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Kleinwort Benson V. Birmingham City Council Notes

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KLEINWORT BENSON V. BIRMINGHAM CITY COUNCIL FACTS During the 1980s a number of local authorities entered the financial markets in order to trade in a new form of derivative, known as the interest rate swaps contract. Then the courts held that these contracts were ultra vires the local authorities and therefore void. In some cases the market rates of interest had moved against the local authorities, and they were the plaintiffs. In others, including the present, the banks had paid out more by way of differences than they had received, and they claimed to recover the net overpayment. In this case, the bank claims to recover PS353,321*91 as the net amount of payments made by it to the appellant, Birmingham City Council ("the authority"), under a swaps contract dated 23 September 1982 which ran until September 1987. The authority applied for leave to amend its points of defence so as to raise what has come to be known as the defence of "passing on." What this means for present purposes is that the authority seeks to assert that the bank has not in fact suffered any, or any substantial, loss as a result of these transactions. The reason given is that the payments which the bank made to the authority and which it now claims to recover were in fact matched by payments which it received from third parties described as counterparties under hedging arrangements which it made with them... If those are the facts, says the authority, then the bank has suffered no, or no substantial, loss and its claim for restitution should fail. Thus the form of "passing on" alleged by the authority in the present case is the bank's practice of hedging or otherwise covering itself against the risks inherent in the swaps contract. HOLDING The issue here is whether what is called the defence of passing on is available when the plaintiff is the bank. The hedging operations which it carries out in the normal course of its operations are not ones which would normally be undertaken by a local authority. But the same principle would apply if the local authority was the plaintiff and the bank as defendant contended that because of a hedging operation or for any other reason the authority had not suffered the depletion of its assets which it is said is essential to found a claim. The essence of the defence is that the plaintiff ought not to recover the payment which has "unjustly" enriched the defendant, if the result of restitution would be that the plaintiff, not being out of pocket, would himself receive a "windfall gain"

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