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BCL Law Notes Restitution of Unjust Enrichment BCL Notes

Guinness Mahon V. Kensington And Chelsea Rlbc Notes

Updated Guinness Mahon V. Kensington And Chelsea Rlbc Notes

Restitution of Unjust Enrichment BCL Notes

Restitution of Unjust Enrichment BCL

Approximately 620 pages

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Guinness Mahon v. Kensington and Chelsea Royal Longon Borough Council

Facts

On 23 September 1982 the Kensington and Chelsea Royal London Borough Council apparently entered into an agreement with Guinness Mahon & Co. Ltd. ("the bank") setting out the terms of a transaction of a type known as an interest rate swap.

Decision in Hazel: On 1 November 1989 the Divisional Court, in Hazell v. Hammersmith and Fulham London Borough Council [1990] 2 Q.B. 697, declared, as subsequently upheld in the House of Lords [1992] 2 A.C. 1, that such an agreement as the council had apparently concluded with the bank was ultra vires the council and so void from the start.

Proceedings in Westdeutche: In early 1993 two actions selected as test actions for the resolution of the problems arising from the invalidity of such interest rate swaps came before Hobhouse J. They were Westdeutsche Landesbank Girozentrale v. Islington London Borough Council ("Westdeutsche") and Kleinwort Benson Ltd v. Sandwell Borough Council ("Sandwell") [1994] 4 All E.R. 890.

Decision in Westdeutche at first instance: Hobhouse J. gave judgment in February 1993 upholding the claims of the banks in all cases. In particular, he refused to draw a distinction between what might be described as "open swaps," where the period prescribed in the ultra vires agreement had not expired and "closed swaps," where it had.

Appeal on open swaps alone to CA: Though there were appeals in Westdeutsche [1994] 1 W.L.R. 938 on certain points in relation to open swaps there was none in Sandwell because it was settled and therefore none in relation to a closed swap. Accordingly this appeal has been argued on the footing that it is in substance an appeal from the order of Hobhouse J. in Sandwell in so far as it related to a closed swap.

Holding

Morrit LJ

Basis of the decision in Westdeutche was failure of consideration

I have referred at length to the course of the proceedings in Westdeutsche to demonstrate that the true basis for the recovery by the bank of the net amount it paid to the local authority, which had no capacity to enter into the swap agreement, was for money had and received as on a total failure of consideration.

Distinguishing between closed swaps and open swaps

Absurdity Argument: Before considering these submissions in greater detail it is helpful to consider the position of the parties to an open swap and a closed swap. I assume a swap period of five years with swap payments between the bank and local authority every six months. The penultimate payments made 4 years after the date of the agreement have given rise to a net balance in favour of the local authority of 100,000. Westdeutsche establishes that if the original swap agreement was ultra vires the local authority the bank would have a cause of action for repayment of that balance as money had and received or for restitution at common law. Then I assume that six months later the final swap payments are made by a net payment from the bank to the local authority of a further 50,000. The argument for the council, if accepted, would deny the bank any right of recovery. But if the restitutionary principle requires the recognition of a cause of action for recovery of 100,000 when the penultimate payments were made it is difficult to see on what basis it denies any claim at all when on the final payments the balance in favour of the local authority rises to 150,000.

Other reasons for not treating closed and open swaps differently: But whether or not my reading of the judgment of Kerr L.J. is correct one principle clearly established by the Court of Appeal in Westdeutsche[1994] 1 W.L.R. 938 is that in the case of a contract void from the start there must for that reason have been a total failure of consideration:perDillon L.J., at p. 945H, and Leggatt L.J., at p. 953E. To the same effect is the speech of Lord Browne-Wilkinson in the House of Lords[1996] A.C. 669, 710H-711A. These passages, which I have already quoted, demonstrate that it is the very fact that the contract is ultra vires which constitutes the total failure of consideration justifying the remedy of money had and received or restitution for unjust enrichment. If partial performance of that assumed obligation in the case of an open swap does not preclude a total failure of that consideration then there is no basis on which complete performance of a closed swap could do so.

If the contractual promise was void because it was ultra vires, how could the law imply a promise to the like effect? Though the basis of the implied promise may now have gone, in my view the general principle must remain that an ultra vires transaction is of no legal effect. It must follow that the recipient of money thereunder has no right to it. If he keeps it he will be enriched. If he does not then or subsequently obtain a right to keep...

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