Westdeutsche Landesbank Girozentrale v Islington London Borough Council (Kleinwort Benson Ltd v Sandwell Borough Council)

Money paid under a contract which is void for the recipient’s lack of capacity ordinarily passes into the recipient’s legal and beneficial ownership. Failure of consideration does not itself create a resulting trust. A trust requires identifiable trust property and circumstances affecting the legal owner’s conscience.

The payer instead has a personal restitutionary claim arising from total failure of consideration. By a majority of three to two, compound interest was unavailable because the recipient had neither acted fraudulently nor incurred fiduciary accountability. The statutory provision for simple interest did not permit equity to supply compound interest as ancillary relief. Simple interest ran from receipt of the money. Sinclair v Brougham [1914] AC 398 was overruled on its implied-contract and proprietary-remedy aspects.

The Bank paid Islington Council £2.5 million under an interest-rate swap. Following Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1, the transaction was treated as ultra vires the Council and void. After crediting the Council’s payments, £1,145,525.93 remained due to the Bank.

Hobhouse J ordered repayment with compound interest. The Court of Appeal, reported at [1994] 1 WLR 938, held that the Bank had both a common-law restitutionary claim and an equitable proprietary claim under a resulting trust. It awarded compound interest from receipt of the upfront payment.

The Council accepted its personal liability to repay the balance and appealed only against compound interest. The House nevertheless had to determine whether the payment created a trust, whether Sinclair v Brougham [1914] AC 398 should remain authoritative, and whether equity could award compound interest in aid of a common-law restitutionary claim.

1. Appeal allowed by a majority of three to two. The orders below were varied to substitute simple interest, calculated at the applicable average seven-day rates from 18 June 1987, for compound interest.

2. Per Lord Browne-Wilkinson, whose conclusion on the trust issue was shared by all members of the House, the upfront payment was not held on resulting trust. Equity acts upon the conscience of the legal owner. A recipient cannot be a trustee while ignorant of the circumstances said to affect that conscience. There must also be identifiable trust property. The Council had mixed and spent the money before learning that the transaction was void, so those requirements never coincided.

   The Bank intended the payment to become the Council’s absolute property. That intention rebutted any presumed resulting trust. The mere separation of legal and equitable rights does not necessarily import a trust, and the payer had no pre-existing equitable interest which it could retain.

3. Per Lord Browne-Wilkinson, Lord Slynn and Lord Lloyd, Sinclair v Brougham [1914] AC 398 was overruled both in treating restitution for money had and received as resting upon an implied contract and in recognising proprietary rights in the assets arising from an ultra vires payment. A restitutionary obligation is imposed by law to reverse unjust enrichment. The ordinary remedy for money paid under a void contract is personal, based here upon total failure of consideration, and does not confer priority over unsecured creditors.

4. Per Lord Browne-Wilkinson, Lord Slynn and Lord Lloyd, compound interest in equity was confined, apart from fraud, to recouping an improper profit from a trustee or other fiduciary. The Council was neither. Section 3 of the Law Reform (Miscellaneous Provisions) Act 1934 and section 35A of the Supreme Court Act 1981 authorised simple, but not compound, interest. Given Parliament’s interventions, the House should not create a wider equitable jurisdiction on an issue which had not been fully argued.

5. All members agreed that interest should run from receipt of the upfront payment, when the cause of action accrued.

6. Lord Goff and Lord Woolf dissented on compound interest. They agreed that there was no trust, but considered that equity could act in aid of a personal restitutionary claim. In their view, compound interest could be awarded discretionarily where necessary to strip an actual or presumed profit and achieve full restitution. The Council’s commercial benefit from using the Bank’s money would have justified that remedy.

1. House of Lords: By a majority of three to two, allowed the Council’s appeal and varied the orders below. The Council remained liable for £1,145,525.93, but only simple interest was payable from 18 June 1987. The Bank was ordered to pay the Council’s appeal costs.

2. Court of Appeal: In [1994] 1 WLR 938, dismissed the Council’s appeal and allowed the Bank’s cross-appeal. It upheld recovery at common law and in equity and awarded compound interest from receipt of the upfront payment.

3. Commercial Court: Hobhouse J ordered repayment of the net balance with compound interest from 1 April 1990. He held that the Bank had a personal common-law restitutionary claim and an equitable proprietary claim under a resulting trust.