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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Kleinwort Benson Ltd v. Lincoln City Council Kleinwort; Benson Ltd v. Mayor etc of the London Borough of Southwark and Others Kleinwort; Benson Ltd v. Birmingham City Council Mayor etc of the London Borough of Kensington and Chelsea and Others [1998] UKHL 38; [1999] 2 AC 349; [1998] 4 All ER 513; [1998] 3 WLR 1095 (29th October, 1998) URL: http://www.bailii.org/uk/cases/UKHL/1998/38.html Cite as: [1998] UKHL 38, [1998] 4 All ER 513, [1999] 2 AC 349, [1998] 3 WLR 1095 |
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(ON APPEAL FROM THE QUEENS BENCH DIVISION OF THE HIGH COURTS OF JUSTICE)
LORD BROWNE-WILKINSON
My Lords,
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Goff of Chieveley which contains yet another major contribution to the law of restitution.
Were it not for one matter, I would be in full agreement with his views. But unfortunately he and the majority of your Lordships take the view that when established law is changed by a subsequent decision of the Courts, money rightly paid in accordance with the old established law is recoverable as having been paid under a mistake of law. I take the view that the monies are not recoverable since, at the time of payment, the payer was not labouring under any mistake.
The majority view is that the decision in Hazell v. London Borough of Hammersmith and Fulham [1992] 2 A.C. 1 established that the swaps agreements were void; that although the decision in Hazell post-dated the last of the payments made by Kleinworts to the local authorities the decision operated retrospectively so that under the law as eventually established Kleinworts were labouring under a mistake at the time they made each payment in thinking that they were liable to make such payment. Therefore, in their view, Kleinworts can recover payments made under a mistake of law. My view, on the other hand, is that although the decision in Hazell is retrospective in its effect, retrospection cannot falsify history: if at the date of each payment it was settled law that local authorities had capacity to enter into swap contracts, Kleinworts were not labouring under any mistake of law at that date. The subsequent decision in Hazell could not create a mistake where no mistake existed at the time.
There are two questions to be considered. First, when the common law is changed by later judicial decision, have all payments made on the basis of the previous law been made under a mistake of law? Second, in what circumstances can it be said that there was earlier law which was changed by judicial decision? Does there have to be a clear judicial decision overruled by a later judicial decision of a higher court or is it enough that, at the date of payment, there was a generally accepted view of the law which view was upset by the later decision?
Where the law is established by judicial decision subsequently overruled
I will take the case where the law has been established by a single decision of the Court of Appeal made in 1930. In 1990 the payer makes a payment which would only have been due to the payee if the Court of Appeal decision was good law. The payer was advised that the Court of Appeal decision was good law. In 1997 this House overruled the Court of Appeal decision. Is the plaintiff entitled to recover the payment made in 1990 on the ground of mistake of law?
There is, as I understand it, no dispute that in order to recover the plaintiff has to have been labouring under the mistake at the date of payment and to have made the payment because of that mistake. Certainly that position has been accepted by Kleinworts in their written reply and by my noble and learned friend, Lord Goff. The question is whether the subsequent overruling of the 1930 Court of Appeal decision requires the court to hold that at the date of payment (1990) the law (contrary to what the plaintiff had been advised) was not the law established by the Court of Appeal decision of 1930.
The theoretical position has been that judges do not make or change law: they discover and declare the law which is throughout the same. According to this theory, when an earlier decision is overruled the law is not changed: its true nature is disclosed, having existed in that form all along. This theoretical position is, as Lord Reid said, a fairy tale in which no-one any longer believes. In truth, judges make and change the law. The whole of the common law is judge-made and only by judicial change in the law is the common law kept relevant in a changing world. But whilst the underlying myth has been rejected, its progeny--the retrospective effect of a change made by judicial decision--remains. As Lord Goff in his speech demonstrates, in the absence of some form of prospective overruling, a judgment overruling an earlier decision is bound to operate to some extent retrospectively: once the higher court in the particular case has stated the changed law, the law as so stated applies not only to that case but also to all cases subsequently coming before the courts for decision, even though the events in question in such cases occurred before the Court of Appeal decision was overruled.
Therefore the precise question is whether the fact that the later overruling decision operates retrospectively so far as the substantive law is concerned also requires it to be assumed (contrary to the facts) that at the date of each payment the plaintiff made a mistake as to what the law then was. In my judgment it does not. The main effect of your Lordships' decision in the present case is to abolish the rule that money paid under a mistake of law cannot be recovered, which rule was based on the artificial assumption that a man is presumed to know the law. It would be unfortunate to introduce into the amended law a new artificiality, viz., that a man is making a mistake at the date of payment when he acts on the basis of the law as it is then established. He was not mistaken at the date of payment. He paid on the basis that the then binding Court of Appeal decision stated the law, which it did: the fact that the law was later retrospectively changed cannot alter retrospectively the state of the payer's mind at the time of payment. As Deane J. said in the High Court of Australia in University of Wollongong v. Merwally 158 C.L.R. 447 at p. 478:
If that be true of statutory legislation, the same must a fortiori be true of judicial decision. In my judgment, therefore, if a man has made a payment on an understanding of the law which was correct as the law stood at the date of such payment he has not made that payment under a mistake of law if the law is subsequently changed.
I am fortified in that view by considering what will be the effect of your Lordships' decision. A payment which was initially irrecoverable will subsequently become recoverable. Consider the hypothetical case I have put. A payment was made in 1990 when the Court of Appeal decision was still valid. Under the existing law, the claim in restitution should apparently have arisen at the date of such payment: see Baker v. Courage & Co. [1910] 1 K.B. 56. Yet at that date there could be no question of any mistake. It would not have been possible to issue a writ claiming restitution on the grounds of mistake of law until the 1997 decision had overruled the 1930 Court of Appeal decision. Therefore a payment which, when made, and for several years thereafter, was entirely valid and irrecoverable would subsequently become recoverable. This result would be subversive of the great public interest in the security of receipts and the closure of transactions. The position is even worse because all your Lordships consider that the claims to recover money paid under a mistake of law are subject to section 32(1)(c) of the Limitation Act 1980, i.e. that in such a case time will not begin to run until the "mistake" is discovered. A subsequent overruling of a Court of Appeal decision by the House of Lords could occur many decades after payments have been made on the faith of the Court of Appeal decision: in such a case "the mistake" would not be discovered until the later overruling. All payments made pursuant to the Court of Appeal ruling would be recoverable subject only to the possible defence of change of position.
With one possible exception, such judicial and other authority as there is favours the view that there is no relevant mistake of law if the payment is made on the basis of the law as it stood at the date of payment. As to non-judicial authority the Law Commission has taken the view that there would be no relevant mistake: Report No. 227 "Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments" (Cm. 2731), paras. 5.2-5.16. Not surprisingly, Professor Beatson shares that view: see 1995 R.L.R. 280 at p. 284; see also Professor Burrows Law of Restitution pp. 118-120.
As to judicial authority there is a dearth of decisions directly in point. Since the payment of money under a mistake of law was not recoverable in any event, there is little discussion as to what constitutes a mistake of law in that context. However, there are two English cases which throw some light. In Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329, the plaintiff had paid water rates to the defendant calculated in accordance with the law as it was held to be by the Court of Appeal. Subsequent to the date of payment, the House of Lords in the Dobbs case changed the law: if calculated under the changed law the plaintiff had overpaid. He sought to recover the overpayments on the ground that he had paid under compulsion and under a mistake of law. It was apparently accepted by the Court that if both these factors (i.e. compulsion and mistake of law) were present, the overpayment could be recovered. Counsel having submitted that the payments had been made in ignorance of the law, Lord Coleridge C.J. (who had been a member of the Court of Appeal overruled in Dobbs case) said:
In his judgment, Lord Coleridge dismissed the plaintiff's claim on the grounds both that there was no element of compulsion in the payment and that there was no relevant mistake of law. He said:
The other member of the court concurred but it is not clear on which of the two grounds. The decision therefore is not of major authority but it does show that Lord Coleridge was of the view that money was not paid under a mistake of law just because a later change in the law altered the law as it had been at the date of payment.
The other English case is Derrick v. Williams [1939] 2 All E.R. 559. In that case the plaintiff had accepted a payment into court on the basis that a Court of Appeal decision declared the law in a form which precluded the recovery of certain types of damages. Subsequently the House of Lords reversed the Court of Appeal decision and held that such damages were recoverable. The plaintiff in Derrick v. Williams was trying to re-open the matter on the grounds that the subsequent decision of the House of Lords showed that he had been proceeding under a mistake of law when he accepted the money paid in. He relied on the equitable principle set out in In re Roberts [1905] 1 Ch. 704 that a compromise made under a mistake of law can be set aside. The plaintiff's claim failed. Sir Wilfrid Greene M.R. said, at p. 565, that he rejected a contention that the mistake was one of fact and continued:
It is not clear to me whether this case was decided on the ground that payment into court raised special questions, or on the ground that there was no mistake of law because at the date of the withdrawal of the monies paid into court the law was as stated by the Court of Appeal and not as subsequently stated by the House of Lords. But the decision is at least consistent with the view that in deciding whether a person has acted under a mistake of law at a particular time, the question is whether they mistook the law as it then was without reference to subsequent retrospective change by later decisions.
In Commissioner of State Revenue v. The Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51 the High Court of Australia had to consider a payment made in pursuance of a statute which was subsequently repealed with retrospective effect, i.e. the case was analogous to that where the common law is changed by a later common law decision. The majority held that monies paid under the retrospectively repealed statute were not paid under a mistake of law at common law: see per Brennan J., p. 69 (with whom Toohey and McHugh JJ. agreed) and Dawson J. at p. 75. In my judgment this is strong authority in favour of the view which I hold.
The only authority pointing the other way is a recent case in the Court of Appeal decided since the conclusion of the argument in this case: Evans v. Governor of H.M. Prison Brockhill [1998] (unreported). In that case the plaintiff had been sentenced to a term of imprisonment. She was detained by the Governor for a period correctly calculated in accordance with the law as then laid down by a series of decisions in the Divisional Court. That method of calculating the duration of the sentence was subsequently disapproved by a later decision of the Divisional Court which laid down (everyone has assumed correctly) a different method of calculation. If that new method of calculation was adopted the plaintiff had been detained for 59 days too long. The plaintiff claimed damages for false imprisonment. The majority (Lord Woolf M.R. and Judge L.J., Roch L.J. dissenting) held that the retrospective effect of the change in the law produced by the last Divisional Court decision prevented the Governor from relying as a defence on the law as it had been declared by the earlier Divisional Court decisions which at the time of the 59 days' detention laid down the relevant law. The Master of the Rolls described the result as being "highly artificial": it involved the acceptance of Lord Reid's fairy tale but he held that the Court of Appeal could not abandon the fairy tale. I do not propose to comment on that decision (which may be coming on appeal to your Lordships' House) beyond distinguishing it from the present case. In that case the question was one of substantive law: what was the correct duration of the sentence? In the view of the Court of Appeal, that fell to be determined by the law as finally declared. Once that view had been reached, the Court of Appeal were not concerned with the law as at the date of the detention: such law was irrelevant since it could provide no defence. On the other hand, in the present case what needs to be determined is not the substantive law at a particular time but the state of the mind of the payer at that time. Was he then under a mistake as to the law then current? That is a different question.
In my view therefore, if, at the date of payment, the law was settled by clear judicial authority then a payment in accordance with such law was not made under a mistake of law even if the law has subsequently been changed by later judicial decision. I am fortified in this view by the fact that the appellants in their written submissions in reply (paras. 32 and 33) expressly accepted this proposition. They concentrated their submissions on the question whether it is ever possible to establish that at a particular date the law was "settled" in the absence of a judicial decision to that effect. I find it surprising that the majority of your Lordships are finding the law to be that which neither of the parties contended for.
Settled law in the absence of judicial decision?
It is not suggested in the present case that before the decision of this House in Hazell there was any judicial decision which established that local authorities had the capacity to enter into swap agreements. What is said is that, even in the absence of such a decision, there was a "settled view" that local authorities had the necessary capacity and that swap agreements were therefore valid. It is not for your Lordships on these preliminary issues to seek to determine whether in fact there was such a settled view of the law. However, your Lordships do have to decide whether, if at the trial such a settled view is proved to have existed, it would prevent Kleinworts from recovering the monies paid on the basis of monies paid under a mistake of law.
Much commercial and property activity occurs on the basis of law which is not laid down by judicial decision. Such "law" consists of the practice and understanding of lawyers skilled in the field. If, before payment, the payer had sought advice in some cases he would have been told that the law was dubious: if having received such advice he paid over, he must have taken the risk that the law was otherwise and cannot subsequently recover what he has paid. In other cases, he would have been told that the law was clear and he could safely act on it. If in this latter case the payer acted on the law as so advised and subsequently a court held that the law was not as advised, can the payer recover his payment as monies paid under a mistake of law? In the ordinary case, the payer's adviser will just have given wrong legal advice: as a result the payment will have been paid under a mistake of law and will be recoverable. But in a limited number of cases, of which this may be one, it is not really possible to say that the legal adviser made a mistake in advising as he did. There are areas of the law which are sparsely covered by judicial decision, for example, real property, banking and regulatory law. In such areas the commercial world acts, and has to act, on the generally held view of lawyers skilled in the field. In such cases, a payer who sought advice would receive the same advice from everyone skilled in the field. It used to be said that the practice of conveyancers of repute was strong evidence of real property law: see In re Hollis' Hospital and Hague's Contract [1899] 2 Ch. 540 at 551. As late as the middle of this century, Denning L.J. said in In re Downshire Settled Estates [1953] Ch. 218: "The practice of the profession in these cases is the best evidence of what the law is: indeed it makes law."
I doubt whether today anyone would claim that a uniform practice of the profession makes the law. But in the present context it does have a significant impact. In holding that money paid under a mistake of law is recoverable, an essential factor is that the retention of the money so paid would constitute an unjust enrichment of the payee. What constitutes the unjust factor is the mistake made by the payer at the date of payment. If, at the date of payment, it was settled law that payment was legally due, I can see nothing unjust in permitting the payee to retain monies he received at a time when all lawyers skilled in the field would have advised that he was entitled to receive them and the payer was bound to pay them. Again it is critical to establish the position at the time of payment: if, at that date, there was nothing unjust or unmeritorious in the receipt or retention of the monies by the payee in my judgment it was not an unjust enrichment for him subsequently to retain the monies just because the law was, in one sense, subsequently changed.
In New Zealand and Western Australia
the legislatures have provided that monies shall not be recoverable on
the grounds of mistake of law if paid at a time when there was a
"common understanding" that they were payable: New Zealand Judicature
Amendment Act 1958, section 94A(2); Western Australian Law Reform
(Property, Perpetuities and Succession) Act 1962, section 23(1). The
Law Commission (Report No. 227) was not happy with the concept of
"common understanding" but did recommend that money should not be
recoverable if paid "in accordance with a settled view of the law at
the time"; see Report (supra), paras. 5.1-5.13 and draft Bill, clause
3. The Law Commission considered that the law fell to be treated as
"settled" not only by judicial decision but also by reference to the
legal advice which the payer would have received if he had sought it:
My Lords, I agree with the views of the Law Commission and would therefore have held that Kleinworts would not be entitled to recover on the grounds of mistake of law if at the time of payment Kleinworts were, or if they had sought advice would have been, advised by all lawyers skilled in the field that the swaps agreement were valid.
My Lords, in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit monies paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend Lord Goff, that the relevant limitation period applicable to such a claim would be that laid down by section 32(1)(c) of the Limitation Act 1980, i.e. six years from the date on which the mistake was, or could with reasonable diligence have been, discovered. The majority of your Lordships consider that such claim will arise when the law (whether settled by existing authority or by common consensus) is changed by a later decision of the courts. The consequence of this House in its judicial capacity introducing such a fundamental change would be as follows. On every occasion in which a higher court changed the law by judicial decision, all those who had made payments on the basis that the old law was correct (however long ago such payments were made) would have six years in which to bring a claim to recover money paid under a mistake of law. All your Lordships accept that this position cannot be cured save by primary legislation altering the relevant limitation period. In the circumstances, I believe that it would be quite wrong for your Lordships to change the law so as to make money paid under a mistake of law recoverable since to do so would leave this gaping omission in the law. In my judgment the correct course would be for the House to indicate that an alteration in the law is desirable but leave it to the Law Commission and Parliament to produce a satisfactory statutory change in the law which, at one and the same time, both introduces the new cause of action and also properly regulates the limitation period applicable to it.
I would dismiss these appeals.
LORD GOFF OF CHIEVELEY
My Lords,
There are before your Lordships consolidated appeals in four actions, each of which arises from the unravelling of one or more interest rate swap transactions which, following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, proved to be void. The process of unravelling transactions of this kind has produced a host of problems, so much so that Professor Andrew Burrows stated in 1995 (see [1995] R.L.R. 15) that "it is no exaggeration to say that one could write a book on the restitutionary consequences of the decision in Hazell." I fear that any such book will be growing in length as the cases, including the present appeals, pass through the courts.
The nature of an interest rate swap transaction is now very well known. The description usually referred to is that of the Divisional Court in Hazell [1990] 2 Q.B. 697, 739-741, the transactions in the present cases being of the simple type there described. The essence of such a transaction is that one party, known as the fixed rate payer, agrees to pay to the other party over a certain period interest at a fixed rate on a notional capital sum; and the other party, known as the floating rate payer, agrees to pay to the former over the same period interest on the same notional sum at a market rate determined in accordance with a certain formula. In practice, a balance is struck at each relevant date and the party who then owes the greater sum will pay the difference to the other party.
Interest rate swaps can fulfil many purposes, ranging from pure speculation to more useful purposes such as the hedging of liabilities. One form of interest rate swap involves an upfront payment, i.e. a capital sum paid at the outset by one party to the other, which will be balanced by an adjustment of the parties' respective liabilities. The practical result of this is to achieve a form of borrowing. 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, though they must in the process have been storing up trouble for themselves in the future.
The appellant in each of the four consolidated appeals is Kleinwort Benson Ltd., a bank which was an early participant in the market for interest rate swaps. Each of the respondents is a local authority. They may be described in brief as Birmingham City Council, Southwark London Borough Council, Kensington and Chelsea London Borough Council and Lincoln City Council. Kleinwort Benson entered into interest rate swap transactions with each of the respondents. Following the decision of this House in Hazell, Kleinwort Benson commenced proceedings against each of the respondents claiming restitution of the sums it had paid to them under these transactions. The total of the net payments made under them by Kleinwort Benson was £811,208.90.
There are two features of these transactions which are of particular relevance to the present appeals, no doubt flowing from the fact that Kleinwort Benson participated in interest rate swaps at an early stage. The first is that, at the time when proceedings were commenced by Kleinwort Benson, each of the transactions was fully performed by both parties according to its terms across the whole of the agreed period. The second is that not all of the sums paid by Kleinwort Benson to the respondents were paid within the six year limitation period expiring with the date of the issue of the writ. Of the net sum of £811, 208.90 paid by Kleinwort Benson, £388, 114.72 was paid within the six year period, and £423,094.18 represented earlier payments. The former sum has been paid by the relevant local authorities to Kleinwort Benson. The latter sum is in issue, and is the subject of the cases now under appeal.
The claim of Kleinwort Benson in each of these cases is that the money in question was paid by it under a mistake, viz. a mistaken belief that it was paid pursuant to a binding contract between it and the relevant local authority. The claims have been formulated in this way to avoid the six year time limit by bringing them within section 32(1)(c) of the Limitation Act 1980. Section 32(1) provides that:
It is plain however that here the mistake relied upon is a mistake of law; and under the law as it stands at present restitution will in general not be granted in respect of money paid under a mistake of that kind. It follows that, in the present proceedings, Kleinwort Benson is seeking a decision that that long-established rule should no longer form part of the English law of restitution -a decision which, as all parties to the present litigation recognise, can only be made by your Lordships' House. As a result, on 12 July 1996 Langley J. (I understand by consent) made the following orders in each of the four actions. First of all, he ordered the trial of two preliminary issues, viz. (1) whether the facts pleaded by the Plaintiff disclosed a cause of action in mistake; and (2) whether, if the answer to (1) was "Yes," such a mistake was one in respect of which the Plaintiff could rely on section 32(1)(c) of the Limitation Act 1980. The first of these two issues raised directly the question whether money paid under a mistake of law is recoverable in restitution. In each of the actions Langley J. gave a negative answer to Issue (1), on the basis that he was bound by Court of Appeal authority to do so; and accordingly he did not give an answer to Issue (2). Next, he granted a certificate for an appeal (commonly called a leapfrog appeal) directly to your Lordships' House pursuant to section 12 of the Administration of Justice Act 1969. Leave to appeal was duly granted by this House, which further ordered that the parties should have leave to present arguments arising from the fact that each of the interest rate swap transactions had been fully performed, thus adding a third issue to the two which were the subject of Langley J.'s order.
As a result of the basis on which the appeals have come before the House, the Appellate Committee has exceptionally lacked the benefit of reasoned judgments of the courts below. However the loss of that benefit has substantially been offset by arguments of exceptional quality addressed to the Committee by Counsel--Mr. Richard Southwell Q.C. and Mr. Rhodri Davies for the appellant, Kleinwort Benson, and Mr. Nicholas Underhill Q.C., Mr. Charles Béar and Mr. Mark West for the respondent local authorities. I sensed that some, if not all, of these members of the Bar are seasoned warriors in the continuing battle of the swaps.
I propose to consider the Issues in the following order. I shall first consider Issue (1) as ordered by Langley J., which raises the question whether the rule precluding recovery of money paid under a mistake of law should remain part of English law. As part of that Issue I shall also consider whether, if the answer to that question is "No," there should be an exception to recovery on the ground of mistake of law (A) in cases where the money has been paid under a settled understanding of the law which has subsequently been changed by judicial decision, or (B) in cases where the money has been the subject of an honest receipt by the defendant. I shall refer to these two Issues as Issue (1A) and Issue (1B) respectively. I shall then consider the Issue concerned with the impact upon recovery of the fact that all the interest rate swap transactions in question were fully performed. I shall refer to that Issue as Issue (2). Finally I shall turn to consider the second Issue as ordered by Langley J. which raises the question whether, on the true construction of section 32(1)(c) of the Act of 1980, the subsection applies to mistakes of law. That I shall refer to as Issue (3).
Issue 1 Whether the present rule, under which in general money is not recoverable in restitution on the ground that it was paid under a mistake of law, should be maintained as part of English law.
In argument before the Appellate Committee Kleinwort Benson presented in its written case a fully developed argument for the abrogation of what I will, for convenience, call the mistake of law rule. This did not however evoke a comparable argument by the local authorities in defence of the rule. On the contrary, their submission was not that the rule should be retained, but rather that it should be reformulated. Their primary argument was that the House should not itself embark upon any such reformulation, but should leave that task to the Law Commission which already has the matter under consideration. Such a course would benefit the local authorities because, quite apart from the fact that it is uncertain when, if ever, the Law Commission's proposed reforms will be enacted, they would not, if enacted as proposed, be retrospective in effect. Their secondary argument was that, if the House did decide to abrogate the present rule, it should do so in terms which provided a defence in cases in which the money has been paid under a settled understanding of the law, or in which the money has been the subject of an honest receipt by the defendant. Such defences would recognise that the payee has, in such circumstances, a legitimate interest in retaining the payment, based on the need for certainty and finality in transactions.
Faced with this situation, it might be thought that your Lordships need do no more than accept that the present rule should no longer remain in its present form, and then proceed to consider whether reformulation of the rule should be undertaken by this House or by the Law Commission and, if the former, whether the newly recognised right to recover money paid under a mistake of law should be subject to certain special limits as proposed by the local authorities. I myself do not consider that such a course would be appropriate. What is in issue at the heart of this case is the continued existence of a long standing rule of law, which has been maintained in existence for nearly two centuries in what has been seen to be the public interest. It is therefore incumbent on your Lordships to consider whether it is indeed in the public interest that the rule should be maintained, or alternatively that it should be abrogated altogether or reformulated. Having said this, however, your Lordships are fully entitled to recognise that the local authorities are in truth adopting a realistic stance that, in the light of prolonged criticism of the rule by scholars working in the field of restitution, and of recent decisions by courts in other major common law jurisdictions, the case for retention of the rule in its present form can no longer sensibly be advanced before your Lordships' House. In these circumstances I do not have to consider this aspect of the case in as much depth as might otherwise be regarded as appropriate, though I have discovered that consideration of the case as a whole has cast light on the formulation of the limits to the right of recovery which lie at the heart of the case as presented to your Lordships' House.
How the rule became established: The origin of the rule is, as is very well known, the decision of the Court of King's Bench in Bilbie v. Lumley (1802) 2 East 469. There an underwriter paid a claim under a policy which he was entitled in law to repudiate for non-disclosure. Although he knew the relevant facts, he was not aware of their legal significance. He then claimed to recover the money he had paid. In the brief report of the case by East it is recorded that Lord Ellenborough C.J. asked plaintiff's counsel (Mr. Wood, later Baron Wood)
No answer being given, Lord Ellenborough gave judgment against the plaintiff. In his short judgment as reported, his reasoning is to be found in two sentences, at p. 472: "Every man must be taken to be cognisant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case."
Previous authority, such as it was (see Jackson, History of Quasi-Contract, pp. 58-61), shows no distinction being drawn between mistakes of fact and law; on the face of the law reports the suggestion that a mistake of law did not ground recovery appears to have emerged for the first time in an obiter dictum of Buller J. in Lowry v. Bourdieu (1780) 2 Doug. 468, 471, the rule of non-recovery being based by him on the maxim ignorantia juris non excusat--an observation invoked by Lord Ellenborough in Bilbie v. Lumley, 2 East 469, 472. In 1802 Sir William Evans published an Essay on the Action for Money Had and Received. (This has since been published in [1998] R.L.R. , the text having been prepared for publication by Professor Peter Birks and Dr. Lionel Smith of Oxford University; copies were helpfully supplied by Professor Birks to Members of the Appellate Committee and to Counsel shortly before the hearing of the present appeals.) In his Essay (dedicated to Sir Richard Law, shortly to be ennobled as Lord Ellenborough) Sir William strongly supported the opinion of Vinnius that money paid by mistake is recoverable, whether the mistake is one of fact or law, and criticised the contrary view of Pothier denying recovery where the mistake is one of law. In a later publication in 1806 (his translation of Pothier's Treatise on Obligations), Sir William, disappointed by his dedicatee's decision in Bilbie v. Lumley four years earlier, maintained at greater length but with great courtesy his opinion that money paid under a mistake of law was generally recoverable on that ground. In particular he stressed the limited field of application of the maxim ignorantia juris non excusat. He stated, at pp.394-395:
The overall impression is that, in the eighteenth century, it was widely understood that no distinction should be drawn in the present context between mistakes of fact and law, but that towards the end of the century the view was emerging that a mistake of law should not ground recovery. This view must have been more widely held than the single dictum in Lowry v. Bourdieu suggests, having regard to the strong terms in which Lord Ellenborough expressed his judgment in Bilbie v. Lumley, and the account given by Gibbs J. (in Brisbane v. Dacres (1813) 5 Taunt. 143, 155-157) of his experience as counsel in Chatfield v. Paxton and of the universal opinion among the practitioners in the Court of King's Bench that where money was paid with knowledge of the facts it could not be recovered on the ground of mistake.
The decision in Bilbie v. Lumley was followed and applied by the majority of the Court of King's Bench in Brisbane v. Dacres (Chambre J. dissenting). There the commander of a naval vessel, H.M.S. Arethusa, had paid to the Admiral in command a proportion of freight received for the carriage of publicly owned bullion on board the Arethusa in the belief that this was due to the Admiral as a matter of usage. On later discovering that the money was not due because the usage had been discontinued, he sought to recover it from the Admiral's widow and executrix. It is important to observe that the decision in Bilbie v. Lumley was expressly challenged in this case. Here full argument was heard on the point, unlike Bilbie v. Lumley itself which appears to have been decided on the basis of counsel's concession. Judgment was reserved, and fully reasoned judgments were delivered by all members of the Court. Although the maxim ignorantia juris non excusat was invoked by counsel, no member of the Court founded his judgment upon it; indeed the dissenting judge, Chambre J., 5 Taunt. 143, 158- 159 stated (perhaps rather too narrowly) that the maxim applied only in cases of "delinquency," and all the other judges appear to have considered that it had no role to play in the recovery of money paid by mistake. The question whether it was against conscience for the defendant to retain the money was expressly addressed, notably in the judgment of the Chief Justice, Sir James Mansfield, and was answered by him in the negative, because the admiral acted (as all admirals then did) in accordance with what was generally believed to be his accustomed right, and in particular because he might have changed his position on the faith of the payment. However, the ratio decidendi is perhaps most clearly stated in the leading judgment of Gibbs J. when he said, at p. 152:
See also p. 160, per Heath J. Such a conclusion might have provided the basis
for a more sophisticated development of this branch of the law, founded upon a prima facie
right of recovery subject to specific defences. Unfortunately, however, this was not to be so.
It seems that the rule hardened, as rules are liable to do. In Wilson and M'Lellan v.
Sinclair (1830) 3 Wilson & Shaw 398, 409, Lord Brougham L.C. stated that since
Brisbane v. Dacres it had been considered an established point that the mistake must
be "in the fact." Furthermore, Kelly v. Solari (1841) 9 M. & W. 54, 55
Parke B. said of Bilbie v. Lumley that "All that that case decides is, that money
paid with full knowledge of all the facts cannot be recovered back by reason of its having
been paid in ignorance of the law," a statement which was reflected in the judgment of
Lord Abinger C.B. at pp. 57-58. These statements were made in the context of a case
concerned with mistake of fact, the issue being whether means of knowledge, as opposed to
full knowledge, of the facts was enough to preclude recovery. Even so, the observations of
the judges appear to have reflected an accepted opinion that money paid under a mistake of
law was not recoverable as such. At all events the existence of the mistake of law rule
became well established in the course of the nineteenth century, and in the twentieth century
it was regularly applied by courts of first instance and on occasion by the Court of Appeal. It
has however never fallen for consideration by your Lordships' House before the present
appeals, which are now being heard after many years of criticism of the rule by scholars
specialising in the law of restitution, and after the rule itself has been discarded in a number
of major common law jurisdictions.
Criticism of the rule: Although Bilbie v. Lumley was the origin of the rule, Brisbane v. Dacres, in which the whole question was fully argued and the decision in Bilbie v. Lumley reconsidered and affirmed in reasoned judgments, might more properly have been regarded as encapsulating the reasoning on which the rule was based. Unfortunately, however, since the rule became hardened into the form stated in Kelly v. Solari, many critics have concentrated their fire on Bilbie v. Lumley, and in particular on the easy target of what Lord Wright (in his Legal Essays and Addresses (1939) at p. xix) called the "hasty and ill-considered utterance" of Lord Ellenborough in which he invoked the maxim ignorantia juris non excusat. This maxim, it has been pointed out, is properly directed to cases in which the defendant was charged with wrongdoing, whether civil or criminal, and has no place in the law of quasi-contract; see Professor Keener's Law of Quasi-Contracts (1893) at pp. 85 et seq., and Professor Woodward's Law of Quasi-Contracts (1913) at pp. 54 et seq. No reliance was however placed on the maxim by the Court in Brisbane v. Dacres, only eleven years after Bilbie v. Lumley was decided, and seven years after Sir William Evans had published his criticism of the use of the maxim in that decision, after which (despite the sweeping words of Lord Brougham L.C. in Dixon v. Monkland Canal Company (1831) 5 Wilson & Shaw 445, 452) it should no longer have been regarded as providing the justification for the rule of non-recovery in English law. Professor Woodward was also critical of counsel (Mr. Wood) for failing to reply to Lord Ellenborough's enquiry. In this he was surely unjust. The enquiry, as reported, should in the context properly be understood as directed towards the existence of any authority in which the point had been decided; and the answer could properly have been made that there was none, as indeed was confirmed in Brisbane v. Dacres. Professor Corbin (Contracts, vol.3, para. 617, at p. 756) was later to attribute this "handy" rule to expediency. "When a court is convinced that restitution should not be decreed, in the pressure of work it is likely to seize upon the first plausible rule that becomes handy." I am bound to say that there is no evidence that the rule has any such origin; on the contrary, as the majority judgments in Brisbane v. Dacres show, the rule was perceived, after due deliberation, to rest on sound legal policy. This perception appears to have gained ground as the years passed by, fuelled by an an amalgam of fears on a number of scores--for example, that it would be easy to assert a mistake of law, which could not easily be refuted, and that this might be done in almost any case; that in many cases it would be inappropriate to reopen a settled transaction; and that the defendant, having received a payment made on the basis that it was due, might have put to use the money paid to him or otherwise have changed his position on the faith of the payment. This mixture was so potent that the good sense of excluding all possibilities of this kind by the adoption of one simple rule must have appeared most compelling. Indeed, it comes as no surprise to learn that the adoption of a similar rule was considered in Roman law, and that (in the view of some commentators) the controversy on the subject was resolved in favour of its adoption. It is, I believe, unhistorical for us now to castigate our legal ancestors for adopting a doctrine which was widely understood in their time to achieve practical justice. Indeed there is at least one scholar of distinction today who is reluctant to condemn the rule: see Professor Birks' Introduction to the Law of Restitution, 2nd ed. (1989) pp. 164-167; and the difficulties now faced in formulating satisfactory limits to a right to recover money paid under a mistake of law reveal that there was more sense in the rule than its more strident critics have been prepared to admit.
The main criticisms of the rule are now widely perceived as threefold (see the Law Commission's Consultation Paper No. 120 on Restitution of Payments made under a Mistake of Law, paras. 2.24--2.26). First, the rule allows the payee to retain a payment which would not have been made to him but for the payer's mistake, whereas justice appears to demand that money so paid should be repaid unless there are special circumstances justifying its retention. Second, the distinction drawn between mistakes of fact (which can ground recovery) and mistakes of law (which cannot) produces results which appear to be capricious. It is usual here to compare the results in Bilbie v. Lumley and Kelly v. Solari, each concerned with an action by an underwriter to recover back money paid under an insurance policy under a mistake. In the former case, where he did not appreciate that the law enabled him to repudiate a policy for non-disclosure, his action failed; but in the latter, where he forgot that the premium had not been paid and so the policy had lapsed, his action was successful. The same comment can be made of the exceptions and qualifications to which the rule became subject. These are usefully listed in paras. 2.5--2.15 of the Law Commission's Report, Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994) (Cm. 2731) (Law Com. No. 227). They are well- known, and it is unnecessary for me to rehearse them in this opinion. It is however legitimate to comment that, apart from limits such as the recently recognised defence of change of position and an as yet undefined limit in cases in which the payment has been made in settlement of an honest claim, these exceptions and qualifications are heterogeneous and in truth betray an anxiety to escape from the confines of a rule perceived to be capable of injustice; and that, as a result, the law appeared to be arbitrary in its effect. Third, as a result of the difficulty in some cases of drawing the distinction between mistakes of fact and law, and the temptation for judges to manipulate that distinction in order to achieve practical justice in particular cases, the rule became uncertain and unpredictable in its application.
Rejection of the mistake of law rule in the common law world: It is perhaps easier for us now to see that the policy underlying the rule can best be achieved, consistently with justice, by the recognition of a right of recovery subject to specified defences to cater for the fears which formerly appeared to require a blanket exclusion of recovery. However the blossoming of scholarly interest in the development of a coherent law of restitution did not occur in the common law world until the middle of the twentieth century, inspired by the pioneering work of Professors Seavey and Scott in the American Restatement of the Law of Restitution published in 1937. We may regret that it was not until late in the long history of the common law that this should have occurred, but now the judges are able to welcome the assistance which they receive from a number of distinguished writers on the subject. There can be no doubt that it is this scholarly work which has provided the prime cause for the rejection of the mistake of law rule, either by legislation or by judicial decision, in countries throughout the common law world. This is due not only to specific criticism of the mistake of law rule as such, but still more to the combined effect of two fundamental changes in the law: first, recognition that there exists a coherent law of restitution founded upon the principle of unjust enrichment, and second, within that body of law, recognition of the defence of change of position. This is due essentially to the work of scholars. Once that work had been published and widely read it was, I believe, inevitable that in due course both doctrines would be recognised by the judges, the time of such acceptance depending very much on the accidents of litigation. In fact, in England both were accepted by this House in 1991, in the same case-- Lipkin Gorman v. Karpnale Ltd. [1991] 2 A.C. 548. Once both had been recognised it became, in my opinion, also inevitable that the mistake of law rule should be abrogated, or at least reformulated, so that there should be a general right of recovery of money paid under a mistake, whether of fact or law, subject to appropriate defences. This is because a blanket rule of non-recovery, irrespective of the justice of the case, cannot sensibly survive in a rubric of the law based on the principle of unjust enrichment; and because recognition of a defence of change of position demonstrates that this must be proved in fact if it is to justify retention, in whole or in part, of money which would otherwise be repayable on the ground that the payee was unjustly enriched by its receipt. The combined effect is not only that the mistake of law rule can no longer be allowed to survive, but also that the law must evolve appropriate defences which can, together with the defence of change of position, provide protection where appropriate for recipients of money paid under a mistake of law in those cases in which justice or policy does not require them to refund the money. It is this topic which lies at the centre of the present appeals. As the argument before the Appellate Committee has demonstrated, the identification of such defences is by no means easy and, whatever your Lordships' House may decide, the topic is likely to continue to engage the attention of judges, scholars and law reformers for some years to come.
I have referred to the fact that the mistake of law rule has already been abrogated in other common law jurisdictions, either by legislation or by judicial decision. This material is, of course, well known to lawyers in this country, and has, I know, been studied by all members of the Appellate Committee, not of course for the first time, and is regarded with great respect. However, since it is conceded in these appeals by the respondent local authorities that the mistake of law rule must at least be reformulated in the manner indicated by them, I trust that I will be forgiven if I do not lengthen this opinion by an express consideration of, in particular, the relevant judicial pronouncements. I refer, of course, to the dissenting opinion of Dickson J. (as he then was), with whom Laskin C.J. agreed, in Hydro Electric Commission of the Township of Nepean v. Ontario Hydro [1982] 1 R.C.S. 347, 357-370, later to be adopted by La Forest J., with whom (on this point) Lamer, Wilson and L'Heureux-Dubé JJ. agreed, in Air Canada v. British Columbia [1989] 1 S.C.R. 1161, 59 D.L.R. (4th) 161; and David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 C.L.R. 353. (I shall have to refer in particular to the dissenting judgment of Brennan J. (as he then was) in this case at a later stage, when I come to consider the proposed defence of honest receipt.) From countries which, on this topic, apply a system of law based on the civil law, I refer to the decisions of the Appellate Division of the Supreme Court of South Africa in Willis Faber Enthoven (Pty.) Ltd. v. Receiver of Revenue (1992) (4) SA 202, and of the Inner House of the Court of Session in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 S.C. 151, each of whom also rejected the mistake of law rule. The same conclusion was reached at an earlier date by legislation in New Zealand (see section 94A of the Judicature Act 1908, inserted by section 2 of the Judicature Amendment Act 1958) and Western Australia (see section 23 of the Law Reform (Property, Perpetuities and Succession) Act 1962). I shall have to refer to the New Zealand and Western Australian legislation at a later stage, when I come to consider the proposed exclusion of recovery in cases where payments have been made under a settled understanding of the law subsequently departed from by judicial decision. I should add that the mistake of law rule either never applied, or has been abrogated, in a number of States of the United States of America.
The Law Commission: The Law Commission has, in its Report (Law Com. No. 227) on the subject (to which I have already referred), recommended that the mistake of law rule should be abrogated (see paras.3.1 et seq., and clause 2 of the draft Bill appended to the Report). For the reasons set out in paras. 3.8 -3.12 the Commission has recommended that this change should be introduced by legislation. This is a matter to which I will have to return later in this opinion.
Comparative law. The Appellate Committee was helpfully provided with material showing the policy adopted in a number of civil law systems on the continent of Europe towards the recovery of money paid under a mistake of law. This demonstrates that, in the legal systems from which the material was drawn, there is no blanket rule excluding recovery of money paid under a mistake of law. It is of some interest that, in German law, recovery is not dependent on proof of mistake (whether of fact or law) by the claimant. Para. 12(1) of the BGB confers a right to recover benefits obtained without legal justification (ohne rechtlichen Grund). A similar approach is, I understand, adopted in Italian law and has also been adopted recently in France (see Cour de Cassation (Assemblé Plenière) 2.4.1993, D.1993.373). Para.814 of the BGB however provides that a person cannot reclaim a benefit conferred by him if he knew that he was not bound to confer it; but it seems that the burden rests on the recipient to prove the existence of such knowledge (a striking contrast with the common law, which requires the plaintiff to prove mistake). It is of some interest however that a number of these cases, in which it has been held that it is unnecessary for the plaintiff to prove that he was mistaken, have been concerned with the recovery of taxes: see in particular an early German case decided by the Reichsgericht in 1909 (29.10.1909, RGZ 72, 152), and the recent French case, referred to above, which adopted the same position. In such cases, as was recently held by this House in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] A.C. 70, English law too dispenses with any requirement that the money should have been paid under a mistake and indeed goes further, allowing recovery even if the taxpayer pays in the belief that the money is not due. Here is food for thought for both German and English comparative lawyers. In this connection I wish to add in passing that, in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51, 57, Mason C.J. stated that in Woolwich the House of Lords was "unwilling to acknowledge that causative mistake of law is a basis of recovery"; but, with respect, no question of recovery on the ground of a mistake of law arose in that case, because the Woolwich Building Society throughout asserted that the money was not due.
For present purposes, however, the importance of this comparative material is to reveal that, in civil law systems, a blanket exclusion of recovery of money paid under a mistake of law is not regarded as necessary. In particular, the experience of these systems assists to dispel the fears expressed in the early English cases that a right of recovery on the ground of mistake of law may lead to a flood of litigation, while at the same time it shows that in some cases a right of recovery, which has in the past been denied by application of the mistake of law rule, may likewise be denied in civil law countries on the basis of a narrower ground of principle or policy.
Conclusion on the First Issue. For all these reasons, I am satisfied that your Lordships should, if you decide to consider the point yourselves rather than leave it to the Law Commission, hold that the mistake of law rule no longer forms part of English law. I am very conscious that the Law Commission has recommended legislation. But the principal reasons given for this were that it might be some time before the matter came before the House, and that one of the dissentients in the Woolwich case (Lord Keith of Kinkel) had expressed the opinion that the mistake of law rule was too deeply embedded to be uprooted judicially: [1993] A.C. 70, 154. Of these two reasons, the former has not proved to be justified, and the latter does not trouble your Lordships because a more robust view of judicial development of the law is, I understand, taken by all members of the Appellate Committee hearing the present appeals. Moreover, especially in the light of developments in other major common law jurisdictions, not to mention South Africa and Scotland, the case for abrogation is now so strong that the respondents in these appeals have not argued for its retention. In these circumstances I can see no good reason for postponing the matter for legislation, especially when we do not know whether or, if so, when Parliament may legislate. Finally I believe that it would, in all the circumstances, be unjust to deprive the Appellant, Kleinwort Benson, of the benefit of the decision of the House on this point. I would therefore conclude on Issue (1) that the mistake of law rule should no longer be maintained as part of English law, and that English law should now recognise that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution.
Issue IA: Payments made under a settled understanding of the law.
I turn now to a central question in these appeals. This relates to the fact that the payments of which recovery is sought in these cases were made under contracts which at the time were understood by all concerned to be valid and binding, so that the payments themselves were believed to be lawfully due under those contracts. This misunderstanding was, of course, removed by the decision of this House in Hazell [1992] 2 A.C. 1 that the contracts were beyond the powers of the local authorities involved and so void. The argument now advanced by the local authorities is that payments so made on the basis of a settled understanding of the law which is later changed by a judicial decision should not be recoverable on the ground of mistake of law.
This argument is based upon a view propounded by the Law Commission in Consultation Paper No. 120, paras. 2.57-2.65 and, after consultation, adopted by the Commission in its Report (Law Com. No. 227), para. 5.3, and in section 3(1) of its draft Bill. The reasoning so adopted is set out in paras. 2.57 and 2.65 of the Consultation Paper as follows:
In para.5.3 of its Report, it was stated that:
In support of this proposition Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329 was cited. The Commission then considered at some length whether legislation was necessary to achieve this result, and concluded that it was. The exact terms of the proposed legislation were also considered at some length. In the result, section 3 of the draft Bill (at p. 196 of the Report) provides as follows:
The Law Commission's Consultation Paper and Report are, of course, concerned with legislative proposals for changes in the law, proposals which find their origin in a New Zealand statutory provision (section 94A(2) of the Judicature Act 1908, inserted by section 2 of the Judicature Amendment Act 1958) to which I shall refer later. In these appeals, however, your Lordships are concerned with the common law, albeit on the basis that the common law should now recognise that restitution may be granted in respect of money paid under a mistake of law. I therefore ask myself first whether, on the ordinary principles of the common law, any such provision as that proposed by the Law Commission should be held to apply. This raises the question of what is meant by the declaratory theory of judicial decisions, which has long been held to underlie judicial decision-making.
The declaratory theory of judicial decisions.
Historically speaking, the declaratory theory of judicial decisions is to be found in a statement
by Sir Matthew Hale over 300 years ago, viz. that the decisions of the courts do not
constitute the law properly so called, but are evidence of the law and as such "have a
great weight and authority in expounding, declaring and publishing what the law of this
Kingdom is": see Hale's History of the Common Law (6th ed.) p. 90. To the like
effect, Blackstone (Commentaries, 6th ed., i, pp. 88-9) stated that "the decisions
of courts are the evidence of what is the common law". In recent times, however, a
more realistic approach has been adopted, as in Sir George Jessel's celebrated statement
that rules of equity, unlike rules of the common law, are not supposed to have been
established since time immemorial, but have been invented, altered, improved and refined
from time to time: see In re Hallett's Estate (1880) 13 Ch. D. 696, 710. There can be
no doubt of the truth of this statement; and we all know that in reality, in the common law as
in equity, the law is the subject of development by the judges - normally, of course, by
appellate judges. We describe as leading cases the decisions which mark the principal
stages in this development, and we have no difficulty in identifying the judges who are
primarily responsible. It is universally recognised that judicial development of the common
law is inevitable. If it had never taken place, the common law would be the same now as it
was in the reign of King Henry II; it is because of it that the common law is a living system of
law, reacting to new events and new ideas, and so capable of providing the citizens of this
country with a system of practical justice relevant to the times in which they live. The
recognition that this is what actually happens requires, however, that we should look at the
declaratory theory of judicial decision with open eyes and reinterpret it in the light of the way
in which all judges, common law and equity, actually decide cases today.
When a judge decides a case which comes before him, he does so on the basis of what he understands the law to be. This he discovers from the applicable statutes, if any, and from precedents drawn from reports of previous judicial decisions. Nowadays, he derives much assistance from academic writings in interpreting statutes and, more especially, the effect of reported cases; and he has regard, where appropriate, to decisions of judges in other jurisdictions. In the course of deciding the case before him he may, on occasion, develop the common law in the perceived interests of justice, though as a general rule he does this "only interstitially", to use the expression of O.W. Holmes J. in South Pacific Co. v. Jensen (1917) 244 U.S. 2095, 221. This means not only that he must act within the confines of the doctrine of precedent, but that the change so made must be seen as a development, usually a very modest development, of existing principle and so can take its place as a congruent part of the common law as a whole. In this process, what Maitland has called the "seamless web", and I myself (The Search for Principle, Proc. Brit. Acad. vol. LXIX (1983) 170, 186) have called the "mosaic", of the common law, is kept in a constant state of adaptation and repair, the doctrine of precedent, the "cement of legal principle", providing the necessary stability. A similar process must take place in codified systems as in the common law, where a greater stability is provided by the code itself; though as the years pass by, and decided cases assume a greater importance, codified systems tend to become more like common law systems.
Occasionally, a judicial development of the law will be of a more radical nature, constituting a departure, even a major departure, from what has previously been considered to be established principle, and leading to a realignment of subsidiary principles within that branch of the law. Perhaps the most remarkable example of such a development is to be found in the decisions of this House in the middle of this century which led to the creation of our modern system of administrative law. It is into this category that the present case falls; but it must nevertheless be seen as a development of the law, and treated as such.
Bearing these matters in mind, the law which the judge then states to be applicable to the case before him is the law which, as so developed, is perceived by him as applying not only to the case before him, but to all other comparable cases, as a congruent part of the body of the law. Moreover when he states the applicable principles of law, the judge is declaring these as constituting the law relevant to his decision. Subject to consideration by appellate tribunals, and (within limits) by judges of equal jurisdiction, what he states to be the law will, generally speaking, be applicable not only to the case before him but, as part of the common law, to other comparable cases which come before the courts, whenever the events which are the subject of those cases in fact occurred.
It is in this context that we have to reinterpret the declaratory theory of judicial decision. We can see that, in fact, it does not presume the existence of an ideal system of the common law, which the judges from time to time reveal in their decisions. The historical theory of judicial decision, though it may in the past have served its purpose, was indeed a fiction. But it does mean that, when the judges state what the law is, their decisions do, in the sense I have described, have a retrospective effect. That is, I believe, inevitable. It is inevitable in relation to the particular case before the court, in which the events must have occurred some time, perhaps some years, before the judge's decision is made. But it is also inevitable in relation to other cases in which the law as so stated will in future fall to be applied. I must confess that I cannot imagine how a common law system, or indeed any legal system, can operate otherwise if the law is be applied equally to all and yet be capable of organic change. This I understand to be the conclusion reached in Cross and Harris on Precedent in English Law, 4th ed., from which I have derived much assistance, when at p. 33 they ask the question: "what can our judges do but make new law and how can they prevent it from having retrospective effect?" This is also the underlying theme of Lord Coulsfield's evidence to the Scottish Law Commission quoted in para. 3.14 of their Discussion Paper No. 99, Judicial Abolition of the Error of Law Rule and its Aftermath (1996) (which I have read with interest and respect) in which, in the light of the decision of the Inner House in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 S.C. 151, and especially the notable judgment of my noble and learned friend Lord Hope of Craighead in that case, they reconsider and resile from their previous proposal that Scots law should adopt a "settled understanding of the law" provision along the lines proposed by our own Law Commission. The only alternative, as I see it, is to adopt a system of prospective overruling. But such a system, although it has occasionally been adopted elsewhere with, I understand, somewhat controversial results, has no place in our legal system. I wish to add that I do not regard the declaratory theory of judicial decision, as I have described it, as an aberration of the common law. Since I regard it as an inevitable attribute of judicial decision-making, some such theory must, I imagine, be applied in civil law countries, as in common law countries; indeed I understand that a declaratory theory of judicial decision applies in Germany, though I do not know its precise form.
It is in the light of the foregoing that I have to ask myself whether the Law Commission's "settled understanding of the law" proposal forms part of the common law. This, as I understand the position, requires that I should consider whether parties in the position of Kleinwort Benson were mistaken when they paid money to local authorities under interest swap agreements which they, like others, understood to be valid but have later been held to be void. To me, it is plain that the money was indeed paid over under a mistake, the mistake being a mistake of law. The payer believed, when he paid the money, that he was bound in law to pay it. He is now told that, on the law as held to be applicable at the date of the payment, he was not bound to pay it. Plainly, therefore, he paid the money under a mistake of law, and accordingly, subject to any applicable defences, he is entitled to recover it. It comes as no surprise to me that, in the swaps litigation, it appears to have been assumed that money paid pursuant to interest rate swap agreements was paid under a mistake which, in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1994] 4 All E.R. 890, 931E, was inevitably held by Hobhouse J. to have been a mistake of law and so, on the law as it then stood, irrecoverable on that basis. Not surprisingly, there is very little previous authority on the question whether in such circumstances the money has been paid under a mistake of law; but such authority as there is supports this view. The case most frequently cited in this context is Henderson v. Folkestone Waterworks Co., briefly reported in (1885) 1 T.L.R. 329. This case is referred to in para. 2.65 of the Law Commission's Consultation Paper No. 120, and was relied on in argument by Mr. Underhill Q.C. on behalf of the respondent local authorities. In my opinion, however, it does not assist his argument. The plaintiff was rated by the defendant water company at a rate which was legal under a decision which was subsequently reversed by the House of Lords. He then sought to recover the excess; in answer to the defendants' argument that the payment was voluntary and so irrecoverable, he claimed that he paid the money under compulsion. This argument was rejected by a Divisional Court, consisting of Lord Coleridge C.J. and A. L. Smith J., on the ground that the money, having been paid voluntarily under a mistake of law, could not be recovered back. The only passage relied on is contained in an expostulation, in the course of argument, by Lord Coleridge, who had been party to the decision reversed by the House of Lords, when he said: "I had held the contrary, and two eminent Judges agreed with me. Can that be put as ignorance of law?" Little or no importance can however be attached to this intervention in the present context, since both members of the Court rejected the plaintiff's claim on the ground that the money was paid voluntarily under a mistake of law, and was therefore irrecoverable.
In Derrick v. Williams [1939] 2 All E.R. 559, following the reversal by the House of Lords in Rose v. Ford [1937] A.C. 826 of the decision of the Court of Appeal that damages could not be recovered for loss of expectation of life, the plaintiff brought a fresh action seeking to recover such damages notwithstanding that in a previous action on the same facts he had taken out of court money paid in on the basis that no such damages were recoverable. The Court of Appeal held that he could not do this, and dismissed the second action. But in the course of his judgment Sir Wilfrid Greene M.R. made it plain that the plaintiff had acted under a mistake of law in taking the money out of court in the first action. He said, at p. 565E:
The same view is expressed by Professor Burrows in his Law of Restitution, 4th ed. (1993) at pp. 118-119, where he points out that in the common law the jurisprudential tradition is that "changes" are retrospective. He continues:
He then proceeds to rehearse the arguments for and against legislative change of the law in this respect.
The question then arises whether, having regard to the fact that the right to recover money paid under a mistake of law is only now being recognised for the first time, it would be appropriate for your Lordships' House so to develop the law on the lines of the Law Commission's proposed reform as a corollary to the newly developed right of recovery. I can see no good reason why your Lordships' House should take a step which, as I see it, is inconsistent with the declaratory theory of judicial decision as applied in our legal system, under which the law as declared by the judge is the law applicable not only at the date of the decision but at the date of the events which are the subject of the case before him, and of the events of other cases in pari materia which may thereafter come before the courts. I recognise, of course, that the situation may be different where the law is subject to legislative change. That is because legislation takes effect from the moment when it becomes law, and is only retrospective in its effect to the extent that this is provided for in the legislative instrument. Moreover even where it is retrospective, it has the effect that as from the date of the legislation a new legal provision will apply retrospectively in place of that previously applicable. It follows that retrospective legislative change in the law does not necessarily have the effect that a previous payment was, as a result of the change in the law, made under a mistake of law at the time of payment. (I note in parenthesis that in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 69 A.L.J.R. 51, the High Court of Australia was divided on the question whether the retrospective legislation there under consideration had the effect that a previous payment had been made under a mistake of law.) As I have already pointed out, this is not the position in the case of a judicial development of the law. But, for my part, I cannot see why judicial development of the law should, in this respect, be placed on the same footing as legislative change. In this connection, it should not be forgotten that legislation which has an impact on previous transactions can be so drafted as to prevent unjust consequences flowing from it. That option is not, of course, open in the case of judicial decisions.
At this point it is, in my opinion, appropriate to draw a distinction between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions. The former category of cases was considered by your Lordships' House in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] A.C. 70, in which it was held that at common law taxes exacted ultra vires were recoverable as of right, without the need to invoke a mistake of law by the payer. Moreover reference was made, in the course of the hearing, to the various statutory provisions (usefully summarised in the Law Commission's Consultation Paper (Law Com. No. 120) at pp. 74-84) which regulate the repayment of overpaid tax. For present purposes it is of interest that, in the case of some taxes (including income and corporation tax), no relief is given "in respect of an error or mistake as to the basis on which the liability . . . ought to have been computed where the return was in fact made on the basis of or in accordance with the practice generally prevailing at the time when the return was made:" see the proviso to section 33(2) of the Taxes Management Act 1970.
Two observations may be made about the present situation. (I of course have it in mind that this is the subject of proposals for legislative reform contained in the Law Commission's Report (Law Com. No. 227), but your Lordships are concerned with the law as it stands at present.) The first observation is that, in our law of restitution, we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are (1) cases concerned with repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law on the principle in Woolwich, and otherwise are the subject of statutory regimes regulating recovery; and (2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law. The second observation is that, in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable. If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.
In the present case, however, we are concerned with payments made under private law transactions. It so happens that a significant number of payments were in fact made under interest rate swap agreements with local authorities before it was appreciated that they were void; but the number is by no means as great as might conceivably occur in the case of taxes overpaid in accordance with a prevailing practice, or under a settled understanding of the law. Moreover the element of public interest is lacking. In cases such as these I find it difficult to understand why the payer should not be entitled to recover the money paid by him under a mistake of law, even if everybody concerned thought at the time that interest rate swap agreements with local authorities were valid.
Of course, I recognise that the law of restitution must embody specific defences which are concerned to protect the stability of closed transactions. The defence of change of position is one such defence; the defences of compromise, and settlement of an honest claim (the scope of which is a matter of debate), are others. It is possible that others may be developed from judicial decisions in the future. But the proposed "settled understanding of the law" defence is not, overtly, such a defence. It is based on the theory that a payment made on that basis is not made under a mistake at all. Once that reasoning is seen not to be correct, the basis for the proposed defence is, at least in cases such as the present, undermined.
I wish further to add that the proposal that a payment made under a settled understanding of the law, later proved to be erroneous, should be irrecoverable, does not depend upon the lapse of any period of time after the date of the payment in question. Take the present case. Suppose that, shortly after the payment by Kleinwort Benson to a local authority of the first sum due under an interest rate swap contract, it transpires that the contract was ultra vires the local authority and so void, and that the sum so paid was therefore not due. Let it also be assumed that there have been relatively few transactions of this kind with local authorities, but enough for it to be said that that sum was paid on the basis of a settled understanding that the money was lawfully due. I find it difficult to accept that, for that reason alone, the payment would be irrecoverable as having been paid under a mistake of law. Indeed it is an remarkable feature of the proposed principle that, the longer ago the payment was made, the less likely is it to have been made under a settled understanding of the law. An appropriately drawn limitation statute would surely produce a more just result. This is a point to which I will return later in this opinion.
For these reasons alone, therefore, I would reject the argument of the local authorities on this point. But I wish to refer also to the insecure foundation upon which the proposed provision is based, arising from the difficulty of defining the circumstances in which it should apply. The New Zealand statutory provision (section 94A(2) of the Judicature Act 1908) excludes relief in respect of "any payment made at a time when the law requires or allows, or is commonly understood to require or allow, the payment to be made or enforced, by reason only that the law is subsequently changed or shown not to have been as it was commonly understood to be at the time of payment". The Western Australian statutory provision (section 23(2) of the Law Reform (Property, Perpetuities and Succession) Act 1962) takes the same form. It is recognised, however, that the concept of "common understanding" of the law has given rise to difficulty (see, e.g., Bell Bros. Pty. Ltd. v. Shire of Serpentine--Jarrahdale [1969] W.A.R. 155) and, on this score at least, the statutory provision has been the subject of criticism. In this country the Law Commission has attempted to improve on the New Zealand statute by referring not to a common understanding of the law, but instead to a "settled view of the law" which has been departed from by a subsequent judicial decision. However, as Mr. Southwell Q.C. pointed out in argument, there could be much scope for argument over what constituted a settled view of the law. Take the case of interest rate swap agreements. These were assumed by the banks (and indeed by others concerned) to be within the powers of local authorities; but this assumption appears to have been based on practical grounds, rather than on advice about the legal position. Nor do the local authorities appear to have addressed the legal position until after the matter was raised by the Audit Commission in 1987, over five years after agreements of this kind began to be entered into by local authorities. Had the point arisen under a statute in the form recommended by the Law Commission, it would have been necessary to consider whether the above circumstances gave rise to a "settled view of the law." It is only necessary to pose the question to realise how difficult it would have been to answer it in the present case, and very possibly in the case of other payments made under private transactions. For this reason alone it comes as no surprise that the Law Reform Commission of British Columbia decided (see their Report No. 51 (1981) at pp. 68 et seq.) not to recommend the adoption of any such provision in that Province, though they also considered (at p. 72) that the New Zealand statutory provision "goes far beyond what is required". The Law Reform Committee of South Australia (see their Report No. 84 (1984) at p. 31) likewise did not recommend the adoption of any such provision, though three years later the Law Reform Commission of New South Wales (see their Paper No. 53 (1987) at paras. 5.20--5.29) proposed the legislative adoption of a similar but not identical provision. In Scotland, as I have already recorded, the Scottish Law Commission at first recommended its adoption, but later resiled from that recommendation. That this whole topic is one of great difficulty can perhaps best be seen in the Scottish Law Commission's Discussion Paper No. 99, in which the rival arguments for and against legislative reform are rehearsed in some detail, and the difficulties exposed. This division of opinion does not encourage statutory adoption of a provision in these or comparable terms, still less its recognition as part of the common law of this country.
Issue IB--Honest receipt: This issue arises from a principle proposed by Brennan C.J. (then Brennan J.) in David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1991-1992) 175 C.L.R. 353 at p. 399. It reads as follows:
This principle was expressly proposed in order to achieve a degree of certainty in past transactions. As Brennan C.J. said (at p. 398): "Unless some limiting principle is introduced, the finality of any payment would be as uncertain as the governing law."
In this part of the law there has long been concern, among common law judges, about what is sometimes called the finality of transactions, and sometimes the security of receipts. This concern formed a significant part of the amalgam of concerns which led to the rule that money paid under a mistake of law was irrecoverable on that ground. Now that that rule has been abrogated throughout the common law world, attention has of course shifted to the formulation of appropriate defences to the right of recovery. The principle proposed by Brennan C.J. is, I believe, the most far-reaching of the defences to the right of recovery that has yet been proposed.
Anything which falls from Brennan C.J. is, of course, entitled to great respect. But I have to state at once that this proposal seems to have been stillborn. Of the judges who sat with Brennan C.J. on the David Securities case, none supported this proposal. I know of no judicial support which the proposal has since received, nor of any support from any of the Law Commissions which have considered this part of the law. The reason for this lack of support is, I believe, that the proposal is generally regarded as being wider than is necessary to meet the perceived mischief.
I start from the proposition that money paid under a mistake of law is recoverable on the ground that its receipt by the defendant will, prima facie, lead to his unjust enrichment, just as receipt of money paid under a mistake of fact will do so. There may of course be circumstances in which, despite the mistaken nature of the payment, it is not regarded as unjust for the defendant to retain the money so paid. One notable example is change of the defendant's position. Another is the somewhat undefined circumstance that the payment was made in settlement of an honest claim. Yet, Brennan C.J.'s proposed defence is so wide that, if it was accepted, these other defences would in practice cease to have any relevance in the case of money paid under a mistake of law. Moreover in many cases of this kind the mistake is shared by both parties, as for example in the case of the appeals now under consideration. In such cases, recovery by the plaintiff would automatically be barred by Brennan C.J.'s proposed defence. So sweeping is the effect of the defence that it is not perhaps surprising that it has not received support from others.
In my opinion, it would be most unwise for the common law,
having recognised the right to recover money paid under a mistake of law on the ground of
unjust enrichment, immediately to proceed to the recognition of so wide a defence as this
which would exclude the right of recovery in a very large proportion of cases. The proper
course is surely to identify particular sets of circumstances which, as a matter of principle or
policy, may lead to the conclusion that recovery should not be allowed; and in so doing to
draw on the experience of the past, looking for guidance in particular from the analogous
case of money paid under a mistake of fact, but also drawing upon the accumulated wisdom
to be found in the writings of scholars on the law of restitution. However, before so novel and
far-reaching defence as the one now proposed can be recognised, a very strong case for it
has to be made out; and I can discover no evidence of a need for so wide a defence as this.
In particular, experience since the recognition of the right of recovery of money paid under a
mistake of law in the common law world does not appear to have revealed any such need.
For these reasons, with all respect to Brennan C.J., I am unable to accept that the defence proposed by him forms part of the common law.
Issue 2--Completed transactions: This issue was added, by leave of your Lordships' House, to the issues set out in the order of Langley J. It arose from a footnote to an Article by Professor Peter Birks entitled No Consideration: Restitution after Void Contracts (1993) 23 University of Western Australia Law Review 195. In the Article, Professor Birks was concerned to criticise the conclusion of Hobhouse J. in the Westdeutsche case [1994] 4 All E.R. 890 that the basis of recovery of money paid under void interest rate swaps agreements was absence of consideration, his preferred view being that the true ground of recovery was failure of consideration. It formed part of his argument that a party who has received full performance under such a contract cannot recover the value of his performance, i.e. the money he has paid to the other party, because in such circumstances there has been no failure of consideration for his payment. He has received what he wanted, and therefore there was no unjust factor to provide a reason for restitution. However, in a section of the Article entitled "The alternative of restitution for mistake," he reached the conclusion in the text that it seemed that, if the remedy of recovery of money paid under a mistake was available in cases of mistake of law, his earlier conclusion would be largely cancelled out. This was because, since the effect of a mistake must be judged at the time when it was made, "it would seem to follow that if the mistake causes the transfer where the plaintiff never subsequently receives a complete performance, it must equally cause it in the case of complete performance" (see p. 229). Moreover "in the context of void contracts, no valid bargain being in issue, the mistaken party cannot be barred from restitution because he received something from the other, provided only that he can make counter-restitution to the court's satisfaction" (see p. 230). His conclusion in the text (at p. 231) was that it was "undeniable that, at least in jurisdictions with a liberal regime for mistake, the refutation of Hobhouse J.'s novel doctrine will have few practical consequences."
However on p. 230 he added a footnote which appears to have been an afterthought. In this he said:
The question for consideration on this Issue is whether the thesis contained in the footnote is well-founded.
It has to be said at once that the argument set out in the text of the section of the Article entitled The alternative of restitution for mistake, from which I have quoted, is most formidable. It is well established that the cause of action for the recovery of money paid under a mistake of fact accrues at the time of payment. As authority for this proposition it is usual to cite Baker v. Courage & Co. [1910] 1 K.B. 56, a decision of Hamilton J. (later Lord Sumner) which, so far as I am aware, has never been questioned. So if an agreement such as those presently under consideration, under which a series of payments falls to be made, is held to have been void so that each payment has been made under a mistake of law, i.e. the mistaken belief of the payer that he was liable to make the payment, the cause of action for the recovery of the money so paid will accrue, in respect of each payment, on the date when the payment was made. This will be true of each payment; and if the performance of the supposed contract is completed, it will be as true of the final payment as it will have been of all the previous payments. It follows that, if the argument in Professor Birks' footnote is correct, at the moment when the final payment is made under such a contract, not only will the final payment itself be irrecoverable despite the fact that it was made under precisely the same mistake as the previous payments made by him, but the payer will somehow be divested of his accrued right to recover all those previous payments.
In the light of this analysis, the only possible basis for the thesis in Professor Birks' footnote would seem to be that, in the context of void contracts, failure of consideration should be allowed to trump mistake of law as a ground for recovery of benefits conferred. However an equally strong argument may perhaps be made in favour of mistake of law trumping failure of consideration, though either approach is antagonistic to the usual preference of English law to allow either of two alternative remedies to be available, leaving any possible conflict to be resolved by election at a late stage. Neither of these two solutions was however relied upon in argument in the present case; and it is in any event difficult to see how Professor Birks' proposal in his footnote can here be reconciled with the consequences of invalidity arising from the application of the ultra vires doctrine. As a result, following the decision of the House of Lords in Hazell, it was ordered and declared that the items of account (irrespective whether they represented payments or receipts) appearing in the capital markets fund account of the local authority in that case (Hammersmith and Fulham London Borough Council) for the years under challenge were contrary to law (see [1992] 2 A.C. 1, 43H-44A per Lord Templeman, with whose opinion the other members of the Appellate Committee agreed). Of the interest rate swap transactions entered into by the Council, some were closed transactions, and a number were profitable, but no exceptions were made for these in the declarations so made. As Mr. Southwell Q.C. submitted on behalf of Kleinwort Benson, it is incompatible with the ultra vires rule that an ultra vires transaction should become binding on a local authority simply on the ground that it has been completed. Moreover the ultra vires rule is not optional; it applies whether the transaction in question proves to have been profitable or unprofitable. If the argument in Professor Birks' footnote is right, the result would be that effect would be given to a contract which public policy has declared to be void.
In my opinion, these points are unanswerable; and they are reinforced by further arguments advanced by Professor Burrows in his Article entitled Swaps and the Friction between Common Law and Equity in [1995] R.L.R. 15 at pp. 18-19. I would accordingly decide this Issue in favour of Kleinwort Benson.
Issue 3--Does section 32(1)(c) of the Limitation Act 1980 apply to mistakes of law: Section 32(1) of the Limitation Act 1980 provides as follows:
The question which arises under this Issue is whether the actions brought by Kleinwort Benson for the recovery on the ground of mistake of law of money paid to the local authorities under void interest swaps agreements are actions for relief from the consequences of a mistake within section 32(1)(c).
The precursor of section 32(1)(c) of the Limitation Act 1980 was section 26(c) of the Limitation Act 1939, which was in the same terms. That provision was enacted following upon the 5th Interim Report of the Law Revision Committee (Cmnd. 5334). Paragraph 23 of the Report stated that the equitable rule (that time should only run under the Statutes of Limitation from the time at which the mistake was, or could with reasonable diligence have been, discovered) did not apply to cases which fell exclusively within the cognisance of a court of law (here referring to Baker v. Courage [1910] 1 K.B. 56). Having stated that the position was unsatisfactory, it recommended that in all cases when relief was sought from the consequences of a mistake, the equitable rule should prevail.
The submission of Kleinwort Benson was that their actions for the recovery on the ground of mistake of law of money paid under void interest swap agreements were actions for relief from the consequences of a mistake within section 32(1)(c) of the Act of 1980. In support of this submission, they relied, first, on In re Diplock [1948] Ch. 465, in which the Court of Appeal stated (at pp. 515-516) that section 26 of the Act of 1939 would operate to postpone the running of time in the case of an action at common law to recover money paid under a mistake of fact, and would likewise apply to an analogous claim in equity to recover money paid under a mistake of law. Second, they relied on the judgment of Pearson J. in Phillips-Higgins v. Harper [1954] 1 Q.B. 411, in which he stated (at p. 418) with reference to section 26 of the Act of 1939 that the essential question was whether the action was for relief from the consequences of a mistake, a familiar example of which was an action for the recovery of money paid in consequence of a mistake. On this basis, it was submitted, Kleinwort Benson's causes of action in the present cases fell clearly within section 32(1)(c) of the Act of 1980.
In answer to this submission, the submission of the local authorities was twofold. First, they submitted that there was no mistake on the part of Kleinwort Benson; but I have already explained that I am satisfied that they indeed paid the money in question under a mistake of law. Second, they submitted that section 32(1)(c) does not on its true construction apply to mistakes of law. In this connection they relied in particular on the fact that the mistake of law rule was in full force in 1939, when the provision was first enacted; and they further submitted that the words of the subsection, which referred to a mistake being "discovered", showed that the legislature was referring to mistakes of fact rather than mistakes of law--of which it would not be apt to refer to such a mistake being "discovered", still less "discovered with reasonable diligence". In my opinion, however, this verbal argument founders on the fact that the pre-existing equitable rule applied to all mistakes, whether they were mistakes of fact or mistakes of law: see, e.g., Earl Beauchamp v. Winn (1873) L.R. 6 H.L. 223, 232-5, and the dicta from In re Diplock to which I have already referred.
I recognise that the effect of section 32(1)(c) is that the cause of action in a case such as the present may be extended for an indefinite period of time. I realise that this consequence may not have been fully appreciated at the time when this provision was enacted, and further that the recognition of the right at common law to recover money on the ground that it was paid under a mistake of law may call for legislative reform to provide for some time limit to the right of recovery in such cases. The Law Commission may think it desirable, as a result of the decision in the present case, to give consideration to this question indeed they may think it wise to do so as a matter of some urgency. If they do so, they may find it helpful to have regard to the position under other systems of law, notably Scottish and German law. On the section as it stands, however, I can see no answer to the submission of Kleinwort Benson that their claims in the present case, founded upon a mistake of law, fall within the subsection.
Conclusion: In the result, I would answer the questions posed for your Lordships under the various Issues as follows:
Issue 1: The present rule, under which in general money is not recoverable in restitution on the ground that it has been paid under a mistake of law, should no longer be maintained as part of English law, from which it follows that the facts pleaded by Kleinwort Benson in each action disclose a cause of action in mistake.
Issue 1A: There is no principle of English law that payments made under a settled understanding of the law which is subsequently departed from by judicial decision shall not be recoverable in restitution on the ground of mistake of law.
Issue 1B: It is no defence to a claim in English law for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to retain the money or property.
Issue 2: There is no principle of English law that money paid under a void contract is not recoverable on the ground of mistake of law because the contract was fully performed.
Issue 3: Section 32(1)(c) of the Limitation Act 1980 applies in the case of an action for the recovery of money paid under a mistake of law.
It follows that all four appeals must be allowed with costs.
LORD LLOYD OF BERWICK
My Lords,
Of the sums claimed by Kleinwort Benson Ltd. £388,114 has already been repaid by the four local authorities, either voluntarily, or pursuant to proceedings brought under R.S.C. Order 14 on the basis that there had been a total failure of consideration. The claim for the balance of £423,094 is prima facie time-barred. In order to meet this difficulty, the plaintiffs rely on the alternative ground of mistake. They say that the payments made by the plaintiffs were made on the basis of a mistaken belief that there existed binding contracts between the plaintiffs and the defendants. In answer to the defendants' plea of limitation, they rely on section 32(1)(c) of the Limitation Act 1980, which provides that when an action is for relief from the consequences of a mistake, the period of limitation does not begin to run until the mistake is discovered, or could with reasonable diligence have been discovered. For the reasons given by my noble and learned friend Lord Goff, I agree that if there was here a mistake on which the plaintiffs can rely, then they could not have discovered the mistake until the House gave judgment in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1; I agree also that the plaintiffs are entitled to rely on section 32(1)(c) of the Limitation Act, with the result that time did not begin to run until the date of the judgment in Hazell, namely 24 January 1991.
Was there then a mistake on which the plaintiffs can rely? It is common ground that if there was a mistake, the mistake was one of law. For well over a century the courts have recognised and enforced a distinction between mistakes of fact and mistakes of law. The rule has been that, unlike mistake of fact, money paid under a mistake of law cannot be recovered. In a dissenting speech in Woolwich Equitable Building Society v. I.R.C. [1993] A.C. 70, 154 Lord Keith of Kinkel described the rule as being "too deeply embedded in English jurisprudence to be uprooted judicially." So it is not surprising that Langley J. did not give a reasoned judgment when the case came before him at first instance. He was bound by authority to give judgment on the preliminary issues in favour of the defendants. Nor do we have the assistance of reasoned judgments in the Court of Appeal, since the appeal came direct to the House under the leap-frog procedure.
The mistake of law rule has been so heavily and effectively criticised in recent years that Mr. Nicholas Underhill Q.C. wisely did not seek to defend it. Lord Goff's speech demonstrates with compelling force that the rule is indeed indefensible. Instead of defending the rule, Mr. Underhill submits first that the rule should be abrogated by Parliament rather than by the House in its judicial capacity, and secondly that if the rule is abrogated without any safeguards, there may be undesirable side effects. In particular Mr. Underhill is concerned by what he called his paradigm case of a long-standing decision of the Court of Appeal subsequently overruled by the House of Lords. Should a person who has paid money on the faith of the Court of Appeal decision be entitled to recover his money when the decision is overruled by the House of Lords, perhaps many years later? Is there in truth in such a case any mistake at all? or, is it not more accurate to say that there has merely been a failure to predict a change in the law? I shall attempt to deal with each of these submissions in turn.
As to the first, Mr. Underhill invited your Lordships to exercise restraint. The mistake of law rule has stood for many years, and legislation to abolish the rule (so far as one can ever foretell such things) appears, he said, to be imminent. It would be wrong to pre-empt the legislature, especially as changes in other parts of the law might prove necessary. By way of example, there might have to be an amendment to the Limitation Act 1980. For mistake of law cannot have been in mind when section 32(1)(c) was enacted.
I am not persuaded. Indeed I can imagine few areas of the law in which it would be more appropriate for the House to take the initiative. The mistake of law rule is judge made law. There are no considerations of social policy involved. The proposed change is consistent with, and less far-reaching than the change effected by the House in the Woolwich case. In Scotland the Inner House abrogated the mistake of law rule in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 S.L.T. 299 (despite the strong authority of Lord Brougham L.C. to the contrary), even though legislation might also have been said to be imminent following on the Scottish Law Commission discussion paper (1993) No. 95: Recovery of Benefits Conferred under Error of Law. Elsewhere, in Canada, Australia and South Africa, the rule has been abolished by judicial decision. And we have the recommendation of the English Law Commission Report on Restitution (1994) (Cm. 2731) (Law Com. No. 227). It is true that the Law Commission was itself in favour of leaving the change to Parliament. But the Law Commission was not to know that the opportunity for judicial decision would come so soon; in contrast, the prospect of legislation is still uncertain, and perhaps remote. For these reasons I would reject Mr. Underhill's first submission. The critics of the mistake of law rule have waited long enough. The plaintiffs in these proceedings should have the benefit of a change which is long overdue. That is not to say that the plaintiffs will necessarily succeed when the case comes on for trial. But at least the mistake of law rule should not stand in their way as it would if we were to wait for Parliament to take a hand.
I turn to Mr. Underhill's second submission. Here, as it seems to me, he starts more than half way home. For Mr. Southwell conceded in his reply (in my view correctly) that if parties enter into a contract in accordance with a decision of a Court of Appeal, (it is not suggested that there was such a decision in the present case) and if the Court of Appeal decision is subsequently overruled by the House of Lords there could be no question of claiming restitution on the ground of mistake. For when the parties entered into the contract the law was as they believed it to be. How then could they claim to have been mistaken?
But even more important than Mr. Southwell's concession is the Law Commission Report itself. Annexed to the report is a draft Bill. Clause 2 abrogates the mistake of law rule.
It provides:
Clause 3(1) provides:
Clause 3(1) is clearly consistent with Mr. Southwell's concession, and covers Mr. Underhill's paradigm case. But it goes wider. For it is not confined to cases where the law is settled by reason of a prior decision of the Court of Appeal. It covers other cases as well. It is this wider aspect of clause 3(1) of the draft Bill which has caused Mr. Southwell's concern.
But before I come to that concern, there is a more general point to be made. Clause 3(1) of the draft Bill implements the recommendation in paragraph 5.13 of the report. It reads as follows:
That recommendation was the result of very extensive consultation by the Commission. The arguments for and against the recommendation are set out in paragraphs 5.1--5.13 of the report. In paragraph 5.9 the Commission ask a number of questions which others have asked. How "settled" does a view or understanding of the law have to be before a payment based on that view or understanding becomes irrecoverable? The answer given in paragraph 5.10 is as follows:
The Law Commission recommendations have been accepted by two successive governments of different political persuasions. No doubt if a bill were introduced in the form proposed by the Law Commission, an amendment might be proposed and carried to delete clause 3. We cannot tell. But for your Lordships to accept half the package proposed by the Law Commission and reject the other half, would cause me some disquiet. If that is to be the result, then the argument against pre-empting Parliament becomes much stronger. I shall return to this point at the end of my speech.
What then are the reasons for not accepting clause 3 of the draft Bill as it stands? At the outset there is, as so often, a question of terminology. Some of the commentators regard a provision such as is found in clause 3 of the bill as providing the payee with a defence. This is the language used by the Scottish Law Commission, and by my noble and le