Wednesday Law Report: Interest rate swap money recoverable

4 November 1998 Kleinwort Benson Ltd v Lincoln City Council and other appeals House of Lords (Lord Browne-Wilkinson, Lord Goff of Chieveley, Lord Lloyd of Berwick, Lord Hoffman, Lord Hope of Craighead) 29 October 1998

THE RULE under which money paid under a mistake of law was generally not recoverable in restitution no longer formed part of English law.

The House of Lords allowed the appeals of Kleinwort Benson Ltd ("the bank") in four consolidated appeals against the respondent local authorities in which the bank sought recovery of monies paid to them under interest rate swap agreements.

Following the decision of the House of Lords in Hazell v Hammersmith and Fulham London Borough Council [1992] AC 1 the swap transactions had proved to be void, and the bank had commenced proceedings against each of the respondents claiming restitution of the sums it had paid to them under those transactions.

Each of the transactions had been fully performed by both parties according to its terms across the whole of the agreed period. Not all of the sums paid by the bank to the respondents had been paid within the six year limitation period expiring with the date of the issue of the writ.

The bank's claim in each case was that the money in question had been paid by it under a mistake, namely a mistaken belief that it was paid pursuant to a binding contract between it and the relevant local authority.

In order to avoid the six-year time limit the bank had sought to bring the claims within section 32(1)(c) of the Limitation Act 1980, which provided that "where in the case of any action for which a period of limitation is prescribed by this Act . . . the action is for relief from the consequences of a mistake . . . the period of limitation shall not begin to run until the plaintiff has discovered the . . . mistake . . . or could with reasonable diligence have discovered it."

The High Court judge ordered the trial of two preliminary issues, the first of which directly raised the question whether money paid under a mistake of law was recoverable in restitution. On the basis that he was bound by Court of Appeal authority to answer that question in the negative, he granted a certificate for a leapfrog appeal to the House of Lords.

Richard Southwell QC and Rhodri Davies (Clifford Chance) for the bank; Nicholas Underhill QC, Charles Bear and Mark West (Sharpe Pritchard) for Lincoln City Council, Birmingham City Council and Kensington and Chelsea Royal London Borough Council and (Southwark Legal Services) for Southwark London Borough Council.

Lord Goff said that what was in issue at the heart of the case was whether the continued existence of a long standing rule of law, which had its origin in Bilbie v Lumley (1802) 2 East 469, was in the public interest. The issues raised on the appeal would be answered as follows.

The present rule, under which in general money was not recoverable in restitution on the ground that it had been paid under a mistake of law, should no longer be maintained as part of English law. It followed from that that the facts pleaded by Kleinwort Benson in each action disclosed a cause of action in mistake.

There was no principle of English law that payments made under a settled understanding of the law which was subsequently departed from by judicial decision should not be recoverable in restitution on the ground of mistake of law, nor was it a 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 pay- ment or transfer, that he was entitled to retain the money or property.

Further, there was no principle of English law that money paid under a void contract was not recoverable on the ground of mistake of law because the contract had been fully performed, and section 32(1)(c)of the Limitation Act 1980 applied in the case of an action for the recovery of money paid under a mistake of law.

Kate O'Hanlon

Barrister