Before:
 
Lord Justice Neill
Lord Justice Leggatt
Sir Roger Ormrod

 
 

B E T W E E N

JUDGMENT
 
DATED: 21 November 1991

NEILL LJ

This is an appeal by Barclays Bank plc and Barclays De Zoete Wedd Gilts Ltd in action No 318 and by Barclays De Zoete Wedd Gilts Ltd in action No 654 from orders of Mr Justice Hirst dated 1st November 1991. By his orders Mr Justice Hirst granted leave to the Council of the London Borough of Hammersmith and Fulham to amend its points of defence in action No 318 and its points of reply and defence to counterclaim in action No 654. I shall call the council "Hammersmith".

In the two actions the appellants claim restitution from Hammersmith of sums paid to Hammersmith purportedly pursuant to certain financial transactions including interest rate swap contracts. In January 1991 the House of Lords declared that these financial transactions including the interest rate swap contracts were void in that Hammersmith lacked capacity to make them: see [1991] 2 WLR 372.

The claims by the appellants are claims in quasi-contract for moneys paid for a consideration which has wholly failed.

It is unnecessary for the purpose of the present appeal to examine the nature of the financial transactions. The transactions are explained in the speech of Lord Templeman in Hazell v. Hammersmith and Fulham London Borough Council [1991] 2 WLR 372 and, in greater detail, in appendix A to the judgment of the Divisional Court in the same case: see [1990] 2 QB 697, 739.

Before the amendments which are the subject of the present appeal Hammersmith had raised three main defences:

(1) That it was entitled to set off against the sums claimed sums which it had paid under the swap contracts.

(2) That there had not been a total failure of consideration

(a) by reason of the payments which had been made by Hammersmith to the appellants;

(b) by reason of the set off; and

(c) because the parties had conducted themselves on the basis that the contracts were valid.

(3) That Hammersmith had changed its position in good faith in reliance on some of the contracts and that it would be inequitable to require Hammersmith to make restitution either at all or in full.

By the amendments which are the subject of the present appeal Hammersmith seek to raise the further defences:

(a) That the appellants entered into the contracts in the knowledge that Hammersmith might have no capacity to make them and therefore might not perform them; or

(b) That the appellants took a risk that Hammersmith had no such capacity and therefore might not perform them.

It is alleged that in either case the appellants voluntarily assumed the risk on entering into the purported contracts.

It is to be noted that similar amendments have been made in proceedings brought by two other banks against Hammersmith. It is further to be noted that actions No 318 and No 654 are lead actions and that a substantial quantity of other litigation is dependent on the result of these actions.

It is common ground that if the amendments are allowed it will be necessary for the appellants to make a substantial, perhaps a very substantial, amount of discovery. This discovery will relate to the question of any actual knowledge which the appellants had of Hammersmith's powers at the time of the contracts and to the linked questions concerning what consideration had been given by the appellants to the validity of the contracts and what advice they had received on the matter.

It is also common ground that if the amendments stand the length of the trial will be increased, though the parties are not in agreement as to the extent of this increase.

The case for the appellants can be stated quite shortly:

(1) Where a claim is made to recover money paid under a purported contract which is void ab initio so that there has been a total failure of consideration, the payee can raise one or more of the following defences:

(a) that in the circumstances there has not been a total failure of consideration;

(b) that when the payment was made it was the intention of the parties that the payee should keep the money in any event and whether or not the contract was valid. The intention of the parties as to the right to retain any moneys is to be judged on the evidence. We were referred on the question of intention to passages in the speeches in Fibrosa Spolka Alcyjna v. Fairbairn Lawson [1943] AC 32 and in particular to passages in the speech of Lord Wright at pages 61, 63 and 64; and

(c) that in reliance on the payment the payee had changed his position: this is a defence which can be raised in appropriate cases by reason of the decision of the House of Lords in Lipkin Gorman v. Karpnale Ltd [1991] 3 WLR 10.

(2) The knowledge or belief of the payee as to the capacity of the payee to enter into the contract is irrelevant except in so far as it may throw light in a hypothetical case on the intention of the parties as to whether the payee should retain the money in any event. It is not suggested in this case that the parties intended that Hammersmith should be able to keep the money irrespective of the validity of the contracts. Indeed the parties conducted themselves on the basis that the contracts were binding. Counsel drew our attention to paragraph 11 of the defence in action No 318.

(3) Furthermore, the knowledge of the appellants is not in issue. The law presumes that the appellants knew not only of the risk of Hammersmith's incapacity but also of the incapacity itself. Counsel referred us to Halsbury's Laws of England (4th edition), volume 7(1) at paragraph 980 for the proposition that save in cases where the doctrine of ultra vires has been abolished persons contracting with a corporation cannot complain that a contract is beyond the powers of the corporation; knowledge of the corporation's contractual capacity is presumed.

(4) The allegation that the appellants took the risk that Hammersmith lacked capacity added nothing. A distinction is to be drawn between the risk of incapacity and the risk of irrecoverability. Hammersmith could not show that the appellants took the risk that the sums paid would be irrecoverable unless it alleged and proved (which it did not and could not) that it was the intention of the parties that the money should be retained in any event (cf (2) above).

(5) The matters pleaded by way of amendment were incapable in law of constituting a defence to the appellants' claims. The defence was hopeless and contrary to principle. The question of the amendments should be decided now so that unnecessary expense could be avoided.

(6) Finally, if, contrary to the appellants' submissions, Hammersmith's arguments had a faint prospect of success, the court should refuse the amendments in the exercise of its discretion because of the serious prejudice which would be caused to the appellants by the need to give very substantial discovery and by the undue and unnecessary prolongation of the trial.

On behalf of Hammersmith on the other hand reliance was placed in the first place on the difficulty which, it was said, faced the appellants in establishing a valid claim at all. If the claim had been for money lent, the appellants would have been defeated by the decision of the House of Lords in Sinclair v. Brougham [1914] AC 398. In the result the appellants had to rely on the uncertain authority of Re Phoenix Life Assurance Company (1862) 2 John & H 441.

It was far from clear, it was argued, that even if the Phoenix Life case was good law, the knowledge of the payer might not be a relevant consideration as it could be in a claim based on mistake: see RE Jones v. Waring & Gillow Ltd [1926] AC 670. The Lipkin Gorman case demonstrated that the law of unjust enrichment was still in a stage of development.

The court was in fact in uncharted waters where it was important to bear in mind the clear principle that a pleading is only to be struck out in plain and obvious cases: see, for example, Lonrho plc v. Fayed [1991] 3 WLR 188 at page 198 per Lord Bridge.

I regard the submissions put forward on behalf of the appellants by Mr Milligan as very formidable and, in the present state of the law, probably correct. Nevertheless I have come to the conclusion that the amendments ordered by Mr Justice Hirst should be allowed to stand.

For many years there has been controversy as to the true basis for claims in quasi-contract or restitution. It now seems clear, however, that the theory that such relief is based on the principle of unjust enrichment has gained ascendancy over the theory of an implied contract. It is likely that future developments may involve a fresh appraisal of the factors which can be taken into account when the principle of unjust enrichment is applied in practice.

It would not be appropriate on an interlocutory appeal of this nature to attempt any detailed review of the law, but I propose to refer to two leading cases which appear to me to support the proposition that it may be relevant to consider all the circumstances of the particular case, including the state of knowledge of the respective parties, before deciding whether to grant or to withhold relief.

In Moses v. Macferlan (1760) 2 Burr 1005 Lord Mansfield stated that the gist of the action for money had and received was that "the defendant, upon the circumstances of the case, [was] obliged by the ties of natural justice and equity to refund the money." More recently Lord Wright in the Fibrosa case (supra) at page 61 referred to the principle of restitution in these terms:

"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."

If the court is concerned to investigate whether the retention of the money in question does or does not amount to unjust enrichment, I see no objection in principle to including among the matters to be scrutinised the state of mind and knowledge of both the payer and the payee. Moreover the law of restitution is still at a stage of development. It is to be remembered that it is only in the last few months that the House of Lords has given its authority to the defence of a change of position in an action for restitution: see the Lipkin Gorman case (supra). I would also draw attention to the speech of Lord Goff in R v. Tower Hamlets LBC, ex parte Chetnik Ltd [1988] AC 858 where the House of Lords was concerned with the justice or injustice of making a refund under section 9 of the General Rate Act 1967 of a mistaken overpayment of rates. Lord Goff referred to the anomalous position of English law in regard to the recovery of money paid under a mistake of law and continued at page 882:

"Effectively, therefore, the section creates a statutory remedy of restitution, in the circumstances specified by the section, to prevent the unjust enrichment of the rating authority at the expense of the ratepayer.

In these circumstances, it should be of assistance to those considering the exercise of the discretion, conferred by the section, to have regard to the general principles of the law of restitution in their search for guidance in the exercise of the power, though always bearing in mind that those principles may be modified, expressly or impliedly, by the terms of the statute. The approach is, as I see it, entirely consistent with (though broader than) the specific examples given by my noble and learned friend. He has first anxiously considered whether the fact that the rating authority will have, for example, employed a substantial part of its rate income to meet precepts by other authorities, would provide a good reason for denying, at least in part, a ratepayer's claim for refund under section 9. This is no more than an inquiry whether it would be right for the local authority to invoke the restitutionary defence of change of position. Generally speaking, I would have thought this to have been an appropriate ground for declining to make a refund; but I nevertheless agree with my noble and learned friend that to do so would be inconsistent with the legislative intention as revealed by the section. Again, he has considered the case of a claim by a ratepayer who has made the payment 'in full knowledge of a possible ground on which to contest liability and in consequence of a deliberate decision not to do so;' such a payment would be irrecoverable in restitution, even on the ground of mistake of fact: see Kelly v. Solari (1841) 9 M & W 54, 58, per Lord Abinger CB. Finally, he has considered the case where a ratepayer deliberately takes advantage of an excessive valuation; in such a case, there would of course be no basis for recovery in restitution."

This is an unusual case. The appellants are sophisticated financial institutions. For my part I cannot exclude the possibility that, on a detailed examination of the facts and of the actual knowledge possessed by the appellants at the time the contracts were made, the retention by Hammersmith of the moneys paid to them will be held in the particular circumstances to be irrecoverable in restitution as unjust enrichment.

I therefore consider that in principle the amendments should be allowed and I would not refuse them as a matter of discretion.

I would dismiss the appeal.

I agree.

I agree also.