Westdeutsche Landesbank Girozentrale v Council of the London Borough of Islington

The House considered restitutionary recovery of monies paid under an interest-rate swap later held ultra vires, and the correct remedy for the payor. The court confirmed that the payor had a personal claim in restitution to recover the balance of monies paid. It rejected the imposition of a resulting trust over sums paid under a void contract in the circumstances of this case and therefore held that the claimant did not obtain an equitable proprietary remedy which would have entitled it automatically to compound interest as of right.

The panel addressed the scope of the equitable jurisdiction to award compound interest. A majority concluded that, although equity historically awards compound interest in limited fiduciary or trustee cases, it was not appropriate in this case to extend that remedial jurisdiction to grant compound interest ancillary to a personal restitutionary claim (having regard to statutory developments and commercial considerations). The House accordingly varied the Court of Appeal's order so that simple interest (at market-related short-term rates) ran from the date of receipt (18 June 1987).

Background and parties

The respondent bank (Westdeutsche Landesbank) paid an upfront sum of 2.5m under an interest-rate swap to the appellant local authority (Islington) on 18 June 1987. After the decision in Hazell v Hammersmith & Fulham LBC that such swap transactions entered into by local authorities were ultra vires, the bank sued to recover the net balance paid under the void contract together with interest.

Procedural history

• Commercial Court (Hobhouse J): awarded the bank the net balance and compound interest (six-monthly rests) from an identified date.
• Court of Appeal: affirmed recovery of the balance and awarded compound interest from the date of receipt.
• House of Lords (this appeal): allowed in part and varied the interest order to simple interest from the date of receipt; addressed broader restitutionary and equitable issues.

Issues framed

• Was the bank entitled to recover the balance on grounds of restitution/unjust enrichment?
• Did the bank have an equitable proprietary claim (a resulting trust) over the upfront payment such as to justify compound interest?
• Is there an equitable jurisdiction to award compound interest ancillary to a personal restitutionary claim, and if so should it be exercised here; and from what date should interest run?

Court's reasoning

• The House accepted the bank's personal restitutionary claim to recover the net balance but scrutinised the availability of a resulting trust. It concluded that imposing a resulting trust on receipt of monies under a void contract would be inconsistent with established trust principles and commercially undesirable: there was no identifiable trust fund and the recipient's conscience could not be affected at the date of receipt while ignorant of the invalidity.
• Having rejected a proprietary/resulting trust basis for recovery, the court considered whether equity could nevertheless award compound interest in aid of a personal restitutionary remedy. The judges were divided. A majority (Browne-Wilkinson, Slynn, Lloyd) held that it was not appropriate in this case to extend equity to award compound interest in support of a common-law restitutionary claim given statutory developments (section 3 of the Law Reform (Miscellaneous Provisions) Act 1934 and section 35A of the Supreme Court Act 1981) and policy and commercial certainty concerns; they therefore limited recovery to simple interest from the date of receipt. A minority (Goff, Woolf) would have permitted an equitable award of compound interest in order to achieve full restitution.

Relief sought and disposition

The bank sought repayment of the net balance plus interest (compounded). The House ordered repayment of the balance and awarded simple interest (market-related short-term rates) from 18 June 1987, varying the Court of Appeal order accordingly.

Appeal allowed in part and the orders below varied. The House held that the bank was entitled to restitution of the net balance paid under the void swap but that no resulting trust arose in the recipient local authority; the majority declined to extend equity so as to award compound interest ancillary to a personal restitutionary claim and therefore substituted an award of simple interest (market-related short-term rates) from the date of receipt (18 June 1987). The reasons combined concerns of trust law principle, commercial consequences of imposing proprietary remedies and respect for the statutory framework governing interest awards.

Commercial Court (Hobhouse J): judgment for the bank awarding the balance and compound interest. Court of Appeal (17 December 1993): affirmed entitlement to recover the balance and awarded compound interest from date of receipt. House of Lords (22 May 1996): appeal allowed in part; Court of Appeal order varied to award simple interest from 18 June 1987. Neutral citation at House of Lords: [1996] UKHL 12.