the defendant solicitors are under no such duty of inquiry, that further matter does
not now call for consideration.
Re Montagu’s Settlement Trusts
[1987] Ch. 264,
Sir Robert Mcgarry V-C There is nd suggestion that anyone concerned in the matter was dishonest. There was a muddle, but however careless it was, it was an honest muddle. Further, I do not think that the Duke was at any relevant time conscious of the fact that he was not enti tled to receive the chattels and deal with them as beneficial own.er…
At the outset,I think that I should refer to Baden, Delvaux and Lecuit v. Societe Generate pour Favoriser le Developpement du Commerce et de l’lndustrie en France SA [1983] BCLC 325a, case which for obvious reasons I shall call ‘the Baden case.’ That case took 105 days to hear, spread over7 months, and the judgment of Peter Gibson} is over 120 pages long. It wasa ‘knowing assistance’ type of constructive trust, as distinct from the ‘knowing receipt or dealing’ type which is in issue before me. I use these terms as a convenient shorthand for two of the princi pal types of constructive trust. Put shortly, under the first of these heads a person becomes liable as a constructive trustee if he knowingly assists in some fraudulent design on the part of a trustee. Under the second head, a person also becomes liable as a constructive trustee if he either receives trust property with knowledge that the transfer is a breach of trust, or else deals with the property in a manner inconsistent with the trust after acquiring knowledge of the trust. It will be seen that the word ‘knowledge’ occurs under each head; and in the Baden case, at p. 407, the judge in effect said that ‘knowledge’ had the same meaning under each head.
Now until recently I do not think there had been any classification of’knowledge’ which cor responded with the classification of ‘notice.’ However, in the Baden case, at p. 407, the judg ment sets out five categories of knowledge, or of the circumstances in which the court may treat a person as having knowledge. Counsel in that case were substantially in agreement in treating all five types as being relevant for the purpose of a constructive trust; and the judge agreed with them: p. 415. These categories are (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and rea- sonable man on inquiry… . ‘
Of the five categories of knowledge set out_in the Baden case, ……accepted the first three. What was in issue was nos. (iv) and (v), namely, knowledge of cir cumstances which ‘would indicate the facts to an honest and reasonable man’ or ‘would put an honest and reasonable man on inquiry.’ On the view that I take of the present case I do not think that it really matters whether or not categories (iv) and (v) are included, but as the matter has been argued at length, and further question$ on it may arise, I think I should say something about it.
I shall attempt to summarise my conclusions. In doing this, I make no attempt to reconcile all the authorities and dicta, for such a task is beyond me; and in this I suspect I am not alone. Some of the difficulty seems to arise from judgments that have been given without all the rel evant authorities having been put before the judges. All I need do is to find a path through the wood that will suffice for the determination of the case before me, and to assist those who have to read this judgment.
(1) The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct. Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights.
(2) In considering whether a constructive trust has arisen in a case of the knowing receipt of trust property, the basic question is whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust.
(3) Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word ‘know ledge’ and avoid the word ‘notice’ in such cases.
(4) For this purpose, knowledge is not confined to actual knowledge, but includes at least knowledge of types (ii) and (iii) in the Baden case [1983] BCLC 325,407, i.e. actual knowledge that would have been acquired but for shutting one’s eyes to the obvious, or wilfully and reck lessly failing to make such inquiries as a reasonable and honest man would make; for in such cases there is a want of probity which justifies imposing a constructive trust.
(5) Whether knowledge of the Baden types (iv) and (v) suffices for this purpose is at best doubtful; in my view, it does not, for I cannot see that the carelessness involved will normally
amount to a want of probity.
(6) For these purposes, a person is not to be taken to have knowledge ofa fact that he once knew but has genuinely forgotten: the test (or a test) is whether the knowledge continues to operate on that person’s mind at the time in question.
(7) (a) It is at least doubtful whether there is a general doctrine of’imputed knowledge’ that corresponds to ‘imputed notice.’ (b) Even if there is such a doctrine, for the purposes of creat inga constructive trust of the ‘knowing receipt’ type the doctrine will not apply so as to fixa donee or beneficiary with all the knowledge that his solicitor has, at all events if the donee or beneficiary has not employed the solicitor to investigate his right to the bounty, and has done nothing else that can be treated as accepting that the solicitor’s knowledge should be treated as his own. (c) Any such doctrine should be distinguished from the process whereby, under the name ‘imputed knowledge,’ a company is treated as having the knowledge that its directors and
secretary have.
(8) Where an alleged constructive trust is based not on ‘knowing receipt’ but on ‘knowing assistance,’ some at least of these considerations probably apply; but I need not decide anything on that, and I do not do so.
From whatI have said, it must be plain that in my judgment the Duke did not becomea constructive trustee of any of the chattels. I can see nothing that affected his conscience sufficiently to imposea constructive trust on him: and even if, contrary to my opinion, all of the five Baden types of knowledge are in point, instead of only the first three, I do not think that he had any such knowledge Accordingly, I hold that the Duke never became a constructive trustee of any of the chattels.
Belmont Finance Corp v. Williams Furniture Ltd (No 2)
[1980] 1 All ER 393, Court of Appeal
Buckley LJ: … I now come to the constructive trust point. If a stranger to a trust (a) receives and becomes chargeable with some part of the trust fund or (b) assists the trustees of a trust with knowledge of the facts in a dishonest design on the part of the trustees to misapply some part of a trust fund, he is liable as constructive trustee (Barnes v. Addy per Lord Selborne LC).
A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust So, if the directors
of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds….
Inthe present case, the payment of the £500,000 by Belmont to Mr Grosscurth, being an unlawful contravention of[statute], was a misapplication ofBelmont’s money and was in breach
of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City’s knowledge of the whole circumstances of the transae• tion. It must follow, in my opinion, that City is accountable to Belmont asa constructive trustee of the £489,000 under the first of Lord Selborne LC’s two heads….
GoffTLJ.: ..I tum next to the first limb of Belmont’s case on constructive trust, that is to say, ‘knowing receipt’. This is now relevant as against City only. As I have said, this does not depend on proof of fraud, nor in my judgment is Mr James’s belief that ‘the agreement wasa good com mercial proposition for Belmont to purchase Maximum’s shares for £500,000′ anyanswer.
What Belmont has to show is that the payment of the £500,000 was a misfeasance, which for this purpose is equivalent to breach of trust, that City received all or part of this money, and that it did so knowing, or in circumstances in which it ought to know, that it wasa breach ,trust. Infact City received £489,000 and that is the basic measure of any liability under this
head..Then was the payment of the £500,000 a breach of trust? In my judgment it was, on two
counts. First, and obviously, because, as I have held, the agreement was unlawful and the pay ment was made by Belmont for an illegal purpose, namely to facilitate the purchase by Grosscurth and his associates of Belmont shares.
Then did City know, or ought it to have known, of the misfeasance or breach of trust? In my judgment the answer to that question must plainly be Yes, for they are fixed with all the know ledge that Mr James had. Now, he had actual knowledge of all the facts which made the agree ment illegal and his belief that the agreement was a good commercial proposition for Belmont can be no more a defence to City’s liability as constructive trustees than in conspiracy.
Apart from this, clearly, in my judgment, Mr James knew or ought to have known all the facts thatI have rehearsed, showing that there was in any event a misfeasance apart from ille
gality. He knew of the conflict of interest. In my judgment, therefore, City are liable in damages as constructive trustees.’The long arm of equity’ is long enough to catch this sort of transaction.
Powell v. Thompson
[1991] 1 NZLR 597, High Court (New Zealand)
Thomas J: Thefacts of this case are extremely interesting. The plaintiffs’ mother, Mrs Audrey Powell, is a little old woman of an apparently sweet and gentle disposition. One would not imag ine that butter would melt in her mouth. Do not believe it. Between 1979 and 1987 she sys tematically embezzled the grand sum of$289,482. T.he money belonged to Mr Thompson, the first defendant, who is a butcher at Albany. He wanted his money repaid and Mrs Powell wanted to repay him. She sold a property, known as Corrick Hill, in Torbay, to Mr Thompson. After paying off a modest first mortgage, she returned the balance of the purchase price to him in reduction of her indebtedness….
However, Mrs Powell was not the sole owner of Corrick Hill. It was owned by her and her . two daughters, the plaintiffs, as tenants in common in equal shares. The daughters were unaware of the sale and got nothing out of it. This came about because Mrs Powell utilised two old powers of attorney which had been made by her daughters before they went overseas, and which they had failed to revoke after their return.
The plaintiffs claim two-thirds of the money which Mr Thompson was paid by their mother. They claim that he was aware of all the salient facts and thus became a constructive trustee of the moneys which he received. They allege that he unjustly enriched himself at their expense….
… [I]n this case I consider that, in all the circumstances, it would be manifestly unjust to permit the defendant to retain the moneys which represent the proceeds of the sale of the plain tiffs’ two-thirds share of their property sold without their knowledge or consent. I do not pro pose to justify this decision by reference to the many authorities which the subject of constructive trusts has generated. It is widely acknowledged that the authorities are in disarray, and any attempt to analyse or reconcile them is not only unnecessary but is likely to add to the present confusion. In line with what I have said above, I prefer to decide the case on the basis of the principles of equity which underlie the varying decisions-and which accord with reason
and common sense. My approach is, perhaps, not too dissimilar from that of Sir Robert Megarry V-C in Re Montagu’s Settlement Trusts [1987) I Ch. 263, at p. 278, where he states:
‘There is today something of a tendency in equity to put less emphasis on detailed rules that have emerged from the cases and more weight on the underlying principles that engendered those rules, treating the rules less as rules requiring compliance, and more as guidelines to assist the court in applying the principles.’
I am bound to say, however, that any hope that this common approach might dispel the con fusion is at once punctured by the fact that my appreciation of the underlying principles dif fers in key respects from that of this most distinguished Judge.
For the purposes of an examination of the liability of third parties to a trust, the convenient starting point is Lord Selbourne’s round statement of the general principle in Barnes v. Addy [1874) 9 Ch. App. 244, at pp. 251-252:
‘Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.’
This deservedly famous dictum has been cited and followed on numerous occasions. It has led to the Courts and commentators postulating the two well-known types of liability; the ‘knowing receipt or dealing’ and ‘knowing assistance’ categories of constructive trusts. The first (which I will abridge and call the ‘knowing receipt’ class of case) applies where the defendant receives trust property knowing of the -trust attaching to it or, being in receipt of the trust prop erty, deals with it in a manner contrary to the trust. The second arises where the property is not necessarily received or dealt with by the third party but he or she knowingly assists the trustee in committing a breach of trust. The two categories differ, however, in a much more basic respect. In the ‘knowing receipt’
class of case the underlying basis of the defendant’s liability is the unjust enrichment of the defendant at the expense of the plaintiff. The defendant gains the trust property; the plaintiff is deprived of it. In the ‘knowing assistance’ type of case the basis of liability is the conduct of the defendant in participating in a breach of trust. Trust property may or may not pass. That
is immaterial to this head of liability.
Succinctly put, the distinction is that in the ‘knowing receipt’ cases it is the fact that the third party gains a material advantage at the plaintiff’s expense which is regarded as ‘uncon scionable’-in the sense of unreasonable or inequitable; in the ‘knowing assistance’ cases it is the behaviour of the defendant which is regarded as unconscionable.
Failure to appreciate this distinction has led to much of the confusion relating to the type of knowledge the stranger must possess before being held liable as a constructive trustee. Peter Gibson J’s landmark classification of the various kinds of knowledge in Baden D,/vaux and Lecuit v. Societe Generate pour Favoriser le Developpement du Commerce et de /’/nd,utrie en France SA [1983) BCLC 325, for example, is discussed in the context of both categories, with result ing uncertainty as to which applies to which. It results, on the one hand, in the view endorsed by some that the requisite knowledge to found a constructive trust in a ‘knowing receipt’ class of case must contain some element of moral improbity. It has prompted othen, on the other hand, to suggest that the knowledge required of a stranger who is a party to a breach of trust in the ‘knowing assistance’ type of case should be the same as it is for the ‘knowing receipt’ type of case (see, for example, J. K. Maxton, ‘Equity’ [I 990] NZRLR 89, at 93-5.)
Once the fundamental difference in the basis of liability of the two categories is appreciated, however, the temptation to inflate the knowledge required to constitute constructive knowledge in the first, and to dilute the knowledge required for the same purpose in the second, is easily resisted. Thetwo categories may both give rise to constructive trusts but are otherwise distinct. It is more appropriate to perceive them as two heads ofliability than ‘categories’. Clearly, the knowledge required to constitute ‘knowing receipt’ should be appropriate to the basis of liabil ity in that class of case; that is, the injustice of allowing the defendant to retain the property which he or she has acquired at the expense of the plaintiff. Similarly, the knowledge required for there to be’knowing assistance’ needs to be directly related to the basis of liability in that class of case; the unconscionability of the defendant’s conduct.
The question therefore arises as to the knowledge which is appropriate before holdinga person liable to account in ‘knowing receipt’ cases. To my mind, once the basis of liability is identified, the question virtually answers itself; it is knowledge of the trust attaching to the property received by the third party in circumstances where he or she assertsa right to the propertycontrary to the interest of the beneficiary or otherwise acts in a way which is incon sistent with the trust. In deciding whether·or not the defendant’s enrichment is unjust,a Court of Equity will then have regard to alt the circumstances relating to the transfer of the trustproperty. Its determination will depend not just on the defendant’s knowledge, but on
all the circumstances including, no doubt, factors relating to the deprivation suffered by the innocent plaintiff. ,
The danger of stipulating a test which is too high in the ‘knowing receipt’ class of case is that a Court of Equity will be unable to intervene to assist an innocent plaintiff where, in the over aJI circumstances, it might consider such assistance justified. It is therefore sensible that the knowledge required to be established should be no greater than necessary to permit the Court to examine the circumstances of the case with a view to deciding whether or not the defendant’s retention of the trust property is inequitable. In other words, acting inconsistently with the trust knowing of it does not in itself necessarily establish that the defendant’s enrichment is unjust.Rather, it opens the way for an inquiry into all the circumstances as a result of which the Court will be in a position to determine whether it would be inequitable not to require the defendant to account to the plaintiff.
In most cases,I imagine, the third party will have received or dealt with the trust property knowing, not only of the trust, but aJso that he or she is asserting a title or otherwise acting in a way which is inconsistent with the trust. They will know, in other words, that they are ben efiting at the expense of the beneficiary. For the purposes of the present case I can accept that such knowledge is required, but I would not preclude the possibility that in certain circum stancesa Court of Equity could be persuaded to examine the equities of the competing claims where the defendant was not aware that he or she was receiving or dealing with the property in a way which was inconsistent with a trust. Because liability in this class of case stems from equity’s unwillingness to accept the enrichment of the third party at the expense of the benefi ciary, and not any particular conduct or misconduct on the part of either the trustee or the third party, such knowledge may not be necessary in order to activate equity’s jurisdiction with the objective of ensuring a result which is consonant with good conscience. However, on the facts of this case it is not necessary for me to determine this point.
The same flexible approach is to be adopted in determining whether a third party with no actuaJ knowledge of the trust is to be fixed with constructive knowledge of it. Peter Gibson J’s classifications will be recalled: (1) actual knowledge; (2) knowledge which is obtainable but for shutting one’s eyes to the obvious; (3) knowledge obtainable but for wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (4) knowledge of circumstances which would indicate the facts to an honest or reasonable person; (5) knowledge obtainable from inquiries which an honest and reasonable person would feel obliged to make, being put on inquiry as a result of his or her knowledge of suspicious circumstances.
The last three categories, in particular, serve to highlight the fact that equity has never per mitted a person to escape liability if his or her ignorance is self-induced or unreasonable. In equity it is enough for the plaintiff to be able to say that if the defendant did not know, then he or she ought to have known. Again, bearing in mind the basis of liability, there is no sound reason why the third party who has been enriched at someone else’s expense should obtain the benefit of an overly-sensitive test for it to be said that he or she has the requisite constructive knowledge.
All five of Peter Gibson J’s classifications therefore undoubtedly apply to a person charged with being a constructive trustee in the ‘knowing receipt’ class of case (see also Westpac Banking Corporation v. Savin [1985] 2 NZLR 41, per Richardson J at 52-3.) For myself, however, I would delete reference to the word ‘honest’ in the phrases ‘honest and reasonable person’ in categories (3) to (5) as honesty–or dishonesty-is not a necessary ingredient if a constructive trust founded on the unjust enrichment of one at the expense of another is in issue. It is enough that the circumstances are such that a reasonable person would be put upon inquiry. For the most part, therefore, a suspicion on the part of the third party that the property which he has received is subject to a trust will suffice. In such circumstances an inquiry is called for before the third party accepts the benefit of the property and deprives the beneficiary of his or her legitimate interest in it.
To sum up, the requirement of knowledge in the ‘knowing receipt’ class of case is readily apparent. The trust attaches to the property and a third party cannot take or deal with the prop erty knowing of the trust and that he or she is acting contrary to the beneficiary’s interest, whether actually or constructively, without taking the obligations of the trust with it. They make themselves trustees de son tort.
Consequently, in my view, all that the plaintiffs in this case need demonstrate to invoke the Court’s assistance in establishing a constructive trust under this head of liability is that Mr Thompson either knew of the trust, or ought to have known of it, and that he received or dealt with the trust property in a manner which was inconsistent with the trust.
Mr Thompson’s ‘knowing receipt’ of Corrick Hill subject to a trust In terms of the test I have enunciated, I am satisfied that Mr Thompson knew or ought to have known of the trust and that he was acting in a manner which was inconsistent with it. His liability to account to the plaintiffs can be expressed in alternative ways. In the first place, liab ility can be founded on the fact that Corrick Hill was subject to a trust in favour of the plain tiffs by virtue of the fiduciary duty which Mrs Powell owed to her co-owners when dealing with the property. Mr Thompson received this property knowing of that trust and is therefore fixed with the obligations attaching to it. He could no more deal with the property for his own pur poses than Mrs Powell could. Thus, having done so, he is obliged to account to the plaintiffs for the proceeds of the property or, in terms of the claim, their two-thirds share in the proceeds of the property.
In the second place, the claim can be structured so as to attach the trust to the proceeds which Mrs Powell received at the time of settlement. She held the net proceeds from the sale of the property, that is, the $72,700.22, in trust for herself and her daughters simply because they were the joint owners of the property. When Mr Thompson’s solicitors handed over the cheque for that amount in exchange for a cheque of the same amount, the trust, or her fiduciary obliga tions, went with it. Alternatively, the proceeds can be traced, as equity is prone to do, from the
property itself to the moneys paid in respect of that property. Consequently, Mr Thompson is again obliged to account to the plaintiffs….
Ministry of Health v. Simpson (sub·nom. Re Diplock)
[1951] AC 251, House of Lords
Lord Simonds: … The problem for determination can be simply stated and it is perhaps sur prising that the sure answer to it is only to be found by examination of authorities which go back nearly 300 years. Acting under a mistake the personal representatives of a testator whose residuary disposition is invalid distribute his residuary estate upon the footing that it is valid. Have·the next of kin a direct claim in equity against the persons to whom it has been wrongfully distributed? I think that the authorities clearly established that, subject to certain qualifi cations which I shall state, they have such a claim.
…I come to the argument upon which counsel for the appellant laid the greatest stress, relying not only on the judgment of Wynn-Parry,), but upon the other cases which have yet to be examined. It was that the equitable remedy was subject at least to this qualification, that it was not applica ble where the wrongful payment was made in error of law. It was said that in every case where it had been applied the wrongful payment had been made under a mistake of fact and that wher ever the principle had been stated without any such qualification, it must be read, nevertheless, as subject to it. I think, my Lords, that this argument which found favour with the judge is mis conceived. The most satisfactory reason for the distinction rests in the maxim, itself probably taken from the criminal law, ignorantia juris neminem excusat: see Baylis v. Bishop of London.1 The man who makes a wrong payment because he has mistaken the law may not plead his own ignorance of the law and so cannot recover what he has wrongfully paid. It is difficult to see what relevance this distinction can have, where a legatee does not plead his own mistake or his own ignorance but, having exhausted this remedy against the executor who has made the wrongful payment, seeks to recover money from him who has been wrongfully paid. To such a suit the executor was not a necessary party and there was no means by which the plaintiff could find out whether his mistake was of law or of fact or even whether his wrongful act was mistaken or deliberate. He could guess and ask the court to guess but he could prove nothing. I reject therefore the suggestion that the equitable remedy in such circumstances was thus restricted and repeat that it would be a strange thing if the Court of Chancery, having taken upon itself to see that the assets of a deceased person were duly admin istered, was deterred from doing justice to creditor, legatee or next of kin because the executor had done him wrong under a mistake oflaw. If in truth this were so, I think that the Father of Equity would not recognize his child.
Finally, my Lords, I must say some words on an argument of a more general character put forward on behalf of the appellant. The Court of Chancery, it was said, acted upon the con science, and, unless the defendant had behaved in an unconscientious manner, would make no decree against him. The appellant or those through whom he claimed, having received a legacy in good faith and having spent it without knowledge of any flaw in their title, ought not in con science to be ordered to refund. My Lords, I find little help in such generalities. Upon the pro priety of a legatee refusing to repay to the true owner the money that he has wrongly received I do not think it necessary to express any judgment. It is a matter on which opinions may well differ. The broad fact remains that the Court of Chancery., in order to mitigate the rigour of the common law or to supply its deficiencies, established the rule of equity which I have described and this rule did not excuse the wrongly paid legatee from repayment because he had spent what he had been wrongly paid. No doubt the plaintiff might by his conduct and particularly by laches have raised some equity against himself; but if he had not done so, he was entitled to be repaid. In the present case the respondents have done nothing to bar them in equity from asserting their rights….
Dextra Bank & Trust Company Ltd v. Bank of Jamaica (Jamaica)
[2001] UKPC 50 (26 November 2001)
[Delivered by Lord Bingham of Cornhill
and Lord Goff of Chieveley]
——————
On 19 January 1993 Dextra Bank & Trust Co Ltd (“Dextra”) drew a cheque dated 20 January 1993 on its bankers Royal Bank of Canada (New York) in favour of the Bank of Jamaica (“the BOJ”) for US$2,999,000. The BOJ received that cheque on 20 January 1993. On 25 January 1993 the BOJ negotiated the cheque by indorsement and delivery to Citibank International Ltd which duly collected payment from the Royal Bank of Canada. Dextra drew its cheque intending to lend the sum specified to the BOJ against the security of a promissory note executed by the BOJ. The BOJ for its part intended to buy the specified sum of United States dollars in exchange for the equivalent in Jamaican dollars, which it paid to individuals understood to be nominated on behalf of Dextra. Each party was deceived as to the intention of the other and the Jamaican dollar sums paid by the BOJ were received not by Dextra but by others who included those responsible for the deception.
Dextra sued the BOJ to recover the sum paid under its cheque, contending that the BOJ had converted the cheque or alternatively that it (Dextra) was entitled to recover the proceeds of the cheque as money paid under a mistake of fact. Its claim failed in the Supreme Court of Judicature of Jamaica (Harrison J) and in the Court of Appeal (Forte, Patterson and Bingham JJA). It now appeals against the dismissal of its claims by leave of the Court of Appeal.
Since resolution of the issues in this appeal depends on a correct understanding of the facts it is necessary to recite the relevant history, much of it uncontroversial, in some detail.
Dextra is a bank registered in the Cayman Islands and licensed under Cayman law to carry on banking business. Its chairman was Mr Jack Ashenheim, a chartered accountant. He was also employed as a financial consultant and accountant by Myers & Alberga, a firm of Cayman attorneys, one of whose partners, Mr Darryl Myers, was a director of Dextra and acted as its attorney–at-law.
The BOJ is the central bank of Jamaica, established by statute. It has the ordinary functions of a central bank and is authorised to buy, sell and borrow foreign currency.
Until September 1991 exchange controls restricted the buying and selling of foreign currency in Jamaica. The foreign exchange system was then liberalised and it became possible for anyone to buy, sell, borrow or lend foreign currency from or to authorised dealers, although only those authorised could carry on the business of dealing in foreign currency. After September 1991 the BOJ became active in the market, employing a team of authorised agents to identify vendors of foreign currency and to make purchases on behalf of the BOJ. Among its agents authorised for this purpose were Messrs Richard Jones and Wycliffe Mitchell. The BOJ provided overdraft facilities on which agents could draw to make payment for their purchases up to a limit of Jamaican $5 million, later reduced to Jamaican $4 million, but the evidence is clear that these limits were very greatly exceeded. Within the BOJ a special unit responsible to Mr Rupert Straw, a Deputy Governor, supervised the purchase of foreign exchange in the open market.
Mr Orville Beckford was employed as Director of the Economic Co-operation Department of the BOJ from May to December 1992, when he was made redundant. He was however kept on to perform some services relating to his old department and occupied an office in the BOJ until his engagement was finally terminated on 8 February 1993, after the events giving rise to these proceedings had come to light. His duties did not at any time involve the purchase of foreign currency or helping the authorised agents of the BOJ to do so. But it seems that Beckford would identify vendors of foreign currency and sell or arrange sales to certain of the BOJ’s authorised agents. Such agents included Jones and Mitchell. There is no finding that Beckford was authorised by the BOJ to do this. But Jones’ evidence was that he made arrangements with Beckford in August 1992 to assist in obtaining foreign currency. Thereafter Beckford supplied him with US$200,000 on a daily basis. Jones would pay for the sums supplied by Beckford with cheques drawn in favour of payees named by Beckford. Sometimes Jones would draw cheques and give them to Beckford before receiving the foreign currency he was buying.
Among those who sold foreign currency to the BOJ’s authorised agents, either directly or indirectly through Beckford, were Messrs Michael Phillips and John Wildish. They sold such currency to Jones from 1991 until April 1992. After that date Jones did not buy directly from them but, as the trial judge put it, “Beckford subsequently provided the said currency, up to the time of purchase of [Dextra’s] cheque”. It was Beckford, Phillips and Wildish who perpetrated the fraud at the heart of this case.
On about 11 January 1993 Wildish approached Myers & Alberga asking for a short-term loan of US$3 million for three months on behalf, he said, of the BOJ. He did not represent himself to be an agent or employee of the BOJ, and in truth was neither. He had no authority of any kind from the BOJ. Myers spoke to the secretary of Dextra and then wrote to Dextra confirming the request for a loan. On about 12 January Phillips and Wildish personally represented to Dextra that they had been asked by Beckford, an officer of the BOJ, to try and obtain a loan. Again, they did not represent themselves to be servants or agents of the BOJ. On 13 January the board of Dextra passed a resolution agreeing to make a loan and authorising the chairman to negotiate and approve the terms of the loan and of a promissory note in consultation with Dextra’s attorney. The secretary of Dextra told Myers of the resolution. Myers drafted a promissory note which he passed to Wildish for approval. Some amendments were made, it seems at the instance of Beckford. On 15 January Myers sent Wildish a draft of the promissory note and added:
“I suggest you show this letter to the Bank of Jamaica and if they have any further problems with the document let them call us direct to discuss them as going through you as intermediary is a waste of time.”
He then gave Wildish instructions as to the signing of the promissory note:
“A resolution of the board will be required … you must therefore get from the bank a certified copy of the resolution unless Mr Beckford, who I assume has the authority, tells you it is not necessary … if not this is going to cause delay … we must be sure that the note is properly authorised and signed.”
The BOJ knew nothing of any proposed loan or promissory note. No contact had been made with anyone acting on its behalf or with its authority.
At 1.30 pm on 19 January 1993 Ashenheim, as chairman of Dextra, met Myers and Phillips in Grand Cayman. Dextra’s cheque for US$2,999,000 (representing US$3 million less a deduction of US$1,000 for legal costs), post-dated 20 January, drawn on Royal Bank of Canada, Dextra’s bankers in New York, and payable to the BOJ, was handed to Phillips by Myers. Myers told him to take the cheque and two copies of the promissory note to the BOJ, to see personally that the note was signed by the Governor or the Deputy Governor and another authorised officer, to hand Dextra’s cheque to the BOJ upon receipt of the signed note, to take the note to the Stamp Commissioner for stamping as exempt from stamp duty and to return the signed note to him by courier. Phillips did not follow these instructions.
According to Jones, whose evidence was accepted, Beckford told him, sometime before 20 January, that he was expecting to get US$3 million, payable to the BOJ, from a group of Caymanian investors. He would be asking Jones to buy US$2 million and Mitchell US$1 million. He would ask that payment be made “by way of a number of cheques to payees which he would provide”. It appears that he later made this request. On 19 January Jones drew 7 cheques payable to a number of individuals. On the next day he drew another cheque, to make up the total of US$2 million. Mitchell drew four cheques, three on 18 January and one on 19 January, amounting in total to US$999,000. These cheques were given to Beckford, and all of them (with the exception of that dated 20 January) were presented and cleared on or before close of business on 19 January. None of these cheques was drawn in favour of Dextra. The Court of Appeal recorded:
“… the undisputed fact is that certain of those cheques made payable to fictitious persons were lodged to the credit of Le Par Ltd in the account at the New Kingston branch of the Eagle Commercial Bank. Phillips and Wildish were the signatories to and operators of that account. Certain other cheques used in purchasing the Dextra cheque were lodged to the Troy McGill account. The lodgment slips were signed by Phillips or Wildish in each case”.
In drawing cheques in favour of payees (or fictitious payees) nominated by Beckford in anticipation of receiving the foreign currency they were buying Jones and Mitchell failed to comply with a term of their respective agency agreements with the BOJ which provided:
“All payments for purchases by the Agent must be by way of cheques drawn in the name of the Vendor. Payment may only be made to the Vendor against immediate delivery of the cash items or effects to the Agent.”
Late on 19 January, or possibly on the following day, Beckford handed Dextra’s cheque to Jones in Jamaica. It was an unremarkable document. The only unusual feature of the cheque form was the inclusion of the printed word “For” and then a blank space in which the purpose of the cheque could be specified. This space was left blank.
The Jamaican dollar sums expended by Jones and Mitchell in buying the US dollars represented by the Dextra cheque were debited to their respective accounts and the accounts were promptly replenished. On 20 January the cheque was lodged to the credit of the BOJ and entered in the BOJ’s records as a purchase of foreign exchange. A loan would have been differently recorded. As already recited, the BOJ indorsed the cheque to Citibank which presented the cheque for payment and it was paid.
In evidence at the trial Beckford testified to a course of events quite different from that narrated above (he said that the promissory note had been duly signed on behalf of the BOJ by Straw, the Deputy Governor, and the supposed promissory note was produced), but his evidence was roundly rejected and need not be summarised. It is not suggested that he had authority from the BOJ to borrow or buy US dollars from Dextra or that the BOJ held him out as having such authority. No finding was made below as to his legal role in this transaction beyond Patterson JA’s description of him as a “mere human conduit, entrusted with the cheque to carry it from the drawer Dextra to its intended payee the BOJ”. In contrast, the trial judge and all three members of the Court of Appeal were satisfied that Phillips acted as the agent of Dextra to hand over its cheque to the BOJ (although his authority was of course subject to clear limitations, never communicated to the BOJ) and this he did through Beckford as an intermediary.
No finding was made, nor was it suggested, that either Jones or Mitchell acted otherwise than in complete good faith at any stage of this transaction. Neither had notice of the limitations on Phillips’ authority. The courts below made no significant criticism of the BOJ, although it is clear that the agents’ overdraft limits were exceeded by a gross margin and the prescribed procedures for making payment to vendors of foreign currency were not followed. In contrast the trial judge criticised the conduct of Dextra as “less than prudent” in a number of respects which he listed but in particular in seeking to make a substantial loan without making contact with anyone representing the borrower, a criticism which the Court of Appeal adopted.
Dextra’s claim in conversion
The tort of conversion, with special reference to bills of exchange, was authoritatively described by Diplock LJ in Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 956 at 970-971 in a passage too well-known to require repetition. It cannot be doubted that the recipient of a cheque who indorses it and negotiates it to a third party exercises the rights of an owner. He treats it as his. That is what the BOJ did here. So the BOJ committed the tort of conversion, unless the cheque in law belonged to it. Put another way, Dextra was entitled to exercise the rights of an owner if it was the owner, but not if it was not. So the fate of Dextra’s claim in conversion must depend on whether in law the BOJ was or was not the owner of the cheque.
Bills of exchange are governed in Jamaica by the Bills of Exchange Act, which derives from an Act of 1893 and is in substance (although not in layout) indistinguishable from the British Bills of Exchange Act 1882. It is to the statute one must first look. Dextra’s cheque was an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it was addressed to pay on demand a sum certain in money to or to the order of a particular person. It was thus a bill of exchange within the terms of sections 3 and 73 of the 1882 Act, to which (for convenience) further references will relate, and the material provisions of the Act apply to it. Section 21 of the Act provides:
“(1) Every contract on a bill, whether it be the drawer’s, the acceptor’s, or an indorser’s, is incomplete and revocable, until delivery of the instrument in order to give effect thereto.
Provided that where an acceptance is written on a bill, and the drawee gives notice to or according to the directions of the person entitled to the bill that he has accepted it, the acceptance then becomes complete and irrevocable.
(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery in order to be effectual –
(a) must be made either by or under the authority of the party drawing, accepting, or indorsing, as the case may be;
(b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.
But if the bill be in the hands of a holder in due course a valid delivery of the bill by all parties prior to him so as to make them liable to him is conclusively presumed.
(3) Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor, or indorser, a valid and unconditional delivery by him is presumed until the contrary is proved.”
Subsection (1) lays down the cardinal rule that title to a bill passes on delivery. This reflects the commercial reality that cheques are treated as the equivalent of cash. “Delivery” is defined in section 2 of the Act to mean “transfer of possession, actual or constructive, from one person to another”. There is no question of constructive possession here, since the BOJ acquired actual possession. Section 2 makes plain that a cheque is issued when it is first delivered, complete in form, to a person who takes it as a holder. “Holder” is defined to mean “the payee or indorsee of a bill or note who is in possession of it”.
Section 21(2) is of obvious relevance to this appeal. The dispute here arises between the immediate parties to the cheque and the BOJ was not a holder in due course: R E Jones Ltd v Waring & Gillow Ltd [1926] AC 670. It is clear that in using the term “conditional” subsection (2)(b) is referring not to the terms of the bill, which must be unconditional to satisfy the definition in section 3(1), but to the terms on which possession is transferred to the transferee. Such transfer may be on terms which make clear that the transferee is not to treat the bill as his own unless or until a further event occurs, as where a bill is delivered in escrow. It seems clear that any condition or special purpose must be communicated by the transferor to the transferee, since the commercial efficacy of the transaction depends on the transferee knowing that he may not, at least for the time being, present or negotiate the bill: see Equitable Securities Ltd v Neil [1987] 1 NZLR 233. There having been no such communication, it was accepted by Dextra that Beckford’s delivery of the cheque to Jones was not conditional.
Argument in the appeal focused on the requirement in subsection (2)(a) that delivery “to be effectual must be made either by or under the authority of the party drawing”. For Dextra it was strongly argued that delivery of its cheque to the BOJ was not made by it or under its authority as drawer because delivery was in fact made by Beckford who was not authorised by Dextra to make delivery. To this submission the BOJ countered that Phillips was authorised by Dextra to make delivery of the cheque to the BOJ, a task he was to undertake whether the transaction was one of loan (as Dextra thought) or purchase (as the BOJ thought): in either event the cheque was to be delivered and was to be immediately payable. The BOJ could not, it was said, be affected by any limitation on the authority of Phillips not disclosed to the BOJ. Nor did it make any difference that Phillips, as an agent authorised to make delivery, had chosen to employ Beckford as an intermediary. It was as if the cheque had been sent by post.
There is a surprising lack of authority on the construction of section 21(2)(a), and the Board’s attention was not drawn to any authority factually indistinguishable from the present. It is accordingly necessary to decide whether, on the facts of this case, there was an effectual delivery of the cheque to the BOJ so as to constitute the BOJ a holder entitled to sue on the cheque.
Dextra drew the cheque payable to the BOJ. The cheque was regular and complete on its face. Dextra entrusted this cheque to Phillips whom it authorised to deliver it to the BOJ. Such authority was circumscribed by conditions relating to the obtaining of a promissory note, but subject to those conditions delivery was authorised. It is plain (and not, as it is understood, contested) that if Phillips had personally delivered the cheque to the BOJ, although without observing or notifying to the BOJ the conditions to which his authority to deliver was subject, the BOJ would have acquired good title to the cheque provided it gave value and had no notice of Phillips’ limited authority. That is the effect of the decision in Watson v Russell (1862) 3 B&S 34; (1864) 5 B&S 968. The same result would follow if (as was the case here) Phillips had obtained the cheque from Dextra in fraud of Dextra, provided the BOJ had no notice of that fraud: Clutton v George Attenborough & Son [1897] AC 90; Talbot v Von Boris [1911] 1 KB 854; Hasan v Willson [1977] 1 Lloyd’s Rep 431.
Thus Dextra rested its conversion claim on a single point, the engagement by Phillips of Beckford to effect physical delivery of the cheque to Jones as the agent of the BOJ. The narrowness of this point can be demonstrated by considering varied factual hypotheses. Suppose Phillips had, as instructed, obtained a promissory note duly executed by the BOJ, had had it duly stamped and had returned it to Dextra by courier, and had then sent Dextra’s cheque to the BOJ through the post or via a messenger. Could Dextra have resisted a claim on the cheque by the BOJ on the ground that there had been no effectual delivery? Plainly not. Or suppose no condition had been imposed by Dextra on Phillips with regard to a promissory note, but he had been clearly instructed to hand over a cheque personally and had instead posted it to the BOJ. Could Dextra have resisted a claim by the BOJ on the cheque on the ground that there had been no effectual delivery? Again, plainly not. These examples show that section 21(2)(a) is concerned with authority to deliver and not with the precise mode of delivery which is authorised. This distinction makes good sense. If a cheque is drawn in favour of a named payee and is placed in, for example, a file, from which it is abstracted by a thief or mischief-maker by whom it is handed to the payee, it seems just that the drawer should not be liable since he has never authorised delivery at all. But if the drawer prescribes delivery by one method and physical transfer is effected by another, in circumstances where the payee gives value and does not (and ordinarily could not) know of the method of transfer prescribed by the drawer, it would seem neither just nor consistent with the objective of achieving maximum certainty in mercantile transactions to deny the transferee a right to recover. It was accepted that the BOJ gave value for the cheque.
Here, Phillips was Dextra’s agent with authority to hand over the cheque to the BOJ. He chose to do this through Beckford. It was not found, nor in view of the findings was it argued, that Beckford was the agent of the BOJ. It might well have been different if he had been, as it might well have been different in R E Jones Ltd v Waring & Gillow (above) if Bodenham had been the agent of Jones: see pp 695, 701. Beckford was a bailee of the cheque, with no right over it and no task in relation to it other than to carry it to the BOJ: he was aptly described as a “mere human conduit”. It would be anomalous if his adventitious interposition into the chain of delivery had the legal effect for which Dextra contended, and the Board is satisfied that it did not.
For these reasons, which derive some support from Midland Bank Plc v Brown Shipley & Co Ltd [1991] 1 Lloyd’s Rep 576 at 583 and Yan v Post Office Bank Ltd [1994] 1 NZLR 154, and which are essentially the grounds relied on by the Court of Appeal, Dextra’s claim in conversion was rightly rejected. This conclusion makes it unnecessary to review a number of other arguments ventilated before the Board and in the courts below (estoppel, negligence, the rule in Cocks v Masterman (1829) 9 B&C 902 and the rights of a bona fide holder for value). The BOJ acquired good title to the cheque and did not convert it.
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.
Kleinwort Benson Ltd v. Lincoln City Council Kleinwort;
Benson Ltd v. Mayor etc of the London Borough of Southwark and Others Kleinwort; Benson Ltd v. Birmingham City Council Mayor etc of the London Borough of Kensington and Chelsea and Others [1998] UKHL 38; [1999] 2 AC 349; [1998] 4 All ER 513; [1998] 3 WLR 1095 (29th October, 1998)
LORD BROWNE-WILKINSON
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Goff of Chieveley which contains yet another major contribution to the law of restitution.
Were it not for one matter, I would be in full agreement with his views. But unfortunately he and the majority of your Lordships take the view that when established law is changed by a subsequent decision of the Courts, money rightly paid in accordance with the old established law is recoverable as having been paid under a mistake of law. I take the view that the monies are not recoverable since, at the time of payment, the payer was not labouring under any mistake.
The majority view is that the decision in Hazell v. London Borough of Hammersmith and Fulham [1992] 2 A.C. 1 established that the swaps agreements were void; that although the decision in Hazell post-dated the last of the payments made by Kleinworts to the local authorities the decision operated retrospectively so that under the law as eventually established Kleinworts were labouring under a mistake at the time they made each payment in thinking that they were liable to make such payment. Therefore, in their view, Kleinworts can recover payments made under a mistake of law. My view, on the other hand, is that although the decision in Hazell is retrospective in its effect, retrospection cannot falsify history: if at the date of each payment it was settled law that local authorities had capacity to enter into swap contracts, Kleinworts were not labouring under any mistake of law at that date. The subsequent decision in Hazell could not create a mistake where no mistake existed at the time.
There are two questions to be considered. First, when the common law is changed by later judicial decision, have all payments made on the basis of the previous law been made under a mistake of law? Second, in what circumstances can it be said that there was earlier law which was changed by judicial decision? Does there have to be a clear judicial decision overruled by a later judicial decision of a higher court or is it enough that, at the date of payment, there was a generally accepted view of the law which view was upset by the later decision?
Where the law is established by judicial decision subsequently overruled
I will take the case where the law has been established by a single decision of the Court of Appeal made in 1930. In 1990 the payer makes a payment which would only have been due to the payee if the Court of Appeal decision was good law. The payer was advised that the Court of Appeal decision was good law. In 1997 this House overruled the Court of Appeal decision. Is the plaintiff entitled to recover the payment made in 1990 on the ground of mistake of law?
There is, as I understand it, no dispute that in order to recover the plaintiff has to have been labouring under the mistake at the date of payment and to have made the payment because of that mistake. Certainly that position has been accepted by Kleinworts in their written reply and by my noble and learned friend, Lord Goff. The question is whether the subsequent overruling of the 1930 Court of Appeal decision requires the court to hold that at the date of payment (1990) the law (contrary to what the plaintiff had been advised) was not the law established by the Court of Appeal decision of 1930.
The theoretical position has been that judges do not make or change law: they discover and declare the law which is throughout the same. According to this theory, when an earlier decision is overruled the law is not changed: its true nature is disclosed, having existed in that form all along. This theoretical position is, as Lord Reid said, a fairy tale in which no-one any longer believes. In truth, judges make and change the law. The whole of the common law is judge-made and only by judicial change in the law is the common law kept relevant in a changing world. But whilst the underlying myth has been rejected, its progeny–the retrospective effect of a change made by judicial decision–remains. As Lord Goff in his speech demonstrates, in the absence of some form of prospective overruling, a judgment overruling an earlier decision is bound to operate to some extent retrospectively: once the higher court in the particular case has stated the changed law, the law as so stated applies not only to that case but also to all cases subsequently coming before the courts for decision, even though the events in question in such cases occurred before the Court of Appeal decision was overruled.
Therefore the precise question is whether the fact that the later overruling decision operates retrospectively so far as the substantive law is concerned also requires it to be assumed (contrary to the facts) that at the date of each payment the plaintiff made a mistake as to what the law then was. In my judgment it does not. The main effect of your Lordships’ decision in the present case is to abolish the rule that money paid under a mistake of law cannot be recovered, which rule was based on the artificial assumption that a man is presumed to know the law. It would be unfortunate to introduce into the amended law a new artificiality, viz., that a man is making a mistake at the date of payment when he acts on the basis of the law as it is then established. He was not mistaken at the date of payment. He paid on the basis that the then binding Court of Appeal decision stated the law, which it did: the fact that the law was later retrospectively changed cannot alter retrospectively the state of the payer’s mind at the time of payment. As Deane J. said in the High Court of Australia in University of Wollongong v. Merwally 158 C.L.R. 447 at p. 478:
“A parliament may legislate that, for the purposes of the law which it controls, past facts or past laws are to be deemed and treated as having been different to what they were. It cannot however objectively expunge the past or alter the facts of history.”
If that be true of statutory legislation, the same must a fortiori be true of judicial decision. In my judgment, therefore, if a man has made a payment on an understanding of the law which was correct as the law stood at the date of such payment he has not made that payment under a mistake of law if the law is subsequently changed.
I am fortified in that view by considering what will be the effect of your Lordships’ decision. A payment which was initially irrecoverable will subsequently become recoverable. Consider the hypothetical case I have put. A payment was made in 1990 when the Court of Appeal decision was still valid. Under the existing law, the claim in restitution should apparently have arisen at the date of such payment: see Baker v. Courage & Co. [1910] 1 KB 56. Yet at that date there could be no question of any mistake. It would not have been possible to issue a writ claiming restitution on the grounds of mistake of law until the 1997 decision had overruled the 1930 Court of Appeal decision. Therefore a payment which, when made, and for several years thereafter, was entirely valid and irrecoverable would subsequently become recoverable. This result would be subversive of the great public interest in the security of receipts and the closure of transactions. The position is even worse because all your Lordships consider that the claims to recover money paid under a mistake of law are subject to section 32(1)(c) of the Limitation Act 1980, i.e. that in such a case time will not begin to run until the “mistake” is discovered. A subsequent overruling of a Court of Appeal decision by the House of Lords could occur many decades after payments have been made on the faith of the Court of Appeal decision: in such a case “the mistake” would not be discovered until the later overruling. All payments made pursuant to the Court of Appeal ruling would be recoverable subject only to the possible defence of change of position.
With one possible exception, such judicial and other authority as there is favours the view that there is no relevant mistake of law if the payment is made on the basis of the law as it stood at the date of payment. As to non-judicial authority the Law Commission has taken the view that there would be no relevant mistake: Report No. 227 “Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments” (Cm. 2731), paras. 5.2-5.16. Not surprisingly, Professor Beatson shares that view: see 1995 R.L.R. 280 at p. 284; see also Professor Burrows Law of Restitution pp. 118-120.
As to judicial authority there is a dearth of decisions directly in point. Since the payment of money under a mistake of law was not recoverable in any event, there is little discussion as to what constitutes a mistake of law in that context. However, there are two English cases which throw some light. In Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329, the plaintiff had paid water rates to the defendant calculated in accordance with the law as it was held to be by the Court of Appeal. Subsequent to the date of payment, the House of Lords in the Dobbs case changed the law: if calculated under the changed law the plaintiff had overpaid. He sought to recover the overpayments on the ground that he had paid under compulsion and under a mistake of law. It was apparently accepted by the Court that if both these factors (i.e. compulsion and mistake of law) were present, the overpayment could be recovered. Counsel having submitted that the payments had been made in ignorance of the law, Lord Coleridge C.J. (who had been a member of the Court of Appeal overruled in Dobbs case) said:
“Of what law? I was ignorant of it before the decision of the House of Lords. I had held to the contrary, and two eminent judges agreed with me. Can that be put as ignorance of law? Just see what consequences would follow–that wherever there has been a reversal of judgment all the money that has been paid under the previous notion of the law can be recovered back! Has that ever been held? Can it be that every reversal of a decision may give rise to hundreds of actions to recover back money previously paid?”
In his judgment, Lord Coleridge dismissed the plaintiff’s claim on the grounds both that there was no element of compulsion in the payment and that there was no relevant mistake of law. He said:
“But here at the time the money was paid, which was before Dobbs case, the law was in favour of the company, and there was no authority to show that it could be recovered back on account of a judicial decision reversing the former understanding of the law.”
The other member of the court concurred but it is not clear on which of the two grounds. The decision therefore is not of major authority but it does show that Lord Coleridge was of the view that money was not paid under a mistake of law just because a later change in the law altered the law as it had been at the date of payment.
The other English case is Derrick v. Williams [1939] 2 All E.R. 559. In that case the plaintiff had accepted a payment into court on the basis that a Court of Appeal decision declared the law in a form which precluded the recovery of certain types of damages. Subsequently the House of Lords reversed the Court of Appeal decision and held that such damages were recoverable. The plaintiff in Derrick v. Williams was trying to re-open the matter on the grounds that the subsequent decision of the House of Lords showed that he had been proceeding under a mistake of law when he accepted the money paid in. He relied on the equitable principle set out in In re Roberts [1905] 1 Ch 704 that a compromise made under a mistake of law can be set aside. The plaintiff’s claim failed. Sir Wilfrid Greene M.R. said, at p. 565, that he rejected a contention that the mistake was one of fact and continued:
“It was a mistake of law, and consisted of the fact that the plaintiff was under the belief that the law as laid down by this court . . . was correctly laid down. In that he was wrong, and he is asking the court to say that, having acted upon the basis of a mistaken view of the law, now that the law has been enunciated by the highest tribunal, he is entitled to make another attempt. That is the thing which, it seems to me, cannot be permitted on principle. It appears to me to be completely indefensible. No shadow of authority was cited to us which would justify the proposition that, where, pursuant to the rules of court, a claim has been satisfied by money paid into court by the defendant, the plaintiff can afterwards come and say: ‘I was wrongly advised as to the law when I did this, because the law was not as then laid down by the Court of Appeal, but as subsequently enunciated by the House of Lords.’ It would be an intolerable hardship on successful litigants if, in circumstances such as these, their opponents were entitled to harass them with further litigation because their view of the law had turned out to be wrong, and, unless I were constrained by binding authority, I should be quite unable, on principle, to accept any such proposition.”
It is not clear to me whether this case was decided on the ground that payment into court raised special questions, or on the ground that there was no mistake of law because at the date of the withdrawal of the monies paid into court the law was as stated by the Court of Appeal and not as subsequently stated by the House of Lords. But the decision is at least consistent with the view that in deciding whether a person has acted under a mistake of law at a particular time, the question is whether they mistook the law as it then was without reference to subsequent retrospective change by later decisions.
In Commissioner of State Revenue v. The Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51 the High Court of Australia had to consider a payment made in pursuance of a statute which was subsequently repealed with retrospective effect, i.e. the case was analogous to that where the common law is changed by a later common law decision. The majority held that monies paid under the retrospectively repealed statute were not paid under a mistake of law at common law: see per Brennan J., p. 69 (with whom Toohey and McHugh JJ. agreed) and Dawson J. at p. 75. In my judgment this is strong authority in favour of the view which I hold.
The only authority pointing the other way is a recent case in the Court of Appeal decided since the conclusion of the argument in this case: Evans v. Governor of H.M. Prison Brockhill [1998] (unreported). In that case the plaintiff had been sentenced to a term of imprisonment. She was detained by the Governor for a period correctly calculated in accordance with the law as then laid down by a series of decisions in the Divisional Court. That method of calculating the duration of the sentence was subsequently disapproved by a later decision of the Divisional Court which laid down (everyone has assumed correctly) a different method of calculation. If that new method of calculation was adopted the plaintiff had been detained for 59 days too long. The plaintiff claimed damages for false imprisonment. The majority (Lord Woolf M.R. and Judge L.J., Roch L.J. dissenting) held that the retrospective effect of the change in the law produced by the last Divisional Court decision prevented the Governor from relying as a defence on the law as it had been declared by the earlier Divisional Court decisions which at the time of the 59 days’ detention laid down the relevant law. The Master of the Rolls described the result as being “highly artificial”: it involved the acceptance of Lord Reid’s fairy tale but he held that the Court of Appeal could not abandon the fairy tale. I do not propose to comment on that decision (which may be coming on appeal to your Lordships’ House) beyond distinguishing it from the present case. In that case the question was one of substantive law: what was the correct duration of the sentence? In the view of the Court of Appeal, that fell to be determined by the law as finally declared. Once that view had been reached, the Court of Appeal were not concerned with the law as at the date of the detention: such law was irrelevant since it could provide no defence. On the other hand, in the present case what needs to be determined is not the substantive law at a particular time but the state of the mind of the payer at that time. Was he then under a mistake as to the law then current? That is a different question.
In my view therefore, if, at the date of payment, the law was settled by clear judicial authority then a payment in accordance with such law was not made under a mistake of law even if the law has subsequently been changed by later judicial decision. I am fortified in this view by the fact that the appellants in their written submissions in reply (paras. 32 and 33) expressly accepted this proposition. They concentrated their submissions on the question whether it is ever possible to establish that at a particular date the law was “settled” in the absence of a judicial decision to that effect. I find it surprising that the majority of your Lordships are finding the law to be that which neither of the parties contended for.
Settled law in the absence of judicial decision?
It is not suggested in the present case that before the decision of this House in Hazell there was any judicial decision which established that local authorities had the capacity to enter into swap agreements. What is said is that, even in the absence of such a decision, there was a “settled view” that local authorities had the necessary capacity and that swap agreements were therefore valid. It is not for your Lordships on these preliminary issues to seek to determine whether in fact there was such a settled view of the law. However, your Lordships do have to decide whether, if at the trial such a settled view is proved to have existed, it would prevent Kleinworts from recovering the monies paid on the basis of monies paid under a mistake of law.
Much commercial and property activity occurs on the basis of law which is not laid down by judicial decision. Such “law” consists of the practice and understanding of lawyers skilled in the field. If, before payment, the payer had sought advice in some cases he would have been told that the law was dubious: if having received such advice he paid over, he must have taken the risk that the law was otherwise and cannot subsequently recover what he has paid. In other cases, he would have been told that the law was clear and he could safely act on it. If in this latter case the payer acted on the law as so advised and subsequently a court held that the law was not as advised, can the payer recover his payment as monies paid under a mistake of law? In the ordinary case, the payer’s adviser will just have given wrong legal advice: as a result the payment will have been paid under a mistake of law and will be recoverable. But in a limited number of cases, of which this may be one, it is not really possible to say that the legal adviser made a mistake in advising as he did. There are areas of the law which are sparsely covered by judicial decision, for example, real property, banking and regulatory law. In such areas the commercial world acts, and has to act, on the generally held view of lawyers skilled in the field. In such cases, a payer who sought advice would receive the same advice from everyone skilled in the field. It used to be said that the practice of conveyancers of repute was strong evidence of real property law: see In re Hollis’ Hospital and Hague’s Contract [1899] 2 Ch 540 at 551. As late as the middle of this century, Denning L.J. said in In re Downshire Settled Estates [1953] Ch. 218: “The practice of the profession in these cases is the best evidence of what the law is: indeed it makes law.”
I doubt whether today anyone would claim that a uniform practice of the profession makes the law. But in the present context it does have a significant impact. In holding that money paid under a mistake of law is recoverable, an essential factor is that the retention of the money so paid would constitute an unjust enrichment of the payee. What constitutes the unjust factor is the mistake made by the payer at the date of payment. If, at the date of payment, it was settled law that payment was legally due, I can see nothing unjust in permitting the payee to retain monies he received at a time when all lawyers skilled in the field would have advised that he was entitled to receive them and the payer was bound to pay them. Again it is critical to establish the position at the time of payment: if, at that date, there was nothing unjust or unmeritorious in the receipt or retention of the monies by the payee in my judgment it was not an unjust enrichment for him subsequently to retain the monies just because the law was, in one sense, subsequently changed.
In New Zealand and Western Australia the legislatures have provided that monies shall not be recoverable on the grounds of mistake of law if paid at a time when there was a “common understanding” that they were payable: New Zealand Judicature Amendment Act 1958, section 94A(2); Western Australian Law Reform (Property, Perpetuities and Succession) Act 1962, section 23(1). The Law Commission (Report No. 227) was not happy with the concept of “common understanding” but did recommend that money should not be recoverable if paid “in accordance with a settled view of the law at the time”; see Report (supra), paras. 5.1-5.13 and draft Bill, clause 3. The Law Commission considered that the law fell to be treated as “settled” not only by judicial decision but also by reference to the legal advice which the payer would have received if he had sought it:
“had the payer taken advice from a qualified legal practitioner who was reasonably experienced in the field of law in question at the time of payment, and that practitioner had obtained access to all of the ordinarily available legal materials on the point of law in issue, he would have had no doubt in advising the payer that the law supported the payment. (para. 5.11)”
My Lords, I agree with the views of the Law Commission and would therefore have held that Kleinworts would not be entitled to recover on the grounds of mistake of law if at the time of payment Kleinworts were, or if they had sought advice would have been, advised by all lawyers skilled in the field that the swaps agreement were valid.
My Lords, in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit monies paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend Lord Goff, that the relevant limitation period applicable to such a claim would be that laid down by section 32(1)(c) of the Limitation Act 1980, i.e. six years from the date on which the mistake was, or could with reasonable diligence have been, discovered. The majority of your Lordships consider that such claim will arise when the law (whether settled by existing authority or by common consensus) is changed by a later decision of the courts. The consequence of this House in its judicial capacity introducing such a fundamental change would be as follows. On every occasion in which a higher court changed the law by judicial decision, all those who had made payments on the basis that the old law was correct (however long ago such payments were made) would have six years in which to bring a claim to recover money paid under a mistake of law. All your Lordships accept that this position cannot be cured save by primary legislation altering the relevant limitation period. In the circumstances, I believe that it would be quite wrong for your Lordships to change the law so as to make money paid under a mistake of law recoverable since to do so would leave this gaping omission in the law. In my judgment the correct course would be for the House to indicate that an alteration in the law is desirable but leave it to the Law Commission and Parliament to produce a satisfactory statutory change in the law which, at one and the same time, both introduces the new cause of action and also properly regulates the limitation period applicable to it.
I would dismiss these appeals.
LORD GOFF OF CHIEVELEY
My Lords,
There are before your Lordships consolidated appeals in four actions, each of which arises from the unravelling of one or more interest rate swap transactions which, following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, proved to be void. The process of unravelling transactions of this kind has produced a host of problems, so much so that Professor Andrew Burrows stated in 1995 (see [1995] R.L.R. 15) that “it is no exaggeration to say that one could write a book on the restitutionary consequences of the decision in Hazell.” I fear that any such book will be growing in length as the cases, including the present appeals, pass through the courts.
The nature of an interest rate swap transaction is now very well known. The description usually referred to is that of the Divisional Court in Hazell [1990] 2 Q.B. 697, 739-741, the transactions in the present cases being of the simple type there described. The essence of such a transaction is that one party, known as the fixed rate payer, agrees to pay to the other party over a certain period interest at a fixed rate on a notional capital sum; and the other party, known as the floating rate payer, agrees to pay to the former over the same period interest on the same notional sum at a market rate determined in accordance with a certain formula. In practice, a balance is struck at each relevant date and the party who then owes the greater sum will pay the difference to the other party.
Interest rate swaps can fulfil many purposes, ranging from pure speculation to more useful purposes such as the hedging of liabilities. One form of interest rate swap involves an upfront payment, i.e. a capital sum paid at the outset by one party to the other, which will be balanced by an adjustment of the parties’ respective liabilities. The practical result of this is to achieve a form of borrowing. It appears that it was this feature which, in particular, attracted local authorities to enter into transactions of this kind, since they enabled local authorities subject to rate-capping to obtain upfront payments uninhibited by the relevant statutory controls, though they must in the process have been storing up trouble for themselves in the future.
The appellant in each of the four consolidated appeals is Kleinwort Benson Ltd., a bank which was an early participant in the market for interest rate swaps. Each of the respondents is a local authority. They may be described in brief as Birmingham City Council, Southwark London Borough Council, Kensington and Chelsea London Borough Council and Lincoln City Council. Kleinwort Benson entered into interest rate swap transactions with each of the respondents. Following the decision of this House in Hazell, Kleinwort Benson commenced proceedings against each of the respondents claiming restitution of the sums it had paid to them under these transactions. The total of the net payments made under them by Kleinwort Benson was £811,208.90.
There are two features of these transactions which are of particular relevance to the present appeals, no doubt flowing from the fact that Kleinwort Benson participated in interest rate swaps at an early stage. The first is that, at the time when proceedings were commenced by Kleinwort Benson, each of the transactions was fully performed by both parties according to its terms across the whole of the agreed period. The second is that not all of the sums paid by Kleinwort Benson to the respondents were paid within the six year limitation period expiring with the date of the issue of the writ. Of the net sum of £811, 208.90 paid by Kleinwort Benson, £388, 114.72 was paid within the six year period, and £423,094.18 represented earlier payments. The former sum has been paid by the relevant local authorities to Kleinwort Benson. The latter sum is in issue, and is the subject of the cases now under appeal.
The claim of Kleinwort Benson in each of these cases is that the money in question was paid by it under a mistake, viz. a mistaken belief that it was paid pursuant to a binding contract between it and the relevant local authority. The claims have been formulated in this way to avoid the six year time limit by bringing them within section 32(1)(c) of the Limitation Act 1980. Section 32(1) provides that:
“Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act. . . (c) the action is for relief from the consequences of a mistake. . . the period of limitation shall not begin to run until the plaintiff has discovered the . . . mistake . . . or could with reasonable diligence have discovered it.”
It is plain however that here the mistake relied upon is a mistake of law; and under the law as it stands at present restitution will in general not be granted in respect of money paid under a mistake of that kind. It follows that, in the present proceedings, Kleinwort Benson is seeking a decision that that long-established rule should no longer form part of the English law of restitution -a decision which, as all parties to the present litigation recognise, can only be made by your Lordships’ House. As a result, on 12 July 1996 Langley J. (I understand by consent) made the following orders in each of the four actions. First of all, he ordered the trial of two preliminary issues, viz. (1) whether the facts pleaded by the Plaintiff disclosed a cause of action in mistake; and (2) whether, if the answer to (1) was “Yes,” such a mistake was one in respect of which the Plaintiff could rely on section 32(1)(c) of the Limitation Act 1980. The first of these two issues raised directly the question whether money paid under a mistake of law is recoverable in restitution. In each of the actions Langley J. gave a negative answer to Issue (1), on the basis that he was bound by Court of Appeal authority to do so; and accordingly he did not give an answer to Issue (2). Next, he granted a certificate for an appeal (commonly called a leapfrog appeal) directly to your Lordships’ House pursuant to section 12 of the Administration of Justice Act 1969. Leave to appeal was duly granted by this House, which further ordered that the parties should have leave to present arguments arising from the fact that each of the interest rate swap transactions had been fully performed, thus adding a third issue to the two which were the subject of Langley J.’s order.
As a result of the basis on which the appeals have come before the House, the Appellate Committee has exceptionally lacked the benefit of reasoned judgments of the courts below. However the loss of that benefit has substantially been offset by arguments of exceptional quality addressed to the Committee by Counsel–Mr. Richard Southwell Q.C. and Mr. Rhodri Davies for the appellant, Kleinwort Benson, and Mr. Nicholas Underhill Q.C., Mr. Charles Béar and Mr. Mark West for the respondent local authorities. I sensed that some, if not all, of these members of the Bar are seasoned warriors in the continuing battle of the swaps.
I propose to consider the Issues in the following order. I shall first consider Issue (1) as ordered by Langley J., which raises the question whether the rule precluding recovery of money paid under a mistake of law should remain part of English law. As part of that Issue I shall also consider whether, if the answer to that question is “No,” there should be an exception to recovery on the ground of mistake of law (A) in cases where the money has been paid under a settled understanding of the law which has subsequently been changed by judicial decision, or (B) in cases where the money has been the subject of an honest receipt by the defendant. I shall refer to these two Issues as Issue (1A) and Issue (1B) respectively. I shall then consider the Issue concerned with the impact upon recovery of the fact that all the interest rate swap transactions in question were fully performed. I shall refer to that Issue as Issue (2). Finally I shall turn to consider the second Issue as ordered by Langley J. which raises the question whether, on the true construction of section 32(1)(c) of the Act of 1980, the subsection applies to mistakes of law. That I shall refer to as Issue (3).
Issue 1 Whether the present rule, under which in general money is not recoverable in restitution on the ground that it was paid under a mistake of law, should be maintained as part of English law.
In argument before the Appellate Committee Kleinwort Benson presented in its written case a fully developed argument for the abrogation of what I will, for convenience, call the mistake of law rule. This did not however evoke a comparable argument by the local authorities in defence of the rule. On the contrary, their submission was not that the rule should be retained, but rather that it should be reformulated. Their primary argument was that the House should not itself embark upon any such reformulation, but should leave that task to the Law Commission which already has the matter under consideration. Such a course would benefit the local authorities because, quite apart from the fact that it is uncertain when, if ever, the Law Commission’s proposed reforms will be enacted, they would not, if enacted as proposed, be retrospective in effect. Their secondary argument was that, if the House did decide to abrogate the present rule, it should do so in terms which provided a defence in cases in which the money has been paid under a settled understanding of the law, or in which the money has been the subject of an honest receipt by the defendant. Such defences would recognise that the payee has, in such circumstances, a legitimate interest in retaining the payment, based on the need for certainty and finality in transactions.
Faced with this situation, it might be thought that your Lordships need do no more than accept that the present rule should no longer remain in its present form, and then proceed to consider whether reformulation of the rule should be undertaken by this House or by the Law Commission and, if the former, whether the newly recognised right to recover money paid under a mistake of law should be subject to certain special limits as proposed by the local authorities. I myself do not consider that such a course would be appropriate. What is in issue at the heart of this case is the continued existence of a long standing rule of law, which has been maintained in existence for nearly two centuries in what has been seen to be the public interest. It is therefore incumbent on your Lordships to consider whether it is indeed in the public interest that the rule should be maintained, or alternatively that it should be abrogated altogether or reformulated. Having said this, however, your Lordships are fully entitled to recognise that the local authorities are in truth adopting a realistic stance that, in the light of prolonged criticism of the rule by scholars working in the field of restitution, and of recent decisions by courts in other major common law jurisdictions, the case for retention of the rule in its present form can no longer sensibly be advanced before your Lordships’ House. In these circumstances I do not have to consider this aspect of the case in as much depth as might otherwise be regarded as appropriate, though I have discovered that consideration of the case as a whole has cast light on the formulation of the limits to the right of recovery which lie at the heart of the case as presented to your Lordships’ House.
How the rule became established: The origin of the rule is, as is very well known, the decision of the Court of King’s Bench in Bilbie v. Lumley (1802) 2 East 469. There an underwriter paid a claim under a policy which he was entitled in law to repudiate for non-disclosure. Although he knew the relevant facts, he was not aware of their legal significance. He then claimed to recover the money he had paid. In the brief report of the case by East it is recorded that Lord Ellenborough C.J. asked plaintiff’s counsel (Mr. Wood, later Baron Wood)
“whether he could state any case where if a party paid money to another voluntarily with a full knowledge of all the facts of the case, he could recover it back again on account of his ignorance of the law.”
No answer being given, Lord Ellenborough gave judgment against the plaintiff. In his short judgment as reported, his reasoning is to be found in two sentences, at p. 472: “Every man must be taken to be cognisant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case.”
Previous authority, such as it was (see Jackson, History of Quasi-Contract, pp. 58-61), shows no distinction being drawn between mistakes of fact and law; on the face of the law reports the suggestion that a mistake of law did not ground recovery appears to have emerged for the first time in an obiter dictum of Buller J. in Lowry v. Bourdieu (1780) 2 Doug. 468, 471, the rule of non-recovery being based by him on the maxim ignorantia juris non excusat–an observation invoked by Lord Ellenborough in Bilbie v. Lumley, 2 East 469, 472. In 1802 Sir William Evans published an Essay on the Action for Money Had and Received. (This has since been published in [1998] R.L.R. , the text having been prepared for publication by Professor Peter Birks and Dr. Lionel Smith of Oxford University; copies were helpfully supplied by Professor Birks to Members of the Appellate Committee and to Counsel shortly before the hearing of the present appeals.) In his Essay (dedicated to Sir Richard Law, shortly to be ennobled as Lord Ellenborough) Sir William strongly supported the opinion of Vinnius that money paid by mistake is recoverable, whether the mistake is one of fact or law, and criticised the contrary view of Pothier denying recovery where the mistake is one of law. In a later publication in 1806 (his translation of Pothier’s Treatise on Obligations), Sir William, disappointed by his dedicatee’s decision in Bilbie v. Lumley four years earlier, maintained at greater length but with great courtesy his opinion that money paid under a mistake of law was generally recoverable on that ground. In particular he stressed the limited field of application of the maxim ignorantia juris non excusat. He stated, at pp.394-395:
“The rule in its terms is sufficiently satisfied, by holding that no man shall, under the pretence of an ignorance of the law, excuse himself from the performance of his own obligations, or acquire an advantage, or avoid a detriment, when he has omitted using the means ordained by law for those purposes. Applied to the immediate subject matter, it has no reference to the point, of money paid under a mistaken idea of a preceding obligation.”
The overall impression is that, in the eighteenth century, it was widely understood that no distinction should be drawn in the present context between mistakes of fact and law, but that towards the end of the century the view was emerging that a mistake of law should not ground recovery. This view must have been more widely held than the single dictum in Lowry v. Bourdieu suggests, having regard to the strong terms in which Lord Ellenborough expressed his judgment in Bilbie v. Lumley, and the account given by Gibbs J. (in Brisbane v. Dacres (1813) 5 Taunt. 143, 155-157) of his experience as counsel in Chatfield v. Paxton and of the universal opinion among the practitioners in the Court of King’s Bench that where money was paid with knowledge of the facts it could not be recovered on the ground of mistake.
The decision in Bilbie v. Lumley was followed and applied by the majority of the Court of King’s Bench in Brisbane v. Dacres (Chambre J. dissenting). There the commander of a naval vessel, H.M.S. Arethusa, had paid to the Admiral in command a proportion of freight received for the carriage of publicly owned bullion on board the Arethusa in the belief that this was due to the Admiral as a matter of usage. On later discovering that the money was not due because the usage had been discontinued, he sought to recover it from the Admiral’s widow and executrix. It is important to observe that the decision in Bilbie v. Lumley was expressly challenged in this case. Here full argument was heard on the point, unlike Bilbie v. Lumley itself which appears to have been decided on the basis of counsel’s concession. Judgment was reserved, and fully reasoned judgments were delivered by all members of the Court. Although the maxim ignorantia juris non excusat was invoked by counsel, no member of the Court founded his judgment upon it; indeed the dissenting judge, Chambre J., 5 Taunt. 143, 158- 159 stated (perhaps rather too narrowly) that the maxim applied only in cases of “delinquency,” and all the other judges appear to have considered that it had no role to play in the recovery of money paid by mistake. The question whether it was against conscience for the defendant to retain the money was expressly addressed, notably in the judgment of the Chief Justice, Sir James Mansfield, and was answered by him in the negative, because the admiral acted (as all admirals then did) in accordance with what was generally believed to be his accustomed right, and in particular because he might have changed his position on the faith of the payment. However, the ratio decidendi is perhaps most clearly stated in the leading judgment of Gibbs J. when he said, at p. 152:
“We must take this payment to have been made under a demand of right, and I think that where a man demands money of another as a matter of right, and that other, with a full knowledge of the facts upon which the demand is founded, has paid a sum, he never can recover back the sum he has so voluntarily paid. It may be, that upon a further view he may form a different opinion of the law, and it may be, his subsequent opinion may be the correct one. If we were to hold otherwise, I think that many inconveniences may arise; there are many doubtful questions of law: when they arise, the Defendant has an option, either to litigate the question, or to submit to the demand, and pay the money. I think, that by submitting to the demand, he that pays the money gives it to the person to whom he pays it, and makes it his, and closes the transaction between them.”
See also p. 160, per Heath J. Such a conclusion might have provided the basis for a more sophisticated development of this branch of the law, founded upon a prima facie right of recovery subject to specific defences. Unfortunately, however, this was not to be so. It seems that the rule hardened, as rules are liable to do. In Wilson and M’Lellan v. Sinclair (1830) 3 Wilson & Shaw 398, 409, Lord Brougham L.C. stated that since Brisbane v. Dacres it had been considered an established point that the mistake must be “in the fact.” Furthermore, Kelly v. Solari (1841) 9 M. & W. 54, 55 Parke B. said of Bilbie v. Lumley that “All that that case decides is, that money paid with full knowledge of all the facts cannot be recovered back by reason of its having been paid in ignorance of the law,” a statement which was reflected in the judgment of Lord Abinger C.B. at pp. 57-58. These statements were made in the context of a case concerned with mistake of fact, the issue being whether means of knowledge, as opposed to full knowledge, of the facts was enough to preclude recovery. Even so, the observations of the judges appear to have reflected an accepted opinion that money paid under a mistake of law was not recoverable as such. At all events the existence of the mistake of law rule became well established in the course of the nineteenth century, and in the twentieth century it was regularly applied by courts of first instance and on occasion by the Court of Appeal. It has however never fallen for consideration by your Lordships’ House before the present appeals, which are now being heard after many years of criticism of the rule by scholars specialising in the law of restitution, and after the rule itself has been discarded in a number of major common law jurisdictions.
Criticism of the rule: Although Bilbie v. Lumley was the origin of the rule, Brisbane v. Dacres, in which the whole question was fully argued and the decision in Bilbie v. Lumley reconsidered and affirmed in reasoned judgments, might more properly have been regarded as encapsulating the reasoning on which the rule was based. Unfortunately, however, since the rule became hardened into the form stated in Kelly v. Solari, many critics have concentrated their fire on Bilbie v. Lumley, and in particular on the easy target of what Lord Wright (in his Legal Essays and Addresses (1939) at p. xix) called the “hasty and ill-considered utterance” of Lord Ellenborough in which he invoked the maxim ignorantia juris non excusat. This maxim, it has been pointed out, is properly directed to cases in which the defendant was charged with wrongdoing, whether civil or criminal, and has no place in the law of quasi-contract; see Professor Keener’s Law of Quasi-Contracts (1893) at pp. 85 et seq., and Professor Woodward’s Law of Quasi-Contracts (1913) at pp. 54 et seq. No reliance was however placed on the maxim by the Court in Brisbane v. Dacres, only eleven years after Bilbie v. Lumley was decided, and seven years after Sir William Evans had published his criticism of the use of the maxim in that decision, after which (despite the sweeping words of Lord Brougham L.C. in Dixon v. Monkland Canal Company (1831) 5 Wilson & Shaw 445, 452) it should no longer have been regarded as providing the justification for the rule of non-recovery in English law. Professor Woodward was also critical of counsel (Mr. Wood) for failing to reply to Lord Ellenborough’s enquiry. In this he was surely unjust. The enquiry, as reported, should in the context properly be understood as directed towards the existence of any authority in which the point had been decided; and the answer could properly have been made that there was none, as indeed was confirmed in Brisbane v. Dacres. Professor Corbin (Contracts, vol.3, para. 617, at p. 756) was later to attribute this “handy” rule to expediency. “When a court is convinced that restitution should not be decreed, in the pressure of work it is likely to seize upon the first plausible rule that becomes handy.” I am bound to say that there is no evidence that the rule has any such origin; on the contrary, as the majority judgments in Brisbane v. Dacres show, the rule was perceived, after due deliberation, to rest on sound legal policy. This perception appears to have gained ground as the years passed by, fuelled by an an amalgam of fears on a number of scores–for example, that it would be easy to assert a mistake of law, which could not easily be refuted, and that this might be done in almost any case; that in many cases it would be inappropriate to reopen a settled transaction; and that the defendant, having received a payment made on the basis that it was due, might have put to use the money paid to him or otherwise have changed his position on the faith of the payment. This mixture was so potent that the good sense of excluding all possibilities of this kind by the adoption of one simple rule must have appeared most compelling. Indeed, it comes as no surprise to learn that the adoption of a similar rule was considered in Roman law, and that (in the view of some commentators) the controversy on the subject was resolved in favour of its adoption. It is, I believe, unhistorical for us now to castigate our legal ancestors for adopting a doctrine which was widely understood in their time to achieve practical justice. Indeed there is at least one scholar of distinction today who is reluctant to condemn the rule: see Professor Birks’ Introduction to the Law of Restitution, 2nd ed. (1989) pp. 164-167; and the difficulties now faced in formulating satisfactory limits to a right to recover money paid under a mistake of law reveal that there was more sense in the rule than its more strident critics have been prepared to admit.
The main criticisms of the rule are now widely perceived as threefold (see the Law Commission’s Consultation Paper No. 120 on Restitution of Payments made under a Mistake of Law, paras. 2.24–2.26). First, the rule allows the payee to retain a payment which would not have been made to him but for the payer’s mistake, whereas justice appears to demand that money so paid should be repaid unless there are special circumstances justifying its retention. Second, the distinction drawn between mistakes of fact (which can ground recovery) and mistakes of law (which cannot) produces results which appear to be capricious. It is usual here to compare the results in Bilbie v. Lumley and Kelly v. Solari, each concerned with an action by an underwriter to recover back money paid under an insurance policy under a mistake. In the former case, where he did not appreciate that the law enabled him to repudiate a policy for non-disclosure, his action failed; but in the latter, where he forgot that the premium had not been paid and so the policy had lapsed, his action was successful. The same comment can be made of the exceptions and qualifications to which the rule became subject. These are usefully listed in paras. 2.5–2.15 of the Law Commission’s Report, Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994) (Cm. 2731) (Law Com. No. 227). They are well- known, and it is unnecessary for me to rehearse them in this opinion. It is however legitimate to comment that, apart from limits such as the recently recognised defence of change of position and an as yet undefined limit in cases in which the payment has been made in settlement of an honest claim, these exceptions and qualifications are heterogeneous and in truth betray an anxiety to escape from the confines of a rule perceived to be capable of injustice; and that, as a result, the law appeared to be arbitrary in its effect. Third, as a result of the difficulty in some cases of drawing the distinction between mistakes of fact and law, and the temptation for judges to manipulate that distinction in order to achieve practical justice in particular cases, the rule became uncertain and unpredictable in its application.
Rejection of the mistake of law rule in the common law world: It is perhaps easier for us now to see that the policy underlying the rule can best be achieved, consistently with justice, by the recognition of a right of recovery subject to specified defences to cater for the fears which formerly appeared to require a blanket exclusion of recovery. However the blossoming of scholarly interest in the development of a coherent law of restitution did not occur in the common law world until the middle of the twentieth century, inspired by the pioneering work of Professors Seavey and Scott in the American Restatement of the Law of Restitution published in 1937. We may regret that it was not until late in the long history of the common law that this should have occurred, but now the judges are able to welcome the assistance which they receive from a number of distinguished writers on the subject. There can be no doubt that it is this scholarly work which has provided the prime cause for the rejection of the mistake of law rule, either by legislation or by judicial decision, in countries throughout the common law world. This is due not only to specific criticism of the mistake of law rule as such, but still more to the combined effect of two fundamental changes in the law: first, recognition that there exists a coherent law of restitution founded upon the principle of unjust enrichment, and second, within that body of law, recognition of the defence of change of position. This is due essentially to the work of scholars. Once that work had been published and widely read it was, I believe, inevitable that in due course both doctrines would be recognised by the judges, the time of such acceptance depending very much on the accidents of litigation. In fact, in England both were accepted by this House in 1991, in the same case– Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548. Once both had been recognised it became, in my opinion, also inevitable that the mistake of law rule should be abrogated, or at least reformulated, so that there should be a general right of recovery of money paid under a mistake, whether of fact or law, subject to appropriate defences. This is because a blanket rule of non-recovery, irrespective of the justice of the case, cannot sensibly survive in a rubric of the law based on the principle of unjust enrichment; and because recognition of a defence of change of position demonstrates that this must be proved in fact if it is to justify retention, in whole or in part, of money which would otherwise be repayable on the ground that the payee was unjustly enriched by its receipt. The combined effect is not only that the mistake of law rule can no longer be allowed to survive, but also that the law must evolve appropriate defences which can, together with the defence of change of position, provide protection where appropriate for recipients of money paid under a mistake of law in those cases in which justice or policy does not require them to refund the money. It is this topic which lies at the centre of the present appeals. As the argument before the Appellate Committee has demonstrated, the identification of such defences is by no means easy and, whatever your Lordships’ House may decide, the topic is likely to continue to engage the attention of judges, scholars and law reformers for some years to come.
I have referred to the fact that the mistake of law rule has already been abrogated in other common law jurisdictions, either by legislation or by judicial decision. This material is, of course, well known to lawyers in this country, and has, I know, been studied by all members of the Appellate Committee, not of course for the first time, and is regarded with great respect. However, since it is conceded in these appeals by the respondent local authorities that the mistake of law rule must at least be reformulated in the manner indicated by them, I trust that I will be forgiven if I do not lengthen this opinion by an express consideration of, in particular, the relevant judicial pronouncements. I refer, of course, to the dissenting opinion of Dickson J. (as he then was), with whom Laskin C.J. agreed, in Hydro Electric Commission of the Township of Nepean v. Ontario Hydro [1982] 1 R.C.S. 347, 357-370, later to be adopted by La Forest J., with whom (on this point) Lamer, Wilson and L’Heureux-Dubé JJ. agreed, in Air Canada v. British Columbia [1989] 1 S.C.R. 1161, 59 D.L.R. (4th) 161; and David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 C.L.R. 353. (I shall have to refer in particular to the dissenting judgment of Brennan J. (as he then was) in this case at a later stage, when I come to consider the proposed defence of honest receipt.) From countries which, on this topic, apply a system of law based on the civil law, I refer to the decisions of the Appellate Division of the Supreme Court of South Africa in Willis Faber Enthoven (Pty.) Ltd. v. Receiver of Revenue (1992) (4) SA 202, and of the Inner House of the Court of Session in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SC 151, each of whom also rejected the mistake of law rule. The same conclusion was reached at an earlier date by legislation in New Zealand (see section 94A of the Judicature Act 1908, inserted by section 2 of the Judicature Amendment Act 1958) and Western Australia (see section 23 of the Law Reform (Property, Perpetuities and Succession) Act 1962). I shall have to refer to the New Zealand and Western Australian legislation at a later stage, when I come to consider the proposed exclusion of recovery in cases where payments have been made under a settled understanding of the law subsequently departed from by judicial decision. I should add that the mistake of law rule either never applied, or has been abrogated, in a number of States of the United States of America.
The Law Commission: The Law Commission has, in its Report (Law Com. No. 227) on the subject (to which I have already referred), recommended that the mistake of law rule should be abrogated (see paras.3.1 et seq., and clause 2 of the draft Bill appended to the Report). For the reasons set out in paras. 3.8 -3.12 the Commission has recommended that this change should be introduced by legislation. This is a matter to which I will have to return later in this opinion.
Comparative law. The Appellate Committee was helpfully provided with material showing the policy adopted in a number of civil law systems on the continent of Europe towards the recovery of money paid under a mistake of law. This demonstrates that, in the legal systems from which the material was drawn, there is no blanket rule excluding recovery of money paid under a mistake of law. It is of some interest that, in German law, recovery is not dependent on proof of mistake (whether of fact or law) by the claimant. Para. 12(1) of the BGB confers a right to recover benefits obtained without legal justification (ohne rechtlichen Grund). A similar approach is, I understand, adopted in Italian law and has also been adopted recently in France (see Cour de Cassation (Assemblé Plenière) 2.4.1993, D.1993.373). Para.814 of the BGB however provides that a person cannot reclaim a benefit conferred by him if he knew that he was not bound to confer it; but it seems that the burden rests on the recipient to prove the existence of such knowledge (a striking contrast with the common law, which requires the plaintiff to prove mistake). It is of some interest however that a number of these cases, in which it has been held that it is unnecessary for the plaintiff to prove that he was mistaken, have been concerned with the recovery of taxes: see in particular an early German case decided by the Reichsgericht in 1909 (29.10.1909, RGZ 72, 152), and the recent French case, referred to above, which adopted the same position. In such cases, as was recently held by this House in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70, English law too dispenses with any requirement that the money should have been paid under a mistake and indeed goes further, allowing recovery even if the taxpayer pays in the belief that the money is not due. Here is food for thought for both German and English comparative lawyers. In this connection I wish to add in passing that, in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51, 57, Mason C.J. stated that in Woolwich the House of Lords was “unwilling to acknowledge that causative mistake of law is a basis of recovery”; but, with respect, no question of recovery on the ground of a mistake of law arose in that case, because the Woolwich Building Society throughout asserted that the money was not due.
For present purposes, however, the importance of this comparative material is to reveal that, in civil law systems, a blanket exclusion of recovery of money paid under a mistake of law is not regarded as necessary. In particular, the experience of these systems assists to dispel the fears expressed in the early English cases that a right of recovery on the ground of mistake of law may lead to a flood of litigation, while at the same time it shows that in some cases a right of recovery, which has in the past been denied by application of the mistake of law rule, may likewise be denied in civil law countries on the basis of a narrower ground of principle or policy.
Conclusion on the First Issue. For all these reasons, I am satisfied that your Lordships should, if you decide to consider the point yourselves rather than leave it to the Law Commission, hold that the mistake of law rule no longer forms part of English law. I am very conscious that the Law Commission has recommended legislation. But the principal reasons given for this were that it might be some time before the matter came before the House, and that one of the dissentients in the Woolwich case (Lord Keith of Kinkel) had expressed the opinion that the mistake of law rule was too deeply embedded to be uprooted judicially: [1993] AC 70, 154. Of these two reasons, the former has not proved to be justified, and the latter does not trouble your Lordships because a more robust view of judicial development of the law is, I understand, taken by all members of the Appellate Committee hearing the present appeals. Moreover, especially in the light of developments in other major common law jurisdictions, not to mention South Africa and Scotland, the case for abrogation is now so strong that the respondents in these appeals have not argued for its retention. In these circumstances I can see no good reason for postponing the matter for legislation, especially when we do not know whether or, if so, when Parliament may legislate. Finally I believe that it would, in all the circumstances, be unjust to deprive the Appellant, Kleinwort Benson, of the benefit of the decision of the House on this point. I would therefore conclude on Issue (1) that the mistake of law rule should no longer be maintained as part of English law, and that English law should now recognise that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution.
Issue IA: Payments made under a settled understanding of the law.
I turn now to a central question in these appeals. This relates to the fact that the payments of which recovery is sought in these cases were made under contracts which at the time were understood by all concerned to be valid and binding, so that the payments themselves were believed to be lawfully due under those contracts. This misunderstanding was, of course, removed by the decision of this House in Hazell [1992] 2 A.C. 1 that the contracts were beyond the powers of the local authorities involved and so void. The argument now advanced by the local authorities is that payments so made on the basis of a settled understanding of the law which is later changed by a judicial decision should not be recoverable on the ground of mistake of law.
This argument is based upon a view propounded by the Law Commission in Consultation Paper No. 120, paras. 2.57-2.65 and, after consultation, adopted by the Commission in its Report (Law Com. No. 227), para. 5.3, and in section 3(1) of its draft Bill. The reasoning so adopted is set out in paras. 2.57 and 2.65 of the Consultation Paper as follows:
“2.57 One question is the effect of a judicial alteration of the law. Where the general understanding of the law changes as a result of a court decision should a payment made on the basis of the former understanding of the law be recoverable? Where the law is changed by legislation it would seem beyond doubt that a payment made on the basis of the old law cannot be recovered on the basis of mistake because there is no mistake of law at the time the payment was made: at that time the law was indeed as the payer believed it to be. It seems clear to us that as a matter of policy the result should be no different where the law is effectively changed by judicial decision rather than legislation.
“2.58 It can however be argued that a payment made before a judicial ‘change’ of the law is indeed made as a result of a mistake and therefore should be recoverable because of the commonly accepted theory of the operation of the common law that judicial decisions are declaratory and do not change the law. We believe that this would not be a desirable result: to interpret the impact of the common law in this manner is a mere fiction and should not be allowed to affect substantive rights. . . .”
In para.5.3 of its Report, it was stated that:
“The Commission’s provisional view was that it should not matter whether a change occurs through legislation or judicial decision: the payment should not be recoverable because in substance there has been no mistake.”
In support of this proposition Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329 was cited. The Commission then considered at some length whether legislation was necessary to achieve this result, and concluded that it was. The exact terms of the proposed legislation were also considered at some length. In the result, section 3 of the draft Bill (at p. 196 of the Report) provides as follows:
“3.–(1) An act done in accordance with a settled view of the law shall not be regarded as founding a mistake claim by reason only that a subsequent decision of a court or tribunal departs from that view.
“(2) A view of the law may be regarded for the purposes of this section as having been settled at any time notwithstanding that it was not held unanimously or had not been the subject of a decision by a court or tribunal.”
The Law Commission’s Consultation Paper and Report are, of course, concerned with legislative proposals for changes in the law, proposals which find their origin in a New Zealand statutory provision (section 94A(2) of the Judicature Act 1908, inserted by section 2 of the Judicature Amendment Act 1958) to which I shall refer later. In these appeals, however, your Lordships are concerned with the common law, albeit on the basis that the common law should now recognise that restitution may be granted in respect of money paid under a mistake of law. I therefore ask myself first whether, on the ordinary principles of the common law, any such provision as that proposed by the Law Commission should be held to apply. This raises the question of what is meant by the declaratory theory of judicial decisions, which has long been held to underlie judicial decision-making.
The declaratory theory of judicial decisions. Historically speaking, the declaratory theory of judicial decisions is to be found in a statement by Sir Matthew Hale over 300 years ago, viz. that the decisions of the courts do not constitute the law properly so called, but are evidence of the law and as such “have a great weight and authority in expounding, declaring and publishing what the law of this Kingdom is”: see Hale’s History of the Common Law (6th ed.) p. 90. To the like effect, Blackstone (Commentaries, 6th ed., i, pp. 88-9) stated that “the decisions of courts are the evidence of what is the common law”. In recent times, however, a more realistic approach has been adopted, as in Sir George Jessel’s celebrated statement that rules of equity, unlike rules of the common law, are not supposed to have been established since time immemorial, but have been invented, altered, improved and refined from time to time: see In re Hallett’s Estate (1880) 13 Ch D 696, 710. There can be no doubt of the truth of this statement; and we all know that in reality, in the common law as in equity, the law is the subject of development by the judges – normally, of course, by appellate judges. We describe as leading cases the decisions which mark the principal stages in this development, and we have no difficulty in identifying the judges who are primarily responsible. It is universally recognised that judicial development of the common law is inevitable. If it had never taken place, the common law would be the same now as it was in the reign of King Henry II; it is because of it that the common law is a living system of law, reacting to new events and new ideas, and so capable of providing the citizens of this country with a system of practical justice relevant to the times in which they live. The recognition that this is what actually happens requires, however, that we should look at the declaratory theory of judicial decision with open eyes and reinterpret it in the light of the way in which all judges, common law and equity, actually decide cases today.
When a judge decides a case which comes before him, he does so on the basis of what he understands the law to be. This he discovers from the applicable statutes, if any, and from precedents drawn from reports of previous judicial decisions. Nowadays, he derives much assistance from academic writings in interpreting statutes and, more especially, the effect of reported cases; and he has regard, where appropriate, to decisions of judges in other jurisdictions. In the course of deciding the case before him he may, on occasion, develop the common law in the perceived interests of justice, though as a general rule he does this “only interstitially”, to use the expression of O.W. Holmes J. in South Pacific Co. v. Jensen (1917) 244 U.S. 2095, 221. This means not only that he must act within the confines of the doctrine of precedent, but that the change so made must be seen as a development, usually a very modest development, of existing principle and so can take its place as a congruent part of the common law as a whole. In this process, what Maitland has called the “seamless web”, and I myself (The Search for Principle, Proc. Brit. Acad. vol. LXIX (1983) 170, 186) have called the “mosaic”, of the common law, is kept in a constant state of adaptation and repair, the doctrine of precedent, the “cement of legal principle”, providing the necessary stability. A similar process must take place in codified systems as in the common law, where a greater stability is provided by the code itself; though as the years pass by, and decided cases assume a greater importance, codified systems tend to become more like common law systems.
Occasionally, a judicial development of the law will be of a more radical nature, constituting a departure, even a major departure, from what has previously been considered to be established principle, and leading to a realignment of subsidiary principles within that branch of the law. Perhaps the most remarkable example of such a development is to be found in the decisions of this House in the middle of this century which led to the creation of our modern system of administrative law. It is into this category that the present case falls; but it must nevertheless be seen as a development of the law, and treated as such.
Bearing these matters in mind, the law which the judge then states to be applicable to the case before him is the law which, as so developed, is perceived by him as applying not only to the case before him, but to all other comparable cases, as a congruent part of the body of the law. Moreover when he states the applicable principles of law, the judge is declaring these as constituting the law relevant to his decision. Subject to consideration by appellate tribunals, and (within limits) by judges of equal jurisdiction, what he states to be the law will, generally speaking, be applicable not only to the case before him but, as part of the common law, to other comparable cases which come before the courts, whenever the events which are the subject of those cases in fact occurred.
It is in this context that we have to reinterpret the declaratory theory of judicial decision. We can see that, in fact, it does not presume the existence of an ideal system of the common law, which the judges from time to time reveal in their decisions. The historical theory of judicial decision, though it may in the past have served its purpose, was indeed a fiction. But it does mean that, when the judges state what the law is, their decisions do, in the sense I have described, have a retrospective effect. That is, I believe, inevitable. It is inevitable in relation to the particular case before the court, in which the events must have occurred some time, perhaps some years, before the judge’s decision is made. But it is also inevitable in relation to other cases in which the law as so stated will in future fall to be applied. I must confess that I cannot imagine how a common law system, or indeed any legal system, can operate otherwise if the law is be applied equally to all and yet be capable of organic change. This I understand to be the conclusion reached in Cross and Harris on Precedent in English Law, 4th ed., from which I have derived much assistance, when at p. 33 they ask the question: “what can our judges do but make new law and how can they prevent it from having retrospective effect?” This is also the underlying theme of Lord Coulsfield’s evidence to the Scottish Law Commission quoted in para. 3.14 of their Discussion Paper No. 99, Judicial Abolition of the Error of Law Rule and its Aftermath (1996) (which I have read with interest and respect) in which, in the light of the decision of the Inner House in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SC 151, and especially the notable judgment of my noble and learned friend Lord Hope of Craighead in that case, they reconsider and resile from their previous proposal that Scots law should adopt a “settled understanding of the law” provision along the lines proposed by our own Law Commission. The only alternative, as I see it, is to adopt a system of prospective overruling. But such a system, although it has occasionally been adopted elsewhere with, I understand, somewhat controversial results, has no place in our legal system. I wish to add that I do not regard the declaratory theory of judicial decision, as I have described it, as an aberration of the common law. Since I regard it as an inevitable attribute of judicial decision-making, some such theory must, I imagine, be applied in civil law countries, as in common law countries; indeed I understand that a declaratory theory of judicial decision applies in Germany, though I do not know its precise form.
It is in the light of the foregoing that I have to ask myself whether the Law Commission’s “settled understanding of the law” proposal forms part of the common law. This, as I understand the position, requires that I should consider whether parties in the position of Kleinwort Benson were mistaken when they paid money to local authorities under interest swap agreements which they, like others, understood to be valid but have later been held to be void. To me, it is plain that the money was indeed paid over under a mistake, the mistake being a mistake of law. The payer believed, when he paid the money, that he was bound in law to pay it. He is now told that, on the law as held to be applicable at the date of the payment, he was not bound to pay it. Plainly, therefore, he paid the money under a mistake of law, and accordingly, subject to any applicable defences, he is entitled to recover it. It comes as no surprise to me that, in the swaps litigation, it appears to have been assumed that money paid pursuant to interest rate swap agreements was paid under a mistake which, in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1994] 4 All E.R. 890, 931E, was inevitably held by Hobhouse J. to have been a mistake of law and so, on the law as it then stood, irrecoverable on that basis. Not surprisingly, there is very little previous authority on the question whether in such circumstances the money has been paid under a mistake of law; but such authority as there is supports this view. The case most frequently cited in this context is Henderson v. Folkestone Waterworks Co., briefly reported in (1885) 1 T.L.R. 329. This case is referred to in para. 2.65 of the Law Commission’s Consultation Paper No. 120, and was relied on in argument by Mr. Underhill Q.C. on behalf of the respondent local authorities. In my opinion, however, it does not assist his argument. The plaintiff was rated by the defendant water company at a rate which was legal under a decision which was subsequently reversed by the House of Lords. He then sought to recover the excess; in answer to the defendants’ argument that the payment was voluntary and so irrecoverable, he claimed that he paid the money under compulsion. This argument was rejected by a Divisional Court, consisting of Lord Coleridge C.J. and A. L. Smith J., on the ground that the money, having been paid voluntarily under a mistake of law, could not be recovered back. The only passage relied on is contained in an expostulation, in the course of argument, by Lord Coleridge, who had been party to the decision reversed by the House of Lords, when he said: “I had held the contrary, and two eminent Judges agreed with me. Can that be put as ignorance of law?” Little or no importance can however be attached to this intervention in the present context, since both members of the Court rejected the plaintiff’s claim on the ground that the money was paid voluntarily under a mistake of law, and was therefore irrecoverable.
In Derrick v. Williams [1939] 2 All E.R. 559, following the reversal by the House of Lords in Rose v. Ford [1937] A.C. 826 of the decision of the Court of Appeal that damages could not be recovered for loss of expectation of life, the plaintiff brought a fresh action seeking to recover such damages notwithstanding that in a previous action on the same facts he had taken out of court money paid in on the basis that no such damages were recoverable. The Court of Appeal held that he could not do this, and dismissed the second action. But in the course of his judgment Sir Wilfrid Greene M.R. made it plain that the plaintiff had acted under a mistake of law in taking the money out of court in the first action. He said, at p. 565E:
“It was a mistake of law, and consisted of the fact that the plaintiff was under the belief that the law as laid down by this court in Rose v. Ford was correctly laid down. In that he was wrong, and he is asking the court to say that, having acted upon the basis of a mistaken view of the law, now that the law has been enunciated by the highest tribunal, he is entitled to make another attempt. That is a thing which, it seems to me, cannot be permitted on principle.”
The same view is expressed by Professor Burrows in his Law of Restitution, 4th ed. (1993) at pp. 118-119, where he points out that in the common law the jurisprudential tradition is that “changes” are retrospective. He continues:
“On this retrospective view the payor did make a mistake of law at the time he made the payment and, in accordance with the proposed abolition of the mistake of law bar, he would prima facie be entitled to restitution.”
He then proceeds to rehearse the arguments for and against legislative change of the law in this respect.
The question then arises whether, having regard to the fact that the right to recover money paid under a mistake of law is only now being recognised for the first time, it would be appropriate for your Lordships’ House so to develop the law on the lines of the Law Commission’s proposed reform as a corollary to the newly developed right of recovery. I can see no good reason why your Lordships’ House should take a step which, as I see it, is inconsistent with the declaratory theory of judicial decision as applied in our legal system, under which the law as declared by the judge is the law applicable not only at the date of the decision but at the date of the events which are the subject of the case before him, and of the events of other cases in pari materia which may thereafter come before the courts. I recognise, of course, that the situation may be different where the law is subject to legislative change. That is because legislation takes effect from the moment when it becomes law, and is only retrospective in its effect to the extent that this is provided for in the legislative instrument. Moreover even where it is retrospective, it has the effect that as from the date of the legislation a new legal provision will apply retrospectively in place of that previously applicable. It follows that retrospective legislative change in the law does not necessarily have the effect that a previous payment was, as a result of the change in the law, made under a mistake of law at the time of payment. (I note in parenthesis that in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 69 A.L.J.R. 51, the High Court of Australia was divided on the question whether the retrospective legislation there under consideration had the effect that a previous payment had been made under a mistake of law.) As I have already pointed out, this is not the position in the case of a judicial development of the law. But, for my part, I cannot see why judicial development of the law should, in this respect, be placed on the same footing as legislative change. In this connection, it should not be forgotten that legislation which has an impact on previous transactions can be so drafted as to prevent unjust consequences flowing from it. That option is not, of course, open in the case of judicial decisions.
At this point it is, in my opinion, appropriate to draw a distinction between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions. The former category of cases was considered by your Lordships’ House in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] AC 70, in which it was held that at common law taxes exacted ultra vires were recoverable as of right, without the need to invoke a mistake of law by the payer. Moreover reference was made, in the course of the hearing, to the various statutory provisions (usefully summarised in the Law Commission’s Consultation Paper (Law Com. No. 120) at pp. 74-84) which regulate the repayment of overpaid tax. For present purposes it is of interest that, in the case of some taxes (including income and corporation tax), no relief is given “in respect of an error or mistake as to the basis on which the liability . . . ought to have been computed where the return was in fact made on the basis of or in accordance with the practice generally prevailing at the time when the return was made:” see the proviso to section 33(2) of the Taxes Management Act 1970.
Two observations may be made about the present situation. (I of course have it in mind that this is the subject of proposals for legislative reform contained in the Law Commission’s Report (Law Com. No. 227), but your Lordships are concerned with the law as it stands at present.) The first observation is that, in our law of restitution, we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are (1) cases concerned with repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law on the principle in Woolwich, and otherwise are the subject of statutory regimes regulating recovery; and (2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law. The second observation is that, in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable. If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.
In the present case, however, we are concerned with payments made under private law transactions. It so happens that a significant number of payments were in fact made under interest rate swap agreements with local authorities before it was appreciated that they were void; but the number is by no means as great as might conceivably occur in the case of taxes overpaid in accordance with a prevailing practice, or under a settled understanding of the law. Moreover the element of public interest is lacking. In cases such as these I find it difficult to understand why the payer should not be entitled to recover the money paid by him under a mistake of law, even if everybody concerned thought at the time that interest rate swap agreements with local authorities were valid.
Of course, I recognise that the law of restitution must embody specific defences which are concerned to protect the stability of closed transactions. The defence of change of position is one such defence; the defences of compromise, and settlement of an honest claim (the scope of which is a matter of debate), are others. It is possible that others may be developed from judicial decisions in the future. But the proposed “settled understanding of the law” defence is not, overtly, such a defence. It is based on the theory that a payment made on that basis is not made under a mistake at all. Once that reasoning is seen not to be correct, the basis for the proposed defence is, at least in cases such as the present, undermined.
I wish further to add that the proposal that a payment made under a settled understanding of the law, later proved to be erroneous, should be irrecoverable, does not depend upon the lapse of any period of time after the date of the payment in question. Take the present case. Suppose that, shortly after the payment by Kleinwort Benson to a local authority of the first sum due under an interest rate swap contract, it transpires that the contract was ultra vires the local authority and so void, and that the sum so paid was therefore not due. Let it also be assumed that there have been relatively few transactions of this kind with local authorities, but enough for it to be said that that sum was paid on the basis of a settled understanding that the money was lawfully due. I find it difficult to accept that, for that reason alone, the payment would be irrecoverable as having been paid under a mistake of law. Indeed it is an remarkable feature of the proposed principle that, the longer ago the payment was made, the less likely is it to have been made under a settled understanding of the law. An appropriately drawn limitation statute would surely produce a more just result. This is a point to which I will return later in this opinion.
For these reasons alone, therefore, I would reject the argument of the local authorities on this point. But I wish to refer also to the insecure foundation upon which the proposed provision is based, arising from the difficulty of defining the circumstances in which it should apply. The New Zealand statutory provision (section 94A(2) of the Judicature Act 1908) excludes relief in respect of “any payment made at a time when the law requires or allows, or is commonly understood to require or allow, the payment to be made or enforced, by reason only that the law is subsequently changed or shown not to have been as it was commonly understood to be at the time of payment”. The Western Australian statutory provision (section 23(2) of the Law Reform (Property, Perpetuities and Succession) Act 1962) takes the same form. It is recognised, however, that the concept of “common understanding” of the law has given rise to difficulty (see, e.g., Bell Bros. Pty. Ltd. v. Shire of Serpentine–Jarrahdale [1969] W.A.R. 155) and, on this score at least, the statutory provision has been the subject of criticism. In this country the Law Commission has attempted to improve on the New Zealand statute by referring not to a common understanding of the law, but instead to a “settled view of the law” which has been departed from by a subsequent judicial decision. However, as Mr. Southwell Q.C. pointed out in argument, there could be much scope for argument over what constituted a settled view of the law. Take the case of interest rate swap agreements. These were assumed by the banks (and indeed by others concerned) to be within the powers of local authorities; but this assumption appears to have been based on practical grounds, rather than on advice about the legal position. Nor do the local authorities appear to have addressed the legal position until after the matter was raised by the Audit Commission in 1987, over five years after agreements of this kind began to be entered into by local authorities. Had the point arisen under a statute in the form recommended by the Law Commission, it would have been necessary to consider whether the above circumstances gave rise to a “settled view of the law.” It is only necessary to pose the question to realise how difficult it would have been to answer it in the present case, and very possibly in the case of other payments made under private transactions. For this reason alone it comes as no surprise that the Law Reform Commission of British Columbia decided (see their Report No. 51 (1981) at pp. 68 et seq.) not to recommend the adoption of any such provision in that Province, though they also considered (at p. 72) that the New Zealand statutory provision “goes far beyond what is required”. The Law Reform Committee of South Australia (see their Report No. 84 (1984) at p. 31) likewise did not recommend the adoption of any such provision, though three years later the Law Reform Commission of New South Wales (see their Paper No. 53 (1987) at paras. 5.20–5.29) proposed the legislative adoption of a similar but not identical provision. In Scotland, as I have already recorded, the Scottish Law Commission at first recommended its adoption, but later resiled from that recommendation. That this whole topic is one of great difficulty can perhaps best be seen in the Scottish Law Commission’s Discussion Paper No. 99, in which the rival arguments for and against legislative reform are rehearsed in some detail, and the difficulties exposed. This division of opinion does not encourage statutory adoption of a provision in these or comparable terms, still less its recognition as part of the common law of this country.
Issue IB–Honest receipt: This issue arises from a principle proposed by Brennan C.J. (then Brennan J.) in David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1991-1992) 175 C.L.R. 353 at p. 399. It reads as follows:
“It is a defence to a claim for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to receive and retain the money or property.”
This principle was expressly proposed in order to achieve a degree of certainty in past transactions. As Brennan C.J. said (at p. 398): “Unless some limiting principle is introduced, the finality of any payment would be as uncertain as the governing law.”
In this part of the law there has long been concern, among common law judges, about what is sometimes called the finality of transactions, and sometimes the security of receipts. This concern formed a significant part of the amalgam of concerns which led to the rule that money paid under a mistake of law was irrecoverable on that ground. Now that that rule has been abrogated throughout the common law world, attention has of course shifted to the formulation of appropriate defences to the right of recovery. The principle proposed by Brennan C.J. is, I believe, the most far-reaching of the defences to the right of recovery that has yet been proposed.
Anything which falls from Brennan C.J. is, of course, entitled to great respect. But I have to state at once that this proposal seems to have been stillborn. Of the judges who sat with Brennan C.J. on the David Securities case, none supported this proposal. I know of no judicial support which the proposal has since received, nor of any support from any of the Law Commissions which have considered this part of the law. The reason for this lack of support is, I believe, that the proposal is generally regarded as being wider than is necessary to meet the perceived mischief.
I start from the proposition that money paid under a mistake of law is recoverable on the ground that its receipt by the defendant will, prima facie, lead to his unjust enrichment, just as receipt of money paid under a mistake of fact will do so. There may of course be circumstances in which, despite the mistaken nature of the payment, it is not regarded as unjust for the defendant to retain the money so paid. One notable example is change of the defendant’s position. Another is the somewhat undefined circumstance that the payment was made in settlement of an honest claim. Yet, Brennan C.J.’s proposed defence is so wide that, if it was accepted, these other defences would in practice cease to have any relevance in the case of money paid under a mistake of law. Moreover in many cases of this kind the mistake is shared by both parties, as for example in the case of the appeals now under consideration. In such cases, recovery by the plaintiff would automatically be barred by Brennan C.J.’s proposed defence. So sweeping is the effect of the defence that it is not perhaps surprising that it has not received support from others.
In my opinion, it would be most unwise for the common law, having recognised the right to recover money paid under a mistake of law on the ground of unjust enrichment, immediately to proceed to the recognition of so wide a defence as this which would exclude the right of recovery in a very large proportion of cases. The proper course is surely 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; and in so doing to draw on the experience of the past, looking for guidance in particular from the analogous case of money paid under a mistake of fact, but also drawing upon the accumulated wisdom to be found in the writings of scholars on the law of restitution. However, before so novel and far-reaching defence as the one now proposed can be recognised, a very strong case for it has to be made out; and I can discover no evidence of a need for so wide a defence as this. In particular, experience since the recognition of the right of recovery of money paid under a mistake of law in the common law world does not appear to have revealed any such need.
For these reasons, with all respect to Brennan C.J., I am unable to accept that the defence proposed by him forms part of the common law.
Issue 2–Completed transactions: This issue was added, by leave of your Lordships’ House, to the issues set out in the order of Langley J. It arose from a footnote to an Article by Professor Peter Birks entitled No Consideration: Restitution after Void Contracts (1993) 23 University of Western Australia Law Review 195. In the Article, Professor Birks was concerned to criticise the conclusion of Hobhouse J. in the Westdeutsche case [1994] 4 All E.R. 890 that the basis of recovery of money paid under void interest rate swaps agreements was absence of consideration, his preferred view being that the true ground of recovery was failure of consideration. It formed part of his argument that a party who has received full performance under such a contract cannot recover the value of his performance, i.e. the money he has paid to the other party, because in such circumstances there has been no failure of consideration for his payment. He has received what he wanted, and therefore there was no unjust factor to provide a reason for restitution. However, in a section of the Article entitled “The alternative of restitution for mistake,” he reached the conclusion in the text that it seemed that, if the remedy of recovery of money paid under a mistake was available in cases of mistake of law, his earlier conclusion would be largely cancelled out. This was because, since the effect of a mistake must be judged at the time when it was made, “it would seem to follow that if the mistake causes the transfer where the plaintiff never subsequently receives a complete performance, it must equally cause it in the case of complete performance” (see p. 229). Moreover “in the context of void contracts, no valid bargain being in issue, the mistaken party cannot be barred from restitution because he received something from the other, provided only that he can make counter-restitution to the court’s satisfaction” (see p. 230). His conclusion in the text (at p. 231) was that it was “undeniable that, at least in jurisdictions with a liberal regime for mistake, the refutation of Hobhouse J.’s novel doctrine will have few practical consequences.”
However on p. 230 he added a footnote which appears to have been an afterthought. In this he said:
“Nonetheless there is one good argument against allowing restitution in this situation on the ground of this particular kind of mistake, namely the transferor’s mistaken belief in his/her liability to make the transfer and the liability of the other to reciprocate. It is that after the execution of the supposed contract the force of this type of mistake is spent . . . Therefore, even though it is true, as is admitted in the text above, that the mistake will have been causative at the time of the performance, that mistake cannot on this reasoning be relied upon when matters have progressed to the point at which it can clearly be seen that the only prejudice which it might have entailed never in fact eventuated.”
The question for consideration on this Issue is whether the thesis contained in the footnote is well-founded.
It has to be said at once that the argument set out in the text of the section of the Article entitled The alternative of restitution for mistake, from which I have quoted, is most formidable. It is well established that the cause of action for the recovery of money paid under a mistake of fact accrues at the time of payment. As authority for this proposition it is usual to cite Baker v. Courage & Co. [1910] 1 KB 56, a decision of Hamilton J. (later Lord Sumner) which, so far as I am aware, has never been questioned. So if an agreement such as those presently under consideration, under which a series of payments falls to be made, is held to have been void so that each payment has been made under a mistake of law, i.e. the mistaken belief of the payer that he was liable to make the payment, the cause of action for the recovery of the money so paid will accrue, in respect of each payment, on the date when the payment was made. This will be true of each payment; and if the performance of the supposed contract is completed, it will be as true of the final payment as it will have been of all the previous payments. It follows that, if the argument in Professor Birks’ footnote is correct, at the moment when the final payment is made under such a contract, not only will the final payment itself be irrecoverable despite the fact that it was made under precisely the same mistake as the previous payments made by him, but the payer will somehow be divested of his accrued right to recover all those previous payments.
In the light of this analysis, the only possible basis for the thesis in Professor Birks’ footnote would seem to be that, in the context of void contracts, failure of consideration should be allowed to trump mistake of law as a ground for recovery of benefits conferred. However an equally strong argument may perhaps be made in favour of mistake of law trumping failure of consideration, though either approach is antagonistic to the usual preference of English law to allow either of two alternative remedies to be available, leaving any possible conflict to be resolved by election at a late stage. Neither of these two solutions was however relied upon in argument in the present case; and it is in any event difficult to see how Professor Birks’ proposal in his footnote can here be reconciled with the consequences of invalidity arising from the application of the ultra vires doctrine. As a result, following the decision of the House of Lords in Hazell, it was ordered and declared that the items of account (irrespective whether they represented payments or receipts) appearing in the capital markets fund account of the local authority in that case (Hammersmith and Fulham London Borough Council) for the years under challenge were contrary to law (see [1992] 2 A.C. 1, 43H-44A per Lord Templeman, with whose opinion the other members of the Appellate Committee agreed). Of the interest rate swap transactions entered into by the Council, some were closed transactions, and a number were profitable, but no exceptions were made for these in the declarations so made. As Mr. Southwell Q.C. submitted on behalf of Kleinwort Benson, it is incompatible with the ultra vires rule that an ultra vires transaction should become binding on a local authority simply on the ground that it has been completed. Moreover the ultra vires rule is not optional; it applies whether the transaction in question proves to have been profitable or unprofitable. If the argument in Professor Birks’ footnote is right, the result would be that effect would be given to a contract which public policy has declared to be void.
In my opinion, these points are unanswerable; and they are reinforced by further arguments advanced by Professor Burrows in his Article entitled Swaps and the Friction between Common Law and Equity in [1995] R.L.R. 15 at pp. 18-19. I would accordingly decide this Issue in favour of Kleinwort Benson.
Issue 3–Does section 32(1)(c) of the Limitation Act 1980 apply to mistakes of law: Section 32(1) of the Limitation Act 1980 provides as follows:
“(1) Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act either- (a) the action is based upon the fraud of the defendant; or (b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or (c) the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”
The question which arises under this Issue is whether the actions brought by Kleinwort Benson for the recovery on the ground of mistake of law of money paid to the local authorities under void interest swaps agreements are actions for relief from the consequences of a mistake within section 32(1)(c).
The precursor of section 32(1)(c) of the Limitation Act 1980 was section 26(c) of the Limitation Act 1939, which was in the same terms. That provision was enacted following upon the 5th Interim Report of the Law Revision Committee (Cmnd. 5334). Paragraph 23 of the Report stated that the equitable rule (that time should only run under the Statutes of Limitation from the time at which the mistake was, or could with reasonable diligence have been, discovered) did not apply to cases which fell exclusively within the cognisance of a court of law (here referring to Baker v. Courage [1910] 1 KB 56). Having stated that the position was unsatisfactory, it recommended that in all cases when relief was sought from the consequences of a mistake, the equitable rule should prevail.
The submission of Kleinwort Benson was that their actions for the recovery on the ground of mistake of law of money paid under void interest swap agreements were actions for relief from the consequences of a mistake within section 32(1)(c) of the Act of 1980. In support of this submission, they relied, first, on In re Diplock [1948] Ch. 465, in which the Court of Appeal stated (at pp. 515-516) that section 26 of the Act of 1939 would operate to postpone the running of time in the case of an action at common law to recover money paid under a mistake of fact, and would likewise apply to an analogous claim in equity to recover money paid under a mistake of law. Second, they relied on the judgment of Pearson J. in Phillips-Higgins v. Harper [1954] 1 Q.B. 411, in which he stated (at p. 418) with reference to section 26 of the Act of 1939 that the essential question was whether the action was for relief from the consequences of a mistake, a familiar example of which was an action for the recovery of money paid in consequence of a mistake. On this basis, it was submitted, Kleinwort Benson’s causes of action in the present cases fell clearly within section 32(1)(c) of the Act of 1980.
In answer to this submission, the submission of the local authorities was twofold. First, they submitted that there was no mistake on the part of Kleinwort Benson; but I have already explained that I am satisfied that they indeed paid the money in question under a mistake of law. Second, they submitted that section 32(1)(c) does not on its true construction apply to mistakes of law. In this connection they relied in particular on the fact that the mistake of law rule was in full force in 1939, when the provision was first enacted; and they further submitted that the words of the subsection, which referred to a mistake being “discovered”, showed that the legislature was referring to mistakes of fact rather than mistakes of law–of which it would not be apt to refer to such a mistake being “discovered”, still less “discovered with reasonable diligence”. In my opinion, however, this verbal argument founders on the fact that the pre-existing equitable rule applied to all mistakes, whether they were mistakes of fact or mistakes of law: see, e.g., Earl Beauchamp v. Winn (1873) LR 6 HL 223, 232-5, and the dicta from In re Diplock to which I have already referred.
I recognise that the effect of section 32(1)(c) is that the cause of action in a case such as the present may be extended for an indefinite period of time. I realise that this consequence may not have been fully appreciated at the time when this provision was enacted, and further that the recognition of the right at common law to recover money on the ground that it was paid under a mistake of law may call for legislative reform to provide for some time limit to the right of recovery in such cases. The Law Commission may think it desirable, as a result of the decision in the present case, to give consideration to this question indeed they may think it wise to do so as a matter of some urgency. If they do so, they may find it helpful to have regard to the position under other systems of law, notably Scottish and German law. On the section as it stands, however, I can see no answer to the submission of Kleinwort Benson that their claims in the present case, founded upon a mistake of law, fall within the subsection.
Conclusion: In the result, I would answer the questions posed for your Lordships under the various Issues as follows:
Issue 1: The present rule, under which in general money is not recoverable in restitution on the ground that it has been paid under a mistake of law, should no longer be maintained as part of English law, from which it follows that the facts pleaded by Kleinwort Benson in each action disclose a cause of action in mistake.
Issue 1A: There is no principle of English law that payments made under a settled understanding of the law which is subsequently departed from by judicial decision shall not be recoverable in restitution on the ground of mistake of law.
Issue 1B: It is no defence to a claim in English law for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to retain the money or property.
Issue 2: There is no principle of English law that money paid under a void contract is not recoverable on the ground of mistake of law because the contract was fully performed.
Issue 3: Section 32(1)(c) of the Limitation Act 1980 applies in the case of an action for the recovery of money paid under a mistake of law.
It follows that all four appeals must be allowed with costs.
LORD LLOYD OF BERWICK
My Lords,
Of the sums claimed by Kleinwort Benson Ltd. £388,114 has already been repaid by the four local authorities, either voluntarily, or pursuant to proceedings brought under R.S.C. Order 14 on the basis that there had been a total failure of consideration. The claim for the balance of £423,094 is prima facie time-barred. In order to meet this difficulty, the plaintiffs rely on the alternative ground of mistake. They say that the payments made by the plaintiffs were made on the basis of a mistaken belief that there existed binding contracts between the plaintiffs and the defendants. In answer to the defendants’ plea of limitation, they rely on section 32(1)(c) of the Limitation Act 1980, which provides that when an action is for relief from the consequences of a mistake, the period of limitation does not begin to run until the mistake is discovered, or could with reasonable diligence have been discovered. For the reasons given by my noble and learned friend Lord Goff, I agree that if there was here a mistake on which the plaintiffs can rely, then they could not have discovered the mistake until the House gave judgment in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1; I agree also that the plaintiffs are entitled to rely on section 32(1)(c) of the Limitation Act, with the result that time did not begin to run until the date of the judgment in Hazell, namely 24 January 1991.
Was there then a mistake on which the plaintiffs can rely? It is common ground that if there was a mistake, the mistake was one of law. For well over a century the courts have recognised and enforced a distinction between mistakes of fact and mistakes of law. The rule has been that, unlike mistake of fact, money paid under a mistake of law cannot be recovered. In a dissenting speech in Woolwich Equitable Building Society v. I.R.C. [1993] AC 70, 154 Lord Keith of Kinkel described the rule as being “too deeply embedded in English jurisprudence to be uprooted judicially.” So it is not surprising that Langley J. did not give a reasoned judgment when the case came before him at first instance. He was bound by authority to give judgment on the preliminary issues in favour of the defendants. Nor do we have the assistance of reasoned judgments in the Court of Appeal, since the appeal came direct to the House under the leap-frog procedure.
The mistake of law rule has been so heavily and effectively criticised in recent years that Mr. Nicholas Underhill Q.C. wisely did not seek to defend it. Lord Goff’s speech demonstrates with compelling force that the rule is indeed indefensible. Instead of defending the rule, Mr. Underhill submits first that the rule should be abrogated by Parliament rather than by the House in its judicial capacity, and secondly that if the rule is abrogated without any safeguards, there may be undesirable side effects. In particular Mr. Underhill is concerned by what he called his paradigm case of a long-standing decision of the Court of Appeal subsequently overruled by the House of Lords. Should a person who has paid money on the faith of the Court of Appeal decision be entitled to recover his money when the decision is overruled by the House of Lords, perhaps many years later? Is there in truth in such a case any mistake at all? or, is it not more accurate to say that there has merely been a failure to predict a change in the law? I shall attempt to deal with each of these submissions in turn.
As to the first, Mr. Underhill invited your Lordships to exercise restraint. The mistake of law rule has stood for many years, and legislation to abolish the rule (so far as one can ever foretell such things) appears, he said, to be imminent. It would be wrong to pre-empt the legislature, especially as changes in other parts of the law might prove necessary. By way of example, there might have to be an amendment to the Limitation Act 1980. For mistake of law cannot have been in mind when section 32(1)(c) was enacted.
I am not persuaded. Indeed I can imagine few areas of the law in which it would be more appropriate for the House to take the initiative. The mistake of law rule is judge made law. There are no considerations of social policy involved. The proposed change is consistent with, and less far-reaching than the change effected by the House in the Woolwich case. In Scotland the Inner House abrogated the mistake of law rule in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SLT 299 (despite the strong authority of Lord Brougham L.C. to the contrary), even though legislation might also have been said to be imminent following on the Scottish Law Commission discussion paper (1993) No. 95: Recovery of Benefits Conferred under Error of Law. Elsewhere, in Canada, Australia and South Africa, the rule has been abolished by judicial decision. And we have the recommendation of the English Law Commission Report on Restitution (1994) (Cm. 2731) (Law Com. No. 227). It is true that the Law Commission was itself in favour of leaving the change to Parliament. But the Law Commission was not to know that the opportunity for judicial decision would come so soon; in contrast, the prospect of legislation is still uncertain, and perhaps remote. For these reasons I would reject Mr. Underhill’s first submission. The critics of the mistake of law rule have waited long enough. The plaintiffs in these proceedings should have the benefit of a change which is long overdue. That is not to say that the plaintiffs will necessarily succeed when the case comes on for trial. But at least the mistake of law rule should not stand in their way as it would if we were to wait for Parliament to take a hand.
I turn to Mr. Underhill’s second submission. Here, as it seems to me, he starts more than half way home. For Mr. Southwell conceded in his reply (in my view correctly) that if parties enter into a contract in accordance with a decision of a Court of Appeal, (it is not suggested that there was such a decision in the present case) and if the Court of Appeal decision is subsequently overruled by the House of Lords there could be no question of claiming restitution on the ground of mistake. For when the parties entered into the contract the law was as they believed it to be. How then could they claim to have been mistaken?
But even more important than Mr. Southwell’s concession is the Law Commission Report itself. Annexed to the report is a draft Bill. Clause 2 abrogates the mistake of law rule.
It provides:
“The classification of a mistake as a mistake of law or as a mistake of fact shall not of itself be material to the determination of a mistake claim; and no such claim shall be denied on the ground that the alleged mistake is a mistake of law.”
Clause 3(1) provides:
“An act done in accordance with a settled view of the law shall not be regarded as founding a mistake claim by reason only that a subsequent decision of a court or tribunal departs from that view.”
Clause 3(1) is clearly consistent with Mr. Southwell’s concession, and covers Mr. Underhill’s paradigm case. But it goes wider. For it is not confined to cases where the law is settled by reason of a prior decision of the Court of Appeal. It covers other cases as well. It is this wider aspect of clause 3(1) of the draft Bill which has caused Mr. Southwell’s concern.
But before I come to that concern, there is a more general point to be made. Clause 3(1) of the draft Bill implements the recommendation in paragraph 5.13 of the report. It reads as follows:
“Accordingly, we recommend that a restitutionary claim in respect of any payment, service or benefit that has been made, rendered or conferred under a mistake of law should not be permitted merely because it was done in accordance with a settled view of the law at the time, which was later departed from by a subsequent judicial decision.”
That recommendation was the result of very extensive consultation by the Commission. The arguments for and against the recommendation are set out in paragraphs 5.1–5.13 of the report. In paragraph 5.9 the Commission ask a number of questions which others have asked. How “settled” does a view or understanding of the law have to be before a payment based on that view or understanding becomes irrecoverable? The answer given in paragraph 5.10 is as follows:
“It is not realistic to restrict ‘settled law’ to propositions which arise only from statute or from judicial decisions–it is often only in the light of the actual operation of the law in practice and criticism or discussion of it in legal literature that these acquire a flavour of immutability. We believe that this is a common-sense question, and that it is one which the courts are particularly well-qualified to answer. Courts will be free, under our proposed formulation of the bar, to recognise a proposition as settled irrespective of the source from which it is derived. Equally, courts will be able to recognise that different sources of law carry different weight in establishing whether a particular proposition is settled.”
The Law Commission recommendations have been accepted by two successive governments of different political persuasions. No doubt if a bill were introduced in the form proposed by the Law Commission, an amendment might be proposed and carried to delete clause 3. We cannot tell. But for your Lordships to accept half the package proposed by the Law Commission and reject the other half, would cause me some disquiet. If that is to be the result, then the argument against pre-empting Parliament becomes much stronger. I shall return to this point at the end of my speech.
What then are the reasons for not accepting clause 3 of the draft Bill as it stands? At the outset there is, as so often, a question of terminology. Some of the commentators regard a provision such as is found in clause 3 of the bill as providing the payee with a defence. This is the language used by the Scottish Law Commission, and by my noble and learned friend Lord Hope. I, for my part, find it easier to think of clause 3 as a safeguard (another term used by the Scottish Law Commission) rather than a defence. The safeguard is needed because law, unlike facts, can change. Facts are immutable, law is not. Where, therefore, mistake of law is relied on to ground a claim for restitution, it is necessary to define what one means by “mistake.” That, as it seems to me, is the function of clause 3. It does not create a defence to a general right of recovery. It is not like the defence of change of position recognised by the House in Lipkin Gorman v. Karpnale [1991] 2 AC 548. Clause 3 is more in the nature of a defining clause. Its purpose is to clarify and de-limit what is meant by “mistake” in cases where the law has changed.
This brings us to the central question. Nobody now suggests that the common law is static. It is capable of adapting itself to new circumstances. Is it then capable of being changed? or is it only capable of being developed? The common sense answer is that the common law is capable of being changed, not only by legislation, but also by judicial decision. This is nowhere clearer than when a long-standing decision of the Court of Appeal is overruled. Indeed in a system such as ours, where the Court of Appeal is bound by its own previous decisions, the main justification for the existence of a second tier appeal is that it enables the House to re-direct the law when it has taken a wrong turning. I am not thinking of landmark cases such as Donoghue v. Stevenson [1932] AC 562 or Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465. I am thinking of more ordinary cases, of which there may be one or two a year, in which a line of recent Court of Appeal authority is overturned. By way of example one can take two cases from the field of building contracts: Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689 overruling Dawnays Ltd. v. F. G. Minter Ltd. and Trollope & Colls Ltd. [1971] 1 W.L.R. 1205, and Beaufort Developments (N.I.) Ltd. v. Gilbert-Ash N.I. Ltd. and others [1998] 2 WLR 860 overruling Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. [1984] Q.B. 644. Or there are the less frequent cases in which long-standing decisions are overruled, such as Hindcastle Ltd. v. Barbara Attenborough Associates Ltd. [1997] AC 70 overruling Stacey v. Hill [1901] 1 K.B. 660 and Attorney-General for Hong Kong v. Reid [1994] 1 AC 324 disapproving Lister & Co. v. Stubbs (1890) 45 Ch.D.1.
What then is the House doing when it overrules a line of Court of Appeal authority? First and foremost it is determining what the law is in relation to the case which it is deciding. It will then apply that law to the facts of the particular case. Since the transaction giving rise to the case will have occurred in the past, it can be said that to that very limited extent (and the same is true of every decision of every court) it is applying the law retrospectively.
An inevitable consequence of determining the law in relation to a particular case is that the same law will apply to other cases as yet undecided, in which the same point arises. This is so whether the transaction in question lies in the past or the future. So again, to that limited extent, it can be said that the decision operates retrospectively. But that, as it seems to me, is the full extent of any retrospective effect. There is no way in which the decision can be applied retrospectively to cases which have already been decided. Nor is there any logical reason why there should be. It is the function of the court to decide what the law is, not what it was. So when the House of Lords overrules a line of Court of Appeal decisions it does not, and cannot, decide those cases again. The law as applied to those cases was the law as decided at the time by the Court of Appeal. The House of Lords can say that the Court of Appeal took a wrong turning. It can say what the law should have been. But it cannot say that the law actually applied by the Court of Appeal was other than what it was. It cannot, in my learned and noble friend Lord Browne- Wilkinson’s vivid expression, falsify history.
It follows that in such a case the House of Lords is doing more than develop the law. It is changing the law, as common sense suggests, and as Mr. Southwell was right to concede. If this view of what happens is inconsistent with the declaratory theory of the Court’s function, then it is time we said so. It always was a fairy tale.
If it is right that the House of Lords can change the law by overruling a previous decision of the Court of Appeal, it must follow that a person relying on the old law was under no mistake at the time, and cannot claim to have been under a mistake ex post facto because the law is subsequently changed. This is obviously true where the law is changed by legislation. In my opinion it is equally true when the law is changed by judicial decision. The point is put clearly by the Scottish Law Commission in Discussion Paper No. 99, Judicial Abolition of the Error of Law Rule and its Aftermath (1996) paragraph 3.33 when summarising the views of the Court of Session judges:
“The Court of Session judges pointed to the oddity of providing that a payment is not to be recoverable by reason of a ‘change’ in the law. If it is indeed a change, the payment would ex hypothesi not be recoverable. We agree that any provision introducing the bar should not refer to a change in the law. If the courts do change the law, the reference is unnecessary; if they do not (because of the declaratory theory) it would be inappropriate for statute to state that they do.”
The next question is whether the same reasoning applies where there is no previous decision of the Court of Appeal directly in point. Can the House of Lords “change” the law in those circumstances, or can it only develop the law? I can see no difference in principle. The English common law is not confined to decided cases. In the field of commercial law, for example, the custom of merchants has always been a fruitful source of law. It is true that a custom can be challenged in a court of law. But it does not need a court of law to establish a custom. Custom is binding on the parties irrespective of any judicial decision. Where therefore a long established custom is rejected by a court of law on the ground that it is inconsistent with statute, the law is “changed” just as much as when a decision of the Court of Appeal is overruled by the House of Lords. I repeat some sentences from the Law Commission Report No. 227 which I have already quoted:
“It is not realistic to restrict ‘settled law’ to propositions which arise only from statute or from judicial decisions . . . Courts will be free . . . to recognise a proposition as settled irrespective of the source from which it is derived.”
I agree with these observations. There may of course be cases where there is a dispute whether the law was settled at the time of the transaction. But as the Law Commission again point out, this is just the sort of common sense question which the courts are particularly well qualified to answer.
There are two policy reasons which support the Law Commission’s view point. The prospect of transactions being reopened many years after the event by a subsequent decision of the Court of Appeal or House of Lords is not one which the law should favour, especially in the field of commerce. It is true that in many cases the defendant would be able to rely on change of position as a defence. But this would not necessarily be so in every case. Certainty and finality, as has been said so often, are twin policy objectives of the highest importance in formulating legal principles.
Secondly, Mr. Underhill points out that if payer and payee are at one in believing the law to be in accordance with a settled understanding, there would appear to be no moral obligation resting on the payee to repay when the law is subsequently changed. Why, asks Mr. Underhill, should the payee’s conscience be affected? Where is the unjust factor?
In my opinion this is a strong argument in favour of the Law Commission’s proposals. For if the payee’s conscience is affected in such a case, it would seem that it ought also to be affected if the law is subsequently changed by legislation. Yet nobody suggests that a subsequent change in the law by legislation can ground a claim in restitution.
Even when the legislation is retrospective, it by no means follows, as Lord Goff points out, that a previous payment will have been made under a mistake of law at the time of payment. My noble and learned and friend Lord Hope is of the same opinion. The correct analysis in his view is that there will have been no mistake of law when the payment was made. I respectfully agree. If the retrospective legislation positively requires a transaction to be reopened, the liability to repay will arise, not because the payee’s conscience is affected, but by operation of statute: see Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 69 A.L.J.R. 51 per Brennan J. at p. 69. But if that be so, it is difficult to defend, on policy grounds, a different rule for changes in the law effected by judicial decision. Appellate courts ought to be encouraged to change the law in those rare cases where change is needed. They should not be inhibited by the fear of reopening past transactions.
The policy arguments in favour of the Law Commission’s proposals do not mean that, if the proposals are adopted, your Lordships would be indulging in a legislative act. As I have tried to demonstrate, clause 3 of the proposed Bill is in the nature of a defining clause. It tells us what mistake of law means. If your Lordships are entitled to abolish the judge-made mistake of law rule, as I firmly believe we should, we are surely entitled to define what it is that we are abolishing: quo modo oritur eodem solvitur.
Mr. Southwell argued that if your Lordships were to accept the Law Commission’s proposal on settled law, it would neutralise much of the benefit flowing from the abolition of the mistake of law rule. I agree that the restricted definition of mistake of law contained in clause 3(1) of the draft bill will confine the operation of clause 2. That, after all, is its purpose. I do not agree that it will render the whole exercise futile, or even much less beneficial. Clause 3(1) only removes those cases from the operation of clause 2 where there has been a subsequent change of the law, or where, in the language of clause 3(1) itself, a court “departs from” a settled view of the law. In all other cases where a mistake of law has in the past precluded a claim in restitution, for example, where a plaintiff has been wrongly advised as to the law, whether settled or otherwise, clause 2 will have full effect.
It is said that the Scottish Law Commission in its 1996 Discussion Paper resiled from the view expressed in its 1993 Discussion Paper No. 95, Recovery of Benefits Conferred under Error of Law. In the former paper the Commission favoured a statutory provision precluding repetition in cases where there has been a change in the law, or in the common understanding of the law, by subsequent judicial decision. The reason why they favoured such a provision was because they regarded the safeguard as “too important to be left to the uncertainties of judicial decisions:” see paragraph 2.123. In the latter paper the Commission changed its mind as to the need for a statutory provision. In other words the Commission came down against the first and second of the possible options outlined in the paper, both of which envisaged a statutory bar to recovery. Instead it favoured the third possible option, namely to leave the development of safeguards to the courts. No doubt it was influenced in its view by the intervening decision of the Inner House in Morgan Guaranty Trust Company of New York v. Lothian Regional Council 1995 SLT 299. Whereas, therefore, it is true to say that, for a variety of reasons, the Commission resiled from its former preference for a statutory safeguard, it did not express any view one way or the other, certainly no strong view, against a “settled law exception” being implemented by the court.
Much of Mr. Southwell’s final submissions were devoted to showing that the decision of the House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 did not change the law. There had been no previous decision of any court that swap transactions were intra vires, nor was there any settled law to that effect. So far as any previous judicial decision is concerned he is, of course, right. But whether or not it was settled law that the transactions were intra vires it is still too soon to say. Mr. Southwell specifically accepted towards the end of his reply that if the House were to agree with the Law Commission’s proposals then the question whether there was a settled view of the law in this case would have to go back to the trial judge; see also paragraph 7 of Mr. Southwell’s closing submissions in writing. Mr. Underhill expressed some surprise at Mr. Southwell’s concession. But he nevertheless agreed.
In the course of his speech Lord Goff tests his view of the law by applying it to the facts of the present case. He pre-supposes that the payer at the date of payment believed that he was bound to pay. The payer is then told in Hazell’s case that, on the law applicable at the date of payment, he was not bound to pay. Lord Goff concludes that the payer paid under a mistake of law. But this assumes that the law applicable at the date of payment was the same as the law stated in Hazell’s case. If it was, then of course the payer must have been mistaken. But if Hazell’s case changed the law, then it would not follow. My noble and learned friend may well be right that Hazell’s case did not change the law. But it was common ground, as I understand it, that we are not yet in a position to say one way or the other.
The only other point on which I would, with diffidence, disagree with my Lord is where, towards the end of his speech, he assumes, for the purpose of argument, that the plaintiffs paid on the basis of a settled understanding of the law, later proved to be erroneous, but nevertheless holds that the payment would not for that reason alone be irrecoverable. For the reasons already mentioned, I find this hard to accept. I agree that the payment might be recoverable on some other ground, for example, total failure of consideration, assuming the claim was not time-barred, but not on the grounds on mistake. For if there really was a settled understanding of the law, then that was the law at the time of payment. The payer was not mistaken. The subsequent change in the law could not create a cause of action which, ex hypothesi, did not exist at the relevant time. Even if the change were to come very soon after the payment it would make no difference.
I have not discussed any of the authorities, since on the crucial question whether we should adopt the Law Commission’s settled law proposal, I do not regard the authorities, with one exception, as being of great assistance. The exception is the Royal Insurance Australia Ltd. case, 69 A.L.J.R. 51 and, in particular, the observations of Brennan J. at page 69 and Dawson J. at page 75.
Mr. Underhill invited your Lordships to give some guidance as to how, if the question of settled law is to be remitted to the trial judge, that question should be approached. I do not think it would be desirable to say much in that connection, save to draw attention to paragraph 5.11 of the Law Commission Report No. 227. That paragraph provides all the guidance that can usefully be given at this stage. Thus it is not enough that there should be a “common understanding”, if by common understanding is meant only the common understanding of the parties. It must be a common understanding shared by their lawyers, and indeed by lawyers in general. The essential requirement is that the plaintiff should be able to prove that he made a mistake. At one extreme he will fail if he paid in accordance with what lawyers generally believed to be the law at the time of payment, whether he obtained legal advice or not. At the other extreme he would fail if the law gave rise to serious doubts; for if lawyers differed among themselves, it could not be said that one view rather than another was mistaken.
Last of all it is said that if Hazell’s case did indeed change the law, it would mean that these plaintiffs alone among many others would have failed to recover. But the others have recovered on the ground of failure of consideration, as indeed have the plaintiffs. It is only because these plaintiffs are now seeking to recover in respect of payments which are prima facie time- barred that they are relying on mistake of law at all.
For the above reasons, I would answer the questions formulated by Lord Goff as follows:
Issue 1: Subject to the answer to Issue 1A, the facts pleaded in the statement of claim disclosed a cause of action in mistake;
Issue 1A: Monies paid on the basis of a settled view of the law which has been subsequently overturned by judicial decision are not recoverable;
Issue 1B, 2 & 3: As proposed by Lord Goff.
But a majority of your Lordships are of a different view. What are the consequences? One consequence is that in all those cases where the House of Lords has overruled a previous decision of the Court of Appeal it would be open to those who have entered into transactions in reliance on the previous decision to seek to re-open their transactions. This is a consequence which, in the commercial field at any rate, I view with alarm. My noble and learned friend Lord Hoffmann accepts that there is a problem, but considers that the solution can be left to Parliament. It is reasonable to assume that Parliament would start with the Law Commission’s proposals, which, as I have said, successive governments of both main parties have accepted. But in the meantime there will be an inevitable period of intense uncertainty. If your Lordships are not willing to adopt the Law Commission’s solution as it stands, it is surely better to let Parliament adopt that solution, or some other solution, before our decision rather than after.
For myself, I would want to allow the appeal, if I could, along the lines of the Law Commission’s proposals. But as that is not to be, I consider the second best course is to leave the abolition of the mistake of law rule to Parliament, as the Law Commission itself envisaged. Like my noble and learned friend Lord Browne-Wilkinson therefore I would dismiss these appeals.
LORD HOFFMANN
My Lords,
It is no mere form of words to say that I have had the privilege of reading in draft the speech of my noble and learned friend Lord Goff of Chieveley. It is, if I may be allowed respectfully to say so, one of the most distinguished of his luminous contributions to this branch of the law. On all but one of the questions debated before your Lordships, I understand that it commands unanimous assent. It would therefore be superfluous for me to add anything of my own. But I should say something on the issue which divides your Lordships, because I have to confess that on this point I have changed my mind. At the end of the argument I was of opinion, perhaps not in a very focused way, that a person who pays in accordance with what was then a settled view of the law has not made a mistake. In fact it seemed to me that one could go further and say that if he had acted in accordance with a tenable view of the law, he had not made a mistake. In the first case he was right, and in the second neither right nor wrong, but in both cases his state of mind could be better described as a failure to predict the outcome of some future event (scilicet, a decision of this House) than a mistake about the existing state of the law.
On reflection, however, I have come to the conclusion that this theory was wrong, both in its stronger (“tenable view”) and in its weaker (“settled view”) form. The reason, I think, is that it looks at the question of what counts as a mistake in too abstract a way, divorced from its setting in the law of unjust enrichment.
The problem arises because (1) the law requires that a mistake should have been as to some existing fact or (on the view which your Lordships now take) the then existing state of the law but (2) a judicial statement of the law operates retrospectively. So the question is whether the retrospectivity of the law- making process enables one to say that holding a contrary view of the law at an earlier stage was a mistake. This question cannot be answered simply by taking a robust, common sense stion at the time of payment, and that one does not believe in fairy stories. It is easy to understand the expostulation of Lord Coleridge C.J. in Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329 at the suggestion that, because his judgment had been reversed by the House of Lords, he had been “ignorant of the law.” The common sense notion of a mistake as to an existing state of affairs is that one has got it wrong when, if one had been better informed, one could have got it right. But common sense does not easily accommodate the concept of retrospectivity. This is a legal notion. If the ordinary man was asked whether Lord Coleridge had made a mistake, he would no doubt have said that in the ordinary sense, which might carry some reflection on his competence as a judge, he had not. But if he was asked whether he should be treated for the purposes of some legal rule as having made a mistake, he might say “I don’t know. You tell me that the later decision operated retrospectively, which means that at least for some purposes, it must be assumed to have been the law at the time. Therefore it may be that for some purposes a person who held the contrary view should be treated as having made a mistake. It all depends upon the context. You had better ask a lawyer.”
The lawyer would, I think, start by considering why, in principle, a person who had paid because he held some mistaken belief should be entitled to recover. The answer is that it is prima facie unjust for the recipient to retain the money when, if the payer had known the true state of affairs, he would not have paid. It has never been suggested that, in the case of a mistake of fact, he could not recover if everyone would probably have shared the same false belief. On the contrary, there was once a view that he should not be able to recover if a reasonable person in his position would not have shared his false belief, but this was repudiated in Kelly v. Solari (1841) 9 M. & W. 54. Since then, it has not mattered whether the person making the payment could have discovered the true state of affairs or not.
The distinction therefore does not turn upon the fact that the person making the payment could not have discovered the true state of affairs about the law any more than about the facts. It turns upon the purely abstract proposition that in principle (and leaving aside the problem of Schrödinger’s cat) the truth or falsity of any proposition of existing fact could have been ascertained at the time, whereas the law, as it was subsequently be declared to have been, could not.
One must therefore ask why, in the context of unjust enrichment, this should make a difference. In both cases it has turned out that the state of affairs at the time was not (or was deemed not to have been) what the payer thought. In the case of a mistake of fact, it is because things were actually not what he believed them to be. In the case of a mistake of law, it is by virtue of the retrospectivity of the decision. Does the principle of unjust enrichment require that this retrospectivity should be carried through into the question of whether the payer made a mistake?
In my view, it would be very anomalous if it did not. Imagine a client who has paid under what he thought to be a legal obligation. He had not consulted a lawyer at the time, but seeks advice after a case in the House of Lords which decides that the obligation was void. The lawyer tells him that according to the House of Lords, he need not have paid. He asks whether he can recover his money on the grounds of mistake. On the “settled view” theory, the lawyer has to say: “No, because if you had consulted me at the time, I would have told you that you were certainly right to pay. Therefore you made no mistake.” The client asks: “Does that mean that the obligation was actually valid? If so, what has made it invalid?” The lawyer has to answer “No, the House of Lords has told us that it was always void. Nevertheless, you made no mistake. On the other hand, if lawyers had regarded it as a doubtful point, or if any lawyer would have told you then that the obligation was void, so that it would have been extremely foolish of you not to have sought advice, then you would have been able to recover.”
My Lords, it seems to me that the imaginary client would have great difficulty in understanding how these distinctions can arise out of a rule giving a remedy for unjust enrichment. In each case he thought that the obligation was valid and it has subsequently turned out that it was not. In principle, the question should not turn upon what other people might have thought was the law but upon what he thought was the law. And this has turned out to have been wrong, however many lawyers might have agreed with him at the time. So there ought to be a remedy in all cases or none. I should mention that Mr. Southwell Q.C. said in his written submissions in reply that if someone made a payment because he had been told that the Court of Appeal had decided that a person in such circumstances should do so, he would not be treated as having made a mistake when the decision was subsequently reversed. But he thought that the answer would be different if he had not been told of the decision but came to the same conclusion on first principles or by accident. He commented that this was an absurdity, which might be thought to cast doubt upon the soundness of the proposition. I think it is wrong. It does not matter why the payer thought that the law required him to pay. Retention is prima facie unjust if he paid because he thought he was obliged to do so and it subsequently turns out that he was not.
An analogy was drawn in argument between a retrospective decision of a court and a retrospective Act of Parliament. A failure to predict the latter, it was said, could not possibly be a mistake and therefore why should the former. I do not myself see why, in principle, if an Act of Parliament requires that the law be deemed to have been different on an earlier date, it should not follow that a person who acted in accordance with the law as it then was should be deemed to have made a mistake. This was the view of Mason C.J. in Commissioner of State Revenue v. Royal Insurance Australia Ltd. [1992] 182 C.L.R. 51 and I respectfully think that in principle he was right. But usually the question will turn upon the construction of the statute: it may provide expressly for the refund of money declared not to be owing, or such an obligation may be implied, or it may be argued that the failure to provide expressly for repayment showed a Parliamentary intention that transactions under the previous law should not be disturbed. I find the analogy of a retrospective Act of Parliament, which can deal with the consequences of its retrospectivity, unhelpful in dealing with a change of law by judicial decision. The judges who change the law can use only the common law to remedy any injustices which compliance with the previous law may have caused.
I therefore do not think that there are any reasons of principle for distinguishing cases in which a subsequent decision changes a settled view of the law, or, for that matter, settles what was previously an unsettled view of the law. The enrichment of the recipient is in each case unjust because he has received money which he would not have received if the payer had known the law to be what it has since been declared to have been.
There is, however, another ground for adopting the “settled view” theory and that is simply in order to preserve the security of past transactions. The argument is that where the law was thought to have been settled, there are likely to have been many transactions entered into in reliance upon it. Therefore a rule which uniformly denies recovery in such cases would, on balance, do less harm than good.
The adoption of the “settled view” rule on these grounds would be a legislative act in a sense in which the abrogation of the mistake of law rule would not. The latter rule is, as my noble and learned friend Lord Goff of Chieveley has amply demonstrated, not founded upon any defensible logic or principle. It is the proper business of your Lordships in a judicial capacity to clarify and develop the common law by restating rules in accordance with principle, even when this may require the correction of ancient heresies. But the adoption of the “settled view” rule would be founded purely upon policy; upon a utilitarian assessment of the advantages of preserving the security of transactions against the inevitable anomalies, injustices and difficulties of interpretation which such a rule would create. That is not a course which I think your Lordships should take.
I accept that allowing recovery for mistake of law without qualification, even taking into account the defence of change of position, may be thought to tilt the balance too far against the public interest in the security of transactions. The most obvious problem is the Limitation Act, which as presently drafted is inadequate to deal with the problem of retrospective changes in law by judicial decision. But I think that any measures to redress the balance must be a matter for the legislature. This may suggest that your Lordships should leave the whole question of the abrogation of the mistake of law rule to the legislature, so that the change in the law and the necessary qualifications can be introduced at the same time. There is obviously a strong argument for doing so, but I do not think that it should prevail over the desirability of giving in this case what your Lordships consider to be a just and principled decision.
I should say in conclusion that your Lordships’ decision leaves open what may be difficult evidential questions over whether a person making a payment has made a mistake or not. There may be cases in which banks which have entered into certain kinds of transactions prefer not to raise the question of whether they involve any legal risk. They may hope that if nothing is said, their counter-parties will honour their obligations and all will be well, whereas any suggestion of a legal risk attaching to the instruments they hold might affect their credit ratings. There is room for a spectrum of states of mind between genuine belief in validity, founding a claim based on mistake, and a clear acceptance of the risk that they are not. But these questions are not presently before your Lordships.
LORD HOPE OF CRAIGHEAD
My Lords,
The background to these consolidated appeals is to be found in sections 5 and 32(1)(c) of the Limitation Act of 1980. Section 5 of that Act provides that an action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued. Section 32(1)(c) provides that, where in the case of any action for which a period of limitation is provided by the Act the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the plaintiff has discovered the mistake or could with reasonable diligence have discovered it.
Interest rate swap contracts first came into use in about 1981, and in the following year they began to be used by local authorities. But it was not until 30 May 1989 that Anthony John Hazell, the auditor appointed by the Audit Commission for Local Authorities in England and Wales to audit the accounts of Hammersmith and Fulham London Borough Council, applied to the court for a declaration that the items of account appearing in the capital market fund account relating to the interest rate swaps which had been entered into by that local authority were contrary to law and for an order for rectification of the accounts. By that date a very large number of similar transactions had been entered into by numerous other local authorities. Following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 that, having regard to the provisions and limitations of the Local Government Act 1972 regulating the function of borrowing, interest rate swaps were ultra vires local authorities, actions were begun by both banks and local authorities to obtain restitution under interest rate swap contracts which, as a result of that decision, were held to be void. In those cases where the contracts had only recently been entered into there was no limitation problem. But in some others, particularly some of those involving Kleinwort Benson Limited which was one of the first of several merchant banks to have attracted business in this field, this was not so. In their case, where the contracts had been entered into more than six years previously, the limitation defence was available.
The right of a party to a void interest rate swap contract to recover its net payments by an action for money had and received was established by the decision of Hobhouse J. in Westdeutsche Landesbank Girozentale v. Islington London Borough Council [1994] 4 All E.R. 890. His decision on this point was upheld by the Court of Appeal. No question of limitation was raised in the Westdeutsche case. But in Kleinwort Benson Ltd. v. Sandwell Borough Council, in which certain of the issues of law arising on the pleadings were tried together with the Westdeutsche case – as to which there had been a full trial of the action on an agreed statement of facts supplemented by oral evidence called by both sides–the limitation defence was raised in regard to the first of four swaps, as the limitation period had been exceeded in the case of that swap. Following dicta in In re Diplock’s Estate [1948] Ch. 465, 514, Hobhouse J. held that section 5 of the Limitation Act 1980 applied to causes of action for money had and received. His decision that the limitation defence applied was not challenged in the Court of Appeal.
No issue was raised in the Sandwell case as to whether the exception under section 32(1)(c), as the action was for relief from the consequences of a mistake, was available. The ground on which the plaintiffs had a prima facie right to recover the net payments was held by Hobhouse J. to be absence of consideration: [1994] 4 All E.R. 890, 936E. The plaintiffs had submitted that mistake gave them an additional ground on which they could base their claim. But Hobhouse J. held at p. 931E-F that the critical matter of which they were unaware was the provisions of the Local uot;had the payer taken advice from a qualified legal practitioner who was onal Court and the House of Lords in Hazell. He said that lack of knowledge of a statutory provision and its legal effect was an error of law, with this result: “The plaintiffs accept that in this court I am bound by authority to hold that a mistake of law does not give a right to recover money at common law as money had and received.”
The swaps in the present cases involve a number of payments which were made more than six years before the writs were issued. The respondents seek to rely on the limitation defence in regard to these payments. So, in order to obtain the full restitution which would not otherwise be available to them, Kleinwort Benson have renewed their alternative cause of action on the ground of mistake. They contend that section 32(1)(c) of the Limitation Act 1980 applies where the mistake is one of law.
The first of the three issues, as stated in the Agreed Statement of Facts and Issues, relates to this alternative cause of action. It is whether the facts pleaded by Kleinwort Benson in the relevant paragraphs of their Points of Claim disclose a cause of action in mistake. The answers to be given to the other two issues, as to whether recovery is available in the case of those swap contracts which been fully performed–the “closed swaps” – and as to the limitation point, depend upon the answer which is to be given to the first issue. The primary question is whether there is a cause of action in mistake for money paid under a mistake of law.
Although this question has come before us in these appeals on preliminary issues it is, I think, necessary to have regard to at least part of the factual background. This is particularly important in the context of the discussion as to whether Kleinwort Benson were acting under a mistake of law when they made the payments. So I should like to begin by summarising my understanding of the facts before I turn to the questions of law which we must decide.
The Facts
The Points of Claim state that the payments were made by Kleinwort Benson on the basis of a mistaken belief that they were being made pursuant to a binding contract. No details are given of the circumstances or nature of the alleged mistake, and there has been no request for further and better particulars. The pleadings appear to have been framed on the assumption that there was no issue as to whether or not Kleinwort Benson were acting under a mistake when they made the payments, the only issue being whether the mistake was a mistake of law. It seems to have been assumed also, while the argument was being developed before Hobhouse J. in Westdeutsche, that all the payments in that case were made under a mistake. In the event it was sufficient for his purpose that there was no evidence of or allegation in either case that the relevant bank was mistaken as to any actual fact: p. 931E. He did not need to examine the matter further. The circumstances of the mistake affecting the payment made by Westdeutsche to Islington had however been the subject of evidence. It was in the light of that evidence that Hobhouse J. made findings at pp. 930J-931E which I think are of some help as background to this case– although it cannot, of course, be assumed that the facts here are exactly the same, as the judge in this case has not heard any evidence.
In the Islington case the investment banker employed by Westdeutsche was telephoned in June 1987 by a firm of interest swap brokers asking whether the bank would be interested in becoming a party to a swaps transaction with a local authority. He assumed that any reputable local authority would not enter into transactions which it was not empowered to do. He believed that the swap contract was a proper contract for Islington to undertake. He was confirmed in this belief by his knowledge that local authorities had been engaging in the swaps market for a number of years as ordinary participants in that market. So he assumed that in making his agreement with Islington he was entering into a legal contract with them. He was a commercial man, not a lawyer. There was no evidence that he sought legal advice before he entered into the contract.
His position can be seen from the narrative which Hobhouse J. provided at pp. 896E-898D to have been unremarkable. A sophisticated market had developed since interest rate swaps first came into use in about 1981. It involved institutions in the position of market makers and a corps of money brokers. As it became more complex it was recognised that it needed to become more organised. A set of standard terms and conditions was formulated by the British Bankers Association in association with the Foreign Exchange Currency Deposit Brokers Association. The parties to these contracts were normally regular participants in the money markets. Local authorities were among the participants in the money markets, and they were regarded as being institutions of unquestioned solvency. It was assumed that interest rate swaps could legitimately be entered into with them as an ancillary to their statutory borrowing and lending powers. The Chartered Institute of Public Finance and Accountancy received advice to this effect in the latter part of 1983. The absence of any legal risk was based on what was understood to be the effect of para. 20 of Schedule 13 to the Local Government Act 1972.
This assumption continued to be acted upon uncritically until 1987. In August of that year the Audit Commission and its officers made statements which for the first time called into question their legality. The advice of counsel was obtained that, unless they were actual hedging transactions in relation to actual loans that fell within the powers of a local authority, interest rate swap contracts were not within the powers of a local authority under the Act of 1972. On 14 July 1988 a press release was issued by the Commission publishing that advice and warning that auditors might challenge items arising from such transactions that were not permitted by the statute.
It appears therefore that at the time when the transactions in the present case were entered into there was a general understanding, which was shared by banks and local authorities as regular participants in the money markets, that interest rate swap contracts were within the borrowing and lending powers of local authorities. This understanding appears to have based upon commercial assumptions which developed within the money markets, not as a result of initiatives taken on legal advice by either party to the transactions. When advice was taken by the Chartered Institute it confirmed what was already understood to be the position in the money markets. The formulation of standard clauses for use in the basic interest swap contracts – although not designed specifically for use in transactions with local authorities – no doubt added to the general understanding that there was no legal risk. It does not appear that any auditor of local authority accounts expressed doubt on the matter until the issue was first raised in 1987 by the Audit Commission.
The Mistake of Law Rule
On the primary question whether the time has now come to end the rule that payments made under a mistake of law are not recoverable, I agree with my noble and learned friend Lord Goff of Chieveley that we should decide the point now rather than leave this task to the Law Commission. Mr. Underhill Q.C. said that he was not seeking to uphold the rule in its traditional form. What he sought to do was to draw attention to the problems which might arise if it were to be removed without regard to the consequences. He went on to develop arguments as to how those problems might be met in a way which, in these cases, would provide the local authorities with a defence. For my part, I think that the case for a departure from the traditional rule is now unanswerable. But I also agree with my noble and learned friend that the taking of this step gives rise to difficult questions of policy and analysis.
Three considerations have persuaded me that the mistake of law rule should no longer form part of English law.
The first relates to the ground of the decision by Lord Ellenborough C.J. in Bilbie v. Lumley (1802) 2 East 469, following Buller J. in Lowrie v. Bourdieu (1780) 2 Dougl. 468. The maxim ignorantia juris non excusat, upon which Lord Ellenborough based his decision, had featured regularly in debates among the civilian lawyers as to whether a person who paid money under an error of law could obtain a remedy. The pleadings in the Scottish case of Stirling v. Earl of Lauderdale (1733) Mor 2930, the relevant passages from which are to be found in the opinion which I delivered in Morgan Guaranty Trust Company of New York v. Lothian Regional Council 1995 SC 151, 162-163, show that it was an important part of the petitioner’s argument in the Stirling case that the maxim did not apply only to the law of delict. It had been applied by the many of the great civilian Commentators to the case of indebiti solutio, to the effect that no action was competent where the sum was paid under an error of law. This argument was met by the response that, while some Commentators were of that view, others were of the contrary opinion. The petitioner’s main point was that the great rule of equity is nemo debet locupletior cum alterius jactura. The maxim that every man is presumed to know the law ought to be applied equally to the recipient, who had taken what he ought to be presumed to have known was not due to him.
In the light of this background Lord Wright’s description, in the Preface to his Legal Essays and Addresses (1939) at p. xix, of Lord Ellenborough’s use of the maxim as “hasty and ill-considered” may seem to have been rather harsh. Anyone who was familiar with the debate which had been going on among the civilian lawyers for centuries would have recognised the use of the maxim in this context as a legitimate part of the argument. The Scottish institutional writer Erskine, Institutes III iii 54 (1773) wrote: “Civilians are not agreed whether it takes place where one pays the indebitum through a mistake in law; because by a known maxim ignorantia juris neminem excusat.” But there is now wide support for the view that the maxim is out of place in this field and that it cannot serve as the foundation for the rule barring recovery of monies paid under a mistake: Hydro-Electric Commission of the Township of Nepean v. Ontario Hydro [1982] 1 R.C.S. 347, 358-361, per Dickson J.; David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1991-92) 175 C.L.R. 353, 402 per Dawson J. agreeing with the reasoning of Mason C.J. and four other members of the High Court on this point; Willis Faber Enthoven (Pty.) Ltd. v. Receiver of Revenue 1992 (4) SA 202, 221-223 per Hefer J.A.; Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SC 151, 164 in my own opinion and 174 per Lord Cullen.
The second consideration relates to the principle of unjust enrichment itself, which now lies at the heart of the law of restitution in English law. The principle was stated by Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32, 61, in words which restated in the English language the maxim nemo debet locupletari aliena jactura of the civil law:
“It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep.”
In Ontario Hydro at pp. 367-368 Dickson J. said: “Once a doctrine of restitution or unjust enrichment is recognized, the distinction as to mistake of law and mistake of fact becomes simply meaningless.”
In Air Canada v. British Columbia (1989) 59 D.L.R. (4th) 161, 192 La Forest J. said that he had no hesitation in following Dickson J.’s lead in these matters:
“In my view the distinction between mistake of fact and mistake of law should play no part in the law of restitution. Both species of mistake, if one can be distinguished from the other, should, in an appropriate case, be considered as factors which can make an enrichment at the plaintiff’s expense ‘unjust’ or ‘unjustified’.”
In David Securities, 175 C.L.R. 353, 375 Mason C.J. and others, after referring to the statement by Dickson J. and to the description by Deane J. in Pavey & Matthews Pty Ltd v. Paul (1987) 162 C.L.R. 221, 256-257 of unjust enrichment as a “unifying legal concept”, said:
“If the ground for ordering recovery is that the defendant has been unjustly enriched, there is no justification for drawing distinctions on the basis of how the enrichment was gained, except in so far as the manner of gaining the enrichment bears upon the justice of the case.”
In the same case at p. 393 Brennan J. said:
“When a defendant receives a payment which he has no right to receive and which the plaintiff has paid to him by mistake, the injustice of the defendant’s enrichment does not depend on the nature of the mistake that caused the payment to be made. Whether the plaintiff made a mistake of law or a mistake of fact, the defendant, having no right to receive the payment, is unjustly enriched by its receipt. Then should the distinction between the two categories of mistake make any difference to a finding of unjust enrichment?”
In answer to his own question he said that he agreed with the majority in rejecting the distinction as critical to the question whether the defendant has been unjustly enriched. He went on to say that he did not see the distinction between mistakes of fact and mistakes of law as being immaterial to the question whether the payment was recoverable. This is a qualification to which I must return later. For the present it is sufficient to note his agreement with the majority on the absence of any good ground for the distinction. Similar views were expressed in Willis Faber and in Morgan Guaranty after a review of the civilian authorities. The unanimity which has been expressed on this point, in which common law jurisdictions are at one with those whose roots lie in the civil law, gives powerful recognition to the unifying effect of the principle of unjust enrichment. I do not think that the law of England, having accepted the principle, can continue to resist its consequences.
The third consideration relates to the practical effects of the distinction. I do not need to elaborate on this point. As Mr. Southwell Q.C. explained, the rule is subject to numerous exceptions and qualifications. I wish to mention only a few examples. Relief may be given where the error of law is one as to the construction of a private contract between the two parties which affects them only: Cooper v. Phibbs (1867) LR 2 HL 149; Earl Beauchamp v. Winn (1873) LR 6 HL 223; see also British Hydro- Carbon Chemicals Ltd. and British Transport Commission, Petitioners 1961 S.L.T. 280, per Lord Kilbrandon. And there is the exception which was described by Lord Denning in Kiriri Cotton Co. Ltd. v. Dewani [1960] AC 192, 204 which applies where there is “something more” in addition to the mistake of law such as something in the defendant’s conduct which shows that he was the one who was primarily responsible for the mistake. Experience has shown that in practice the rule has tended to lead to unjust results and to a desire to avoid the consequences. It is unsatisfactory that the law should have had to resort to exceptions and qualifications, the subsequent application of which to other cases can give rise to difficulty.
Was There a Mistake?
Subject to any defences that may arise from the circumstances, a claim for restitution of money paid under a mistake raises three questions: (1) was there a mistake? (2) did the mistake cause the payment? and (3) did the payee have a right to receive the sum which was paid to him?
The first question arises because the mistake provides the cause of action for recovery of the money had and received by the payee. Unless the payer can prove that he acted under a mistake, he cannot maintain an action for money had and received on this ground. The second question arises because it will not be enough for the payer to prove that he made a mistake. He must prove that he would not have made the payment had he known of his mistake at the time when it was made. If the payer would have made the payment even if he had known of his mistake, the sum paid is not recoverable on the ground of that mistake. The third question arises because the payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground.
In the present case the second and third questions do not appear to present any difficulty. But the first question raises an issue of very real importance. The answer which is given to it will have significant implications for the future development of the law of restitution on the ground of unjust enrichment.
In my opinion the proper starting point for an examination of this issue is the principle on which the claim for restitution of these payments is founded, which is that of unjust enrichment. The essence of this principle is that it is unjust for a person to retain a benefit which he has received at the expense of another, without any legal ground to justify its retention, which that other person did not intend him to receive. This has been the basis for the law of unjust enrichment as it has developed both in the civilian aken advice from a qualified legal practitioner who was y civilian and partly common law. On the whole, now that the common law systems see their law of restitution as being based upon this principle, one would expect them to apply it, broadly speaking, in the same way and to reach results which, broadly speaking, were similar: Zweigert and Kotz, An Introduction to Comparative Law, 2nd ed. (1987), vol.II, pp. 262-263, 267.
What, then, is the function of mistake in the field of restitution on the ground of unjust enrichment? The answer, one may say, is that its function is to show that the benefit which has been received was an unintended benefit. A declaration of intention to confer the benefit, even if unenforceable, will be enough to justify the retention of the enrichment. A mistake, on the other hand, will be enough to justify the restitutionary remedy, on the ground that a benefit which cannot be legally justified should not be retained where it was a mistaken–and thus unintended–benefit.
It may be helpful to mention the material we were given to illustrate its function in the civilian systems. The details vary as between the major civil codes. But in simple terms, the law looks for the absence of a legal justification for the enrichment: Zweigert and Kotz, p. 232. If the payer paid in the mistaken belief that he was under a duty to pay, it is prima facie unjust that the payee should be allowed to retain what he received. But the burden of proving that the payer knew that there was no duty, and was not mistaken, is on the recipient: Englard, International Encyclopedia of Comparative Law, (1991) vol. X, pp. 8-9, para. 5.13. Mistake in this context means lack of knowledge, and it makes no difference whether this is of fact or of law: Englard, p. 18, para. 5.30. As for the concept of enrichment, a person is enriched when he receives a payment which the payer was not bound by any obligation to make to him. The payee is entitled to retain the payment if it was made to him voluntarily, as in the case of a gift. The enrichment is unjust if the person who made the payment did not do so voluntarily and there was no obligation to confer the benefit: Zweigert and Kotz, p. 261.
The approach of the common law is to look for an unjust factor, something which makes it unjust to allow the payee to retain the benefit: Birks, An Introduction to the Law of Restitution, 2nd ed. (1989), pp. 140 et seq. It is the mistake by the payer which, as in the case of failure of consideration and compulsion, renders the enrichment of the payee unjust. The common law accepts that the payee is enriched where the sum was not due to be paid to him, but it requires the payer to show that this was unjust. Whereas in civilian systems proof of knowledge that there was no legal obligation to pay is a defence which may be invoked by the payee, under the common law it is for the payer to show that he paid under a mistake. My impression is that the common law tends to place more emphasis on the need for proof of a mistake. But the underlying principle in both systems is that of unjust enrichment. The purpose of the principle is to provide a remedy for recovery of the enrichment where no legal ground exists to justify its retention. But does it matter whether the mistake is one of fact or one of law?
To answer this question one must have in mind both the state of mind of the payer and the state of the facts or the law about which there is said to have been a mistake. The state of mind of the payer must be related to the time when the payment was made. So also must the state of the facts or the law. That is the time as at which it must be determined whether the payment was or was not legally justified. I agree with Brennan J.’s observation in David Securities that the right to recover the amount paid by mistake accrues at the moment when the sum is received by the payee: see also Baker v. Courage & Co. [1910] 1 KB 56. The point of the inquiry is to show that, had the payer known the true state of the facts or the law at that time, he would not have made the payment to the payee.
The inquiry will not be a difficult one, where the mistake is said to have been one of fact, if the facts have not changed since the date of the payment and the payer is able to show that he paid due to a misunderstanding of them, to incorrect information or to ignorance. In such a case the requirements for recovery will normally be satisfied. Nor is it difficult to deal with the case where the facts have changed. In such a case proof that the alleged state of the facts at the time did not emerge until afterwards will usually be sufficient to show that there was, at the time of payment, no mistake. The case may be more difficult where the mistake is said to have been a mistake of law. But I do not think that there is any essential difference in principle. A question of law may be as capable of being answered as precisely and with as much certainty as a question of fact, or it may be- -as are some questions of fact–a matter of opinion.
Nor is there any essential difference as between fact and law in regard to the payer’s state of mind. This may vary from one of complete ignorance to a state of ample knowledge but a misapplication of what is known to the facts. The mistake may have been caused by a failure to take advice, by omitting to examine the available information or by misunderstanding the information which has been obtained. Or it may have been due to a failure to predict correctly how the court would determine issues which were unresolved at the time of the payment, or even to foresee that there was an issue which would have to be resolved by the court. As Mason C.J. said in David Securities, p. 374 the concept of mistake includes cases of sheer ignorance as well as of positive but incorrect belief.
Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong–and that is so whether the issue is one of fact or one of law. As for mistake, this may arise where there is no suggestion that the law has changed since the payment was made. If it can be demonstrated by reference to statute or to case law that the law was overlooked or was applied wrongly, the position will be the same as that where the mistake was one as to the state of the facts. It is very unusual for a statute to provide for the law to be changed retrospectively, but this is not unknown: see the War Damage Act 1965. If the law is changed retrospectively by statute, so that a payment which was legally due when it was paid has now become undue, the correct analysis will be that there was no mistake at the time when it was made. The enrichment will have been due to the fact that the law was changed retrospectively by the statute.
What then is the position where the fact that the payment was not legally due at the time when it was made was only revealed later by subsequent case law? In posing this question I am not dealing with the situation where a judgment of the court that a sum is due has become final and been acted upon, but is afterwards overruled by a higher court in a different case. The law of unjust enrichment does not disturb transactions of that kind. Where the payment is made because the court has held that the sum is due to be paid to the payee, the obligation to pay is to be found in the order which has been made by the court. I am dealing with the case where the payment was made on the understanding that the law on the point was settled and that understanding was shown by subsequent case law to have been wrong.
The answer to this question may be said to depend upon whether the decision in question has changed the law or has merely declared what the law always was. óKóóK We were reminded of Lord Reid’s observation that to say that the judges never change the law is a fairy tale: (1972-73) J.S.P.T.L. 22. Experience has shown that the judges do from time to time change the law, in order to adapt it to changed social conditions or in response to other factors which show that the law has become out of date. But it would be equally wrong to say that the judges never declare the law. It may simply be that there was a gap which needed to be filled, or that there was a defect in thinking which needed to be revealed so that a point could be clarified. And to overturn an established line of authority is one thing. It is quite another where there was no previous decision on a point which no-one had sought to bring before the court previously. It may be said that a view of the law can be regarded as settled even where there is no case law at all on the subject, because all those interested in it have acted on a common understanding of what the law requires. But I would find it difficult to accept that a judge who said that that common understanding was wrong, and that the law was different from what everyone previously had thought it was, had changed the law. It would seem to be more accurate to say that, as it was for the judge to say what the law was, he was merely declaring what the law was and that he was not changing it.
On the whole it seems to me to be preferable to avoid being drawn into a discussion as to whether a particular decision changed the law or whether it was merely declaratory. It would not be possible to lay down any hard and fast rules on this point. Each case would have to be decided on what may in the end be a matter of opinion, about which there may be room for a good deal of dispute. It is better to face up to the fact that every decision as to the law by a judge operates retrospectively, and to concentrate instead on the question–which I would regard as the critical question–whether the payer would have made the payment if he had known what he is now being told was the law. It is the state of the law at the time of the payment which will determine whether or not the payment was or was not legally due to be paid, and it is the state of mind of the payer at the time of payment which will determine whether he paid under a mistake. But there seems to me to be no reason in principle why the law of unjust enrichment should insist that that mistake must be capable of being demonstrated at the same time as the time when the payment was made. A mistake of fact may take some time to discover. If there is a dispute about this, the question whether there was a mistake may remain in doubt until the issue has been resolved by a judge. Why should this not be so where the mistake is one of law?
In the present case we have no evidence about the state of the law at the time of the payments other than what can be derived from the agreed facts. But the background, as it can be discovered from the judgment of Hobhouse J. in the Westdeutsche case, is reasonably clear. He said at p. 931E that the effect of the statutory provisions of which the relevant bank had previously been unaware was subsequently “declared” by the Divisional Court and the House of Lords in the Hazell case. His choice of language seems to me to have been entirely appropriate. There had been no previous judicial decision on the point until the practice in the money markets was challenged for the first time in that case by the district auditor. Nor is it suggested that an opinion had been expressed about it which could be regarded as authoritative in the sense that it was binding on all parties including the auditor. If it were necessary to decide this point, I do not think that it would be right to say that the decision in the Hazell case “changed” the law. What it did was to clarify a point which had been overlooked and was in need of determination by the court. But the situation seems to me to be no different in principle from one where the facts are shown, as a result of inquiries which at the time of the payment were overlooked or not thought to be necessary, to have been different from what they had been thought to be at the time of the payment by the payer. Prima facie the Bank is entitled to restitution on the ground of mistake.
The Defences
The question is whether the removal of the mistake of law rule requires, on grounds of public policy, that there should nevertheless be defences in mistake of law cases which are not available in mistake cases generally. It is appropriate as a first step however to recognise that the defences which are available generally already cover much of the ground where to allow recovery would lead to injustice. At this early stage it may be unwise to assume, until the matter has been tested on a case by case basis, that there are significant gaps in mistake of law cases which still need to be filled. Despite the careful study which has been given to this subject by the two Law Commissions, I would be inclined to proceed cautiously at this stage.
The initial requirements already mentioned which the plaintiff must satisfy will do much to sort out those case which deserve a remedy and those which do not. He must show that he acted under a mistake which caused him to pay a sum which the payee was not legally entitled to receive. A payment made in the knowledge that there was a ground to contest liability will be irrecoverable: see Kelly v. Solari (1841) 9 M. & W. 54, 58 per Lord Abinger C.B. Then there are the defences of undoubted general application, as well as that of estoppel which requires no elaboration. The first is that of change of position which was recognised in Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548. One of the examples which were given of its application by Lord Goff was where the plaintiff pays to the defendant under a mistake of fact and the defendant, while acting in good faith, pays the money or part of it to a charity. I think that it would be equally unjust to require the defendant to make restitution in such a case where the plaintiff pays the money under a mistake of law. The nature of the mistake makes no difference to the defendant who is acting in good faith. Mason C.J. seems to have been viewing this defence as applicable generally when he said in David Securities at p. 385 that a defence of change of position was necessary to ensure that enrichment of the recipient was prevented only where this would be unjust in a case where the defendant had acted to his or her detriment on the faith of the receipt.
Then there is the defence that the money was paid as, or as part of, a compromise. Brennan J. in the same case said at p. 395 that, where a claim is satisfied by accord and satisfaction, a payment made in satisfaction is made in discharge of an obligation created by the accord: it is unaffected by any mistake as to the validity of the compromise. That must be so, irrespective whether the mistake is as to the facts or the law regarding its validity. In the Ontario Hydro case Dickson J. said at p. 380 that there was a head of public policy which recognised that there was a need to preserve the validity of compromises freely entered into with advice. I think that it is possible to find a more principled basis for the defence, as Brennan J. has suggested. But my main point is that it is available irrespective of the nature of the mistake.
It has been suggested that it should be a defence that the money was paid in settlement of an honest claim: Goff and Jones, The Law of Restitution, 3rd ed. (1986), pp. 118-119. In the Ontario Hydro case at p. 364 Dickson J. accepted that a payment made in these circumstances would be irrecoverable, even if later events indicated that the payer was foolish to have acceded to the request for payment. It is not clear from his brief comment whether he saw this defence as one which would be relevant in mistake of law cases only. But in his summary of Dickson J.’s analysis in the Air Canada case at p. 191 La Forest J. treats this defence as one which would be applicable to any case of enrichment at the plaintiff’s expense. In David Securities Mason C.J. in the majority judgment at p. 374 uses the expression “honest claim” to distinguish a voluntary payment which is made irrespective of the validity or invalidity of the obligation from the case where the payment is made under compulsion or undue influence. It is clear that the majority saw such factual circumstances, if relevant, as applicable to mistake of fact cases as well as to mistake of law cases. This was one reason why they regarded the mistake of law rule as broader and, as they put it, more preclusive than was necessary.
In the Westdeutsche case Hobhouse J. said at p. 934 that the principle of voluntary payments could not be applied unless there was a conscious appreciation by the payer that the contracts were or might be void, and that on the evidence in the Islington case there clearly was no voluntary assumption of risk in any respect that was relevant. It is not clear, as there has been no evidence, whether there was a voluntary assumption of risk in any of the cases which are before us in these appeals. So I would not be prepared to say that it was a defence which in these cases was available. It is sufficient for my purpose that, while the precise limits of it have still to be clarified, it is a defence which applies generally irrespective of the nature of the mistake.
Two defences have however been suggested which are designed specifically for cases where the mistake was a mistake of law. I take first the defence which was formulated in David Securities by Brennan J. in his dissenting opinion at pp. 398-399. He said that it should be a defence to a claim for money paid or property transferred under a mistake of law that the defendant honestly believed when he learned of the payment or transfer that he was entitled to receive and to retain the money or the property. I regret that, while I have derived much assistance from his judgment, I am unable to agree with him on this point. I have some difficulty in seeing why this defence, if there is merit in it as a means of preventing recovery where this would be unjust, should be confined to mistake of law cases. If an honest belief on the part of the payee can overcome the fact that it is prima facie unjust that the payer should not be able to recover what he paid under a mistake, why should this not be so in all cases? The reason, I think, is that in mistake of fact cases such a defence has never been recognised. To admit it now in such cases would be to run counter to many authorities. The defence seems to me to be based on expediency not on principle, and in any event to be too wide. But there are other objections. It does not sit easily with the defence of change of position. Indeed, in mistake of law cases, that defence would become unnecessary. The element of good faith would seem to be enough even though the defendant had not acted on the faith of the receipt. I think that this shows that it is lacking in principle. It would also tend to perpetuate the distinction between mistakes of fact and mistakes of law, which is itself undesirable. The Law Commissions have not supported it. I would not favour the adoption of the defence as part of English law.
There remains the defence of common understanding or of settled law, to which Mr. Underhill devoted much of his argument under this chapter. This clearly is a defence which would be applicable only to the mistake of law cases, and there is some justification for it on grounds of public policy. It would tend to support certainty in the law and to preserve settled transactions. In one or other of its formulations it has been supported by various Law Commissions, but in neither case can it be said that that support has been unqualified. The “common understanding” defence has become part of the law in New Zealand and in Western Australia: see the New Zealand Judicature Amendment Act 1958, section 94A(2); the Western Australian Law Reform (Property, Perpetuities and Succession) Act 1962, section 23(1). But in other jurisdictions these provisions have been criticised. The Law Reform Commission of British Columbia, Report No 51, Benefits Conferred under a Mistake of Law (1981), pp. 70-72 said, after careful analysis, that they presented formidable problems of definition and proof. A Western Australian case, Bell Bros. Pty. Ltd. v. Shire of Serpentine-Jarrahdale [1969] W.A.R. 155, was referred to in order to illustrate some of the difficulties. They concluded that the court had ample tools for limiting recovery, and that the protection offered by these provisions went far beyond what was required. Neither the Law Commission nor the Law Commission for Scotland, although initially attracted by them, have recommended their adoption in this country.
The “settled law” defence is the one favoured by the Law Commission, after consultation, in its Report (No. 227) Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994), para. 5.13. They have recommended that a restitutionary claim in respect of any payment, service or benefit that has been made, rendered or conferred under a mistake of law should not be permitted merely because it was done in accordance with a settled view of the law at the time, which was later departed from by a subsequent judicial decision. The Scottish Law Commission in its Discussion Paper (No. 95) Recovery of Benefits Conferred under Error of Law (1993), para. 2.125 invited comments on their provisional view that provision should be made by statute to preclude the re-opening of settled payment transactions following a change in the law, or in the common understanding of the law, effected by a judicial decision. But in a subsequent Discussion Paper (No. 99) Judicial Abolition of the Error of Law Rule and its Aftermath (1996), para. 3.51 which was published following the Morgan Guaranty case they proposed that a statutory bar to this effect should not be introduced. On balance, after further consultation with the judiciary among others and after examining the difficulties, they were of the view that the case for a bar was not sufficiently strong to justify the intervention of a statute.
One of the objections to the “settled law” defence is that it is incapable of precise definition. Each case would have to be decided on the evidence, that would create uncertainty, and it is difficult to predict the absurdities which may result. One point however does appear to emerge from the discussions so far. This is that a payment made on a settled view of the law is more likely to be excusable, and thus to be one where restitution would more obviously be justified, than a payment made as a result of one man’s mistake or ignorance. Yet a mistake of law which only the payer himself had made would not be caught by the defence. As Mr. Southwell said, the worse the legal advice the more likely the payer could show that the defence was not applicable. But I do not need to elaborate on this point. The valuable work done by the Scottish Law Commission has shown a need for caution which I consider to be entirely justified. I would not favour the introduction of such a defence judicially. Nor do I think that it would be right to apply it to this case, even if its recognition were to be thought to be desirable on grounds of public policy. The fact that restitution has already been given in many of the interest swap cases, albeit on the ground of failure of consideration, would create a situation which I would find unacceptable. Unless the defence can satisfy the test of denying restitution in all cases on the same facts it ought not, in fairness to all parties, to be applied in any of them.
The Completed Swaps
The reason why the swap contracts were held to be void was that they were ultra vires the local authorities. The purpose of the ultra vires doctrine is to protect the public: Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, p. 36F-G per Lord Templeman. So it is a legitimate criticism of Mr. Underhill’s argument for the local authorities that if, as he has contended, there is no claim for money had and received in the case of a completed swap the result will have been to give practical effect to a transaction which, on the doctrine of ultra vires, did not legally exist. All the items of account appearing within the capital markets fund account of the local authority in the Hazell case were held to be contrary to law, and the accounts were ordered to be rectified. This order extended to the swaps transactions which were entered into after July 1988 when the local authority was advised by the auditor that the transactions were of doubtful validity. It would be unsatisfactory if restitution were to be possible only in the case of the uncompleted transactions. That would leave any balance in favour of the local authorities without any item in the accounts which could properly be attached to it. It would not be possible for the bank to re-open the transactions as they are void. The grounds of decision in Hazell suggest that no distinction should be made between ultra vires transactions on the ground that in the one case they were completed and in the other they were not.
In my opinion the law of restitution should provide a remedy in these cases irrespective of the stage which the transactions had reached. In expressing his decision on the Sandwell case in Westdeutsche Hobhouse J. said at p. 930F-G that it was irrelevant to the existence of a cause of action in connection with the payments made under the first Sandwell swap that the contract was fully performed. The Court of Appeal reached the same conclusion in the Guinness Mahon case. I agree with those decisions, and I have nothing to add to what my noble and learned friend Lord Goff has said about them. But restitution in those cases was not given on the ground of mistake, which is the ground on which Kleinwort Benson needs to succeed if they are to be successful in meeting the defence of limitation which has been raised by the local authorities.
Had it not been for what Professor Birks has said in footnote 137 at p. 230 of his article No Consideration: Restitution After Void Contracts (1993) 23 University of Western Australia L.R. 195, I would not have thought that there was any difficulty about restitution on the ground of mistake in the case of the completed swaps. The assumption on which I proceed is that each payment was made on either side in the belief that the sum was legally due to the other party under the contract. The mistake was the same throughout the progress of the transaction. The right to recover each payment on the ground of mistake accrued when the sum was received by the payee. I do not think that it makes any difference whether there was a single payment or a series of payments or, where there was a series, whether the transaction was interrupted or had run its course. Each payment is to be looked at separately.
Professor Birks’ argument is that after the execution of the proposed contract the force of this type of mistake is spent because the matter has proceeded to the point where the only prejudice which might be entailed – non-performance by the other party – never in fact eventuated. It was only the antecedent liability which was defective. But this seems to be inconsistent with the principle that the cause of action is complete when the payment is made and received by the payee. Brennan J.in David Securities at p. 390 said that it is at that moment that it can be determined whether and to what extent the payee has been unjustly enriched. The argument also assumes, wrongly in my opinion, that the payer’s mistake was that the payee was obliged to reciprocate. That is not the basis of the claim for restitution on the ground of mistake. The mistake which the payer made was in believing that he was obliged to make the payment because it was legally due to the payee. A further difficulty is that it produces a result which is one-sided and unjust. The local authorities, unlike Kleinwort Benson, can say that the transactions which they entered into were beyond their capacity. As their accounts must be rectified the transactions, although closed, must be re-opened to enable them to recover the money which they had no power to pay out. In a case where the bank was the net beneficiary it cannot retain the net benefit which it received in the form of ultra vires payments from the local authorities. It would be unjust if the bank was not to be able to recover its net loss in those cases where the balance lies the other way.
Professor Burrows has given convincing reasons for rejecting this argument: Swaps and the Friction between Common Law and Equity [1995] R.L.R. 15, 18-19. I also am unpersuaded by Professor Birks on this point. In my opinion completed transactions are in the same position as transactions which were not completed when restitution is claimed on the ground of mistake.
Limitation
Kleinwort Benson’s purpose in claiming restitution of the ground of mistake has been to pre-empt the limitation defence by the local authorities. The final question is whether, on the assumption that restitution on the ground of mistake is available, Kleinwort Benson can take the benefit of the postponement provision in section 32(1)(c) of the Limitation Act 1980. The answer to it depends on whether the action is one for relief from the consequences of a mistake within the meaning of that subsection.
There is no difficulty about the language. The word “mistake” appears in the subsection without qualification. There is nothing in the words used in it which restricts its application to a mistake of fact. The origin of the section suggests that the absence of restriction was intentional. In its 5th Interim Report (Statutes of Limitation) (1936) (Cmd. 5334), pp. 31-32, para. 23 the Law Revision Committee recommended that the equitable rule of postponement should prevail in all cases where relief was sought from the consequences of a mistake, and that time should only run from the moment when the mistake was discovered or could with reasonable diligence have been discovered. This recommendation was put into effect in section 26(c) of the Limitation Act 1939, of which section 32(1)(c) is a re-enactment. In In re Diplock [1948] Ch.465, 515 the Court of Appeal said that section 26(c) of the 1939 Act would operate to postpone the running of time in the case of an action to recover money paid under a mistake of fact.
But the distinction between mistake of fact and mistake of law as a ground for recovery is not absolute. Relief is available where the mistake of law relates to private rights: Earl Beauchamp v. Winn (1873) LR 6 HL 223. Private agreements made under a mistake of law may be set aside, and relief will be given in respect of payments made under such agreements. Other examples may be given where a cause of action for relief will be available although the mistake was one of law. In Regina v. Tower Hamlets London Borough Council, Ex parte Chetnik Developments Ltd. [1988] A.C. 858, 874H-877C Lord Bridge referred to a substantial line of authority showing circumstances in which the court would not permit the mistake of law rule to be invoked. These include payments made under an error of law to or by a trustee in bankruptcy as an officer of the court: Ex parte James (1874) L.R. 9 Ch. App. 609. It is hard to see why in those cases the equitable rule which allows for the postponement of the limitation period should not apply, to the effect that time will not run until the claimant knew of the mistake or ought with reasonable diligence to have known of it. If the postponement can apply in these examples of mistake of law, I think that it ought to apply to mistakes of law generally.
The objection may be made that time may run on for a very long time before a mistake of law could have been discovered with reasonable diligence, especially where a judicial decision is needed to establish the mistake. It may also be said that in some cases a mistake of law may have affected a very large number of transactions, and that the potential for uncertainty is very great. But I do not think that any concerns which may exist on this ground provide a sound reason for declining to give effect to the section according to its terms. The defence of change of position will be available, and difficulties of proof are likely to increase with the passage of time. I think that the risk of widespread injustice remains to be demonstrated. If the risk is too great that is a matter for the legislature. The problem does not arise under the statutory scheme which applies in Scotland. The prescriptive period of five years under section 6 of the Prescription and Limitation (Scotland) Act 1973 applies to any obligation based on redress of unjustified enrichment: Schedule I, para.1(b). It may be extended only where the creditor was induced to refrain from making a claim by fraud or error induced by the debtor’s words or conduct or was under a legal disability. Mistake on its own is not a ground for relief. It may be that even in mistake of fact cases where restitution is available under English law some further restriction of the circumstances where indefinite postponement is available may be appropriate. But that is a matter which is best considered by the Law Commission.
In my opinion Kleinwort Benson will be entitled to the benefit of section 32(1)(c) of the Act of 1980 if they can show that the payments which they seek to recover were made under a mistake of law.
In the result I would answer each of the questions under the Issues which are before us in the terms proposed by my noble and learned friend Lord Goff of Chieveley. I too would allow these appeals.
Western Potato Co-Operative Ltd v Peter Durnan
4441983 No. 3708
Circuit Court
27 February 1984
[1985] I.L.R.M. 5
(Judge Clarke)
JUDGE CLARKE
delivered his judgment on 27 February 1984 saying: The first question here is as to the cause of the failure of the defendant’s/counter-claimant’s potato crop, grown from seed potatoes supplied by the plaintiffs, and for which they now claim the price. It does not appear from the evidence that there can be any certain answer to this question. The highest technician to have been called as a witness was Professor Enda Bannon, Ph.D. whose doctorate is in the subject of agricultural science. He saw the defendant’s field when the seed potatoes were still in the ground, or had produced such growth as they were to achieve. He found that those which had produced nothing were lying in contact with fertilizer, whereas where growth or emergence had been achieved, there was no sign of the fertilizer present. He felt that this would justify a conclusion that the laying of the unsuccessful potatoes in contact with the fertilizer had resulted in what is referred to, untechnically, as ‘fertilizer burn’. This, he thought, would be a fair inference. The defendant is unquestionably a practical farmer, and said that he planted the seed potatoes in the way he has always done. The six tons of the seed potatoes supplied by the plaintiffs should have produced, at a moderate estimate, a crop of well over 80 tons, but in fact produced no more than nine tons. He got £50 a ton for these: a total of £450.
Other witnesses appeared for the defendant, including two farmers who purchased seed potatoes from the plaintiff company and who had bad results. They also have claims against them for the price of these, for which they have not paid. Neither of them had the same method of planting as this defendant. One, Mr Jack McGuinness, used a machine that poured the fertilizer into the ground two inches below the level at which it planted the seeds. These potatoes failed except in some few sections. His failure was far more extensive than the defendant’s. While Professor Bannon suggests the possibility that this crop might in some way have also suffered from the same so-called ‘fertilizer burn’, the facts do not seem to lay any solid basis for such an hypothesis. The plants that grew, the Professor thought, showed signs of under-nourishment. No satisfactory explanation seemed to be available to explain the failure of these seeds. The farmer again is a practical, experienced man, and in the same season got perfectly normal potato crops elsewhere out of other seeds. He attributed the failure to the seed. This raised doubts about the quality of the seeds, and about the diagnosis in regard to the defendant’s seed potatoes — this so-called ‘fertilizer burn’. The other farmer, Mr James White, prepared his land for planting in a different way to the previous one and to the defendant’s. He spread the fertilizer on the ground surface and rotavated it into the land, and then made his drills for the seed potatoes. There was no possible question of this so-called ‘fertilizer burn’ in this case, but the cropping was a total failure: not a single plant emerged, and he attributed it to the plaintiff’s seeds. Mr White is an experienced farmer.
Professor Bannon did suggest another cause for all this crop failure, a condition of reduced vitality which can affect some lots of seed-potatoes, and he described it as ‘physiological age’. This would seem to be more consistent with the failure of the crops on all three farms.
*7
Two of the lots of seed potatoes, the defendant’s six tons and one of these farmer’s 15½ tons, came from the supply originally sent to a fourth farmer, Mr Ennis, and which were stored for a short time in his shed, in the sealed bags in which they were sold. He had opened a few of these bags and did not like the look of the potatoes. He thought they looked hard and lacked vitality. It was April, and he would have expected to see some signs of sprouting. Partly for that reason, but also because he did not like the form of contract presented to him for signing, he refused to sign the contract; and so it was that this supply came to be divided by the plaintiffs between the defendant and the other farmers. Mr Ennis makes no claim to be an expert in potato production, but he is clearly a shrewd man, both in the way of farming and business.
In weighing up the evidence, it appears to me that this lack of vitality in the potato seed, which is common to the three farmer-witnesses seems to have destined them to produce poor returns; and, in the defendant’s case, perhaps the failure of his crop was added to by laying the seed potato in contact with the fertilizer; but, it seems to me, on the probabilities of the evidence, that this would be no more than a marginal factor in the failure of this crop of his.
At this stage, it is necessary to consider a second question, which is the terms of the written contract presented by the plaintiffs and signed by the defendant as governing the sale and purchase of the seed potatoes. This contract has two aspects to it, but they are interconnected, and are each part of the mutual considerations. The first half or so of the contract (clauses 1–8 inclusive, pp. 1–6) deals with the obligation of the defendant, who is called ‘the grower’ to produce, and to deliver and sell to the plaintiffs, who are called ‘the buyers’, 80 tons of Kerrs Pinks potatoes: the second half (clauses 9–20, pp. 6–10) deals with the obligation of the grower to produce this tonnage exclusively from seed potatoes to be supplied by the plaintiffs, and to be paid for by the defendant. The seed potatoes are, in the words of clause 9, to be ‘all A Certificate seed potatoes that the buyers deem necessary for the grower to plant in respect of his contractual tonnage’. This was in fact measured and agreed to be 6 tons, which was duly supplied to and accepted by the grower. The seed potatoes supplied are more fully described by clause 9: ‘The buyers will provide to the grower seed potatoes from stocks which have been certified as suitable for seed by the inspectors of the Department of Agriculture, Dublin, under the Agricultural Produce (Potatoes) Act, 1931’; the evidence shows that the six tons of seed potatoes answered to that. Clause 9 adds that ‘said certification shall be conclusive evidence as to their purity and health’ and that ‘the sealing of bags or other containers by inspectors of the Department of Agriculture shall be accepted as proof of the quality, size and health of the potatoes’; and, lastly, that clause provides that ‘the sale of such potatoes by the buyers to the grower shall be without warranty of germination or crop result’. In so far as any part of clause 9 proves to be in effect in conflict with or contradictory of the obligations imposed in the grower, or proves to be ambiguous in its application to the facts of the case, then, under the rules of construction, it is to be construed against the buyers, contra proferentem ; the contract having been prepared on behlaf of the buyers as a standard form in use by them with their *8 growers and couched generally in terms protective of the buyer. The growers position is left uncertain in several respects, and the buyer is made sole and final arbiter in certain cases. On reading the contract form, Mr Ennis, as already mentioned, refused to sign, and a perusal of the document makes his attitude easy to understand.
The contract, as described, provides in the first half for the production by the grower of an amount of potatoes, in this case 80 tons, to be supplied to the buyer; and in the second half provides that these potatoes are to be grown exclusively from the seed potatoes to be supplied by the buyer to the grower and not otherwise. The only form of assurance offered as to the suitability of the seed potatoes to provide the crop necessary for the contract is that they should be A Certificate seeds certified and sealed by the inspectors of the Department of Agriculture, the buyer entering into no commitment in the form of a condition or warranty beyond that, and the contract providing that the potatoes answering to these specific factors of certification and sealing will be conclusively accepted, and assumed as to their ‘purity and health’ and as to their ‘quality, size and health’. If this were meant to amount to a contractual form of estoppel preventing any evidence to establish the opposite qualities of impurity, disease, lact of quality, size and health, such provision might have to be construed as an exemption clause in respect of such matters; but, in view of the fact that the contract taken as a whole primarily relates to the production of 80 tons of potatoes for supply to the buyer, it is necessary to consider the construction of this clause in another light, namely, that A Certificate seed potatoes, supplied in such quantity as ‘the buyers deem necessary for the grower to plant in respect of his contractual tonnage’ are taken as a matter of fact, assumed by both parties, to be sufficient to produce the contract tonnage of 80 tons. But, on the evidence, it appears that the six tons of seed potatoes supplied was not capable of producing the crop; therefore, this basic assumption is shown to be mistaken, a mistake on both parts, due perhaps to a condition in those seed potatoes suggested by Professor Bannon as ‘physiological age’, a factor causing the basic purpose of the contract to collapse, to be frustrated.
Mistake as to the existence of a fact at the root of the contract or on the basis of an assumption which subsequently proves to be false is dealt with in Anson’s Law of Contract , 25th ed., in the light of the House of Lords decision in Bell v Lever Bros. Ltd [1932] AC 161, stated to be the leading case on the subject; and, in interpreting the decision, citing Denning LJ in Solle v Butcher [1950] 1 KB 671, at p. 691:
The correct interpretation of that case, to my mind, is that, once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground …
And Anson notes at p. 287, Fn.: ‘Mistake can be regarded as a type of “pre-contractual frustration”’. Pursuing the implications of Bell v Lever Bros. Ltd in *9 the matter of mistake as to the quality of the thing contrcted for, Anson at p. 292 cites from Lord Atkin’s speech [1932] AC 161, at p. 218 that:
Mistake as to quality of the thing contracted for raises more difficult questions. In such a case mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.
And, under the heading of ‘A False and Fundamental assumption’, Anson at p. 296 states:
Where the parties contract under a false and fundamental assumption, going to the root of the contract, and which both of them must be taken to have in mind at the time they entered into it as the basis of their agreement, the contract is void. This should not be regarded as a category separate and distinct from those categories of mistake already mentioned, but rather as a more compendious statement of the type of error required. Adding later that It is not surprising that the strictness of this test has resulted in a dearth of cases on the subject of fundamental mistake.
It seems to me that on the facts of the present case this strict test is fulfilled. And the case of Sheikh Bros. Ltd v Ochsner [1957] AC 136, later cited as an example ( Anson p. 297), has some similarity to the present one. There the contract was declared void, where one party contracted to grant a licence to cut, process and manufacture all sisal grown on a particular estate of which they were lessees, in return for which the party granted the licence deposited a sum of money and undertook to deliver to the first party 50 tons of sisal fibre manufactured by him each month; but where it proved in fact that the estate was not capable of producing such a quantity of sisal as would meet this requirement. This followed principles enunciated in Bell v Lever Bros. Ltd.
Applying this principle to the present case, I would treat this contract as void. Both sides are at some loss as a result. The defendant has, however, received £450 for a quantity of 9 tons of potatoes, out of an anticipated crop of perhaps about 90 tons (the contractual figure of 80 tons was stated to be a very conservative expectation). In other words, about one-tenth of the expected yield was realised; which might call for an equivalent reward to the plaintiffs of one-tenth of the purchase price. The original contract being void, the defendant should be deemed impliedly liable for the fair price of such of the seed potatoes as produced a crop and of which he took the benefit. For the rest of the matter, the parties will have to accept the losses just as they have fallen.
Elizabeth Rogers v Louth County Council
Supreme Court
11 March 1981
[1981] I.L.R.M. 144
(O’Higgins CJ, Griffin, Kenny JJ)
GRIFFIN J
(O’Higgins CJ concurring) delivered his judgment on 11 March 1981 saying: In proceedings brought against the defendants in the Circuit Court for the County of Louth the plaintiff, who is the personal representative of James Murphy deceased, claims the return to her of the sum of £ 935.53 which it is alleged had been overpaid by her to the defendants in redeeming an annuity in respect of a cottage the property of the deceased at Rathnure, Co. Louth. The annuity was redeemed under and in pursuance of the provisions of s.99 of the Housing Act, 1966.
James Murphy was, at the time of his death, the owner of the said cottage, which by a vesting order made under the Labourers Act, 1936, was vested in him in fee simple free from encumbrances but subject to an annuity of £ 19.10.0 per annum for the period of forty nine years from 2 April 1958, and to the statutory conditions, being those set out in s.17 of the 1936 Act. In 1968, he was anxious to redeem the said annuity, and on 25 November 1968 his solicitors wrote to the defendants stating that their client ‘wished to purchase the fee simple of his property. We would be obliged if you would let us have a note of the amount due’. The letter erroneously referred to the purchase of the fee simple; it was the purchase of the annuity which was intended. James Murphy died on 17 October, 1968, and after some further correspondence the defendants wrote to the solicitors for the personal representatives of the deceased on 22 September 1969 stating that the amount required to redeem the outstanding annuity on the vested cottage would be £ 1,163. The personal representatives had some difficulty in raising that sum and the redemption was not concluded until 12 October 1972 when £ 1,163 was paid to the defendants. On 18 October 1972, the County Council certified that the annuity had been redeemed in full.
As already stated, the redemption took place under s.99 of the Housing Act, 1966. That section provides:
An annuity at any time outstanding may, if the housing authority entitled to receive the annuity think fit, be redeemed by the person liable to pay the annuity by payment to the authority of such amount as may be approved by the Minister, and the premises, which but for this section would be subject to and charged with the payment of the annuity or the part, shall, on receipt by the authority of the amount so approved, stand freed and discharged from the payment of the annuity.
The Minister therein referred to was the Minister for Local Government, now the Minister for the Environment. Under s.100 where an annuity is redeemed under s.99, all the provisions of the Act of 1936, including the statutory conditions, shall cease to apply in respect of the cottage.
The sum of £ 1,163, as being the redemption value of the annuity, was arrived at by the defendants in accordance with directions included at paragraph 147D of a circular No. H.5/67 issued by the Department for Local Government (as it then was) in 1967, requiring the redemption value of the annuity to be based not on the capitalized value of the annuity, but on the current market value of the cottage, due allowance being made for the number of years for which the annuity had been paid on the cottage. In Meade v Cork County Council (Supreme Court 31 July 1974 unrep.), this Court decided that the method of assessment *146 of the redemption value of an annuity assessed in accordance with para. 147D of the said circular was incorrect, the correct amount being the capitalized value of the annuity outstanding at the time when redemption took place. In the instant case, it is agreed that the redemption value of the annuity under s.99 of the 1966 Act, in accordance with the principles laid down by this Court in Meade v Cork County Council, is the sum of £ 227.47.
There was therefore an overpayment by the plaintiff of the sum of £ 935.53. After Meade’s case had been decided, the plaintiff claimed the return of the sums so overpaid by her in respect of the redemption of the annuity, but the defendants refused to refund such overpayment.
The defendants having failed to repay the over-payments made by the plaintiff, these proceedings were instituted, and the defendants pleaded that the sum of £ 1,163 was paid by the plaintiff voluntarily and with full knowledge of the facts, and that if any sum had been overpaid by the plaintiff, it was paid under a mistake of law and is irrecoverable. When the matter came for hearing before the Circuit Court Judge, he referred to this Court for determination the following questions:
1. Whether the defendants were entitled to require payment by the plaintiff of the sum actually paid in respect of redemption of the said annuity?
2. If the defendants were not entitled to require the said sum to be paid, whether the sum was paid by a mistake either of law or of fact?
3. If the said sum was paid by the plaintiff by mistake, whether the said sum or any part thereof is now recoverable?
As to the first question, having regard to the decision of this Court in Meade v Cork County Council, counsel for the defendants very properly conceded that the County Council were not entitled to require payment by the plaintiff of the sum of £ 1,163 and that, as stated earlier in this judgment, it was agreed that the sum of £ 227.47 was the correct redemption value of the annuity.
Likewise, in respect of the second question, the argument in this Court proceeded on the basis that the mistake was not one of fact but of law. Both parties were agreed that the mistake was one of law; the defendants submitted that, as it was a voluntary payment, no sum was recoverable by the plaintiff, whilst the plaintiff submitted that whilst the mistake was one of law, it was one made by the defendants when they were in a privileged position with the right to withhold that privilege and that therefore the payment was not voluntary.
The real question therefore for determination is whether a payment made, in circumstances such as the present, in mistake of law is recoverable. The general rule is usually stated to be that where money is paid under the influence of a mistake, and the mistake is one of fact, an action will lie to recover it back; but that to entitle the plaintiff to recover, the mistake upon which he has acted must be one of fact, not of law. Thus in Pollock on Contracts, (13th ed.), edited by Professor Winfield, it is stated at p. 378 that ‘money paid under a mistake of law cannot in any case be recovered’. Similar statements are to be found in many textbooks. However, the Judicial Committee of the Privy Council held in Kiriri *147 Cotton Co Ltd v Dewani [1960] 2 WLR 127 that a plaintiff may recover money paid on a mistake of law provided that he is not in pari delicto with the defendant in mistaking the law. Delivering the advice of the Privy Council, Lord Denning said at p. 133:
Nor is it correct to say that money paid under a mistake of law can never be recovered back. The true proposition is that money paid under a mistake of law, by itself and without more, cannot be recovered back. James LJ pointed that out in Rogers v Ingham. If there is something more in addition to a mistake of law — if there is something in the defendant’s conduct which shows that, of the two of them, he is the one primarily responsible for the mistake — then it may be recovered back. Thus, if as between the two of them the duty of observing the law is placed on the shoulders of the one rather than the other — it being imposed on him specially for the protection of the other — then they are not in pari delicto and the money can be recovered back; see Browning v Morris, by Lord Mansfield. Likewise, if the responsibility for the mistake lies more on the one than the other because he has misled the other when he ought to know better — then again they are not in pari delicto and the money can be recovered back.
This passage was cited with approval by Kenny J in Dolan v Neligan [1967] IR 247, at 260. Again, even where there has been no mistake of fact, a plaintiff may still recover monies so paid in an action for money had and received upon proof that the monies were paid by him involuntarily, that is, as the result of some extortion, coercion or compulsion in the legal sense — see per Windeyer J in Mason v New South Wales, 102 CLR 108, 139. He cannot recover if the payment was made voluntarily. A payment may be said to be voluntary, in this context, when the payer makes it deliberately with a knowledge of all relevant facts, and either being indifferent to whether or not he is liable in law, or knowing, or having reason to think, himself not liable, yet intending finally to close the transaction — see per Windeyer J ib at 143. Whether the payment has been voluntary in this sense may also be deduced from the relationship of the parties. As Abott CJ said in Morgan v Palmer, 2 B & C 729 at 734:
It has been well argued that the payment having been voluntary, it cannot be recovered back in an action for money had and received. I agree that such a consequence would have followed had the parties been on equal terms. But if one party has the power of saying to the other, ‘That which you require shall not be done except upon the conditions I choose to impose’, no person can contend that they stand upon anything like an equal footing.
In such a case, the payment is by no means to be considered to be voluntary — see per McTiernan J in Bell v Shire of Serpentine, (1969) 121 CLR 137.
Applying these principles to the present case, the plaintiff is in my judgment entitled to recover the overpayment of £ 935.53 made by her. The payment of £ 1,163 made by the plaintiff was not ‘voluntary’ in the context aforesaid. The parties were not on equal terms; the defendants had the power, if they thought fit, to withhold permission for the redemption of the annuity; they were however prepared to allow the plaintiff to redeem it, but only on the conditions imposed by them, which included exacting a payment in excess of that permitted by the Statute. The plaintiff was not in possession of all the relevant *148 facts, and did not know, nor had she reason to think, that she was not liable to pay the sum demanded by the defendants for the redemption of the annuity. The defendants were in my view primarily responsible for the mistake and the parties were accordingly not in pari delicto .
I would accordingly answer the questions submitted by the learned Circuit Court judge as follows: Question 1 No. Question 2 The sum paid was paid by a mistake of law. Question 3 Yes.
KENNY J
having recited the facts of the case delivered his judgment on 11 March 1981 saying: … The aphorism ‘money paid under a mistake of fact may be recovered but money paid under a mistake of law cannot’ is grossly inaccurate. It has the advantage of simplicity but the matter is much more complex than it suggests. I have no doubt that the excessive sum fixed by the County Council for the redemption was caused by the circular sent by the Department of Local Government which was based on an entirely wrong interpretation of s.99 and which was, therefore, a mistake of law. The recovery of a sum so paid is well dealt with in chapter 4 of the second edition of the Law of Restitution by Goff J and Professor Jones (1978 edition). It has also been dealt with in the case law; my judgment when I was a judge of the High Court in Dolan v Neligan [1967] IR 245 and the decision of the Privy Council in Kiriri Cotton Co Ltd v Ranchoddas [1960] AC 192.
In the latter Lord Denning said:
It is not correct to say that everyone is presumed to know the law. The true proposition is that no man can excuse himself from doing his duty by saying that he did not know the law on the matter. Ignorantia juris neminem excusat . Nor is it correct to say that money paid under a mistake of law can never be recovered back. The true proposition is that money paid under a mistake of law by itself and without more cannot be recovered back … If there is something more in addition to a mistake of law — if there is something in the defendant’s conduct which shows that of the two of them, he is the one primarily responsible for the mistake, — then it may be recovered back … if the responsibility for the mistake lies more on the one than the other — because he has misled the other when he ought to know better — then again they are not in pari delicto and the money can be recovered back.
In the instant case the plaintiff’s solicitor wrote to the defendants asking what was the redemption price of the annuity. The plaintiff’s solicitor could not be expected to know the redemption price. He relied on the defendants to give him the correct figure. Nor could he be expected to anticipate the decision of the Supreme Court in Meade’s Case. It is important to bear in mind that the decision of the Supreme Court reversed that of a High Court judge who thought that the excessive amount of the redemption price of an annuity could not be recovered back from the defendants in that case.
I have no doubt that the plaintiff is entitled to recover the £ 953.53 from the defendants.
The answers to the questions posed by the Circuit Court judge should, in my opinion be: (i) The defendants were not entitled to require payment by the plaintiff of the sum actually paid in respect of the redemption of the annuity. (ii) *149 The amount of the redemption price of the annuity was paid under a mistake of law. (iii) £ 953.53, part of the redemption price paid, is recoverable by the plaintiff as personal representative from the defendants.