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Cite as: [1996] 5 Bank LR 341, [1996] 2 WLR 802, [1996] AC 669, [1996] UKHL 12, [1996] 2 AC 669, [1996] 2 All ER 961

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JISCBAILII_CASE_TRUSTS

    Parliamentary Archives,
    HL/PO/JU/18/256

    Westdeutsche Landesbank Girozentrale (Respondents) v. Council of the London Borough of

    Islington (Appellants)


    JUDGMENT

    Die Mercurii 22° Mali 1996

    Upon Report from the Appellate Committee to whom was referred the Cause
    Westdeutsche Landesbank Girozentrale against the Council of the London Borough of Islington,
    That the Committee had heard Counsel as well on Monday the 10th as on Tuesday the 11th,
    Wednesday the 12th and Thursday the 13th days of July last upon the Petition and Appeal of the
    Council of the London Borough of Islington, of 122 Upper Street, Islington, London Nl, praying
    that the matter of the Order set forth in the Schedule thereto, namely an Order of Her Majesty's
    Court of Appeal of the 17th day of December 1993, might be reviewed before Her Majesty the
    Queen in Her Court of Parliament and that the said Order might be reversed, varied or altered or
    that the Petitioners might have such other relief in the premises as to Her Majesty the Queen in
    Her Court of Parliament might seem meet; as upon the case of Westdeutsche Landesbank
    Girozentrale lodged in answer to the said Appeal; and due consideration had this day of what was
    offered on either side in this Cause:

    It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of
    Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of
    Appeal of the 17th day of December 1993 complained of in the said Appeal and the Order of Mr
    Justice Hobhouse of the 18th day of February 1993 be, and the same are hereby, so Varied that:

    (i) the amount payable by the Appellants to the Respondents is £1,145,525 and 93 pence
    together with interest on the balance outstanding at the relevant time between the amount
    of £2.5 million received by the Respondents on the 18th day of June 1987 and the
    amounts paid from time to time under the swaps contract and pursuant to the Orders of
    the Court of Appeal and Mr Justice Hobhouse by the Appellants to the Respondents;

    (ii) the interest payable shall be simple interest at average seven day rates applicable from
    time to time on the outstanding balance, as from the 18th day of June 1987;

    (iii) the Appellants having paid to the Respondents pursuant to the Orders of the Court of
    Appeal and Mr Justice Hobhouse £1,599,745 and 18 pence on the 24th day of February
    1993 and £987,208 and 14 pence on 4th day of April 1994, if it should appear that by
    either of these payments the Appellants have paid more than was due the Respondents
    shall pay to the Appellants the amount of the overpayment together with simple interest at
    average seven day rate from the date of overpayment to the date of payment:

    And it is further Ordered, That the Respondents do pay or cause to be paid to the said Appellants
    the Costs incurred by them in respect of the said Appeal to this House, the amount of such Costs
    to be certified by the Clerk of the Parliaments if not agreed between the parties.

    Cler: Parliamentor:

    HOUSE OF LORDS

    OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

    IN THE CAUSE

    WESTDEUTSCHE LANDESBANK GIROZENTRALE
    (REPONDENTS)

    v.

    COUNCIL OF THE LONDON BOROUGH OF ISLINGTON

    (APPPELLANT)

    ON 22 MAY 1996


    Lord Goff of Chieveley
    Lord Browne-Wilkinson
    Lord Slynn of Hadley
    Lord Woolf
    Lord Lloyd of Berwick


    LORD GOFF OF CHIEVELEY

    My Lords,

    This appeal is concerned with a transaction known as an interest rate
    swap. Under such a transaction, one party (the fixed rate payer) agrees to pay
    the other over a certain period interest at a fixed rate on a notional capital
    sum; and the other party (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. Interest rate swaps can
    fulfil many purposes, ranging from pure speculation to more useful purposes
    such as the hedging of liabilities. They are in law wagers, but they are not
    void as such because they are excluded from the regime of the Gaming Acts
    by section 63 of the Financial Services Act 1986.

    One form of interest rate swap involves what is called an upfront
    payment, i.e. a capital sum paid by one party to the other, which will be
    balanced by an adjustment of the parties' respective liabilities. Thus, as in the
    present case, the fixed rate payer may make an upfront payment to the floating
    rate payer, and in consequence the rate of interest payable by the fixed rate
    payer is reduced to a rate lower than the rate which would otherwise have
    been payable by him. The practical effect is to achieve a form of borrowing
    by, in this example, the floating rate payer through the medium of the interest
    rate swap transaction. It appears that it was this feature which, in particular,
    attracted local authorities to enter into transactions of this kind, since they
    enabled local authorities subject to rate-capping to obtain upfront payments
    uninhibited by the relevant statutory controls.

    - 1 -

    At all events, local authorities began to enter into transactions of this
    kind soon after they came into use in the early 1980s. At that time, there was
    thought to be no risk involved in entering into such transactions with local
    authorities. Financially, they were regarded as secure: and it was assumed
    that such transactions were within their powers. However, as is well-known,
    in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2
    A.C. 1 your Lordships' House, restoring the decision of the Divisional Court,
    held that such transactions were ultra vires the local authorities who had
    entered into them. It is unnecessary for present purposes to examine the basis
    of that decision; though I wish to record that it caused grave concern among
    financial institutions, and especially foreign banks, which had entered into
    such transactions with local authorities in good faith, with no idea that a rule
    as technical as the ultra vires doctrine might undermine what they saw as a
    perfectly legitimate commercial transaction. There then followed litigation in
    which banks and other financial institutions concerned sought to recover from
    the local authorities with which they had dealt the balance of the money paid
    by them, together with interest. Out of the many actions so commenced, two

    were selected as test cases. These were the present case, Westdeutsche
    Landesbank Girozentrale v
    . Islington Borough Council, and Kleinwort Benson
    Ltd. v
    . Sandwell Borough Council. Both cases came on for hearing before
    Hobhouse J. Your Lordships are concerned only with the former case. In a
    powerful judgment Hobhouse J, held that the plaintiffs ("the Bank") were
    entitled to recover from the defendants ("the Council") the net balance
    outstanding on the transaction between the parties, viz., the difference
    between the upfront payment of £2.5m. paid by the Bank to the Council on
    18 June 1987, and the total of four semi-annual interest payments totalling
    £1,354,474.07 paid by the Council to the Bank between December 1987 and
    June 1989, leaving a net balance of £1,145,525.93 which the judge ordered
    the Council to pay to the Bank. He held the money to be recoverable by the
    Bank either as money had and received by the Council to the use of the Bank,
    or as money which in equity the Bank was entitled to trace into the hands of
    the Council and have repaid out of the Council's assets. He decided that the
    Bank's right to restitution at common law arose from the fact that the payment
    made by the Bank to the Council was made under a purported contract which,
    unknown to both parties, was ultra vires the Council and so void, no
    consideration having been given for the making of the payment. The decision
    by the judge, which was affirmed by the Court of Appeal, raised important
    questions in the law of restitution, which are of great interest to lawyers
    specialising in this field. Yet it is an extraordinary feature of the present
    appeal to your Lordships' House that the judge's decision on the substantive
    right of recovery at common law does not fall for consideration by your
    Lordships' House. The appeal of the Council is confined to one point only -
    the question of interest.

    The judge ordered that the Council should pay compound interest on
    the sum awarded against them, calculated at six-monthly rests from 1 April
    1990 to the date of judgment. The Court of Appeal affirmed the judge's
    decision to award compound interest but, allowing a cross-appeal by the Bank,

    - 2 -

    ordered that interest should run from the date of receipt of the upfront
    payment. Both the judge and the Court of Appeal held that they were entitled
    to invoke against the Council the equitable jurisdiction to award compound
    interest, on the basis that the Bank was entitled to succeed against the Council
    in an equitable proprietary claim. The foundation for the Bank's equitable
    proprietary claim lay in the decision of this House in Sinclair v. Brougham
    [1914] AC 398. Since that decision has for long been controversial, the
    Appellate Committee invited argument on the question whether the House
    should depart from the decision despite the fact that it has stood for many
    years.

    The shape of the case

    Once the character of an interest swap transaction has been identified
    and understood, and it is appreciated that, because the transaction was beyond
    the powers of the Council, it was void ab initio, the basic question is whether
    the law can restore the parties to the position they were in before they entered
    into the transaction. That is, of course, the function of the law of restitution.
    I feel bound to say that, in the present case, there ought to be no difficulty
    about that at all. This is because the case is concerned solely with money.
    All that has to be done is to order that each party should pay back the money
    it has received - or, more sensibly, to strike a balance, and order that the
    party who has received most should repay the balance; and then to make an
    appropriate order for interest in respect of that balance. It should be as simple
    as that. And yet we find ourselves faced with a mass of difficult problems,
    and struggling to reconcile a number of difficult cases.

    I must confess that, like all the judges who have been involved in these
    cases, I too have found myself struggling in this way. But in the end I have
    come to realise the importance of keeping my eyes on the simple outline of
    the case which I have just described; and I have discovered that, if one does
    that - if one keeps one's eyes open above the thicket of case law in which we
    can so easily become enclosed - the solution of the problem in the present case
    becomes much more simple. In saying this, I do not wish in any way to
    criticise the judges who have been grappling with the case at first instance and
    in the Court of Appeal, within the confines of the doctrine of precedent by
    which they are bound. On the contrary, they are entitled to our gratitude and
    respect. The masterly judgment of Hobhouse J., in particular, has excited
    widespread admiration. But it is the great advantage of a supreme court that,
    not only does it have the great benefit of assistance from the judgments of the
    courts below, but also it has a greater freedom to mould, and remould, the
    authorities to ensure that practical justice is done within a framework of
    principle. The present case provides an excellent example of a case in which
    this House should take full advantage of that freedom.

    - 3 -

    The three problems

    There are three reasons why the present case has become so
    complicated. The first is that, in our law of restitution, there has developed
    an understanding that money can only be recovered on the ground of failure
    of consideration if that failure is total. The second is that because, in
    particular, of the well known but controversial decision of this House in
    Sinclair v. Brougham [1914] AC 398. it has come to be understood that a
    trust may be imposed in cases such as the present where the incapacity of one
    of the parties has the effect that the transaction is void. The third is that our
    law of interest has developed in a fragmentary and unsatisfactory manner, and
    in consequence insufficient attention has been given to the jurisdiction to
    award compound interest.

    I propose at the outset to devote a little attention to each of these
    matters.

    (1) Total failure of consideration.

    There has long been a desire among restitution lawyers to escape from
    the unfortunate effects of the so-called rule that money is only recoverable at
    common law on the ground of failure of consideration where the failure is
    total, by reformulating the rule upon a more principled basis: and signs that
    this will in due course be done are appearing in judgments throughout the
    common law world, as appropriate cases arise for decision. It is fortunate
    however that, in the present case, thanks (I have no doubt) to the admirable
    researches of counsel, a line of authority was discovered which had escaped
    the attention of the scholars who work in this field. This line of authority was
    concerned with contracts for annuities which were void if certain statutory
    formalities were not complied with. They were not therefore concerned with
    contracts void by reason of the incapacity of one of the parties. Even so, they
    were concerned with cases in which payments had been made, so to speak,
    both ways; and the courts had to decide whether they could, in such
    circumstances, do justice by restoring the parties to their previous positions.
    They did not hesitate to do so, by ascertaining the balance of the account
    between the parties, and ordering the repayment of the balance. Moreover the
    form of action by which this was achieved was the old action for money had
    and received what we nowadays call a personal claim in restitution at
    common law. With this precedent before him, Hobhouse J. felt free to make
    a similar order in the present case; and in this he was self-evidently right.

    The most serious problem which has remained in this connection is the
    theoretical question whether recovery can here be said to rest upon the ground
    of failure of consideration. Hobhouse J. thought not. He considered that the
    true ground in these cases, where the contract is void, is to be found in the
    absence, rather than the failure, of consideration; and in this he was followed
    by the Court of Appeal. This had the effect that the courts below were not

    - 4 -

    troubled by the question whether there had been a total failure of
    consideration.

    The approach so adopted may have found its origin in the idea, to be
    derived from a well known passage in the speech of Viscount Simon L.C. in
    the Fibrosa case [1943] AC 32, 48, that a failure of consideration only
    occurs where there has been a failure of performance by the other party of his
    obligation under a contract which was initially binding. But the concept of
    failure of consideration need not be so narrowly confined. In particular it
    appears from the annuity cases themselves that the courts regarded them as
    cases of failure of consideration; and concern has been expressed by a number
    of restitution lawyers that the approach of Hobhouse J. is contrary to principle
    and could, if accepted, lead to undesirable consequences: (see Professor Birks
    in (1993) 23 W.A.L.R. 195; Mr. W. J. Swadling in [1994] R.L.R. 73; and
    Professor Burrows in [1995] R.L.R. 15). However since there is before your
    Lordships no appeal from the decision that the Bank was entitled to recover
    the balance of the payments so made in a personal claim in restitution, the
    precise identification of the ground of recovery was not explored in argument
    before the Appellate Committee. It would therefore be inappropriate to
    express any concluded view upon it. Even so, I think it right to record that
    there appears to me to be considerable force in the criticisms which have been
    expressed; and I shall, when considering the issues on this appeal, bear in
    mind the possibility that it may be right to regard the ground of recovery as
    failure of consideration.

    (2) A proprietary claim in restitution

    I have already stated that restitution in these cases can be achieved by
    means of a personal claim in restitution. The question has however arisen
    whether the Bank should also have the benefit of an equitable proprietary
    claim in the form of a resulting trust. The immediate reaction must be - why
    should it? Take the present case. The parties have entered into commercial
    transaction. The transaction has, for technical reasons, been held to be void
    from the beginning. Each party is entitled to recover its money, with the
    result that the balance must be repaid. But why should the plaintiff Bank be
    given the additional benefits which flow from a proprietary claim, for example
    the benefit of achieving priority in the event of the defendant's insolvency?
    After all, it has entered into a commercial transaction, and so taken the risk
    of the defendant's insolvency, just like the defendant's other creditors who
    have contracted with it, not to mention other creditors to whom the defendant
    may be liable to pay damages in tort.

    I feel bound to say that I would not at first sight have thought that an
    equitable proprietary claim in the form of a trust should be made available to
    the Bank in the present case, but for two things. The first is the decision of
    this House in Sinclair v. Brougham [1914] AC 398, which appears to
    provide authority that a resulting trust may indeed arise in a case such as the
    present. The second is that on the authorities there is an equitable jurisdiction

    - 5 -

    to award the plaintiff compound interest in cases where the defendant is a
    trustee. It is the combination of those two factors which has provided the
    foundation for the principal arguments advanced on behalf of the Bank in
    support of its submission that it was entitled to an award of compound
    interest. I shall have to consider the question of availability of an equitable
    proprietary claim, and the effect of Sinclair v. Brougham, in some depth in
    a moment. But first I wish to say a few words on the subject of interest.

    (3) Interest.

    One would expect to find, in any developed system of law, a
    comprehensive and reasonably simple set of principles by virtue of which the
    courts have power to award interest. Since there are circumstances in which
    the interest awarded should take the form of compound interest, those
    principles should specify the circumstances in which compound interest, as
    well as simple interest, may be awarded; and the power to award compound
    interest should be available both at law and in equity. Nowadays, especially
    since it has been established (see National Bank of Greece S.A. v. Pinios
    Shipping Co. No. 1. The Maira
    [1990] 1 A.C. 637) that banks may, by the
    custom of bankers, charge compound interest upon advances made by them
    to their customers, one would expect to find that the principal cases in which
    compound interest may be awarded would be commercial cases.

    Sadly, however, that is not the position in English law. Unfortunately,
    the power to award compound interest is not available at common law. The
    power is available in equity; but at present that power is, for historical
    reasons, exercised only in relation to certain specific classes of claim, in
    particular proceedings against trustees for an account. An important I
    believe the most important - question in the present case is whether that
    jurisdiction should be developed to apply in a commercial context, as in the
    present case.

    Equitable proprietary claims

    I now turn to consider the question whether an equitable proprietary
    claim was available to the Bank in the present case.

    Ever since the law of restitution began, about the middle of this
    century, to be studied in depth, the role of equitable proprietary claims in the
    law of restitution has been found to be a matter of great difficulty. The
    legitimate ambition of restitution lawyers has been to establish a coherent law
    of restitution, founded upon the principle of unjust enrichment; and since
    certain equitable institutions, notably the constructive trust and the resulting
    trust, have been perceived to have the function of reversing unjust enrichment,
    they have sought to embrace those institutions within the law of restitution, if
    necessary moulding them to make them fit for that purpose. Equity lawyers,
    on the other hand, have displayed anxiety that in this process the equitable
    principles underlying these institutions may become illegitimately distorted;

    - 6 -

    and though equity lawyers in this country are nowadays much more
    sympathetic than they have been in the past towards the need to develop a
    coherent law of restitution, and of identifying the proper role of the trust
    within that rubric of the law, they remain concerned that the trust concept
    should not be distorted, and also that the practical consequences of its
    imposition should be fully appreciated. There is therefore some tension
    between the aims and perceptions of these two groups of lawyers, which has
    manifested itself in relation to the matters under consideration in the present
    case.

    In the present case, however, it is not the function of your Lordships'
    House to write the agenda for the law of restitution, nor even to identify the
    role of equitable proprietary claims in that part of the law. The judicial
    process is neither designed for, nor properly directed towards, such
    objectives. The function of your Lordships' House is simply to decide the
    questions at issue before it in the present case; and the particular question now
    under consideration is whether, where money has been paid by a party to a
    contract which is ultra vires the other party and so void ab initio, he has the
    benefit of an equitable proprietary claim in respect of the money so paid.
    Moreover the manner in which this question has arisen before this House
    renders it by no means easy to address. First of all, the point was not debated
    in any depth in the courts below, because they understood that they were
    bound by Sinclair v. Brougham to hold that such a claim was here available.
    But second, the point has arisen only indirectly in this case, since it is relevant
    only to the question whether the court here has power to make an award of
    compound interest. It is a truism that, in deciding a question of law in any
    particular case, the courts are much influenced by considerations of practical
    justice, and especially by the results which would flow from the recognition
    of a particular claim on the facts of the case before the court. Here, however,
    an award of compound interest provides no such guidance, because it is no
    more than a consequence which is said to flow, for no more than historical
    reasons, from the availability of an equitable proprietary claim. It therefore
    provides no guidance on the question whether such a claim should here be
    available.

    In these circumstances I regard it as particularly desirable that your
    Lordships should, so far as possible, restrict the inquiry to the actual questions
    at issue in this appeal, and not be tempted into formulating general principles
    of a broader nature. If restitution lawyers are hoping to find in your
    Lordships' speeches broad statements of principle which may definitively
    establish the future shape of this part of the law, I fear that they may be
    disappointed. I also regard it as important that your Lordships should, in the
    traditional manner, pay particular regard to the practical consequences which
    may flow from the decision of the House.

    With these observations by way of preamble, I turn to the question of
    the availability of an equitable proprietary claim in a case such as the present.
    The argument advanced on behalf of the Bank was that the money paid by

    - 7 -

    them under the void contract was received by the Council subject to a
    resulting trust. This approach was consistent with that of Dillon L.J. in the
    Court of Appeal: see [1994] 1 W.L.R. 938, 947. It is also consistent with the
    approach of Viscount Haldane L.C. (with whom Lord Atkinson agreed) in
    Sinclair v. Brougham [1914] AC 398, 420-421.

    I have already expressed the opinion that, at first sight, it is surprising
    that an equitable proprietary claim should be available in a case such as the
    present. However before I examine the question as a matter of principle. I
    propose first to consider whether Sinclair v. Brougham supports the argument
    now advanced on behalf of the Bank.

    Sinclair v. Brougham

    The decision of this House in Sinclair v. Brougham has loomed very
    large in both the judgments in the courts below and in the admirable
    arguments addressed to the Appellate Committee of this House. It has long
    been regarded as a controversial decision, and has been the subject of much
    consideration by scholars, especially those working in the field of restitution.
    I have however reached the conclusion that it is basically irrelevant to the
    decision of the present appeal.

    It is first necessary to establish what the case was about. The Birkbeck
    Permanent Benefit Building Society decided to set up a banking business,
    known as the Birkbeck Bank. The banking business was however held to be
    ultra vires the objects of the building society; and there followed a spate of
    litigation concerned with solving the problems consequent upon that decision.
    Sinclair v. Brougham was one of those cases.

    The case has been analysed in lucid detail in the speech of my noble
    and learned friend. Lord Browne-Wilkinson, which I have read (in draft) with
    great respect. In its bare outline, it was concerned with the distribution of the
    assets of the Society, which was insolvent. There were four classes of
    claimants. First, there were two classes of shareholders - the A shareholders
    (entitled to repayment of their investment on maturity) and the B shareholders
    (whose shares were permanent). Next, there was a numerous class of people
    who had deposited money at the bank, under contracts which were ultra vires
    and so void. Finally, there were the ordinary trade creditors of the Society.
    By agreement, the A shareholders and the trade creditors were paid off first,
    leaving only the claims of the depositors and the B shareholders. There were
    sufficient assets to pay off the A shareholders, but not the depositors and
    certainly not both. The question of how to reconcile their competing claims
    arose for consideration on a summons by the liquidator for directions.

    The problem arose from the fact that the contracts under which the
    depositors deposited their money at the bank were ultra vires and so void.
    That prevented them from establishing a simple contractual right to be repaid,
    in which event they would have ranked with the ordinary trade creditors of the

    - 8 -

    Society in the liquidation. As it was, they claimed to be entitled to repayment
    in an action for money had and received in the same way as the Bank
    claimed repayment in the case now before your Lordships. But the House of
    Lords held that they were not entitled to claim on this ground. This was in
    substance because to allow such a claim would permit an indirect enforcement
    of the contract which the policy of the law had decreed should be void. In
    those days, of course, judges still spoke about the common law right to
    restitution in the language of implied contract, and so we find Lord Sumner
    saying in a much quoted passage, at p. 452:

                To hold otherwise would be indirectly to sanction an ultra

    vires borrowing. All these causes of action are common species of the
    genus assumpsit. All now rest, and long have rested, upon a notional
    or imputed promise to repay. The law cannot de jure impute promises
    to repay, whether for money had and received or otherwise, which, if
    made de facto, it would inexorably avoid."

    This conclusion however created a serious problem because, if the
    depositors had no claim, then, in the words of Lord Dunedin, at p. 436:

    "The appalling result in this very case would be that the society's
    shareholders, having got proceeds of the depositors' money in the form
    of investments, so that each individual depositor is utterly unable to
    trace his money, are enriched to the extent of some 500 per cent."

    As a matter of practical justice, such a result was obviously unacceptable: and
    it was to achieve justice that the House had recourse to equity to provide the
    answer. It is, I think, apparent from the reasoning of the members of the
    Appellate Committee that they regarded themselves, not as laying down some
    broad general principle, but as solving a particular practical problem. In this
    connection it is, in my opinion, significant that there was a considerable
    variation in the way in which they approached the problem. Viscount
    Haldane, with whom Lord Atkinson agreed, did so, at p. 421, on the basis
    that there arose in the circumstances "a resulting trust, not of an active
    character." Lord Dunedin based his decision upon a broad equity of
    restitution, drawn from Roman and French law. He asked himself the
    question, at p. 435: "Is English equity to retire defeated from the task which
    other systems of equity have conquered?" - a question which he answered in
    the negative. Lord Parker of Waddington, at pp. 441-442, attempted to
    reconcile his decision with the established principles of equity by holding that
    the depositors' money had been received by the directors of the Society as
    fiduciaries, with the effect that the depositors could thereafter follow their
    money in equity into the assets of the Society. Lord Sumner, at p. 458,
    considered that the case should be decided on equitable principles on which
    there was no direct authority. He regarded the question as one of
    administration, in which "the most just distribution of the whole must be
    directed, so only that no recognised rule of law or equity be disregarded."
    Setting on one side the opinion of Lord Parker, whose approach I find very

    - 9 -

    difficult to reconcile with the facts of the case. I do not discern in the
    speeches of the members of the Appellate Committee any intention to impose
    a trust carrying with it the personal duties of a trustee.

    For present purposes. I approach this case in the following way. First,
    it is clear that the problem which arose in Sinclair v. Brougham, viz. that a
    personal remedy in restitution was excluded on grounds of public policy, does
    not arise in the present case, which is not of course concerned with a
    borrowing contract. Second, I regard the decision in Sinclair v. Brougham as
    being a response to that problem in the case of ultra vires borrowing
    contracts, and as not intended to create a principle of general application.
    From this it follows, in my opinion, that Sinclair v. Brougham is not relevant
    to the decision in the present case. In particular it cannot be relied upon as
    a precedent that a trust arises on the facts of the present case, justifying on
    that basis an award of compound interest against the Council.

    But I wish to add this. I do not in any event think that it would be
    right for your Lordships' House to exercise its power under the Practice
    Statement (Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234) to
    depart from Sinclair v. Brougham. I say this first because, in my opinion,
    any decision to do so would not be material to the disposal of the present
    appeal, and would therefore be obiter. But there is a second reason of
    substance why, in my opinion, that course should not be taken. I recognise
    that nowadays cases of incapacity are relatively rare, though the swaps
    litigation shows that they can still occur. Even so, the question could still
    arise whether, in the case of a borrowing contract rendered void because it
    was ultra vires the borrower, it would be contrary to public policy to allow
    a personal claim in restitution. Such a question has arisen in the past not only
    in relation to associations such as the Birkbeck Permanent Benefit Building
    Society, but also in relation to infants' contracts. Moreover there is a
    respectable body of opinion that, if such a case arose today, it should still be
    held that public policy would preclude a personal claim in restitution, though
    not of course by reference to an implied contract. That was the opinion
    expressed by Leggatt L.J. in the Court of Appeal in the present case (see
    [1994] 1 W.L.R. 938, 952E-F), as it had been by Hobhouse J.; and the same
    view has been expressed by Professor Birks (see An Introduction to the Law
    of Restitution
    (1985), at p. 374). I myself incline to the opinion that a
    personal claim in restitution would not indirectly enforce the ultra vires
    contract, for such an action would be unaffected by any of the contractual
    terms governing the borrowing, and moreover would be subject (where
    appropriate) to any available restitutionary defences. If my present opinion
    were to prove to be correct then Sinclair v. Brougham will fade into history.
    If not, then recourse can at least be had to Sinclair v. Brougham as authority
    for the proposition that, in such circumstances, the lender should not be
    without a remedy. Indeed, I cannot think that English law, or equity, is so
    impoverished as to be incapable of providing relief in such circumstances.
    Lord Wright, who wrote in strong terms (see [1938] C.L.J. 305) endorsing

    - 10 -

    the just result in Sinclair v. Brougham, would turn in his grave at any such
    suggestion. Of course, it may be necessary to reinterpret the decision in that
    case to provide a more satisfactory basis for it: indeed one possible suggestion
    has been proposed by Professor Birks (see his An Introduction to the Law of
    Restitution,
    pp. 396 et seq.). But for the present the case should in my
    opinion stand, though confined in the manner I have indicated, as an assertion
    that those who are caught in the trap of advancing money under ultra vires
    borrowing contracts will not be denied appropriate relief.

    The availability of an equitable proprietary claim in the present case

    Having put Sinclair v. Brougham on one side as providing no authority
    that a resulting trust should be imposed in the facts of the present case. I turn
    to the question whether, as a matter of principle, such a trust should be
    imposed, the Bank's submission being that such a trust arose at the time when
    the sum of £2.5m. was received by the Council from the Bank.

    As my noble and learned friend Lord Browne-Wilkinson observes, it
    is plain that the present case falls within neither or the situations which are
    traditionally regarded as giving rise to a resulting trust, viz. (1) voluntary
    payments by A to B. or for the purchase of property in the name of B or in
    his and A's joint names, where there is no presumption of advancement or
    evidence of intention to make an out and out gift; or (2) property transferred
    to B on an express trust which does not exhaust the whole beneficial interest.
    The question therefore arises whether resulting trusts should be extended
    beyond such cases to apply in the present case, which I shall treat as a case
    where money has been paid for a consideration which fails.

    In a most interesting and challenging paper published in Equity:
    Contemporary Legal Developments
    (1992 ed. Goldstein). Professor Birks has
    argued for a wider role for the resulting trust in the field of restitution, and
    specifically for its availability in cases of mistake and failure of consideration.
    His thesis is avowedly experimental, written to test the temperature or the
    water. I feel bound to respond that the temperature of the water must be
    regarded as decidedly cold: see. e.g., Professor Burrows in [1995] R.L.R. 15.
    and Mr. W.J. Swadling in (1996) 16 Legal Studies 133.

    In the first place, as Lord Browne-Wilkinson points out, to impose a
    resulting trust in such cases is inconsistent with the traditional principles of
    trust law. For on receipt of the money by the payee it is to be presumed that
    (as in the present case) the identity of the money is immediately lost by
    mixing with other assets of the payee, and at that lime the payee has no
    knowledge of the facts giving rise to the failure of consideration. By the time
    that those facts come to light, and the conscience of the payee may thereby be
    affected, there will therefore be no identifiable fund to which a trust can
    attach. But there are other difficulties. First, there is no general rule that the
    property in money paid under a void contract does not pass to the payee: and
    it is difficult to escape the conclusion that, as a general rule, the beneficial

    - 11 -

    interest to the money likewise passes to the payee. This must certainly be the
    case where the consideration for the payment fails after the payment is made,
    as in cases of frustration or breach of contract: and there appears to be no
    good reason why the same should not apply in cases where, as in the present
    case, the contract under which the payment is made is void ab initio and the
    consideration for the payment therefore fails at the time of payment. It is true
    that the doctrine of mistake might be invoked where the mistake is
    fundamental in the orthodox sense of that word. But that is not the position
    in the present case: moreover the mistake in the present case must be
    classified as a mistake of law which, as at the law at present stands, creates
    its own special problems. No doubt that much-criticised doctrine will fall to
    be reconsidered when an appropriate case occurs: but I cannot think that the
    present is such a case, since not only has the point not been argued but (as
    will appear) it is my opinion that there is any event jurisdiction to award
    compound interest in the present case. For all of these reasons I conclude, in
    agreement with my noble and learned friend, that there is no basis for holding
    that a resulting trust arises in cases where money has been paid under a
    contract which is ultra vires and therefore void ab initio. This conclusion has
    the effect that all the practical problems which would flow from the imposition
    of a resulting trust in a case such as the present, in particular the imposition
    upon the recipient of the normal duties of trustee, do not arise. The dramatic
    consequences which would occur are detailed by Professor Burrows in his
    article on Swaps and the Friction between Common Law and Equity in [1995]
    R.L.R. 15, 27: the duty to account for profits accruing from the trust
    property; the inability of the payee to rely upon the defence of change of
    position: the absence of any limitation period: and so on. Professor Burrows
    even goes so far as to conclude that the action for money had and received
    would be rendered otiose in such cases, and indeed in all cases where the
    payer seeks restitution of mistaken payments. However, if no resulting trust
    arises, it also follows that the payer in a case such as the present cannot
    achieve priority over the payee's general creditors in the event of his
    insolvency - a conclusion which appears to me to be just.

    For all these reasons I conclude that there is no basis for imposing a
    resulting trust in the present case, and I therefore reject the Bank's submission
    that it was here entitled to proceed by way of an equitable proprietary claim.
    I need only add that, in reaching that conclusion, I do not find it necessary to
    review the decision of Goulding J. in Chase Manhattan Bank N.A. v. Israel-
    British Bank (London) Ltd.
    [1981] Ch. 105.

    Interest

    It is against that background that I turn to consider the question of
    compound interest. Here there are three points which fall to be considered.
    These are (1) whether the court had jurisdiction to award compound interest;
    (2) if so, whether it should have exercised its jurisdiction to make such an
    award in the present case; and (3) from what date should such an award of
    compound interest run, if made.

    - 12 -

    It is common ground that in a case such as the present there is no
    jurisdiction to award compound interest at common law or by statute. The
    central question in the present case is therefore whether there is jurisdiction
    in equity to do so. It was held below, on the basis that the Bank was entitled
    to succeed not only in a personal claim at common law but also in a
    proprietary claim in equity, that there was jurisdiction in equity to make an
    order that the Council should pay compound interest on the sum adjudged due.
    It was that jurisdiction which was exercised by Hobhouse J., whose decision
    on the point was not challenged before the Court of Appeal, on the basis that
    Sinclair v. Brougham [1914] AC 398 provided binding authority that a
    proprietary claim was available to the Bank in this case. However since, in
    my opinion. Sinclair v. Brougham provides no such authority, and no
    proprietary claim is available to the Bank, the question now arises whether the
    equitable jurisdiction to award compound interest may nevertheless be
    exercised on the facts of the present case.

    I wish however to record that Hobhouse J. was in no doubt that, if he
    had jurisdiction to do so, he should award compound interest in this case. He
    said (see [1994] 4 All E.R. at p. 955):

    "Anyone who lends or borrows money on a commercial basis
    receives or pays interest periodically and if that interest is not paid it
    is compounded. ... I see no reason why I should deny the plaintiff a
    complete remedy or allow the defendant arbitrarily to retain part of the
    enrichment which it has unjustly enjoyed."

    With that reasoning I find myself to be in entire agreement. The Council has
    had the use of the Bank's money over a period of years. It is plain on the
    evidence that, if it had not had the use of the Bank's money, it would (if free
    to do so) have borrowed the money elsewhere at compound interest. It has
    to that extent profited from the use of the Bank's money. Moreover, if the
    Bank had not advanced the money to the Council, it would itself have
    employed the money on similar terms in its business. Full restitution requires
    that, on the facts of the present case, compound interest should be awarded.
    having regard to the commercial realities of the case. As the judge said, there
    is no reason why the Bank should be denied a complete remedy.

    It follows therefore that everything depends on the scope of the
    equitable jurisdiction. It also follows, in my opinion, that if that jurisdiction
    does not extend to apply in a case such as the present. English law will be
    revealed as incapable of doing full justice.

    It is right that I should record that the scope of the equitable
    jurisdiction was not explored in depth in the course of argument before the
    Appellate Committee, in which attention was concentrated on the question
    whether a proprietary claim was available to the Bank in the circumstances of
    the present case. In other circumstances, it might well have been appropriate
    to invite further argument on the point. However, since it was indicated to

    - 13 -

    the Committee that the Council was not prepared to spend further money on
    the appeal, whereupon it took no further part in the proceedings, and since the
    relevant authorities had been cited to the Committee, I am satisfied that it is
    appropriate that the point should now be decided by your Lordships' House.

    I wish also to record that I have had the opportunity of reading in draft
    the speech of my noble and learned friend Lord Woolf, and that I find myself
    to be in agreement with his reasoning and conclusion on the point. Even so,
    I propose to set out in my own words my reasons for reaching the same
    conclusion.

    I shall begin by expressing two preliminary thoughts. The first is that,
    where the jurisdiction of the court derives from common law or equity, and
    is designed to do justice in cases which come before the courts, it is startling
    to be faced by an argument that the jurisdiction is so restricted as to prevent
    the courts from doing justice. Jurisdiction of that kind should as a matter of
    principle be as broad as possible, to enable justice to be done wherever
    necessary: and the relevant limits should be found not in the scope of the
    jurisdiction but in the manner of its exercise as the principles are worked out
    from case to case. Second, I find it equally startling to find that the
    jurisdiction is said to be limited to certain specific categories of case. Where
    jurisdiction is founded on a principle of justice. I would expect that the
    categories of case where it is exercised should be regarded not as occupying
    the whole field but rather as emanations of the principle, so that the possibility
    of the jurisdiction being extended to other categories of case is not foreclosed.

    It is with these thoughts in mind that I turn to the equitable jurisdiction
    to award interest. In President of India v. La Pintada Compania Navigacion
    S.A
    [1985] A.C. 104 Lord Brandon of Oakbrook, delivering a speech with
    which the other members of the Appellate Committee agreed, described the
    equitable jurisdiction in the following words, at p. 116:

    "Chancery courts had further regularly awarded interest,
    including not only simple interest but also compound interest, when
    they thought that justice so demanded, that is to say in cases where
    money had been obtained and retained by fraud, or where it had been
    withheld or misapplied by a trustee or anyone else in a fiduciary
    position."

    Later however he said, also at p. 116, that Courts of Chancery only awarded
    compound, as distinct from simple, interest in two special classes of case.

    With great respect I myself consider that, if the jurisdiction to award
    compound interest is available where justice so demands, it cannot be so
    confined as to exclude any class of case simply because that class of case has
    not previously been recognised as falling within it. I prefer therefore to read
    the passage quoted from Lord Brandon's speech as Mason C.J. and Wilson
    J. read it in Hungerfords v. Walker (1988) 171 C.L.R. 125, 148, as providing

    - 14 -

    examples (i.e., not exclusive examples) of the application of the underlying
    principle of justice.

    Now it is true that the reported cases on the exercise of the equitable
    jurisdiction, which are by no means numerous, are concerned with cases of
    breach of duty by trustees and other fiduciaries. In Attorney-General v. Alford
    (1855) 4 De G.M. & G. 843, for example, which came before Lord
    Cranworth L.C., the question arose whether an executor and trustee, who had
    for several years retained in his hands trust funds which he ought to have
    invested, should be chargeable with interest in excess of the ordinary rate of
    simple interest. It was held that he should not be chargeable at a higher rate.
    Lord Cranworth recognised that the court might in such a case impose interest
    at a higher rate, or even compound interest. But he observed that if so the
    court does not impose a penalty on the trustee. He said, at p. 851:

    "What the court ought to do, I think, is to charge him only with
    the interest which he has received, or which it is justly entitled to say
    he ought to have received, or which it is so fairly to be presumed that
    he did receive that he is estopped from saying that he did not receive
    it."

    In cases of misconduct which benefits the executor, however, the court may
    fairly infer that he used the money in speculation, and may, on the principle
    'In odium spoliatoris omnia praesumuntur' assume that he made a higher rate,
    if that was a reasonable conclusion.

    Likewise in Burdick v. Garrick (1876) L.R. 5 Ch. App. 233, where
    a fiduciary agent held money of his principal and simply paid it into his bank
    account, it was held that he should be charged with simple interest only. Lord
    Hatherley L.C., at pp. 241-242, applied the principle laid down in Attorney-
    General v. Alford,
    namely that:

    "... the Court does not proceed against an accounting party by way
    of punishing him for making use of the Plaintiff's money by directing
    rests, or payment of compound interest, but proceeds upon this
    principle, either that he has made, or has put himself in such a position
    that he is to be presumed to have made, 5 per cent., or compound
    interest, as the case may be .... If the Court finds . . . that the
    money received has been invested in an ordinary trade, the whole
    course of decision has tended to this, that the Court presumes that the
    party against whom relief is sought has made that amount of profit
    which persons ordinarily do make in trade, and in those cases the
    Court directs rests to be made."

    For a more recent case in which the equitable jurisdiction was invoked, see
    Wallersteiner v. Moir (No.2) [1975] Q.B. p. 373.

    - 15 -

    From these cases it can be seen that compound interest may be
    awarded in cases where the defendant has wrongfully profited, or may be
    presumed to have so profited, from having the use of another person's money.
    The power to award compound interest is therefore available to achieve justice
    in a limited area of what is now seen as the law of restitution, viz. where the
    defendant has acquired a benefit through his wrongful act (see Goff and Jones,
    Law of Restitution, 4th ed., pp. 632 et seq.; Birks, Introduction to the Law of
    Restitution,
    pp. 313 et seq.; Burrows, Law of Restitution, pp. 403 et seq.) The
    general question arises whether the jurisdiction must be kept constrained in
    this way, or whether it may be permitted to expand so that it can be exercised
    to ensure that full justice can be done elsewhere in that rubric of the law. The
    particular question is whether the jurisdiction can be exercised in a case such
    as the present in which the Council has been ordered to repay the balance of
    the Bank's money on the ground of unjust enrichment, in a personal claim at
    common law.

    At this stage of the argument I wish to stress two things. The first is
    that it is plain that the jurisdiction may, in an appropriate case, be exercised
    in the case of a personal claim in equity. In both Alford's case and Burdick
    v. Garrick,
    the cases were concerned with the taking of an account, and an
    order for payment of the sum found due. In each case the accounting party
    was a fiduciary, who held the relevant funds on trust. But the jurisdiction is
    not limited to cases in which a proprietary claim is being made and an award
    of interest is sought as representing the fruits of the property so claimed. On
    the contrary, the jurisdiction is in personam, and moreover an award of
    interest may be made not only where the trustee or fiduciary has made a
    profit, but also where it is held that he ought to have made a profit and has
    not done so. Furthermore in my opinion the decision of the Court of Appeal
    in In re Diplock [1948] Ch. 465 provides no authority for the proposition that
    there is no jurisdiction to award compound interest where the claim is a
    personal claim. It is true that in that case the Court of Appeal decided not to
    award interest against a number of charities which had been held liable, in a
    personal claim in equity, to repay legacies which had been paid to them in
    error. But in so doing the Court simply followed an old decision of Lord
    Eldon in Gittins v. Steele (1818) 1 Swanst. 199, 200, in which his judgment
    was as follows:

    "Where the fund out of which the legacy ought to have been
    paid is in the hands of the Court making interest, unquestionably
    interest is due. If a legacy has been erroneously paid to a legatee who
    has no farther property in the estate, in recalling that payment I
    apprehend that the rule of the court is not to charge interest; but if the
    legatee is entitled to another fund making interest in the hands of the
    court, justice must be done out of his share."

    The Court of Appeal in In re Diplock can have had no desire to make an
    award of interest against the charities in the personal claim against them in
    that case, and they must have been very content to follow uncritically this old

    - 16 -

    "rule of court." But it does not follow that me rule or court went to the
    jurisdiction of the court. It is more likely that it represented an established
    practice which, as Lord Eldon's brief judgment indicates, was subject to
    exceptions. In any event the Court of Appeal was there concerned only with
    simple interest: and in cases of the kind there under consideration, it seems
    unlikely that any question of an award of compound interest would ever have
    arisen.

    I must confess that I find the reasoning which would restrict the
    equitable jurisdiction to award compound interest to cases where the claim is
    proprietary in nature to be both technical and unrealistic. This is shown by
    the reasoning and conclusion of Hobhouse J. in Kleinwort Benson Ltd. v.
    South Tyneside Metropolitan Borough Council
    [1994] 4 All E.R. 972, another
    swap transaction case, in which the plaintiff bank had no proprietary claim.
    The judge upheld the submission of the defendant council that, although they
    were under a personal liability to make restitution both at law and in equity,
    nevertheless the court had no jurisdiction to award compound interest on the
    sum adjudged due. He said, at p. 994:

    "If ... the plaintiff is only entitled to a personal remedy which
    will be the case where, although there was initially a fiduciary
    relationship and the payer was entitled in equity to treat the sum
    received by the payee as his, the payer's, money and to trace it, but
    because of subsequent developments he is no longer able to trace the
    sum in the hands of the payee, then there is no subject matter to which
    the rationale on which compound interest is awarded can be applied.
    The payee cannot be shown to have a fund belonging to the payer or
    to have used it to make profits for himself."

    This reasoning is logical, assuming the restricted nature of the equitable
    jurisdiction to award compound interest. But if, as Lord Brandon of
    Oakbrook stated, the jurisdiction is founded upon the demands of justice, it
    is difficult to see the sense of the distinction which Hobhouse J. felt compelled
    to draw. It seems strange indeed that, just because the power to trace
    property has ceased, the court's jurisdiction to award compound interest
    should also come to an end. For where the claim is based upon the unjust
    enrichment of the defendant, it may be necessary to have power to award
    compound interest to achieve full restitution, i.e. to do full justice, as much
    where the plaintiff's claim is personal as where his claim is proprietary in
    nature. Furthermore I know of no authority which compelled Hobhouse J. to
    hold that he had no jurisdiction to award compound interest in respect of the
    personal claim in equity in the case before him.

    For these reasons I am satisfied that there is jurisdiction in equity to
    award compound interest in the case of personal claims as well as proprietary
    claims.

    - 17 -

    I turn next to the question whether the equitable jurisdiction can be
    exercised in aid of common law remedies such as, for example, a personal
    remedy in restitution, to repair the deficiencies of the common law. Here I
    turn at once to Snell's Equity, 29th ed. (1990), at p.28, where the first maxim
    of equity is stated to be that "Equity will not suffer a wrong to be without a
    remedy". The commentary on this maxim in the text reads as follows:

    "The idea expressed in this maxim is that no wrong should be
    allowed to go unredressed if it is capable of being remedied by courts
    of justice, and this really underlies the whole jurisdiction of equity.
    As already explained, the common law courts failed to remedy many
    undoubted wrongs, and this failure led to the establishment of the
    Court of Chancery. But is must not be supposed that every moral
    wrong was redressed by the Court of Chancery. The maxim must be
    taken as referring to rights which are suitable for judicial enforcement,
    but were not enforced at common law owing to some technical defect."

    To this maxim is attributed the auxiliary jurisdiction of equity. The
    commentary reads as follows:

    "Again, to this maxim may be traced the origin of the auxiliary
    jurisdiction of the Court of Chancery, by virtue of which suitors at law
    were aided in the enforcement of their legal rights. Without such aid
    these rights would often have been 'wrongs without remedies.' For
    instance, it was often necessary for a plaintiff in a common law action
    to obtain discovery of facts resting in the knowledge of the defendant,
    or of deeds, writings or other things in his possession or power. The
    common law courts, however, had no power to order such discovery,
    and recourse was therefore had to the Court of Chancery, which
    assumed jurisdiction to order the defendant to make discovery on his
    oath."

    The question which arises in the present case is whether, in the exercise of
    equity's auxiliary jurisdiction, the equitable jurisdiction to award compound
    interest may be exercised to enable a plaintiff to obtain full justice in a
    personal action of restitution at common law.

    I start with the position that the common law remedy is, in a case such
    as the present, plainly inadequate, in that there is no power to award
    compound interest at common law and that without that power the common
    law remedy is incomplete. The situation is therefore no different from that
    in which, in the absence of jurisdiction at common law to order discovery,
    equity stepped in to enable justice to be done in common law actions by
    ordering the defendant to make discovery on oath. The only difference
    between the two cases is that, whereas the equitable jurisdiction to order
    discovery in aid of common law actions was recognised many years ago, the
    possibility of the equitable jurisdiction to award compound interest being
    exercised in aid of common law actions was not addressed until the present

    - 18 -

    case. Fortunately, however, judges of equity have always been ready to
    address new problems, and to create new doctrines, where justice so requires.
    As Sir George Jessel M.R. said, in a famous passage in his judgment in In re
    Hallett's Estate
    (1880) 13 Ch D 696. 710:

    "I intentionally say modern rules, because it must not be
    forgotten that the rules of Courts of Equity are not, like the rules of
    the Common Law, supposed to have been established from time
    immemorial. It is perfectly well known that they have been
    established from time to time - altered, improved, and refined from
    time to time. In many cases we know the names of the Chancellors
    who invented them. No doubt they were invented for the purpose of
    securing the better administration of justice, but still they were
    invented."

    I therefore ask myself whether there is any reason why the equitable
    jurisdiction to award compound interest should not be exercised in a case such
    as the present. I can see none. Take, for example, the case of fraud. It is
    well established that the equitable jurisdiction may be exercised in cases or
    fraud. Indeed it is plain that, on the same facts, there may be a remedy both
    at law and in equity to recover money obtained by fraud: see Johnson v. The
    King
    (1904) AC 817. 822. per Lord Macnaghten. Is it to be said that, if the
    plaintiff decides to proceed in equity, compound interest may be awarded: but
    that if he chooses to proceed in an action at law, no such auxiliary relief will
    be available to him? I find it difficult to believe that, at the end of the
    twentieth century, our law should be so hidebound by forms of action as to
    be compelled to reach such a conclusion.

    For these reasons I conclude that the equitable jurisdiction to award
    compound interest may be exercised in the case of personal claims at common
    law, as it is in equity. Furthermore I am satisfied that, in particular, the
    equitable jurisdiction may, where appropriate, be exercised in the case of a
    personal claim in restitution. In reaching that conclusion, I am of the opinion
    that the decision of Hobhouse J. in the Kleinwort Benson case that the court
    had no such jurisdiction should not be allowed to stand.

    I recognise that, in so holding, the courts would be breaking new
    ground, and would be extending the equitable jurisdiction to a field where it
    has not hitherto been exercised. But that cannot of itself be enough to prevent
    what I see to be a thoroughly desirable extension of the jurisdiction, consistent
    with its underlying basis that it exists to meet the demands of justice. An
    action of restitution appears to me to provide an almost classic case in which
    the jurisdiction should be available to enable the courts to do full justice.
    Claims in restitution are founded upon a principle of justice, being designed
    to prevent the unjust enrichment of the defendant: see Lipkin Gorman v.
    Karpnale Ltd. [1991] 2 AC 548. Long ago, in Moses v. Macferlan (1760)
    2 Burr. 1005, 1012, Lord Mansfield said that the gist of the action for money
    had and received is that "the defendant, upon the circumstances of the case.

    - 19 -

    is obliged by the ties of natural justice and equity to refund the money." It
    would be strange indeed if the courts lacked jurisdiction in such a case to
    ensure that justice could be fully achieved by means of an award of compound
    interest, where it is appropriate to make such an award, despite the fact that
    the jurisdiction to award such interest is itself said to rest upon the demands
    of justice. I am glad not to be forced to hold that English law is so
    inadequate as to be incapable of achieving such a result. In my opinion the
    jurisdiction should now be made available, as justice requires, in cases of
    restitution, to ensure that full justice can be done. The seed is there, but the
    growth has hitherto been confined within a small area. That growth should
    now be permitted to spread naturally elsewhere within this newly recognised
    branch of the law. No genetic engineering is required, only that the warm sun
    of judicial creativity should exercise its benign influence rather than remain
    hidden behind the dark clouds of legal history.

    I wish to add that I for my part do not consider that the statutory
    power to award interest, either under section 3 of the Law Reform
    (Miscellaneous Provisions) Act 1934 or under section 35A of the Supreme
    Court Act 1981 (which, pursuant to section 15 of the Administration of Justice
    Act 1982, superseded section 3 of the Act of 1934), inhibits the course of
    action which I now propose. It is true that section 3(1) of the Act of 1934,
    when empowering courts of record to award interest in proceedings for the
    recovery of any debt or damages, did not authorise the giving of interest upon
    interest. But I cannot see that it would be inconsistent with the intention then
    expressed by Parliament later to extend the existing equitable jurisdiction to
    award compound interest to enable courts to ensure that full restitution is
    achieved in personal actions of restitution at common law. It is of course
    common knowledge that, until the latter part of this century, the existence of
    a systematic law of restitution, founded upon the principle of unjust
    enrichment, had not been recognised in English law. The question whether
    there should be a power to award compound interest in such cases, in order
    to achieve full restitution, simply did not arise in 1934 and cannot therefore
    have been considered by Parliament in that year. To hold that, because
    Parliament did not then authorise an award of compound interest in
    proceedings the nature of which was not then recognised, the Courts should
    now be precluded from exercising the ordinary judicial power to develop the
    law by extending an existing jurisdiction to meet a newly recognised need
    appears to me to constitute an unnecessary and undesirable fetter upon the
    judicial development of the law. It is not to be forgotten that there is
    jurisdiction in equity, as well as at common law, to order restitution on the
    ground of unjust enrichment; and I cannot see that section 3(1) of the 1934
    Act would have precluded any extension of the existing equitable jurisdiction
    to award compound interest to enable full restitution to be achieved in such
    a case. Accordingly neither would section 3(1), which applied to all courts
    of record, have precluded a similar extension of the jurisdiction to enable full
    restitution to be achieved in actions at common law. Section 35A of the Act
    of 1981 no doubt perpetuated the position as established by section 3(1) of the
    Act of 1934, in that it too did not confer a power on the courts to award

    - 20 -

    compound interest: but I cannot see that this affects the position. In so far as
    it is relevant to refer to the Report of the Law Commission (Cmnd. "229 of
    7 April 1978) which preceded that enactment, it appears from the Report that
    it was generally opposed to the introduction of any general power to award
    compound interest: but there was no intention of interfering with the equitable
    jurisdiction, and the problem which has arisen in the present case was not
    addressed. I wish to add that such an extension of the equitable jurisdiction
    as I propose would, in my opinion, be a case of equity acting in aid of the
    common law. There is in my opinion no need, and indeed no basis, for
    outlawing such a development as a case of equity acting in aid of the
    legislature simply because the legislature, in conferring upon courts the power
    to award simple interest, did not authorise the giving of compound interest.

    It remains for me to say that I am satisfied, for the reasons given by

    Hobhouse J., that this is a case in which it was appropriate that compound
    interest should be awarded. In particular, since the Council had the free use
    of the Bank's money in circumstances in which, if it had borrowed the money
    from some other financial institution, it would have had to pay compound
    interest for it, the Council can properly be said to have profited from the
    Bank's money so as to make an award of compound interest appropriate.
    However, for the reasons given by Dillon L.J., at pp. 947-949. I agree with
    the Court of Appeal that the interest should run from the date of receipt of the
    money.

    Conclusion

    For these reasons I would dismiss the appeal.

    LORD BROWNE-WILKINSON

    My Lords,

    In the last decade many local authorities entered into interest rate swap
    agreements with banks and other finance houses. In Hazell v. Hammersmith
    and Fulham London Borough Council
    [1992] 2 A.C. 1 your Lordships held
    that such contracts were ultra vires local authorities and therefore void. Your
    Lordships left open the question whether payments made pursuant to such
    swap agreements were recoverable or not. The action which is the subject
    matter of this appeal is one of a number in which the court has had to
    consider the extent to which monies paid under such an agreement are
    recoverable.

    An interest rate swap agreement is an agreement between two parties
    by which each agrees to pay the other on a specified date or dates an amount
    calculated by reference to the interest which would have accrued over a given

    - 21 -

    period on a notional principal sum. The rate of interest payable by each party
    (on the same notional sum) is different. One rate of interest is usually fixed
    and does not change (and the payer is called "the fixed rate payer"); the other
    rate is a variable or floating rate based on a fluctuating interest rate such as
    the six-month London Inter-bank Offered Rate ("LIBOR") and the payer is
    known as "the floating rate payer." Normally the parties do not make the
    actual payments they have contracted for but the party owing the higher
    amount pays to the other party the difference between the two amounts.

    In the present case the swap contract was concluded between the
    respondent bank, Westdeutsche Landesbank Girozentrale ("the Bank"), and the
    appellant, the Council of the London Borough of Islington ("the local
    authority"), on 16 June 1987. The arrangement was to run for ten years
    starting on 18 June 1987. The interest sums were to be calculated on a
    notional principal sum of £25m. and were to be payable half-yearly. The
    Bank was to be the fixed rate payer at a rate of 7.5 per cent. per annum and
    the local authority was to be the floating rate payer at the domestic sterling
    LIBOR rate. In addition, the Bank was to pay to the local authority on 18
    June 1987 a sum of £2.5m. ("the upfront payment") which payment was
    made. As a result of the provision of the upfront payment the rate of interest
    payable by the Bank as the fixed rate payer was agreed to be lower than what
    would have been appropriate (9.43 per cent.) if the upfront payment had not
    been made.

    made:

    Pursuant to the terms of the agreement, the following payments were

    Date

    18.06.87
    18.12.87
    20.06.88
    19.12.88
    19.06.89
    Total :

    Payment by Bank
    to Council

    £2,500,000

    £2,500,000

    Payment by Council
    to Bank

    £ 172,345.89
    £ 229,666.09
    £ 259,054.56
    £ 693,407.53
    £1,354,474.07

    Therefore the payments made by the Bank to the local authority exceed those
    made by the local authority to the Bank to the extent of £1,145,525.93.

    On 1 November 1989 the Divisional Court gave judgment in Hazell
    declaring void swap transactions entered into by local authorities. The
    decision applied to the contract between the parties in the present case.

    - 22 -

    As will appear it is of central importance to note the way in which the
    local authority dealt with the upfront payment of £2.5m. made to it on 18 June
    1987. The money was credited to a bank account of the local authority in
    which there were other monies of the local authority, i.e. into a mixed
    account. That account itself became overdrawn overnight on several dates in
    June and July 1987. There was an overall debit balance on the account on 16
    November 1987. The monies in the mixed account were used by the local
    authority for its general expenditure. If the upfront payment had not been
    received, the local authority would have had to borrow more money if it
    could. The local authority had been, and was likely to be in the future, rate-
    capped and one of the attractions to the local authority in the swap agreement
    was that it obtained the upfront payment in a form which did not attract
    statutory controls.

    The Bank in this action sought recovery of the amounts paid by it
    under the void agreement together with interest. On 12 February 1993
    Hobhouse J. gave judgment in the Commercial Court for the Bank ordering
    payment by the local authority to the Bank of the balance together with
    compound interest on the balance as from 1 April 1990 with six-monthly rests.

    The council appealed to the Court of Appeal against that order and the
    Bank cross-appealed contending that compound interest should have been
    ordered as from the date of receipt of the principal sum. i.e. 18 June 1987.

    On 17 December 1993 the Court of Appeal (Dillon, Leggatt and
    Kennedy L.JJ.) dismissed the local authority's appeal and allowed the cross-
    appeal by the Bank: (1994) 1 WLR 938. It held that the Bank was entitled to
    recover the balance at law as money had and received (Dillon L.J., at p. 946:
    Leggatt L.J., at p. 953E). It also held that the Bank was entitled to recover
    the balance in equity on the ground that the local authority held the upfront
    payment on a resulting trust and was therefore personally liable, as trustee,
    to repay the bank (Dillon L.J., at p. 947A-E: Leggatt L.J., at p. 953G). The
    Court of Appeal further held the local authority liable to pay compound
    interest on the balance from time to time outstanding as from the date of
    receipt of the upfront payment. The ability of the Court to award compound,
    as opposed to simple, interest was founded on the equitable jurisdiction to
    award compound interest as against a trustee or other person owing fiduciary
    duties who is personally accountable and who has made use of the plaintiff's
    money: Dillon L.J., at pp. 949B-951E: Leggatt L.J., at pp. 953H-955.A.

    The local authority now accepts that it is personally liable to repay the
    balance to the Bank. The local authority appeals to your Lordships only
    against the award of compound interest. But, as will appear, notwithstanding
    the narrow scope of the appeal it raises profound questions for decision by
    your Lordships.

    - 23 -

    Compound Interest in Equity

    It is common ground that in the absence of agreement or custom the
    court has no jurisdiction to award compound interest either at law or under
    section 35A of the Supreme Court Act, 1981. It is also common ground that
    in certain limited circumstances courts of equity can award compound interest.
    Mr. Philipson, for the local authority, contends that compound interest can
    only be ordered on a claim against a trustee or other person owing fiduciary
    duties who in breach of such duty has used trust monies in his own trade. He
    contends that compound interest cannot be awarded in this case since (a) the
    local authority never held the upfront payment as a trustee or in a fiduciary
    capacity and (b) in any event the local authority did not use the upfront
    payment in its trade. Mr. Sumption, for the Bank, contends that compound
    interest can be awarded in equity whenever the defendant is liable to disgorge
    a benefit received whether or not he is a trustee or a fiduciary. Alternatively,
    Mr. Sumption contends that the local authority did receive the upfront
    payment as a trustee and as such is in equity accountable for the benefits it has
    received, including the benefit of not having to borrow £2.5m. on the market
    at compound interest.

    In the absence of fraud Courts of Equity have never awarded
    compound interest except against a trustee or other person owing fiduciary
    duties who is accountable for profits made from his position. Equity awarded
    simple interest at a time when courts of law had no right under common law
    or statute to award any interest. The award of compound interest was
    restricted to cases where the award was in lieu of an account of profits
    improperly made by the trustee. We were not referred to any case where
    compound interest had been awarded in the absence of fiduciary accountability
    for a profit. The principle is clearly stated by Lord Hatherley L.C. in Burdick
    v. Garrick,
    L.R. 5 Ch. App. 233, 241:

    "The court does not proceed against an accounting party by way of
    punishing him for making use of the plaintiff's money by directing
    rests, or payment of compound interest, but proceeds upon this
    principle, either that he has made, or has put himself into such a
    position as that he is to be presumed to have made, 5 per cent., or
    compound interest, as the case may be."

    The principle was more fully stated by Buckley L.J. in Wallersteiner
    v
    . Moir (No. 2) [1975] Q.B. 373, 397.

    "Where a trustee has retained trust money in his own hands, he will
    be accountable for the profit which he has made or which he is
    assumed to have made from the use of the money. In Attorney-
    General v. Alford,
    4 De G.M. & G. 843, 851 Lord Cranworth L.C.
    said:

    - 24 -

    "What the court ought to do, I think, is to charge him only with
    the interest which he has received, or which it is justly entitled
    to say he ought to have received, or which it is so fairly to be
    presumed that he did receive that he is estopped from saying
    that he did not receive it.'

    "This is an application of the doctrine that the court will not allow a
    trustee to make any profit from his trust. The defaulting trustee is
    normally charged with simple interest only, but if it is established that
    he has used the money in trade he may be charged compound interest
    . . . The justification for charging compound interest normally lies in
    the fact that profits earned in trade would be likely to be used as
    working capital for earning further profits. Precisely similar equitable
    principles apply to an agent who has retained monies of his principal
    in his hands and used them for his own purposes: Burdick v.
    Garrick."

    In President of India v. La Pintada Compania Navigacion S.A. [1985]
    A.C. 104. 116 Lord Brandon (with whose speech the rest of their Lordships
    agreed) considered the law as to the award of interest as at that date in four
    separate areas. His third area was equity, as to which he said this :

    "Thirdly, the area of equity. The Chancery courts, again differing
    from the common law courts, had regularly awarded simple interest as
    ancillary relief in respect of equitable remedies, such as specific
    performance, rescission and the taking of an account. Chancery courts
    had further regularly awarded interest, including not only simple
    interest but also compound interest, when they thought that justice so
    demanded, that is to say in cases where money had been obtained and
    retained by fraud, or where it had been withheld or misapplied by a
    trustee or anyone else in a fiduciary position. . . Courts of Chancery
    only in two special classes of case, awarded compound, as distinct
    from simple, interest."

    These authorities establish that in the absence of fraud equity only
    awards compound (as opposed to simple) interest against a defendant who is
    a trustee or otherwise in a fiduciary position by way of recouping from such
    a defendant an improper profit made by him. It is unnecessary to decide
    whether in such a case compound interest can only be paid where the
    defendant has used trust monies in his own trade or (as I tend to think)
    extends to all cases where a fiduciary has improperly profited from his trust.
    Unless the local authority owed fiduciary duties to the Bank in relation to the
    upfront payment, compound interest cannot be awarded.

    Was there a Trust? The Argument for the Bank in Outline

    The Bank submitted that, since the contract was void, title did not pass
    at the date of payment either at law or in equity. The legal title of the Bank

    - 25 -

    was extinguished as soon as the money was paid into the mixed account,
    whereupon the legal title became vested in the local authority. But, it was
    argued, this did not affect the equitable interest, which remained vested in the
    Bank ("the retention of title point"). It was submitted that whenever the legal
    interest in property is vested in one person and the equitable interest in
    another, the owner of the legal interest holds it on trust for the owner of the
    equitable title: "the separation of the legal from the equitable interest
    necessarily imports a trust." For this latter proposition ("the separation of
    title point") the Bank, of course, relies on Sinclair v. Brougham [1914] A.C.
    598 and Chase Manhattan Bank [1981] Ch. 105.

    The generality of these submissions was narrowed by submitting that
    the trust which arose in this case was a resulting trust "not of an active
    character": see per Viscount Haldane L.C. in Sinclair v. Brougham, at
    p. 421. This submission was reinforced, after completion of the oral
    argument, by sending to your Lordships Professor Peter Birks' paper
    'Restitution and Resulting Trusts," Goldstein, Equity: Contemporary Legal
    Developments
    (1992). p. 335. Unfortunately your Lordships have not had the
    advantage of any submissions from the local authority on this paper, but an
    article by William Swadling "A new role for resulting trusts?" 16 Legal
    Studies 133 puts forward counter arguments which I have found persuasive.

    It is to be noted that the Bank did not found any argument on the basis
    that the local authority was liable to repay either as a constructive trustee or
    under the in personam liability of the wrongful recipient of the estate of a
    deceased person established by In re Diplock [1948] Ch. 465. I therefore do
    not further consider those points.

    The Breadth of the Submission

    Although the actual question in issue on the appeal is a narrow one, on
    the arguments presented it is necessary to consider fundamental principles of
    trust law. Does the recipient of money under a contract subsequently found
    to be void for mistake or as being ultra vires hold the monies received on trust
    even where he had no knowledge at any relevant time that the contract was
    void? If he does hold on trust, such trust must arise at the date of receipt or,
    at the latest, at the date the legal title of the payer is extinguished by mixing
    monies in a bank account: in the present case it does not matter at which of
    those dates the legal title was extinguished. If there is a trust two
    consequences follow:

    (a) the recipient will be personally liable, regardless of fault, for
    any subsequent payment away of the monies to third parties
    even though, at the date of such payment, the "trustee" was
    still ignorant of the existence of any trust: see Burrows Swaps
    and the Friction between Common Law and Equity
    [1995] RLR
    15;

    - 26 -

    (b) as from the date of the establishment of the trust (i.e. receipt
    or mixing of the monies by the "trustee") the original payer
    will have an equitable proprietary interest in the monies so long
    as they are traceable into whomsoever's hands they come other
    than a purchaser for value of the legal interest without notice.

    Therefore, although in the present case the only question directly in issue is
    the personal liability of the local authority as a trustee, it is not possible to
    hold the local authority liable without imposing a trust which, in other cases,
    will create property rights affecting third parties because monies received
    under a void contract are "trust property."

    The Practical Consequences of the Bank's Argument

    Before considering the legal merits of the submission, it is important
    to appreciate the practical consequences which ensue if the Bank's arguments
    are correct. Those who suggest that a resulting trust should arise in these
    circumstances accept that the creation of an equitable proprietary interest
    under the trust can have unfortunate, and adverse, effects if the original
    recipient of the monies becomes insolvent: the monies, if traceable in the
    hands of the recipient, are trust monies and not available for the creditors of
    the recipient. However, the creation of an equitable proprietary interest in
    monies received under a void contract is capable of having adverse effects
    quite apart from insolvency. The proprietary interest under the unknown trust
    will, quite apart from insolvency, be enforceable against any recipient of the
    property other than the purchaser for value of a legal interest without notice.

    Take the following example, T (the transferor) has entered into a
    commercial contract with Rl (the first recipient). Both parties believe the
    contract to be valid but it is in fact void. Pursuant to that contract:

    (i) T pays £1m. to Rl who pays it into a mixed bank account:

    (ii) T transfers 100 shares in X company to Rl. who is registered
    as a shareholder.

    Thereafter Rl deals with the money and shares as follows:

    (iii) Rl pays £50,000 out of the mixed account to R2 otherwise than
    for value; R2 then becomes insolvent, having trade creditors
    who have paid for goods not delivered at the time of the
    insolvency.

    (iv) Rl charges the shares in X company to R3 by way of equitable
    security for a loan from R3.

    If the Bank's arguments are correct, Rl holds the £lm. on trust for T
    once the money has become mixed in Rl's bank account. Similarly Rl

    - 27 -

    becomes the legal owner of the shares in X company as from the date of his
    registration as a shareholder but holds such shares on a resulting trust for T.
    T therefore has an equitable proprietary interest in the monies in the mixed

    account and in the shares.

    T's equitable interest will enjoy absolute priority as against the
    creditors in the insolvency of R2 (who was not a purchaser for value)
    provided that the £50,000 can be traced in the assets of R2 at the date of its
    insolvency. Moreover, if the separation of title argument is correct, since the
    equitable interest is in T and the legal interest is vested in R2, R2 also holds
    as trustee for T. In tracing the £50,000 in the bank account of R2, R2 as
    trustee will be treated as having drawn out "his own" monies first, thereby
    benefitting T at the expense of the secured and unsecured creditors of R2.
    Therefore in practice one may well reach the position where the monies in the
    bank account of R2 in reality reflect the price paid by creditors for goods not
    delivered by R2: yet, under the tracing rules, those monies are to be treated
    as belonging in equity to T.

    So far as the shares in the X company are concerned. T can trace his
    equitable interest into the shares and will take in priority to R3, whose
    equitable charge to secure his loan even though granted for value will pro
    tanto be defeated.

    All this will have occurred when no one was aware, or could have
    been aware, of the supposed trust because no one knew that the contract was
    void.

    I can see no moral or legal justification for giving such priority to the
    right of T to obtain restitution over third parties who have themselves not been
    enriched, in any real sense, at T's expense and indeed have had no dealings
    with T. T paid over his money and transferred the shares under a supposed
    valid contract. If the contract had been valid, he would have had purely
    personal rights against Rl. Why should he be better off because the contract
    is void?

    My Lords, wise judges have often warned against the wholesale
    importation into commercial law of equitable principles inconsistent with the
    certainty and speed which are essential requirements for the orderly conduct
    of business affairs: see Barnes v. Addy (1874) L.R. 9 Ch.App. 244. 251,
    255; Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana
    [1983] 2 A.C. 694, 703-704. If the Bank's arguments are correct, a
    businessman who has entered into transactions relating to or dependent upon
    property rights could find that assets which apparently belong to one person
    in fact belong to another; that there are "off-balance-sheet" liabilities of which
    he cannot be aware; that these property rights and liabilities arise from
    circumstances unknown not only to himself but also to anyone else who has
    been involved in the transactions. A new area of unmanageable risk will be
    introduced into commercial dealings. If the due application of equitable

    - 28 -

    principles forced a conclusion leading to these results, your Lordships would
    be presented with a formidable task in reconciling legal principle with
    commercial common sense. But in my judgment no such conflict occurs.
    The resulting trust for which the Bank contends is inconsistent not only with
    the law as it stands but with any principled development of it.

    The Relevant Principles of Trust Law

    (i) Equity operates on the conscience of the owner of the legal
    interest. In the case of a trust, the conscience of the legal
    owner requires him to carry out the purposes for which the
    property was vested in him (express or implied trust) or which
    the law imposes on him by reason of his unconscionable
    conduct (constructive trust).

    (ii) Since the equitable jurisdiction to enforce trusts depends upon
    the conscience of the holder of the legal interest being affected,
    he cannot be a trustee of the property if and so long as he is
    ignorant of the facts alleged to affect his conscience, i.e. until
    he is aware that he is intended to hold the property for the
    benefit of others in the case of an express or implied trust, or,
    in the case of a constructive trust, of the factors which are
    alleged to affect his conscience.

    (iii) In order to establish a trust there must be identifiable trust
    property. The only apparent exception to this rule is a
    constructive trust imposed on a person who dishonestly assists
    in a breach of trust who may come under fiduciary duties even
    if he does not receive identifiable trust property.

    (iv) Once a trust is established, as from the date of its establishment
    the beneficiary has, in equity, a proprietary interest in the trust
    property, which proprietary interest will be enforceable in
    equity against any subsequent holder of the property (whether
    the original property or substituted property into which it can
    be traced) other than a purchaser for value of the legal interest
    without notice.

    These propositions are fundamental to the law of trusts and I would
    have thought uncontroversial. However, proposition (ii) may call for some
    expansion. There are cases where property has been put into the name of X
    without X's knowledge but in circumstances where no gift to X was intended.
    It has been held that such property is recoverable under a resulting trust:
    Birch v. Blagrave (1755) Amb. 264: Childers v. Childers (1875) 1 De G. &
    J. 482: In re Vinogradoff [l935] W.N. 68: In re Muller [1953] N.Z.L.R. 879.
    These cases are explicable on the ground that, by the time action was brought.
    X or his successors in title have become aware of the facts which gave rise to
    a resulting trust: his conscience was affected as from the time of such

    - 29 -

    discovery and thereafter he held on a resulting trust under which the property
    was recovered from him. There is, so far as I am aware, no authority which
    decides that X was a trustee, and therefore accountable for his deeds, at any
    time before he was aware of the circumstances which gave rise to a resulting
    trust.

    Those basic principles are inconsistent with the case being advanced
    by the Bank. The latest time at which there was any possibility of identifying
    the "trust property" was the date on which the monies in the mixed bank
    account of the local authority ceased to be traceable when the local authority's
    account went into overdraft in June 1987. At that date, the local authority had
    no knowledge of the invalidity of the contract but regarded the monies as its
    own to spend as it thought fit. There was therefore never a time at which
    both (a) there was defined trust property and (b) the conscience of the local
    authority in relation to such defined trust property was affected. The basic
    requirements of a trust were never satisfied.

    I turn then to consider the Bank's arguments in detail. They were
    based primarily on principle rather than on authority. I will deal first with the
    Bank's argument from principle and then turn to the main authorities relied
    upon by the Bank. Sinclair v. Brougham and Chase Manhattan Bank.

    The Retention of Title Point

    It is said that, since the Bank only intended to part with its beneficial
    ownership of the monies in performance of a valid contract, neither the legal
    nor the equitable title passed to the local authority at the date of payment.
    The legal title vested in the local authority by operation of law when the
    monies became mixed in the bank account but, it is said, the Bank "retained"
    its equitable title.

    I think this argument is fallacious. A person solely entitled to the full
    beneficial ownership of money or property, both at law and in equity, does
    not enjoy an equitable interest in that property. The legal title carries with it
    all rights. Unless and until there is a separation of the legal and equitable
    estates, there is no separate equitable title. Therefore to talk about the Bank
    "retaining" its equitable interest is meaningless. The only question is whether
    the circumstances under which the money was paid were such as, in equity,
    to impose a trust on the local authority. If so, an equitable interest arose for
    the first time under that trust.

    This proposition is supported by In re Cook [1948] Ch. 212;
    Vandervell v. I.R.C. [1967] 2 AC 291, 311g, per Lord Upjohn, and 317F,
    per Lord Donovan; Commissioner of Stamp Duties (Queensland) v. Livingston
    [1965] AC 694, 712B-E; Underhill and Hayton, Law of Trusts and Trustees,
    15th ed. (1995), p. 866.

    - 30 -

    The Separation of Title Point

    The Bank's submission, at its widest, is that if the legal title is in A
    but the equitable interest in B. A holds as trustee for B.

    Again I think this argument is fallacious. There are many cases where
    B enjoys rights which, in equity, are enforceable against the legal owner, A.
    without A being a trustee, e.g. an equitable right to redeem a mortgage,
    equitable easements, restrictive covenants, the right to rectification, an
    insurer's right by subrogation to receive damages subsequently recovered by
    the assured: Lord Napier and Ettrick v. Hunter [1993] A.C. 713. Even in
    cases where the whole beneficial interest is vested in B and the bare legal
    interest is in A. A is not necessarily a trustee, e.g. where title to land is
    acquired by estoppel as against the legal owner: a mortgagee who has fully
    discharged his indebtedness enforces his right to recover the mortgaged
    property in a redemption action, not an action for breach of trust.

    The Bank contended that where, under a pre-existing trust, B is entitled
    in an equitable interest in trust property, if the trust property comes into the
    hands of a third party. X (not being a purchaser for value of the legal interest
    without notice). B is entitled to enforce his equitable interest against the
    property in the hands of X because X is a trustee for B. In my view the third
    party, X, is not necessarily a trustee for B: B's equitable right is enforceable
    against the property in just the same way as any other specifically enforceable
    equitable right can be enforced against a third party. Even if the third party,
    X, is not aware that what he has received is trust property B is entitled to
    assert his title in that property. If X has the necessary degree of knowledge,
    X may himself become a constructive trustee for B on the basis of knowing
    receipt. But unless he has the requisite degree of knowledge he is not
    personally liable to account as trustee: In re Diplock [1948] Ch. 465 at page
    478: In re Montagu 's Settlement [1987] Ch. 264. Therefore, innocent receipt
    of property by X subject to an existing equitable interest does not by itself
    make X a trustee despite the severance of the legal and equitable titles.
    Underhill and Hayton, Law of Trusts and Trustees, 15th ed., pp. 569-370,
    whilst accepting that X is under no personal liability to account unless and
    until be becomes aware of B's rights, does describe X as being a constructive
    trustee. This may only be a question of semantics: on either footing, in the
    present case the local authority could not have become accountable for profits
    until it knew that the contract was void.

    Resulting Trust

    This is not a case where the Bank had any equitable interest which pre-
    dated receipt by the local authority of the upfront payment. Therefore, in
    order to show that the local authority became a trustee, the Bank must
    demonstrate circumstances which raised a trust for the first time either at the
    date on which the local authority received the money or at the date on which
    payment into the mixed account was made. Counsel for the Bank specifically

    - 31 -

    disavowed any claim based on a constructive trust. This was plainly right
    because the local authority had no relevant knowledge sufficient to raise a
    constructive trust at any time before the monies, upon the bank account going
    into overdraft, became untraceable. Once there ceased to be an identifiable
    trust fund, the local authority could not become a trustee: In re Goldcorp
    Exchange Ltd
    [1995] 1 AC 74. Therefore, as the argument for the Bank
    recognised, the only possible trust which could be established was a resulting
    trust arising from the circumstances in which the local authority received the
    upfront payment.

    Under existing law a resulting trust arises in two sets of circumstances:

    1. Where A makes a voluntary payment to B or pays (wholly or
      in part) for the purchase of property which is vested either in
      B alone or in the joint names of A and B. there is a
      presumption that A did not intend to make a gift to B: the
      money or property is held on trust for A (if he is the sole
      provider of the money) or in the case of a joint purchase by A
      and B in shares proportionate to their contributions. It is
      important to stress that this is only a presumption, which
      presumption is easily rebutted either by the counter-
      presumption of advancement or by direct evidence of A's
      intention to make an outright transfer: see Underhill and
      Hayton (supra)
      p. 317 et seq.; Vandervell v. I.R.C. [1967] 2
      A.C. 291 at 312 et seq.; In re Vandervell (No. 2) [1974] Ch.
      269 at 288 et seq.

    2. Where A transfers property to B on express trusts, but the
      trusts declared do not exhaust the whole beneficial interest:
      ibid. and Barclays Bank v. Quistclose Investments Ltd. [1970]
      A.C. 567.

    Both types of resulting trust are traditionally regarded as examples of trusts
    giving effect to the common intention of the parties. A resulting trust is not
    imposed by law against the intentions of the trustee (as is a constructive trust)
    but gives effect to his presumed intention. Megarry J. in In re Vandervell
    (No. 2)
    suggests that a resulting trust of type (B) does not depend on intention
    but operates automatically. I am not convinced that this is right. If the settlor
    has expressly, or by necessary implication, abandoned any beneficial interest
    in the trust property, there is in my view no resulting trust: the undisposed-of
    equitable interest vests in the Crown as bona vacantia: see In re West Sussex
    Constabulary's Widows, Children and Benevolent (1930) Fund Trusts
    [1971]
    Ch. 1.

    Applying these conventional principles of resulting trust to the present
    case, the Bank's claim must fail. There was no transfer of money to the local
    authority on express trusts: therefore a resulting trust of type (B) above could

    - 32 -

    not arise. As to type (A) above, any presumption or resulting trust is rebutted
    since it is demonstrated that the Bank paid, and the local authority received,
    the upfront payment with the intention that the monies so paid should become
    the absolute property of the local authority. It is true that the parties were
    under a misapprehension that the payment was made in pursuance of a valid
    contract. But that does not alter the actual intentions of the parties at the date
    the payment was made or the monies were mixed in the bank account. As the
    article by William Swadling (supra) demonstrates the presumption of resulting
    trust is rebutted by evidence of any intention inconsistent with such a trust,
    not only by evidence of an intention to make a gift.

    Professor Birks, whilst accepting that the principles I have stated
    represent "a very conservative form" of definition of a resulting trust (page
    360), argues from restitutionary principles that the definition should be
    extended so as to cover a perceived gap in the law of "subtractive unjust
    enrichment' (p. 368) so as to give a plaintiff a proprietary remedy when he
    has transferred value under a mistake or under a contract the consideration for
    which wholly fails. He suggests that a resulting trust should arise wherever
    the money is paid under a mistake (because such mistake vitiates the actual
    intention) or when money is paid on a condition which is not subsequently
    satisfied.

    As one would expect, the argument is tightly reasoned but I am not
    persuaded. The search for a perceived need to strengthen the remedies of a
    plaintiff claiming in restitution involves, to my mind, a distortion of trust
    principles. First, the argument elides rights in property (which is the only
    proper subject matter of a trust) into rights in "the value transferred": see p.
    361. A trust can only arise where there is defined trust property: it is
    therefore not consistent with trust principles to say that a person is a trustee
    of property which cannot be defined. Second, Professor Birks' approach
    appears to assume (for example in the case of a transfer of value made under
    a contract the consideration for which subsequently fails) that the recipient will
    be deemed to have been a trustee from the date of his original receipt of
    money, i.e. the trust arises at a time when the "trustee" does not, and cannot,
    know that there is going to be a total failure of consideration. This result is
    incompatible with the basic premise on which all trust law is built, viz. that
    the conscience of the trustee is affected. Unless and until the trustee is aware
    of the factors which give rise to the supposed trust, there is nothing which can
    affect his conscience. Thus neither in the case of a subsequent failure of
    consideration nor in the case of a payment under a contract subsequently
    found to be void for mistake or failure of condition will there be
    circumstances, at the date of receipt, which can impinge on the conscience of
    the recipient, thereby making him a trustee. Thirdly, Professor Birks has to
    impose on his wider view an arbitrary and admittedly unprincipled
    modification so as to ensure that a resulting trust does not arise when there
    has only been a failure to perform a contract, as opposed to total failure of
    consideration: see pp. 356-359 and 362. Such arbitrary exclusion is designed
    to preserve the rights of creditors in the insolvency of the recipient. The fact

    - 33 -

    that it is necessary to exclude artificially one type of case which would
    logically fall within the wider concept casts doubt on the validity of the
    concept.

    If adopted, Professor Birks' wider concepts would give rise to all the
    practical consequences and injustices to which I have referred. I do not think
    it right to make an unprincipled alteration to the law of property (i.e. the law
    of trusts) so as to produce in the law of unjust enrichment the injustices to
    third parties which I have mentioned and the consequential commercial
    uncertainty which any extension of proprietary interests in personal property
    is bound to produce.

    The Authorities

    Three cases were principally relied upon in direct support of the
    proposition that a resulting trust arises where a payment is made under a void
    contract.

    (A) Sinclair v. Brougham [1914] AC 398

    The case concerned the distribution of the assets of the Birkbeck
    Building Society, an unincorporated body which was insolvent. The Society
    had for many years been carrying on business as a bank which, it was held,
    was ultra vires its objects. The bank had accepted deposits in the course of
    its ultra vires banking business and it was held that the debts owed to such
    depositors were themselves void as being ultra vires. In addition to the
    banking depositors, there were ordinary trade creditors. The Society had two
    classes of members, the A shareholders who were entitled to repayment of
    their investment on maturity and the B shareholders whose shares were
    permanent. By agreement, the claims of the ordinary trade creditors and of
    the A shareholders had been settled. Therefore the only claimants to the
    assets of the Society before the Court were the ultra vires depositors and the
    B shareholders, the latter of which could take no greater interest than the
    Society itself.

    The issues for decision arose on a summons taken out by the liquidator
    for directions as to how he should distribute the assets in the liquidation. In
    the judgments, it is not always clear whether this House was laying down
    general propositions of law or merely giving directions as to the proper mode
    in which the assets in that liquidation should be distributed. The depositors
    claimed, first, in quasi contract for money had and received. They claimed
    secondly, as the result of an argument suggested for the first time in the
    course of argument in the House of Lords (at p. 404), to trace their deposits
    into the assets of the Society.

    - 34 -

    Money had and received

    The House of Lords was unanimous in rejecting the claim by the ultra
    vires depositors to recover in quasi-contract on the basis of monies had and
    received. In their view, the claim in quasi-contract was based on an implied
    contract. To imply a contract to repay would be to imply a contract to exactly
    the same effect as the express ultra vires contract of loan. Any such implied
    contract would itself be void as being ultra vires.

    Subsequent developments in the law of restitution demonstrate that this
    reasoning is no longer sound. The common law restitutionary claim is based
    not on implied contract but on unjust enrichment: in the circumstances the
    law imposes an obligation to repay rather than implying an entirely fictitious
    agreement to repay: Fibrosis v. Fairborn [1943] AC 32, 63-64 per Lord
    Wright; Peavey & Matthews Pty. Ltd. v. Paul [1987] 69 I.E. 579, 583,
    603: Lipkin Gorman v. Karpnale Ltd [1991] 2 A.C. 548, 578C: Woolwich
    Equitable Building Society v. I.R.C.
    [1993] AC 70. In my judgment, Your
    Lordships should now unequivocally and finally reject the concept that the
    claim for monies had and received is based on an implied contract. I would
    overrule Sinclair v. Brougham on this point.

    It follows that in Sinclair v. Brougham the depositors should have had
    a personal claim to recover the monies at law based on a total failure or
    consideration. The failure of consideration was not partial: the depositors
    had paid over their money in consideration of a promise to repay. That
    promise was ultra vires and void: therefore the consideration for the payment
    of the money wholly failed. So in the present swaps case (though the point
    is not one under appeal) I think the Court of Appeal were right to hold that
    the swap monies were paid on a consideration that wholly failed. The essence
    of the swap agreement is that, over the whole term of the agreement, each
    party thinks he will come out best: the consideration for one party making a
    payment is an obligation on the other party to make counter-payments over the
    whole term of the agreement.

    If in Sinclair v. Brougham the depositors had been held entitled to
    recover at law, their personal claim would have ranked part passu with other
    ordinary unsecured creditors, in priority to the members of the Society who
    could take nothing in the liquidation until all creditors had been paid.

    The claim in rem.

    The House of Lords held that, the ordinary trade creditors having been
    paid in full by agreement, the assets remaining were to be divided between the
    ultra vires depositors and the members of the Society pro rata according to
    their respective payments to the Society. The difficulty is to identify any
    single ratio decidendi for that decision. Lord Haldane (with whom Lord
    Atkinson agreed) and Lord Parker gave fully reasoned judgments (considered

    - 35 -

    below). Lord Dunedin apparently based himself on some "super-eminent"
    equity (not a technical equity) in accordance with which the Court could
    distribute the remaining assets of the Society: see pp. 434 and 436. The
    members (by which presumably he means the Society) were not in a fiduciary
    relationship with the depositors: it was the directors not the Society which
    had mixed the monies: 438. This indicates that he was adopting the approach
    of Lord Parker: yet he concurred in the judgment of Lord Haldane: 438. I
    can only understand his judgment as being based on some super-eminent
    jurisdiction in the Court to do justice as between the remaining claimants in
    the course of a liquidation.

    Lord Sumner plainly regarded the case as a matter of doing justice in
    administering the remaining assets in the liquidation, all other claims having
    been eliminated: p. 459. He said, at p. 458:

    The question is one of administration. The liquidator, an officer of
    the Court, who has to discharge himself of the assets that have come
    to his hands, asks for directions, and, after hearing all parties
    concerned, the Court has the right and the duty to direct him how to
    distribute all the assets. ... In my opinion, if precedent fails, the
    most just distribution of the whole must be directed, so only that no
    recognised rule of law or equity be disregarded."

    Lord Haldane (p. 418) treated the case as a tracing claim: could the
    depositors follow and recover property with which, in equity, they had "never
    really parted": p. 418. After holding that the parties could not trace at law
    (pp. 418-420) he said that the monies could be traced in equity "based upon
    trust": p. 420. The only passage in which he identifies the trust is at p. 421:
    "The property was never converted into a debt, in equity at all events, and
    there has been throughout a resulting trust, not of an active character, but
    sufficient, in my opinion, to bring the transaction within the general
    principle." He treats the Society itself (as opposed to its directors) as having
    mixed the depositors' money with its own money, but says that such mixing
    was not a breach of fiduciary duty by the Society but authorised by the
    depositors: it was intended that "the Society should be entitled to deal with
    [the depositors' money] freely as its own": pp. 422-423. On that ground he
    distinguished In re Hallett's Estate case (a trustee is taken to have drawn his
    own money first) and held that the mixed monies therefore belonged to the
    depositors and members pro rata.

    Like others before me, I find Lord Haldane's reasoning difficult, if not
    impossible, to follow. The only equitable right which he identifies arises
    under "a resulting trust, not of an active character" which, as I understand it,
    existed from the moment when the Society received the money. Applying the
    conventional approach, the resulting trust could only have arisen because
    either the depositors were treated as contributors to a fund (a resulting trust
    of type (A) above) or because the "trust" on which the monies were paid to
    the Society had failed (a resulting trust of type (B)). Yet the finding that the

    - 36 -

    Society was not in breach of fiduciary duty because it was the intention or the
    parties that the Society should be free to deal with the money as its own
    (p. 423) is inconsistent with either type of resulting trust. Such an intention
    would rebut the presumption of resulting trust of type (A) and is inconsistent
    with a payment on express trusts which fail, i.e. with a type (B) resulting
    trust. Therefore the inactive resulting trust which Lord Haldane was referring
    to was, as Professor Birks points out, not a conventional one: indeed there
    is no trace of any such trust in earlier or later authority. The question is
    whether the recognition of such a trust accords with principle and the demands

    of certainty in commercial dealings.

    As to the latter, Lord Haldane's theory, if correct, gives rise to all the
    difficulties which I have noted above. Nor does the theory accord with
    principle. First, it postulates that the Society became a trustee at a time when
    it was wholly ignorant of the circumstances giving rise to the trust. Second,
    since the depositors' money was intended to be mixed with that of the Society,
    there was never any intention that there should be a separate identifiable trust
    fund, an essential feature of any trust. Third, and most important, if Lord
    Haldane's approach were to be applicable in an ordinary liquidation it is quite
    incapable of accommodating the rights of ordinary creditors. Lord Haldane's
    inactive resulting trust, if generally applicable, would give the depositors (and
    possibly the members) rights having priority not only to those of ordinary
    trade creditors but also to those of some secured creditors, e.g. the common
    form security for bank lending, a floating charge on the company's assets.
    The monies of both depositors and members are, apparently, trust monies and
    therefore form no part of the company's assets available to pay creditors,
    whether secured or unsecured. This seems to be an impossible conclusion.
    Lord Haldane appreciated the difficulty, but did not express any view as to
    what the position would be if there had been trade creditors in competition:
    see at pp. 421-422 and 425-426.

    Lord Parker analysed the matter differently. He held that the
    depositors had paid their money not to the Society itself but to the directors,
    who apparently held the monies on some form of Quistclose trust: the money
    had been paid by the depositors to the directors to be applied by them in
    making valid deposits with the Society and, since such deposit was impossible,
    the directors held the monies on a trust for the depositors: see pp. 441-442
    and 444. It is to be noted that Lord Parker does not at any time spell out the
    nature of the trust. However, he held that the directors owed fiduciary duties
    both to the depositors and to the members of the Society. Therefore it was
    not a case in which a trustee had mixed trust monies with his own monies (to
    which Hallett's case would apply) but of trustees (the directors) mixing the
    monies of two innocent parties to both of whom they owed fiduciary duties:
    the depositors and members therefore ranked part passu: p. 442.

    I find the approach of Lord Parker much more intelligible than that of
    Lord Haldane: it avoids finding that the Society held the money on a resulting
    trust at the same time as being authorised to mix the depositors' money with

    - 37 -

    its own. In In re Diplock [1948] Ch. 465 the Court of Appeal found the ratio
    of Sinclair v. Brougham to lie in Lord Parker's analysis. But, quite apart
    from the fact that no other member of the House founded himself on Lord
    Parker's analysis, it is in some respects very unsatisfactory. First, the finding
    that the depositors' monies were received by the directors, as opposed to the
    Society itself, is artificial. Although it was ultra vires the Society to enter
    into a contract to repay the monies, it was not ultra vires the Society to
    receive monies. Second, Lord Parker's approach gives depositors and
    members alike the same priority over trade creditors as does that of Lord
    Haldane. The fact is that any analysis which confers an equitable proprietary
    interest as a result of a payment under a void contract necessarily gives
    priority in an insolvency to the recovery of the ultra vires payment. Lord
    Parker too was aware of this problem: but he left the problem to be solved
    in a case where the claims of trade creditors were still outstanding. Indeed
    he went further than Lord Haldane. He appears to have thought that the
    Court had power in some cases to postpone trade creditors to ultra vires
    depositors and in other cases to give the trade creditors priority: which course
    was appropriate he held depended on the facts of each individual case: pp.
    444 and 445. There is much to be said for the view that Lord Parker, like
    Lord Haldane and Lord Sumner, was dealing only with the question of the due
    administration of assets of a company in liquidation. Thus he says, at p.449
    "Nor, indeed, am I satisfied that the equity to which effect is being given in
    this case is necessarily confined to a liquidation. It is, however, unnecessary
    for your Lordships to decide these points." This makes it clear that he was
    not purporting to do more than decide how the assets of that society in that
    liquidation were to be dealt with.

    As has been pointed out frequently over the 80 years since it was
    decided, Sinclair v. Brougham is a bewildering authority: no single ratio
    decidendi can be detected: all the reasoning is open to serious objection: it
    was only intended to deal with cases where there were no trade creditors in
    competition and the reasoning is incapable of application where there are such
    creditors. In my view the decision as to rights in rem in Sinclair v. Brougham
    should also be overruled. Although the case is one where property rights are
    involved, such overruling should not in practice disturb long-settled titles.
    However, Your Lordships should not be taken to be casting any doubt on the
    principles of tracing as established in In re Diplock.

    If Sinclair v. Brougham, in both its aspects, is overruled the law can
    be established in accordance with principle and commercial common sense:
    a claimant for restitution of monies paid under an ultra vires, and therefore
    void, contract has a personal action at law to recover the monies paid as on
    a total failure of consideration; he will not have an equitable proprietary claim
    which gives him either rights against third parties or priority in an insolvency;
    nor will he have a personal claim in equity, since the recipient is not a trustee.

    - 38 -

    (B) Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd.
    [1981] Ch. 105

    In that case Chase Manhattan, a New York bank, had by mistake paid
    the same sum twice to the credit of the defendant, a London bank. Shortly
    thereafter, the defendant bank went into insolvent liquidation. The question
    was whether Chase Manhattan had a claim in rem against the assets of the
    defendant bank to recover the second payment.

    Goulding J. was asked to assume that the monies paid under a mistake
    were capable of being traced in the assets of the recipient bank: he was only
    concerned with the question whether there was a proprietary base on which
    the tracing remedy could be founded: p. 116b. He held that, where money
    was paid under a mistake, the receipt of such money without more constituted
    the recipient a trustee: he said that the payer "retains an equitable property
    in it and the conscience of [the recipient] is subjected to a fiduciary duty to
    respect his proprietary right": p. 119d-e.

    It will be apparent from what I have already said that I cannot agree
    with this reasoning. First, it is based on a concept of retaining an equitable
    property in money where, prior to the payment to the recipient bank, there
    was no existing equitable interest. Further, I cannot understand how the
    recipient's "conscience" can be affected at a time when he is not aware of any
    mistake. Finally, the Judge found that the law of England and that of New
    York were in substance the same. I find this a surprising conclusion since the
    New York law of constructive trusts has for a long time been influenced by
    the concept of a remedial constructive trust, whereas hitherto English law has
    for the most part only recognised an institutional constructive trust: see Metall
    & Rohstoff v. Donaldson Inc.
    [1990] 1 Q.B. 391, 478-480. In the present
    context, that distinction is of fundamental importance. Under an institutional
    constructive trust, the trust arises by operation of law as from the date of the
    circumstances which give rise to it: the function of the court is merely to
    declare that such trust has arisen in the past. The consequences that flow
    from such trust having arisen (including the possibly unfair consequences to
    third parties who in the interim have received the trust property) are also
    determined by rules of law, not under a discretion. A remedial constructive
    trust, as I understand it, is different. It is a judicial remedy giving rise to an
    enforceable equitable obligation: the extent to which it operates
    retrospectively to the prejudice of third parties lies in the discretion of the
    court. Thus for the law of New York to hold that there is a remedial
    constructive trust where a payment has been made under a void contract gives
    rise to different consequences from holding that an institutional constructive
    trust arises in English law.

    However, although I do not accept the reasoning of Goulding J., Chase
    Manhattan
    may well have been rightly decided. The defendant bank knew of
    the mistake made by the paying bank within two days of the receipt of the
    monies: see at p. 115a. The judge treated this fact as irrelevant (p. 114f)

    - 39 -

    but in my judgment it may well provide a proper foundation for the decision.
    Although the mere receipt of the monies, in ignorance of the mistake, gives
    rise to no trust, the retention of the monies after the recipient bank learned of
    the mistake may well have given rise to a constructive trust: see Snell's
    Equity
    p. 193: Pettit Equity and the Law of Trusts 7th edn. 168: Metall and
    Rohstoff v. Donaldson Inc.
    [1990] 1 Q.B. 391 at pp. 473-474.

    (C) In re Ames' Settlement [1946] 1 Ch. 217.

    In this case the father of the intended husband, in consideration of the
    son's intended marriage with Miss H., made a marriage settlement under
    which the income was payable to the husband for life and after his death to
    the wife for life or until her remarriage, with remainder to the issue of the
    intended marriage. There was an ultimate trust, introduced by the words "If
    there should not be any child of the said intended marriage who attains a
    vested interest . . . ," for an artificial class of the husband's next of kin. The
    marriage took place. Many years later a decree of nullity on the grounds of
    non-consummation had the effect of rendering the marriage void ab initio.
    The income was paid to the husband until his death which occurred 19 years
    after the decree of nullity. The question was whether the trust capital was
    held under the ultimate trust for the husband's next-of-kin or was payable to
    the settlor's estate. It was held that the settlor's estate was entitled.

    The judgment is very confused. It is not clear whether the judge was
    holding (as I think correctly) that in any event the ultimate trust failed because
    it was only expressed to take effect in the event of the failure of the issue of
    a non-existent marriage (an impossible condition precedent) or whether he
    held that all the trusts of the settlement failed because the beneficial interests
    were conferred in consideration of the intended marriage and that there had
    been a total failure of consideration. In either event, the decision has no
    bearing on the present case. On either view, the fund was vested in trustees
    on trusts which had failed. Therefore the monies were held on a resulting
    trust of type (B) above. The decision casts no light on the question whether,
    there being no express trust, monies paid on a consideration which wholly
    fails are held on a resulting trust.

    The stolen bag of coins

    The argument for a resulting trust was said to be supported by the case
    of a thief who steals a bag of coins. At law those coins remain traceable only
    so long as they are kept separate: as soon as they are mixed with other coins
    or paid into a mixed bank account they cease to be traceable at law. Can it
    really be the case, it is asked, that in such circumstances the thief cannot be
    required to disgorge the property which, in equity, represents the stolen coins?
    Monies can only be traced in equity if there has been at some stage a breach
    of fiduciary duty, i.e. if either before the theft there was an equitable
    proprietary interest (e.g. the coins were stolen trust monies) or such interest
    arises under a resulting trust at the time of the theft or the mixing of the

    - 40 -

    monies. Therefore, it is said, a resulting trust must arise either at the time or
    the theft or when the monies are subsequently mixed. Unless this is me law,
    there will be no right to recover the assets representing the stolen monies once
    the monies have become mixed.

    I agree that the stolen monies are traceable in equity. But the
    proprietary interest which equity is enforcing in such circumstances arises
    under a constructive, not a resulting, trust. Although it is difficult to find
    clear authority for the proposition, when property is obtained by fraud equity
    imposes a constructive trust on the fraudulent recipient: the property is
    recoverable and traceable in equity. Thus, an infant who has obtained
    property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2
    K.B. 235, 244: R. Leslie Ltd. v. Shiell [1914] 3 KB 607. Monies stolen
    from a bank account can be traced in equity: Bankers Trust Co. v. Shapira
    [1980] 1 W.L.R. 1274, 1282c-e. See also McCormick v. Grogan L.R. 4
    H.L. 82, 97.

    Restitution and equitable rights

    Those concerned with developing the law of restitution are anxious to
    ensure that, in certain circumstances, the plaintiff should have the right to
    recover property which he has unjustly lost. For that purpose they have
    sought to develop the law of resulting trusts so as to give the plaintiff a
    proprietary interest. For the reasons that I have given in my view such
    development is not based on sound principle and in the name of unjust
    enrichment is capable of producing most unjust results. The law of resulting
    trusts would confer on the plaintiff a right to recover property from, or at the
    expense of, those who have not been unjustly enriched at his expense at all,
    e.g. the lender whose debt is secured by a floating charge and all other third
    parties who have purchased an equitable interest only, albeit in all innocence
    and for value.

    Although the resulting trust is an unsuitable basis for developing
    proprietary restitutionary remedies, the remedial constructive trust, if
    introduced into English law, may provide a more satisfactory road forward.
    The court by way of remedy might impose a constructive trust on a defendant
    who knowingly retains property of which the plaintiff has been unjustly
    deprived. Since the remedy can be tailored to the circumstances of the
    particular case, innocent third parties would not be prejudiced and
    restitutionary defences, such as change of position, are capable of being given
    effect. However, whether English law should follow the United States and
    Canada by adopting the remedial constructive trust will have to be decided in
    some future case when the point is directly in issue.

    The date from which interest is payable

    The Court of Appeal held that compound interest was payable by the
    local authority on the balance for the time being outstanding, such interest to

    - 41 -

    start from the date of the receipt by the local authority of the upfront payment
    of £2.5m. on 18 June 1987. Although, for the reasons I have given, I do not
    think the Court should award compound interest in this case. I can see no
    reason why interest should not start to run as from the date of payment of the
    upfront payment. I agree with the judgment of Leggatt L.J. in the Court of
    Appeal (at p. 955) that there is no good ground for departing from the general
    rule that interest is payable as from the date of the accrual of the cause of
    action.

    Equity acting in aid of the common law

    Since drafting this speech I have seen, in draft, the speeches of my
    noble and learned friends Lord Goff of Chieveley and Lord Woolf. Both
    consider that compound interest should be awarded in this case on the grounds
    that equity can act in aid of the common law and should exercise its
    jurisdiction to order compound interest in aid of the common law right to
    recover monies paid under an ultra vires contract.

    I fully appreciate the strength of the moral claim of the bank in this
    case to receive full restitution, including compound interest. But I am unable
    to accept that it would be right in the circumstances of this case for your
    Lordships to develop the law in the manner proposed. I take this view for
    two reasons.

    First, Parliament has twice since 1934 considered what interest should
    be awarded on claims at common law. Both the Law Reform (Miscellaneous
    Provisions) Act, 1934, section 3(1) and its successor, section 35A of the
    Supreme Court Act, 1981, make it clear that the Act does not authorise the
    award of compound interest. However both Acts equally make it clear that
    they do not impinge on the award of interest in equity. At the time those Acts
    were passed, and indeed at all times down to the present day, equity has only
    awarded compound interest in the limited circumstances which I have
    mentioned. In my judgment, your Lordships would be usurping the function
    of Parliament if, by expanding the equitable rules for the award of compound
    interest, this House were now to hold that the court exercising its equitable
    jurisdiction in aid of the common law can award compound interest which the
    statutes have expressly not authorised the court to award in exercise of its
    common law jurisdiction.

    Secondly, the arguments relied upon by my noble and learned friends
    were not advanced by the Bank at the hearing. The local authority would
    have a legitimate ground to feel aggrieved if the case were decided against
    them on a point which they had had no opportunity to address. Moreover,
    in my view it would be imprudent to introduce such an important change in
    the law without this House first having heard full argument upon it. Although
    I express no concluded view on the points raised, the proposed development
    of the law bristles with unresolved questions. For example, given that the
    right to interest is not a right which existed at common law but is solely the

    - 42 -

    creation of statute, would equity in tact be acting in aid of the common law
    or would it be acting in aid of the legislature? Does the principle that equity
    acts in aid of the common law apply where there is no concurrent right of
    action in equity? If not, in the absence of any trust or fiduciary relationship
    what is the equitable cause of action in this case? What were the policy
    reasons which led Parliament to provide expressly that only the award of
    simple interest was authorised? In what circumstances should compound
    interest be awarded under the proposed expansion of the equitable rules? In
    the absence of argument on these points it would in my view be imprudent to
    change the law. Rather, the whole question of the award of compound
    interest should be looked at again by Parliament so that it can make such
    changes, if any, as are appropriate.

    For these reasons, which are in substance the same as those advanced
    by my noble and learned friend Lord Lloyd of Berwick. I am unable to agree
    with the views of Lord Goff of Chieveley and Lord Woolf.

    Conclusion

    I would allow the appeal and vary the judgment of the Court of Appeal
    so as to order the payment of simple interest only as from 18 June 1987 on
    the balance from time to time between the sums paid by the Bank to the local
    authority and the sums paid by the local authority to the Bank.

    LORD SLYNN OF HADLEY

    My Lords,

    For the reasons given by my noble and learned friend Lord Browne-
    Wilkinson I agree that Sinclair v. Brougham should be departed from and that
    it should be held that in this case the local authority was neither a trustee of,
    nor in a fiduciary position in relation to, the monies which it had received
    from the Bank, nor had it improperly profited from the use of those monies.
    For the reasons which he gives no resulting trust could arise on the present
    facts.

    It follows that if, as I think, Lord Brandon of Oakbrook in President
    of India v. La Pintada Compania Navigacion S.A.
    [1985] A.C. 104, 116, was
    right to say that in the Court of Chancery the award of compound interest was
    limited to situations "where money had been obtained and retained by fraud,
    or where it had been withheld or misapplied by a trustee or anyone else in a
    fiduciary position." Courts of Chancery would not have awarded compound
    interest in a case like the present.

    - 43 -

    It is common ground that compound interest could not have been
    awarded at common law as presently formulated nor under the statutory
    provisions in section 3 of the Law Reform (Miscellaneous Provisions) Act
    1934 nor under section 35A of the Supreme Court Act 1981 as inserted by the
    Administration of Justice Act 1982.

    But for the legislation I would have accepted that it was open to your
    lordships to hold that, in the light of the development of the law of restitution,
    the courts could award compound interest, either by modifying the common
    law rule or by resorting to equity to act in aid of the common law right to
    recover monies paid under a void transaction. As to whether it would have
    been right to do so in general terms, or whether it would have been right to
    limit the cases in which compound interest should be awarded, or whether
    compound interest should be awarded at all I am not, on the restricted
    arguments advanced in this case, prepared to comment.

    I do not, however, consider that it would be right on this appeal to
    enlarge the cases in which compound interest can be awarded when Parliament
    has twice in relatively recent times limited statutory interest to simple interest.
    This is a matter which should be considered by Parliament when the merits
    or disadvantages of giving the courts power to award compound interest could
    be examined in a context wider than the present case.

    Accordingly in agreement with my noble and learned friends Lord
    Browne-Wilkinson and Lord Lloyd of Berwick, and despite the forceful
    reasoning of my noble and learned friends Lord Goff of Chieveley and Lord
    Woolf, I would allow the appeal and vary the judgment of the Court of
    Appeal so as to award simple interest from 18 June 1987.

    LORD WOOLF

    My Lords,

    This appeal raises directly only one issue of law. It is whether the
    courts have jurisdiction to make an order for the payment of compound
    interest ancillary to an order for restitution when a contract is ultra vires. All
    the judges in the courts below concluded that there was jurisdiction to do so.

    In this case an order was made in favour of the respondent bank as
    against the local authority appellant which was the recipient of the ultra vires
    payment. There is no dispute that there was jurisdiction to make an order for
    the payment of simple interest. The dispute is limited to the order for
    compound interest.

    - 44 -

    It is accepted that if there is jurisdiction to make the order this is a
    case in which this achieves a just result. There is only one other issue raised
    by the appeal and that is as to the date from which the interest should be paid.

    The transaction was a commercial transaction. The local authority in
    calculating the balance which it had to repay the respondents was given credit
    for the sums which it had paid by way of notional interest under the contract
    prior to it being appreciated that the contract might be ultra vires. If the
    transaction had not taken place the local authority would have had to borrow
    (if it could find a way of lawfully doing so) the sum paid to it by the bank on
    terms which would be likely to involve compound interest being recoverable
    in proceedings for default. (Here see National Bank of Greece v. Pinios
    Shipping Co. No. 1, The Maira
    [1990] 1 A.C. 637 as to commercial
    transactions with banks). The bank could have lent that sum on the same
    basis.

    Hobhouse J., the judge at first instance reflected the commercial justice
    of the situation in the passage in his judgment ([1994] 4 All E.R. at p. 955)
    in which he set out succinctly why he considered compound interest was
    payable:

    "[The local authority] has kept that sum and has not made any
    restitution. In this situation I see no reason why I should not exercise
    my equitable jurisdiction to award compound interest. Simple interest
    does not reflect the actual value of money. Anyone who lends or
    borrows money on a commercial basis receives or pays interest
    periodically and if that interest is not paid it is compounded (e.g.
    Wallersteiner v. Moir (No. 2) [1975] 1 All E.R. 849, [1975] Q.B. 373
    and National Bank of Greece S.A. v. Pinios Shipping Co. No. 1, The
    Maira
    [1990] 1 All E.R. 78, [1990] 1 A.C. 637). I see no reason why
    I should deny the plaintiff a complete remedy or allow the defendant
    arbitrarily to retain part of the enrichment which it has unjustly
    enjoyed. There are no special factors which have to be taken into
    account. No question of insolvency is involved nor is there any basis
    for any persuasive argument to the contrary."

    This being the situation I am relieved that I am of the opinion that the
    judges in the courts below were correct in concluding that in the
    circumstances of this case they were entitled to award compound interest.
    Any other decision would be inconsistent with the court's ability to grant full
    restitution. It would be a further unhappy aspect, from a commercial stand
    point, of the history of this case in particular and the swaps litigation as a
    whole. This commenced with the decision, to which I was a party at first
    instance, of Hazell v. Hammersmith and Fulham London Borough Council
    [1992] 2 A.C. 1. It is no secret that the decision at first instance in that case,
    which was approved by this House, caused dismay among some of those
    concerned with the standing abroad of the commercial law of this country.
    That concern is likely to be increased if the outcome of this litigation is that

    - 45 -

    this appeal has to be allowed by this House because the courts have no
    jurisdiction to grant compound interest.

    The position is not improved by the fact that such is the confused state
    of English law as to the extent of its jurisdiction to award interest that the
    hearing before their Lordships involved four days of argument. Argument
    that could have lasted even longer but for counsel for the local authority
    courteously informing their Lordships that because of the costs which the local
    authority was incurring on the appeal he was required by his clients to curtail
    his argument.

    The argument had been extended by their Lordships themselves raising
    the issue as to the correctness of a decision of this House of some 80 years
    standing (Sinclair v. Brougham [1914] AC 398). That case does not directly
    involve the courts' equitable jurisdiction to award interest. Yet the issue as
    to whether the case was correctly decided still needed to be raised because the
    reasoning in that case was inconsistent with the submissions of the local
    authority. The fact that counsel was required to take the course of seeking to
    limit his argument does put in question whether the way appeals are managed
    before the House and the resources available to their Lordships are ideal for
    meeting both the contemporary needs of litigants and their Lordships'
    responsibilities for the proper development of the law.

    I have had the considerable advantage of being able to read in draft the
    admirably reasoned speeches of Lord Goff of Chieveley and Lord Browne-
    Wilkinson. That reasoning convinces me that the bank is not entitled to
    proceed by way of an equitable proprietary claim and that the recipient of a
    sum of money paid under an ultra vires contract should not be regarded as
    owing either the duties of a trustee or fiduciary to the payer of that sum.
    Further then that it is not necessary for me to go. This avoids the dangers
    which Lord Browne-Wilkinson identifies could flow from the wholesale
    importation into commercial law of equitable principles. I am also in
    agreement with Lord Goff's reasoning as to compound interest being able to
    be awarded where one party is under a duty to make restitution to another,
    this being a consequence of the development of the law of restitution.

    The Significance of the Difference Between Equitable Principles and Remedies

    Such a wholesale importation is not necessarily the consequence of a
    finding that the courts have the equitable jurisdiction to make an order for the
    payment of compound interest in conjunction with the grant of a remedy of
    restitution. We are concerned here primarily not with equitable principles of
    substantive law but with the possible existence of an equitable remedy.
    Compound interest, if it is recoverable, will be recoverable in the
    circumstances of this case in equity because of the absence of any statutory or
    common law remedy which will prevent the local authority being unjustly
    enriched at the expense of the bank if compound interest is not payable.

    - 46 -

    The situation is one in which compound interest would be awarded
    because it would be unconscionable to allow the local authority to make a
    profit out of a contract which was void because it had exceeded its own
    powers. This is very much an analogous situation to those where equity has
    traditionally provided remedies. Perhaps the best example is provided by
    specific performance. It is unnecessary to inquire whether the right which is
    being enforced by an order of specific performance is one recognised by the
    common law or equity. What does matter is whether it is equitable to grant
    the remedy and whether an award of damages in lieu would be an adequate
    remedy.

    In addition, if the contract had not been void and the local authority
    had failed to make the payments required the bank might well, as I will seek
    to show, have been fully protected by its remedy in damages at common law.
    Because there is no contract damages are not available. Here the situation is
    very much in keeping with those where equity traditionally mitigates the
    inadequacy of a common law remedy without having to invoke the substantive
    equitable law principles. This situation is described in Snell's Equiry. 29th
    ed., ch. 2. s. 4. p. 26:

    "Between them, equitable interests, mere equities, floating equities and
    the great doctrines of equity cover most of the field of equity: and they
    are all concerned to a greater or lesser degree with the rights of
    property. Yet although the existence of such rights has long been an
    important factor in deciding whether equity will intervene, it is not
    essential. Equitable remedies, though often used in aid of property
    rights, are also often used in other cases. The underlying principle is
    the inadequacy of the common law remedy of damages. Thus the
    equitable remedies of rescission and injunction may be employed in
    relation to contracts for personal services: and injunctions are
    sometimes granted in cases of tort which involve no rights of property.
    In this sense there may be equities unrelated to property."

    In the same sense it can be said there may be equities unrelated to a
    breach of trust or fiduciary duty. I would add that equity does not only come
    to the aid of a claimant where damages are an inadequate remedy. It can also
    do so when one of the other common law remedies is inadequate. I would
    take as an example the remedy of an account. The advantages of the equitable
    remedy over the common law remedy have resulted in the latter remedy being
    supplanted by the former. It may well be that the editors of Snell 's Equity did
    not have in mind the power to award interest when writing the paragraph I
    have set out. The paragraph is nonetheless of general application and there
    is no reason why it should not apply to the equitable remedy of awarding
    interest in the same way as it applies to other equitable remedies. The award
    of interest is only distinct from other remedies in that it is usually awarded as
    an ancillary to some other remedy.

    - 47 -

    I therefore accept Mr. Sumption's submission on behalf of the bank
    that where there is a duty to make restitution equity can achieve full restitution
    by granting, when it is appropriate to do so, simple or compound interest in
    addition to requiring repayment of the principal sum. For this to be the
    position the defendant must have made an actual or presumed profit or a profit
    which he is presumed to have derived from his having been the recipient of
    a principal sum which he has not repaid. The compound interest will not be
    payable as of right. The remedy of awarding interest, like other equitable
    remedies will be discretionary. Interest will only be awarded when it accords
    with equitable principles to make the award.

    I appreciate that Mr. Sumption did not advance the argument in favour
    of the grant of compound interest on the basis that I have put forward.
    However, he came before your Lordships" House not expecting Sinclair v.
    Brougham
    to be challenged. He had no reason in his printed case to do other
    than base his argument on the fact that the local authority was a fiduciary.
    Before your Lordships he made clear that while he was arguing that the local
    authority was a fiduciary he was also contending that, if there was power to
    order restitution, equity could, as I have already indicated, achieve full
    restitution. This is also clear from the statements in the bank's case to which
    I will refer shortly.

    The Absence of Previous Authority

    There may be no clear previous authority to support this conclusion but
    this is not surprising where the relatively new jurisdiction of ordering
    restitution is involved. What is more important than the absence of clear
    support in the authorities for the grant of compound interest is the absence
    from the existing authorities of any statement of principle preventing the
    natural development of a salutary equitable jurisdiction enabling compound
    interest to be awarded. The jurisdiction is clearly desirable if full restitution
    in some cases is to be achieved. It is relevant here to repeat what is stated at
    the outset in the bank's case under the heading "The Position in Principle":

    "1. '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': Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour
    Ltd.
    [1943] AC 32, 61 (Lord Wright), approved in Woolwich
    Equitable Building Society v. Inland Revenue Commissioners
    [1993]
    A.C. 70, 197, 202 (H.L.)."

    Restitution is an area of the law which is still in the process of being
    evolved by the courts. In relation to restitution there are still questions
    remaining to be authoritatively decided. One question, which was still
    undecided until the decision on this appeal, is whether its legitimacy is derived
    from the common law or equity or both. In order to decide whether

    - 48 -

    compound interest is payable in this case I do not consider it is necessary to
    decide which is the correct answer to that question, but I am content to
    assume that the cause of action is one at common law. If the principal sum
    is repayable as money had and received rather than under some trust or
    because of the existence of a fiduciary duty it is still unconscionable for the
    local authority to retain the benefit it made from having received payment
    under a contract it purported to make which was outside its powers. The fact
    that, until the law was clarified by the decision in this case, the local authority
    may reasonably not have appreciated that it should make restitution is not
    critical. What is critical is that the payment of compound interest is required
    to achieve restitution. A defendant may perfectly reasonably not regard
    himself as having been a trustee until the court so decides but this does not
    effect the remedies which the court has jurisdiction to grant. The jurisdiction
    of the court to grant remedies has to be judged in the light of what the court
    decides.

    As to the date from which the interest should run I am in agreement
    with Lord Browne-Wilkinson that the decision or the Court of Appeal should
    not be disturbed.

    (Unjust Enrichment Creates the Required Relationship

    There are a great many situations where interest as an equitable
    remedy has been awarded. Examples are conveniently set out in Halsbury's
    Laws of England
    4th ed. vol. 32, paragraph 109. The principle which
    connects those examples is stated in the first sentence of the paragraph. It is
    the existence of a "particular relationship . . . between the creditor and
    debtor". The "particular relationship" in this case arises out of the right of
    the bank to restitution and the fact that the local authority would be unjustly
    enriched if it retained what it had received. That made the local authority an
    accounting party. The bank had to give credit for the sums it had received
    and the local authority had to pay the balance which was still due or what it
    had received. What it had received included the use or the money. The
    approach is precisely that indicated in the passage of the judgement of Lord
    Hatherley, L.C. in Burdick v. Garrick already cited by Lord Browne-
    Wilkinson. It is the making of the award not as a punishment but to disgorge
    a profit made or presumed to have been made out of the payment of a sum of
    money which should not have been made. Here this was because the contract
    was void as being ultra vires. There would be no difference of principle if the
    contract was void for mistake.

    No Distinction of Principle Between Simple and Compound Interest

    If the case is one where there is jurisdiction to award equitable interest
    then whether compound or simple interest is recoverable depends on the facts
    of the particular case. If it is not a situation where the defendant would have
    earned compound interest then as in Burdick v. Garrick there would be no

    - 49 -

    profit of compound interest so it will not be awarded. Simple interest will
    awarded instead.

    The Law Commission's Approach

    In Law of Contract, Report on Interest (1978 Cmnd. 7229), the Law
    Commission decided not to make any recommendations for change as to the
    equitable jurisdiction. It is, however, interesting to note the following
    paragraphs of the report:

    "10. Thirdly, there is the equitable jurisdiction. Interest may be
    awarded as ancillary relief in respect of equitable remedies such as
    specific performance, rescission or the taking of an account.
    Furthermore, the payment of interest may be ordered where money has
    been obtained and retained by fraud, or where it has been withheld or
    misapplied by an executor or a trustee or anyone else in a fiduciary
    position.

    . . .

    "21. The equitable jurisdiction: The equitable jurisdiction to award
    interest and to fix the rate at which it should be paid is extensive. It
    includes, for example, the power to order the payment of interest
    where money has been obtained or withheld by fraud or where it has
    been misapplied by someone in a fiduciary position. In such cases the
    court has an inherent power to order the payment of interest at
    whatever rate is equitable in the circumstances and may direct that
    such interest be compounded at appropriate intervals. Our view is that
    it would not be appropriate to impose statutory controls upon the
    exercise of the equitable jurisdiction to award interest, beyond those
    controls that are already in existence. We invited criticisms of this
    view in our working paper but no one disagreed with us. Accordingly,
    we make no recommendations for change in relation to the equitable
    jurisdiction."

    From what I have said already it is clear that I agree with the
    statements in those paragraphs in so far as the equitable jurisdiction to award
    interest is regarded as "ancillary relief" but not in so far as they suggest that
    it is only equitable remedies in relation to which there can be the ancillary
    jurisdiction to award interest. The paragraphs are perfectly satisfactory as
    long as they are not regarded as exhaustive. It has to be remembered that the
    Law Commission were not intending to make any recommendations as to the
    equitable interest.

    The fact that the paragraphs accept that compound interest is payable
    in the case of fraud perhaps suggests that it is not intended to limit the relief
    to situations which only give an entitlement to an equitable remedy. In many
    cases of fraud the appropriate remedy will be common law damages. It is

    - 50 -

    true in the first of the only two cases referred to by the Law Commission.
    Johnson v. The King [1904] AC 817, 821, the Privy Council appeared to
    think that interest was not payable in the case of an overpayment by mistake.
    However the authority relied on for this conclusion was the decision of The
    London, Chatham and Dover Railway Co. v
    . South Eastern Railway Co.
    [1893] AC 429. Lord Macnaghten regarded "the law as settled by the
    judgment" of this House in that case. It is a case to which I will refer later
    but it was not concerned with the equitable jurisdiction to grant interest, only
    the common law jurisdiction. What is of interest is what Lord Macnaghten
    said as to the power to award interest if there had been fraud. He said:

    "In order to guard against any possible misapprehension of their
    Lordships' views, they desire to say that, in their opinion, there is no
    doubt whatever that money obtained by fraud and retained by fraud
    can be recovered with interest, whether the proceedings be taken in a
    Court of equity or in a Court of law,
    or in a Court which has a
    jurisdiction both equitable and legal, as the Supreme Court of Sierra
    Leone possesses under the Ordinance of November 10. 1881."
    (emphasis added)

    Lord Macnaghten did not consider that it mattered whether the proceedings
    were based on a common law or equitable cause of action.

    The other case referred to in the Report is Wallersteiner v. Moir (No.
    2)
    [1975] Q.B. 373. That case is a clear authority for the existence of an
    equitable jurisdiction and that it can be exercised where there is breach of a
    fiduciary duty but the court was not concerned with extent of that jurisdiction.
    It was accepted by all the members of the Court of Appeal that the jurisdiction
    was frequently exercised in the case of breach of trust and of a fiduciary duty
    but there is nothing in the judgments to suggest that the jurisdiction is limited
    to those situations. Indeed Lord Denning M.R. clearly did not regard it as
    being so limited. He said, at p. 388:

    "The reason is because a person in a fiduciary position is not allowed
    to make a profit out of his trust: and, if he does, he is liable to account
    for that profit or interest in lieu thereof.

    "In addition, in equity interest is awarded whenever a
    wrongdoer deprives a company of money which it needs for use in its
    business. It is plain that the company should be compensated for the
    loss thereby occasioned to it. Mere replacement of the money - years
    later - is by no means adequate compensation, especially in days of
    inflation. The company should be compensated by the award of
    interest. That was done by Sir William Page Wood V.-C. (afterwards
    Lord Hatherley) in one of the leading cases on the subject, Atwool v.
    Merryweather
    (1867) L.R. 5 Eq. 464n., 468-469. But the question
    arises: should it be simple interest or compound interest? On general
    principles I think it should be presumed that the company (had it not

    - 51 -

    been deprived of the money) would have made the most beneficial use
    open to it: cf. Armory v. Delamirie (1723) 1. Stra. 505. It may be
    that the company would have used it in its own trading operations: or
    that it would have used it to help its subsidiaries. Alternatively, it
    should be presumed that the wrongdoer made the most beneficial use
    of it. But, whichever it is, in order to give adequate compensation,
    the money should be replaced at interest with yearly rests, i.e.
    compound interest."

    This was a broader approach than that adopted by Buckley or Scarman L.JJ.

    There remains a further case to which I should make reference before
    leaving the authorities as to the equitable jurisdiction. It is President of India
    v
    . La Pintada Compania Navigacion S.A. [1985] A.C. 104. This is the
    leading case as to the common law and statutory jurisdictions to which I will
    return later. I refer to it for the leading speech of Lord Brandon of Oakbrook
    with which the other members of the House agreed. Lord Brandon reviewed
    the different jurisdictions to award interest. While doing so he made the
    following dicta about the equitable jurisdiction (Lord Brandon also referred to
    the equitable jurisdiction (pp. 118-121) but he was then dealing with the
    position as to interest in the Admiralty Court and I do not consider those
    references are of any help here):

    "Thirdly, the area of equity. The Chancery Courts, again
    differing from the common law courts, had regularly awarded simple
    interest as ancillary relief in respect of equitable remedies, such as
    specific performance, rescission and the taking of an account.
    Chancery courts had further regularly awarded interest, including not
    only simple interest but also compound interest, when they thought that
    justice so demanded, that is to say in cases where money had been
    obtained and retained by fraud, or where it had been withheld or
    misapplied by a trustee or anyone else in a fiduciary position.

    . . .

    "The first point is that neither the Admiralty Court, nor Courts of
    Chancery, awarded interest, except in respect of moneys for which
    they were giving judgment. The second point is that the Admiralty
    Court never, and Courts of Chancery only in two special classes of
    case, awarded compound, as distinct from simple, interest."

    The House had been referred in the course of argument to the report of the
    Law Commission and I suspect that Lord Brandon restricted the jurisdiction
    of the courts to award interest to equitable remedies following what was stated
    in that report. Likewise as to the distinction which he drew between the
    jurisdictions to award simple and compound interest. According to the report
    of argument, counsel did not address the House on the limits of the equitable
    jurisdiction. Therefore although any statement of Lord Brandon is entitled to

    - 52 -

    the greatest respect I do not regard these two dicta as indicating that Lord
    Brandon held a considered opinion inconsistent with my views, which I have
    set out above. It may well be that he was doing no more than describing the
    situations where in the past the equitable jurisdiction had been exercised.

    The position where the claim is based on a personal equity

    Lord Browne-Wilkinson, in his speech, points out that two arguments
    were not advanced on behalf of the bank. The first is that the local authority
    should be liable to make the repayments as a constructive trustee. There is
    no need for me to make any comment about this argument. The second

    argument which was not advanced is that the bank was entitled to repayment

    because of the existence of a personal equity based on the decision in In re
    Diplock
    [1948] Ch. 465. This is a point which it is necessary for me to
    consider because of the decision of Hobhouse J. in Kleinwort Benson Ltd. v.
    South Tyneside Metropolitan Borough Council [1994] 4 All E.R. 972,
    although the decision in In re Diplock dealt with very different circumstances
    from those which exist here. The court in In re Diplock was concerned with
    the personal equitable liability of a legatee to repay the executors of an estate
    of a deceased person a sum which was wrongly paid to them out of the estate.
    In the Kleinwort Benson case, Hobhouse J. decided that the existence of a
    personal equitable cause of action did not create a power to award compound
    interest. This conclusion is inconsistent with the view which I have expressed
    that there is a power to award compound interest in the circumstances of this
    case.

    Personal equitable rights are not confined to the situation considered
    in In re Diplock. For example, a personal equitable right to contribution can
    exist between co-sureties. This is regarded as being an application of an
    equitable approach to restitution to a situation where the remedy at law is not
    normally satisfactory. It exists without there having to be any proprietary
    right which could give rise to the difficulties to which Lord Browne-Wilkinson
    has referred.

    The Kleinwort Benson case also involved a local authority which had
    entered into a swap transaction which was void. Hobhouse J. distinguished
    the Kleinworth Benson case from the present case because in that case there
    was no reliance on an equitable proprietary claim for repayment of the sum
    which had been paid under the void swap contract. In the Kleinwort Benson
    case, the local authority accepted that prima facie they were under a personal
    liability to make restitution in law and in equity to the bank but argued it was
    not open to a court to award compound interest where only remedies in
    personam were established.

    Hobhouse J. decided that the local authority's submissions were
    correct. At pp. 994G-995C he said as follows:

    - 53 -

    "The position is therefore that if a plaintiff is entitled to a
    proprietary remedy against a defendant who has been unjustly
    enriched, the court may but is not bound to order the repayment of the
    sum with compound interest. If on the other hand the plaintiff is only
    entitled to a personal remedy which will be the case where, although
    there was initially a fiduciary relationship and the payer was entitled
    in equity to treat the sum received by the payee as his, the payer's,
    money and to trace it, but because of subsequent developments he is
    no longer able to trace the sum in the hands of the payee, then there
    is no subject matter to which the rationale on which compound Interest
    is awarded can be applied. The payee cannot be shown to have a fund
    belonging to the payer or to have used it to make profits for himself.
    The legal analysis which is the basis of the award of compound interest
    is not applicable. (It is possible that in some cases there might be an
    intermediate position where it could be demonstrated that the fiduciary
    had, over part of the period, profited from holding a fund as a
    fiduciary even though he no longer held the fund at the date of trial
    and that in such a case the court might make some order equivalent to
    requiring him to account for those profits: but that is not the situation
    which I am asked to consider in the present case.)

    "Although the original equitable right in both situations is the
    same at the outset, that is to say at the time when the payment was
    made and received, the two situations do not continue to be the same
    and are not the same at the time of trial when the remedy comes to be
    given. The payee no longer has property of the payer. The payer is
    confined to personal rights and remedies analogous to those recognised
    by the common law in the action for money had and received. In such
    a situation only simple interest can be awarded even though the
    plaintiff is relying upon a restitutionary remedy. Simple interest was
    awarded in Woolwich Building Society v. I.R.C. [1992] 3 All E.R.
    737, [1993] AC 70 and in BP Exploration (Libya) v. Hunt (No. 2)
    [1982] 1 All E.R. 925, [1979] 1 W.L.R. 783 and both those cases
    involved an application of restitutionary principles which carried with
    them remedies in personam (see also O'Sullivan v. Management
    Agency and Music Ltd.
    [1985] 3 All E.R. 351, [1985] Q.B. 428.)"

    The three cases cited by the judge to support his proposition that
    simple interest only could be awarded do not in fact assist to determine the
    question of principle which is at stake here. In both the Woolwich and the BP
    Exploration
    cases, the claim which was advanced was limited to statutory
    interest. The position as to compound interest was not considered. In the
    O'Sullivan case, it was conceded that in relation to part of the claim
    compound interest was payable and, in fact, it was awarded. Only simple
    interest was paid in relation to the balance of the claim, but this was not
    because of any lack of jurisdiction; it was because it was only appropriate to
    award simple interest in the circumstances of that case.

    - 54 -

    If Hobhouse J.'s reasoning is correct, then even if there had been an
    equitable claim in rem which would justified the award of compound interest,
    that would cease to be the situation if the right to trace were lost. That this
    would create an unsatisfactory state of affairs is demonstrated by the
    contrasting decisions to which the judge came in this case and in the Kleinwort
    Benson
    case. The power of the court to award compound interest would
    depend upon circumstances over which the claimant would have no control.
    This is inconsistent with the commercial realities to which the judge referred
    in the passage which I have cited from his judgment in this case.

    Contrary to the view expressed by Hobhouse J., the rationale on which
    compound interest is awarded is independent of whether or not there is any
    property capable of being traced still in the payee's hands. The critical issue
    is whether, as has happened in this case, the authority was able to make a
    profit (which would include making a saving in the interest which it had to
    pay) from the fact it had received a sum of money to which it was not
    entitled. Even in the case of a claim in rem, the profit is distinct from the
    traceable property. If this were not the position the payee by returning the
    property to the payer prior to the proceedings could defeat the right which a
    claimant would otherwise have to compound interest.

    Hobhouse J. refers to In re Diplock in order to identify the distinction
    between personal and proprietary equitable remedies. He cites a passage from
    the very long judgment of the Court of Appeal in that case, at p. 521.
    However, although this is not clear, I would regard that passage as dealing
    only with equitable proprietary remedies. He also refers to a further passage
    in the judgment in In re Diplock. at p. 517, which he does not cite. He
    presumably refers to the sentence in the judgment which indicates the view of
    the Court of Appeal that:

    "... upon their personal claims the appellants are not entitled to any
    interest. The same may not however be true as regards the claim in
    rem, at least where the appellants are able to 'trace' their proprietary
    interest into some specific investment."

    It is therefore probable that Hobhouse J. was influenced in coming to his
    decision by the judgment of the Court of Appeal in In re Diplock. However,
    that judgment provides a shaky foundation for Hobhouse J.'s decision. The
    passage to which he refers can. and should, in my judgment, be regarded as
    doing no more than indicating the decision on the merits of the situation which
    the Court of Appeal was considering in In re Diplock. A situation which is
    very different from that which exists here. There was no commercial
    relationship between the parties. The overpaid legatees' liability was
    secondary and they were charities. In those circumstances if they had actually
    made a profit from the overpayment which could be traced it would have been
    reasonable to award interest but if they had not it would not have been
    reasonable to do so. I would draw attention here to the following passage of

    - 53 -

    the judgment of the Court of Appeal in In re Diplock which indicates the
    Court of Appeal's general approach:

    "Since the original wrong payment was attributable to the blunder of
    the personal representatives, the right of the unpaid beneficiary is in
    the first instance against the wrongdoing executor or administrator: and
    the beneficiary's direct claim in equity against those overpaid or
    wrongly paid should be limited to the amount which he cannot recover
    from the party responsible. In some cases the amount will be the
    whole amount of the payment wrongly made ..." (at p. 503).

    I would also draw attention to the only passage of the Court of
    Appeal's judgment which gives any reason for their conclusion as to interest
    which is in these terms:

    "We should add that ... in our judgment the respondents are liable
    under this head of their claim for the principal claimed only and not
    for any interest. This last result appears to follow from the case of
    Gittins v. Steele (1818) 1 Swan 200, 36 English Reports 356, cited in
    Roper at p. 461, where the language of Lord Eldon L. C. in the case
    is cited:

    'If a legacy has been erroneously paid to a legatee who has no
    farther property in the estate, in recalling that payment I
    apprehend that the rule of the court is not to charge interest:
    but if the legatee is entitled to another fund making interest in
    the hands of the court, justice must be done out of his share.'"

    The judgment of Lord Eldon in this case is extremely short. The
    Court of Appeal has cited the whole of the judgment except the opening
    sentence which reads:

    "Where the fund out of which the legacy ought to have been paid is in
    the hands of the Court making interest, unquestionably interest is due."

    In fact, interest was therefore ordered to be paid in that case at 4 per
    cent. The short judgment of Lord Eldon was in proceedings which followed
    an earlier judgment (reported (1818) 1 Swan 25, 36 English Reports p. 283).
    Having examined the case in both reports, I find they provide no support for
    a general proposition that equity could not in an appropriate case award
    interest in support of a personal equitable claim. The case supports the
    contrary view. In the circumstances which Lord Eldon is considering, the
    legatee had as far as one can tell benefited financially from the early payment
    and, that being so, the decision is merely an example of the fact that if a
    payee has benefited financially from his being unjustly enriched, an order for
    interest will be made. It is relevant that as interest had been earned (in the
    hands of the court), interest was payable.

    - 56 -

    Before leaving In re Diplock it is important to note mat in re Diplock
    was not concerned with whether compound interest was payable: it was
    concerned with whether any interest, simple or compound, was payable. The
    view that no interest, not even simple, was payable was understandable on the
    facts but not otherwise.

    While, therefore, it is not necessary on my approach to decide whether
    the sums paid by the bank are recoverable from the local authority in equity
    or in common law, it is necessary for me to indicate that Hobhouse J. was
    wrong in his judgment in the Kleinwort Benson case in deciding that he would
    have no power to award compound interest if, as he thought was the case, the
    bank was entitled to a personal equitable remedy which would enable it to
    obtain judgment for the sums which had been paid.

    There is one more aspect of Hobhouse J.'s judgment to which I should
    refer. In his review of the authorities. Hobhouse J. drew attention to two
    lines of authority, one where simple interest is being awarded, and the second
    where compound interest being awarded. In the former situation, the court,
    according to Hobhouse J., is concerned to compensate the party for what he
    has lost in consequence of not receiving the money to which he was entitled.
    In the latter situation the court is concerned with the benefit which the payee
    has derived as a result of the payment having been made. The distinction is
    a valid one if what is being considered is the right to interest on the one hand
    under the statute or common law and on the other in equity. The distinction
    is not valid if a different position is being considered, namely, whether simple
    or compound interest should be awarded in equity. Equity, in the case of both
    simple and compound interest, will look at the benefit which the payee has
    derived. If it is equitable so to do, the payee will be ordered to pay simple
    or compound interest depending upon the benefit which has resulted from the
    payment.

    The Position at Common Law and by Statute

    I should now deal shortly with the situation as to interest at common
    law and by statute. At common law the power to award interest was linked
    to the power to award damages. While the equitable jurisdiction was
    concerned to prevent profit by the recipient of funds to which he was not
    entitled, the common law was concerned with the loss suffered by the payer
    of the funds. The statutory jurisdiction differed from the common law
    because initially there had to be a judgment for the payment of a debt or
    damages before interest could be awarded and the legislator was dealing with
    the generality of those situations.

    As to the common law position a convenient starting point is provided
    by the decision of this House in the London, Chatham and Dover Railway
    Company
    case which I have already cited. In that case the Lord Chancellor.
    Lord Herschell, and the other members of this House, came to the conclusion
    with considerable reluctance that at common law where there was no

    - 57 -

    agreement or statutory provision which permitted the payment of interest a
    court had no power to award interest, whether simple or compound, by way
    of damages for the late payment of a debt. The view of the House was rather
    surprising because the members reluctantly followed a decision of Lord
    Tenterden CJ. in Page v. Newman 9 B. & C. 378, based on convenience in
    preference to an earlier and more" liberal" line of authorities including a
    decision of Lord Mansfield in Eddowes v. Hopkins 1 Douglas 376, and Lord
    Ellenborough in De Havilland v. Bowerbank 1 Camp. 50. Lord Mansfield
    stated the position in these terms:

    "... 'that though by the common law book debts do not of course
    carry interest, it may be payable in consequence of the usage of
    particular branches of trade or of a special agreement' (which of
    course is beyond question), 'or in cases of long delay under vexatious
    and oppressive circumstances if a jury in their discretion shall think fit
    to allow it."

    Lord Ellenborough included among four categories of situations where interest
    was payable that where the money had been actually used and interest made
    on it.

    After the decision in the London, Chatham and Dover Railway
    Company
    case it was generally accepted that at common law, apart from
    statute and some limited exceptions, there was no power to award simple or
    compound interest for the late payment of a sum of money.

    This situation which was regarded as unsatisfactory by this House in
    1893 was ameliorated in 1934 by the intervention of the legislature. Section
    3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 considerably
    extended the power which was contained in Lord Tenterden's Act [1833] (3
    and 4 Wm. 4. c. 42). The Act of 1934 so far as relevant provided:

    "(1) In any proceedings tried in any court of record for the recovery
    of any debt or damages, the court may, if it thinks fit, order that there
    shall be included in the sum for which judgment is given interest at
    such rate as it thinks fit on the whole or any part of the debt or
    damages for the whole or any part of the period between the date when
    the cause of action arose and the date of the judgment: Provided that
    nothing in this section - (a) shall authorise the giving of interest upon
    interest; or (b) shall apply in relation to any debt upon which interest
    is payable as of right whether by virtue of any agreement or otherwise;
    or (c). . ."

    It is to be noted that section 3 of the Act of 1934 makes it abundantly
    clear that it does not authorise the giving of compound interest and that it
    confines the power to award interest to situations where there is a "sum for
    which judgment is given." The latter point was a cause of considerable

    - 58 -

    injustice. It enabled a debtor to prevent a court exercising; the power under
    section 3 of the Act of 1934 by making a late payment but a payment prior to
    any judgment being given. To remedy that situation, the Supreme Court Act
    1981 was amended by the Administration of Justice Act 1982 by adding a new
    section, section 35A. Section 35A is still the current relevant statutory
    provision. It makes clear:

    "(a) that it is still only simple interest which is payable. That it only
    applies to the recovery of a debt or damages and that interest is to be
    paid at 'such rate as the court thinks fit or as rules of court may
    provide' (subsection (1));

    (b) that the section does not apply when for whatever reason
    interest on a debt already runs (subsection (4)).

    (c) that the section applies to payments made up to the date of the
    judgment (subsection (l)(a))."

    The Act of 1982 followed the Report on interest by the Law
    Commission (Cmnd. 7229) of 7 April 1978 to which I have already referred.
    Parliament did not implement by the Act of 1982 all the recommendations of
    the Law Commission as to changes which should be made. In particular, it
    did not accede to the suggestion of the Law Commission that there should be
    a statutory standard rate of interest for reasons of administrative convenience.
    Instead, it retained the court's existing wide statutory discretion.

    There are two more cases to which I need to refer. The first is
    Wadsworth v. Lydall [1981] 1 W.L.R. 598, and the second is President of
    India v
    . La Pintada Compania Navigacion S.A., to which I have already
    referred. The decision in Wadsworth v. Lydall received express approval in
    La Pintada. I refer to Wadsworth v. Lydall for three reasons. The first is
    that it brings out clearly that despite the decision of this House in the London,
    Chatham and Dover Railway Company
    case, there is no inherent common law
    bias against the award of compound interest at common law. What is required
    for compound interest to be payable is that the contract either expressly or
    impliedly provides for the payment of compound interest or there is a breach
    of the contract and the breach is such that compound interest will be regarded
    as flowing from the breach in accordance with the second limb of the principle
    laid down in Hadley v. Baxendale (1854) 9 Exchequer 341. The second
    reason is that while prior to the decision in Wadsworth v. Lydall it could
    legitimately be thought that the situations where compound interest would be
    awarded at common law were necessarily of a commercial nature, this is not
    an essential requirement. The situations where it was clearly established that
    compound interest was recoverable (as, for example, in the case of bills of
    exchange or banking transactions) should be regarded not so much as
    independent exceptions to a general rule but as examples of the application of
    a general rule where in accordance with ordinary contractual principles

    - 59 -

    compound interest should be recoverable. The third reason why I refer to
    Wadsworth v. Lydall is that it clearly demonstrates that notwithstanding the
    period which has elapsed since the decision in the London, Chatham and
    Dover Railway Co.
    case, in 1893, the courts will be prepared to limit the
    application of that decision where this can be done in accordance with
    principle and it is appropriate to do so.

    Wadsworth v. Lydall was a decision of the Court of Appeal. The facts
    were straightforward. The defendant and the plaintiff had an informal
    partnership agreement under which the partnership held an agricultural
    tenancy of a farm and the plaintiff lived in the farmhouse. When the
    partnership was dissolved the plaintiff and the defendant agreed that the
    plaintiff would give up possession of the farm by a specified date when he
    would receive £10,000 from the defendant. On the strength of that agreement
    the plaintiff entered into a further agreement with a third party to purchase
    another property on terms which required him to pay the £10,000, which by
    [hen he should have received from the defendant, to the third party. Only part
    of the £10,000 was paid by the defendant to the plaintiff prior to his
    completing his transaction with the third party. The plaintiff therefore had to
    take out a mortgage from the third party for the balance. In an action which
    he brought against the defendant the plaintiff claimed as special damages the
    interest and costs he incurred due to his having to obtain the mortgage.

    The trial judge disallowed those two items of special damage but the
    plaintiff succeeded in recovering them as a result of the decision of the Court
    of Appeal. In relation to the argument that the Court of Appeal were bound
    to conclude that the appeal failed because of the combined effect of the
    decision in the London, Chatham and Dover Railway Co. case and because of
    the provisions of the Law Reform (Miscellaneous) Provisions Act 1934,
    Brightman L.J. said as follows, at p. 603:

    "In my view the court is not so constrained by the decision of the
    House of Lords. In The London, Chatham and Dover Railway Co. v.
    The South Eastern Railway Co.
    [1893] AC 429 the House of Lords
    was not concerned with a claim for special damages. The action was
    an action for an account. The House was concerned only with a claim
    for interest by way of general damages. If a plaintiff pleads and can
    prove that he has suffered special damage as a result of the defendant's
    failure to perform his obligation under a contract, and such damage is
    not too remote on the principle of Hadley v. Baxendale (1854) 9 Exch.
    341, I can see no logical reason why such special damage should be
    irrecoverable merely because an obligation on which the defendant
    defaulted was an obligation to pay money and not some other type of
    obligation."

    The facts of the La Pintada case are not important. Its significance is
    that the approach of this House was that Parliament had chosen to remedy

    - 60 -

    some of the injustices caused by the common law rule as laid down in the
    decision in the London, Chatham and Dover Railway Co. case, and the
    restrictive language of section 3(1) of the Act of 1934. Due deference to the
    intention of Parliament therefore prevented any further departure from the
    House's earlier decision in relation to interest. So the earlier decision would
    still apply to general damages.

    In his speech, Lord Brandon of Oakbrook, at p. 122 identified:

    "... three cases in which the absence of any common law remedy for
    damage or loss caused by the late payment of a debt may arise."

    For convenience he described these cases as case 1, case 2 and case 3. Case
    1 is where a debt is paid late, before any proceedings for its recovery have
    been begun. Case 2 is where a debt is paid late, after proceedings for its
    recovery have begun, but before they have been concluded. Case 3 is where
    a debt remains unpaid until, as a result of proceedings for its recovery being
    brought and prosecuted to a conclusion, a money judgment is given in which
    the original debt becomes merged.

    Having examined the history and origins of the common law rule and
    the interventions by the legislature. Lord Brandon described qualification of
    the common law rule made in Wadsworth v. Lydall. at p. 129, as being
    important, and set out his conclusions as follows:

    "First, an ideal system of justice would ensure that a creditor should
    be able to recover interest both on unpaid debts in case 1, and also in
    respect of debts paid late or remaining unpaid in cases 2 and 3.
    Secondly, if the legislature had not intervened twice in this field since
    the London, Chatham and Dover Railway Co. case, first by the Act of
    1934 and more recently by the Act of 1982, and if the Court or" Appeal
    had not limited the scope of that case by its decision in Wadsworth v.
    Lydall
    [1981] 1 W.L.R. 598, I should have thought that a strong, if
    not an overwhelming, case would have been made out for your
    Lordships' House, in order to do justice to creditors in all three cases
    1, 2 and 3, to depart from the decision in the London, Chatham and
    Dover Railway
    case [1893] AC 429. But, thirdly, since the
    legislature has made the two interventions in this field to which I have
    referred, and since the scope of the London, Chatham and Dover
    Railway
    case has been qualified to a significant extent by Wadsworth
    v. Lydall
    [1981] 1 W.L.R. 598, I am of the opinion, for three main
    reasons, that the departure sought by the respondents would not now
    be justified."

    The first of the reasons Lord Brandon gave for his conclusion was that
    the greater part of the injustice has already been remedied by the intervention
    of the legislature and judicial qualification of the scope of the decision in the

    - 61 -

    London, Chatham and Dover Railway case. The second was that Parliament
    had given effect in legislation to some of the recommendations of the Law
    Commission but had not given effect to further recommendations which meant
    that for the House to intervene would be to intervene in a manner which
    would conflict with the policy indicated by Parliament. The third reason was
    that the intervention would create for creditors a remedy as of right rather
    than a discretionary remedy which would be again contrary to the policy of
    Parliament as indicated in the Acts of 1934 and 1982.

    The Reasoning in the Pintada Case Does Not Apply to Equitable Interest

    In relation to that reasoning it is important to note that none of the
    three reasons directly apply to the issue at present before their Lordships.
    The first reason does not directly apply to the present case because neither the
    legislation nor the decision in Wadsworth v. Lydall addresses the injustice
    demonstrated by the facts of this case. The injustice arises because, contrary
    to the intention of the parties, there is no contract. The inroads which have
    been made on the decision in the London, Chatham and Dover Railway case
    by Wadsworth v. Lydall can only apply where there is a contract under which
    either interest is expressly payable or the situation is one where the second
    limb of the rule in Hadley v. Baxendale applies to a breach of contract. The
    second reason given by Lord Brandon does not apply because the Law
    Commission made no recommendation as to the equitable remedy of interest.
    The third reason does not apply because if the court has jurisdiction to award
    interest in equity, like other equitable remedies, the remedy will be
    discretionary.

    I therefore do not find anything in Lord Brandon's reasoning which
    makes it inappropriate to extend the right in equity so that it extends to the
    recovery of compound interest ancillary to a restitutionary remedy. In this
    case this is particularly true because if there had been a contract and non
    payment of the sums due under the contract by the local authority the bank
    may well, if proceedings resulted, have received compound interest as special
    damages.

    The Desirability of the Equitable Jurisdiction being Extended

    A decision in favour of the bank in this case, will mark a further
    improvement in the powers of the English courts. An improvement the need
    for which has so frequently been recognised. While the improvement is
    consistent with the decision of this House in the La Pintada case, it should be
    noted that that decision has not been free from criticism. In a typically
    closely reasoned article the late Dr. F. A. Mann in the Law Quarterly Review
    (1985), 101 L.Q.R. at p. 30 was not impressed by the reasoning of the House.
    Dr. Mann, at p. 34, found it difficult to understand, if interest, including
    compound interest, was recoverable under the second limb under the rule in
    Hadley v. Baxendale:

    - 62 -

    "why it should not also be recoverable under the first limb, where
    damages are such 'as may fairly and reasonably be considered arising
    naturally, i.e. according to the usual course of things' from the
    breach?"

    As Dr. Mann pointed out, to say that interest considered as damages is too
    remote is an argument which at the present time is no longer realistic or
    persuasive and which can only be described as an "empty phrase." The
    modern test should be whether the debtor could reasonably foresee that in the
    ordinary course of things the loss was likely to occur or was on the cards.
    Who would refuse to impute such knowledge to a debtor? Who would venture
    to suggest that a defaulting debtor could not reasonably foresee interest as the
    creditor's loss flowing from the failure to pay.

    Dr. Mann did not distinguish between simple and compound interest.
    However, if what he said with regard to simple interest is true then adopting
    the same approach it must equally apply to compound interest. Dr. Mann's
    final comment was. at p. 47:

    "The history of interest, particularly in the field of Admiralty, displays
    a lack of legal analysis and a degree of positivism and inflexibility
    which show the common law of England at its worst."

    In my judgment, their Lordships should avoid leaving the equitable
    jurisdiction of the English courts open to the same criticism.

    Lord Browne-Wilkinson and Lord Lloyd of Berwick (whose speech I
    have also had the advantage of reading in draft) do not regard this as a case
    in which it would be appropriate to extend the law in the way I would wish.
    Their arguments, which are based on the legislative history as to interest and.
    in the case of Lord Lloyd, also based on La Pintada. I have dealt with
    already, However, as to the suggestion of usurpation of the role of parliament
    I do remind myself of the approach of Lord Brandon of Oakbrook in the
    passage of his speech in La Pintada which I have previously cited. Both Lord
    Browne-Wilkinson and Lord Lloyd also make the additional point that the
    local authority could feel aggrieved if this appeal were to be decided on the
    approach which Lord Goff and I would adopt. Here I take a different view.
    If their Lordships had not raised the issue of the correctness and scope of the
    decision in Sinclair v. Brougham, the bank would have succeeded. The local
    authority were only prepared to argue this point with reluctance. As I have
    indicated, the local authority also wanted the argument curtailed. In these
    circumstances they can hardly complain if they lacked the opportunity of
    dealing with the detail of your Lordships' reasoning.

    In my recollection of his argument Mr. Sumption made it clear that his
    argument was not totally dependent on establishing that the local authority was
    a fiduciary. I have already set out how his case described the position in

    - 63 -

    principle. I would also refer to paragraph 13 of his case and the footnote
    thereto, where he said:

    "13. Quite apart from the proprietary claim, the Bank also has a
    personal claim in equity to require Islington to account for its
    property: Snell's Equity, 29th ed. (1990), 284-287.1 (emphasis added)

    "1 In Sinclair v. Brougham it was held that there was no
    personal claim in equity or at law, because to allow such a
    claim would be indirectly to enforced an invalid borrowing
    contract: see, in particular, pages 414, 418 (Viscount Haldane
    L.C.). This part of the decision has been subjected to powerful
    and justified criticism by Lord Wright: (1938) 6 C.L.J. 805.
    But even if correct it has no application to a restitutionary
    claim, whether at law or in equity,
    arising out of a void swap
    contract since such restitution would not be legally or
    financially equivalent to enforcement of the contract itself."
    (emphasis added).

    The passage in Snell refers to a personal claim in equity where their
    is a breach of trust. However, the footnote makes reasonably clear that Mr.
    Sumption was applying the same approach as I would to a restitutionary claim
    "whether at law or in equity".

    For these reasons I would dismiss the appeal.

    LORD LLOYD OF BERWICK

    My Lords,

    It was common ground before your Lordships that the Bank is entitled
    to recover the principal sum of £1,145,526 in a common law action for money
    had and received. Judgment for that sum would carry simple interest at the
    appropriate rate under section 35A of the Supreme Court Act 1981.
    Hobhouse J. and the Court of Appeal have held (albeit for different reasons)
    that the Bank has an alternative claim to recover the principal sum in equity,
    and that the equitable cause of action entitles the Bank to claim a discretionary
    award of compound interest, depending on the facts of the particular case.
    The issue in the appeal as it came before your Lordships was whether the
    courts below were right in this respect. Thus the Bank's argument is stated
    succinctly in paragraph 11 of the respondent's printed case as follows:

    "The Bank's submission in summary is that where money is paid either
    (i) pursuant to a contract which is void, or (ii) under a fundamental
    mistake of fact or law, the money is impressed in the hands of the

    - 64 -

    payee with a trust in favour of the payer. The payee is then
    accountable to the payer not only for the principal but for the entire
    benefit which he has obtained from his possession of the principal in
    the intervening period."

    A little later it is said, in paragraph 12(5):

    "The separation of the legal from the equitable interest necessarily
    imports a trust."

    In support of his argument Mr. Sumption relied, as he had in the courts
    below, on Sinclair v. Brougham [1914] AC 398. He also relied on the
    speech of Lord Brandon of Oakbrook in President of India v. La Pintada
    [1985] A.C. 104, 116b. It was not suggested in the respondent's printed case
    that Lord Brandon's formulation of the equitable jurisdiction to award
    compound interest was incomplete, or insufficient for the Bank's purposes.
    Nor was it suggested that the decision of Hobhouse J. in the parallel decision
    of Kleinwort Benson Ltd. v. South Tyneside Metropolitan Borough Council
    [1994] 4 All E.R. 972, (in which he declined to make an award of compound
    interest in favour of the bank, on the ground that the bank was in that case
    confined to its common law action for money had and received) was wrongly
    decided.

    The local authority, in paragraph 5.1 of the appellant's case, stated the
    issue for decision in similar terms:

    "Both parties accept that compound, as opposed to simple, interest is
    payable only if Islington received the money under the void interest
    rate swaps agreement as fiduciary: President of India v. La Pintada
    Compania Navigacion
    [ 1985] A.C. 104. 116."

    The whole thrust of the appellant's case was directed to showing that the local
    authority was not a fiduciary when it received the money, and did not become
    a fiduciary thereafter. Sinclair v. Brougham could be distinguished. It had
    never been suggested that the mere failure to pay back the principal sum
    rendered the local authority a fiduciary, otherwise "every overdue debtor
    would be a fiduciary liable to compound interest."

    Both parties, therefore, came before your Lordships on the basis that
    Sinclair v. Brougham was correctly decided, for whatever it did decide. But
    in the course of the argument your Lordships indicated that the House would
    be willing to reconsider the correctness of that decision. For the reasons
    given by my noble and learned friend Lord Browne-Wilkinson. I agree that
    Sinclair v. Brougham was wrongly decided on both the points discussed in his
    speech, and should be overruled. I understand that all your Lordships are
    agreed that the Bank has failed to make good its claim that it has an equitable
    cause of action against the local authority for breach of duty as trustee or

    - 65 -

    fiduciary. It follows that the ground on which the courts below awarded
    compound interest cannot be supported. The local authority has succeeded on
    the only issue on which the parties came before your Lordships.
    Accordingly, I would be content to allow the appeal, and leave it at that.

    But my noble and learned friend Lord Woolf is of the view that, even
    though the Bank has failed to prove any breach of trust or fiduciary duty, it
    may nevertheless be entitled to claim compound interest by way of a general
    equitable remedy ancillary to its common law claim for money had and
    received: and his views receive the powerful support of my noble and learned
    friend Lord Goff of Chieveley.

    I have naturally considered these views with the greatest care: for there
    is much force in the argument that the local authority ought, injustice, to pay
    compound interest, if it would have had to pay compound interest (as no doubt
    it would) on sums borrowed by way of more orthodox bank lending. But I
    regret that in my opinion the House cannot, or at any rate should not, hold
    that there is any such power in equity to make good the supposed defects of
    the common law remedy. I have come to that conclusion for three main
    reasons.

    In the first place the point in question, which is one of great general
    importance, was scarcely argued. This was not the fault of counsel. The
    point only emerged from the background once it became apparent that Sinclair
    v. Brougham
    might fall to be reconsidered. By then there was no time to
    develop the argument. Thus the decision of Hobhouse J. in the Kleinwort
    Benson
    case, which would have to be overruled if the point is good, was only
    mentioned by Mr. Philipson at the very end of his argument, and then only
    in connection with the date from which interest should run. The decision was
    never mentioned by Mr. Sumption at all.

    Nor did Mr. Sumption seek to question the reasoning or conclusion of
    the House in President of India v. La Pintada. On the contrary, he relied on
    Lord Brandon's speech as an accurate summary of the equitable jurisdiction
    to award compound interest in the two special classes of case to which Lord
    Brandon referred. I may be wrong, but I do not recall any reference to the
    comments expressed by Mason C.J. and Wilson J. in Hungerfords v. Walker
    [1988] 171 C.L.R. 125. It is accepted that to decide the compound interest
    point in favour of the Bank would mean breaking new ground, and would be
    extending the equitable jurisdiction to a field where it has never before been
    exercised. I do not think it right to take so momentous a course, involving
    such widespread ramifications, on the back of such inadequate argument.
    Above all I cannot regard it as fair to decide the case against the local
    authority on the alternative argument when through no fault of their own, they
    have not had a proper opportunity to deal with the argument.

    Secondly, I have difficulty in reconciling an award of compound
    interest as an equitable remedy available in support of the common law claim

    - 66 -

    for money had and received with the ratio decidendi of the House in President
    of India v. La Pintada.
    The facts of that case were that the charterers were
    between two and six years late in paying sums due to the owners by way of
    freight and demurrage. The owners claimed interest in respect of the late
    payment. The question was referred to arbitration, and the umpire awarded
    compound interest in favour of the owners for the whole period of the delay.
    One of the questions of law for the court was whether the umpire had
    jurisdiction to award interest in respect of the late payment. Mr. Saville Q.C.
    launched a frontal attack on London, Chatham and Dover Railway Co. v.
    South Eastern Railway Co.
    [1893] AC 429, in which it was held that a claim
    for interest by way of general damages will not lie at common law for late
    payment of a debt, in the absence of some custom binding on the parties, or
    some express or implied agreement. In giving the leading speech, Lord
    Brandon said, at p. 129, that other things being equal there was "a strong, if
    not an overwhelming, case" for departing from decision in London, Chatham
    and Dover Railway Co. v. South Eastern Railway Co.
    in order to do justice
    to creditors. But with regret he felt unable to take that course. I return to his
    reasons later. All the other noble Lords shared Lord Brandon's regret. Lord
    Roskill said, at p. 111:

    "It has long been recognised that London, Chatham and Dover Railway
    Co. v. South Eastern Railway Co.
    left creditors with a legitimate sense
    of grievance and an obvious injustice without remedy. I think the
    House in 1893 recognised those consequences of the decision, but then
    felt compelled for historical reasons to leave that injustice
    uncorrected."

    Like Lord Brandon, he felt unable to depart from the London, Chatham and
    Dover Railway
    case, and called for the injustice to be remedied by further
    legislation.

    I quote these passages in order to make the point that if Mr. Saville
    Q.C., for the owners, could have detected some way of supporting the
    umpire's award of compound interest, he would have found a ready ear. He
    pointed out in the course of his argument that the equitable jurisdiction to
    award compound interest had survived the passing of the Act of 1934, as had
    the Admiralty jurisdiction, and he argued that these "exceptional" jurisdictions
    should be regarded as the rule, and not vice versa. But this argument did not
    prevail. When Lord Brandon said, at p. 116, that "the Admiralty Court
    never, and Courts of Chancery only in two special classes of case" awarded
    compound, as distinct from simple, interest (my emphasis), he meant, I think,
    exactly what he said. Moreover, he regarded it as a point of importance. I
    cannot, therefore, agree that he was only giving examples of the application
    of a more general equitable jurisdiction to grant ancillary relief by way of
    compound interest. To my mind the immediate context, and the shape of the
    case as a whole, make quite clear that that was not his meaning.

    - 67 -

    It may be said that in President of India v. La Pintada the claim was
    for payment of a debt due under a contract, whereas in the present case the
    claim is for money had and received. But why should that make any
    difference? It is true that the common law action for money had and received
    can be given a restitutionary label: and that "restitution" may be said to be
    incomplete unless compound interest is included in the award. But the label
    cannot change the underlying reality. The cause of action remains a common
    law action for the return of money paid in pursuance of an ineffective
    contract. If compound interest cannot be recovered in a claim for debt due
    under a contract (in the absence of custom, or some express or implied
    agreement to that effect) I cannot see any reason in principle, or logic, why
    it should be recoverable in the case of money paid under a contract which
    turns out to be ineffective.

    It is said, nevertheless, that the reasoning which led Lord Brandon to
    reject the owners' claim for compound interest does not apply to the different
    facts of the present case. Lord Brandon identified three main reasons for his
    conclusion. It is to the second reason, at p. 130, that I would draw attention.
    I will quote the reason in full:

    "My second main reason is that, when Parliament has given effect by
    legislation to some recommendations of the Law Commission in a
    particular field, but has taken what appears to be a policy decision not
    to give effect to a further such recommendation, any decision of your
    Lordships' House which would have the result of giving effect, by
    another route, to the very recommendation which Parliament appears
    to have taken that policy decision to reject, could well be regarded as
    an unjustifiable usurpation by your Lordships' House of the functions
    which belong properly to Parliament, rather than as a judicial exercise
    in departing from an earlier decision on the ground that it has become
    obsolete and could still, in a limited class of cases, continue to cause
    some degree of injustice."

    It is true that the Law Commission made no recommendation for changing the
    equitable jurisdiction to award interest, and so Parliament cannot be said to
    have taken a policy decision to reject any such recommendation. But the
    underlying objection remains. Parliament has on two occasions, first in 1934,
    and then in 1981, remedied injustices which had long been apparent in the
    power to award interest at common law. On the latter occasion it did so in
    the light of the view expressed by the Law Commission that the equitable
    jurisdiction to award interest was working satisfactorily, and called for no
    change. To extend the equitable jurisdiction for the first time to cover a
    residual injustice at common law, which Parliament chose not to remedy,
    would, I think, be as great a usurpation of the role of the legislature, and as
    clear an example of judicial law-making, as it would have been in President
    of India v. La Pintada.
    If it is thought desirable that the courts should have
    a power to award compound interest in common law claims for money had
    and received, then such a result can now only be brought about by Parliament.

    - 68 -

    My third reason for rejecting the Bank's claim for compound interest
    is that I am by no means certain that the policy considerations all point in
    favour of change. It is presumably in commercial transactions that the
    discretionary power to award compound interest would most frequently be
    used, on the ground that the money received by the payee would otherwise
    have had to be borrowed at compound interest. But it is in just such
    transactions that the need for certainty is paramount. Disputes which would
    otherwise be settled on the basis of simple interest would be fought in the
    hope of persuading the court that an award of compound interest was
    appropriate. It is interesting to note that it was on this very ground that Lord
    Tenterden C.J. rejected the solution proposed by Best C.J. in Arnott v.
    Redfern
    (1826) 3 Bing. 353. In Page v. Newman (1829) 9 B. & C. 378, Lord
    Tenterden said, at p. 380:

    "If we were to adopt as a general rule that which some of the
    expressions attributed to the Lord Chief Justice of the Common Pleas
    in Arnott v. Redfern which it seemed to warrant, viz. that interest is
    due wherever the debt has been wrongfully withheld after the plaintiff
    has endeavoured to obtain payment of it, it might frequently be made
    a question at nisi prius whether the proper means had been used to
    obtain payment of the debt, and such as the party ought to have used.
    That would be productive of great inconvenience."

    As one who has in the past attempted to keep open the availability of equitable
    remedies in commercial disputes, I am now conscious of the strength of the
    arguments the other way: see Scandinavian Trading Tanker Co. A.B. v. Flota
    Petrolera Ecuatoriana
    [1983] 2 A.C. 694, disapproving dicta of Lloyd J. in
    Afovos Shipping Co. S.A. v. R. Pagnan & Fratelli [1980] 2 Lloyd's Rep. 469.
    It is, of course, true that even an award of simple interest lies in the discretion
    of the court, as does the rate of interest. But in the great majority of cases
    it is not difficult to predict the amount of simple interest which is likely to be
    awarded. Compound interest, on the other hand, is not so predictable. It
    presents wider room for disagreement. Disputes would be likely to end up in
    court, and this would, in the words of Lord Tenterden. "be productive of
    great inconvenience." Despite the weight which must attach to the views of
    my noble and learned friends Lord Goff of Chieveley and Lord Woolf. I
    would allow the appeal.

    - 69 -


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