Kleinwort Benson Ltd v City of Glasgow District Council

The House of Lords held that a restitutionary claim for money paid under a purported contract that was void ab initio does not, as a general rule, fall within article 5(1) of the Brussels Convention (as applied within the United Kingdom by Schedule 4 to the Civil Jurisdiction and Judgments Act 1982). Article 2 establishes the basic rule of the defendant's domicile and the special jurisdiction in article 5(1) is a derogation to be construed restrictively. Article 5(1) applies where the proceedings are based on a contractual obligation "in question" and the place of performance of that obligation provides a close connecting factor; a pure unjust enrichment claim ordinarily lacks that feature.

The court applied section 16(3) of the 1982 Act in giving effect to relevant European Court of Justice principles (notably de Bloos, Shenavai and related authorities) and concluded that the respondent's claim for restitution of payments under ultra vires interest swap agreements was not a matter "relating to a contract" for the purposes of article 5(1), save in exceptional cases which were not present here.

Background and facts:

• Between September 1982 and 1987 the City of Glasgow District Council entered into interest rate swap agreements with Kleinwort Benson Ltd. Following Hazell, those swap agreements were held to be ultra vires and void ab initio.
• Kleinwort paid sums to Glasgow totalling £807,230.31 and sought restitution in the English High Court of money paid under the purported contracts.

Procedural history:

• Kleinwort commenced proceedings in England; Glasgow sought a declaration that the English court lacked jurisdiction.
• Hirst J. (High Court) held the English court had no jurisdiction. The Court of Appeal reversed by majority on 25 January 1996, holding jurisdiction under article 5(1); Leggatt L.J. dissented.
• The Court of Appeal sought a preliminary ruling from the European Court of Justice, which declined jurisdiction to rule on the national law question. The appeal then proceeded to the House of Lords.

(i) Nature of the claim: A restitutionary claim for recovery of sums paid under agreements subsequently held void ab initio; relief sought was repayment by way of restitution/unjust enrichment rather than enforcement of contractual rights.

(ii) Issues framed by the court:

1. Whether the English court had jurisdiction under article 5(1) of Schedule 4 (matters relating to a contract; courts for the place of performance of the obligation in question) to hear a restitution claim founded on payments under a contract held void ab initio.
2. Whether article 5(3) (matters relating to tort, delict or quasi-delict) applied.
3. How relevant European Court of Justice jurisprudence and section 16(3) of the 1982 Act informed the interpretation of Schedule 4.

(iii) Reasoning:

• The court emphasised that article 2 (domicile) is the basic rule and that article 5(1) is a derogation which must be construed restrictively to give effect to its purpose of providing a close connecting factor between dispute and forum.
• EU authorities (notably de Bloos, Shenavai and Custom Made) establish that the "obligation in question" in article 5(1) is the contractual obligation forming the basis of the legal proceedings. Where the claim is founded on unjust enrichment rather than on an enforceable contractual obligation, the requisite connecting factor is normally absent.
• Although exceptional cases might exist where a restitution claim is so connected to contractual obligations that article 5(1) applies, the present claim was a straightforward restitution claim and did not fall within article 5(1). Article 5(3) was inapplicable because unjust enrichment claims do not ordinarily presuppose a "harmful event" or "threatened wrong."

Outcome: The House of Lords allowed the appeal, restoring Hirst J.'s order that the English court lacked jurisdiction.

Appeal allowed. The House of Lords held that article 5(1) of Schedule 4 (matters relating to a contract; courts for the place of performance of the obligation in question) does not generally cover a restitutionary claim for money paid under a contract void ab initio. Article 2 (domicile) therefore governed jurisdiction in this case; article 5(3) was also inapplicable. The rationale was that article 5(1) is a derogation from the defendant's domicile rule and requires the proceedings to be based on a contractual obligation whose place of performance supplies a close connecting factor, which a pure unjust enrichment claim lacks in ordinary cases.

First instance: Hirst J., High Court of Justice (England) — held English court had no jurisdiction and granted the declaration sought by Glasgow. Court of Appeal (reconstituted court) — majority decision (Roch and Millett L.JJ., Leggatt L.J. dissenting) on 25 January 1996 held that article 5(1) applied and English courts had jurisdiction. A request for a preliminary ruling to the European Court of Justice was made and the ECJ declined jurisdiction to give a ruling on the national-law question. The case was then heard by the House of Lords, which allowed Glasgow's appeal and restored Hirst J.'s order. (Neutral citation for this House of Lords decision: [1997] UKHL 43.)