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BCL Law Notes Restitution of Unjust Enrichment BCL Notes

Westdeutche V. Islington Borough Council Hobhouse And Ca Notes

Updated Westdeutche V. Islington Borough Council Hobhouse And Ca Notes

Restitution of Unjust Enrichment BCL Notes

Restitution of Unjust Enrichment BCL

Approximately 620 pages

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Westdeutche v. Islington Borough Council

Facts

The plaintiff bank entered into a ten-year interest rate swap agreement with the defendant local authority commencing on 18 June 1987. The interest payments, which were payable half-yearly, were calculated on a notional principal sum of 25m by reference to the difference between the fixed rate of interest (payable by the bank) and the floating London Inter-Bank Offered Rate (payable by the local authority). Additionally, the bank agreed to pay the local authority a lump sum of 2·435m on the commencement date as the first of the fixed rate payments. At the same time, the bank entered into a parallel swap transaction with a second bank in order to hedge its potential liabilities under the arrangement with the local authority. By June 1989 the local authority had made four payments to the bank under the swap agreement, totalling 1,354,474·4307. However, on 1 November 1989 the Divisional Court of the Queen's Bench Division held, in an unrelated case subsequently upheld by the House of Lords in January 1991, that interest rate swap transactions were outside the powers of local authorities and void ab initio. Thereafter the local authority made no further payments. The bank subsequently brought an action against the local authority, claiming inter alia repayment of 1,145,525·4393, being the amount of the initial lump sum payment of 2·435m less the payments made by the local authority, and interest as from 18 June 1987.

The swaps between Westdeutche and Islington were open swaps whereas the swaps between Kleinwort Benson and Sandwell were closed swaps.

Hobhouse J.

Analysis of annuity cases

The primary importance of this line of cases is that the transactions gave rise to payments both ways, that is to say both by the grantor and the grantee. When the transaction had been determined to be void, the moneys paid either way were treated as being recoverable in an action for money had and received.

Citing Lord Ellenborough in Hicks v. Hicks:

This was either an annuity or not an annuity. If not an annuity, the sums paid on either side were money had and received by the one party to the other's use. If the consideration of the annuity be money had and received, it must be money had and received with all its consequences; and therefore the defendant must be at liberty to set off his payments as such, on the same score.”

These authorities therefore establish that the right of restitution existed in respect of payments made under void contracts even though there were payments both ways and therefore on a contractual analysis there was no 'total failure of consideration'.

Sandwell relied upon Davis v Bryan (1827) 6 B & C 651, 108 ER 591 as showing that there should not be a right of recovery in respect of the first Sandwell swap. The first Sandwell swap differs from the other transactions with which the present actions are concerned in that it ran its full course and all the payments contemplated by it were in fact made. In Davis v Bryan the plaintiff was the executrix of a person who had purchased an annuity for his life from the defendant who had regularly paid the annuity up to the time of the death of the grantee. However, no memorial of the grant of the annuity had ever been enrolled. The executrix of the grantee then sued for the repayment of the sum paid by the grantee to the grantor as money had and received by the defendant to the use of the grantee. The action failed.

The judgments appear to be based on three grounds. (See also the report at 9 Dow & Ry 726.) Firstly, they applied a general principle of conformity to equity and good conscience which was implicit in the action for money had and received. It was unconscionable that a party should wait to see how the contract turned out before deciding whether or not to adopt it. 'The testator received the whole of that which he bargained for, and now his representative says that the contract was void from the beginning. Is there any thing like good conscience in the claim?' Secondly, faced with a need to distinguish Hicks v Hicks, they formulated the proposition that the grantee who had failed to register the transaction could not himself unilaterally avoid it; in Hicks v Hicks the transaction had already been avoided in earlier proceedings upon the insistence of the grantor and 'the grantee was therefore at liberty to contend for the same thing'. Thirdly, it was said that a fully executed contract could not be rescinded. (See 6 B & C 651 at 655-656, 108 ER 591 at 592.)

Of these reasons, it is for the second that Davis v Bryan has been treated as authority in the later cases. There is no other authority that the mere fact that the relevant contract is no longer executory is of itself a bar to the remedy of restitution unless it be the now discredited doctrine in Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326, [1904-7] All ER Rep 817, which turned upon a proposition that the remedy of rescission was confined to the rescission of contracts, not conveyances. In my judgment, Davis v Bryan does not establish any proposition of assistance to Sandwell in relation to the first Sandwell swap save that in any action for money had and received it is always necessary to have regard to considerations of equity and good conscience.

Sumption QC’s argument:

The argument developed by Mr Sumption QC was that it is necessary to ask whether the payer got the benefit for which he bargained. 'What the bank bargained for was payments which would discharge a legal obligation and which the bank was entitled lawfully to receive. What it obtained were payments made under a void agreement which Islington was prima facie entitled to recover back.'

The phrase 'failure of consideration' is one which in its terminology presupposes that there has been at some stage a valid contract which has been partially performed by one party. It is essentially a concept for use in the law of contract and provides a common...

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