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Kleinwort Benson V. Lincoln City Council Notes

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KLEINWORT BENSON V. LINCOLN CITY COUNCIL FACTS On various dates between 1982 and 1985 the plaintiff bank entered into interest rate swap agreements with each of four local authorities. Each transaction was fully performed by both parties according to its terms and resulted in the bank paying to the authorities sums totalling PS811,208. Following a decision of the House of Lords in 1991 holding that such interest rate swap contracts were outside the statutory powers of local authorities the bank commenced proceedings in the Commercial Court against the four local authorities claiming restitution of the sums it had paid to them. Interest Swap: 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. This can serve two purposes - first, speculation and second, hedging risks under other transactions. This may also often be used as a source of funding. HOLDING LORD BROWNE-WILKINSON (MINORITY



I take the view that the moneys are not recoverable since, at the time of payment, the payer was not labouring under any mistake. Effect of the House of Lords Decision 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, the bank 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. 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... 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. 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. 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. Can there be a "settled law" in the absence of a judicial decision?
However, your Lordships do have to decide whether, if at the trial such a settled view is proved to have existed, it would prevent the bank from recovering the moneys paid on the basis of moneys paid under a mistake of law. 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. 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 moneys 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. My Lords, I agree with the views of the Law Commission and would therefore have held that the bank would not be entitled to recover on the grounds of mistake of law if at the time of payment the bank

were, or if they had sought advice would have been, advised by all lawyers skilled in the field that the swaps agreements were valid. Conclusion My Lords, in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit moneys paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend, Lord Goff of Chieveley, 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. LORD GOFF Mistake of Law Rule The local authorities did not press the argument that money paid under a mistake of law is not recoverable. Instead, they suggested that even if the court were to do away with this rule, it should do so while permitting exceptions to recovery in such cases - in particular that recovery must not be permitted when the payment was made in pursuance of a "settled understanding of the law." Ignorance of law Rationale: based on 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.

Criticisms of the Mistake of Law rule: 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. Rejection of the mistake of law in common law world 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. 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. Conclusion: 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] A.C. 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 members of the appellate committee hearing the present appeals. What is a mistake of law? Is a judicial decision that changes the law sufficient?
The argument now advanced by the 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. Re-interpreted Declaratory Theory: 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... 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... 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. 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... 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. 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. Settled Law Exception 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. 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. Legislations and Judicial Decisions: 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

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