Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council

Money paid under a contract which was beyond a party’s capacity and void from the outset is paid on a consideration which has totally failed. The payer may recover the balance by which its payments exceeded its receipts as money had and received.

That right applies whether the contemplated transaction remains open or has been fully performed. Completion cannot give legal effect to a transaction which never had any legal existence. Recovery remains subject to any recognised defence, including change of position.

A bank and a local authority completed a five-year interest rate swap. The local authority received a net benefit. It was subsequently established in Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1 that local authority swap agreements of this kind were beyond the authority’s powers and void.

The bank obtained a consent judgment from Phillips J for repayment of the net balance, without prejudice to the authority’s right to appeal. The appeal was treated as raising the unresolved question whether the personal restitutionary remedy recognised for an incomplete, or “open”, swap also applied to a fully performed, or “closed”, swap.

1. Appeal dismissed unanimously. Morritt LJ held that no legal distinction could be drawn between an open swap and a closed swap. Waller LJ and Robert Walker LJ agreed that the binding authority required that result, although Waller LJ expressed reservations about treating the same reasoning as a universal rule for every completed void contract.

2. Per Morritt LJ, a contract which is beyond the capacity of one party is, and always has been, devoid of legal effect. Payments purportedly made under it are therefore made on a consideration which has totally failed. The recipient is prima facie unjustly enriched and the payer may recover, as money had and received, the amount by which its payments exceeded its receipts.

3. The Court of Appeal’s decision in Westdeutsche Landesbank Girozentrale v Islington Borough Council had established that, where a contract was void from the outset, partial performance did not prevent a total failure of consideration. Full performance could not produce a different result. The consideration was the benefit of a legally enforceable obligation, which neither party ever obtained, rather than merely the payments which happened to pass between them.

4. Severing the transaction into six-month periods did not assist the authority. If the consideration were actual performance, each period would be fully performed and recovery would be barred even during an open swap. If the consideration were the supposed legal obligation, it failed for every period. On either analysis, completion supplied no principled distinction.

5. Davis v Bryan (1827) 6 B & C 651 was distinguishable. The annuity there was treated as voidable by the grantor, had never been avoided, and had been performed in full. It did not govern a transaction which was necessarily void from its inception because it exceeded a public body’s capacity.

6. The public-protective purpose of the ultra vires doctrine reinforced the conclusion. Completion could not confer practical effect on a transaction which the law treated as nonexistent. Recovery might be defeated by change of position, but no such defence was advanced.

Order: Appeal dismissed with costs.

1. Court of Appeal: The authority’s appeal was dismissed unanimously with costs. The court upheld the bank’s personal restitutionary claim in respect of the completed swap.

2. High Court, Commercial Court: Phillips J set aside an earlier default judgment by consent and substituted judgment for the bank for £101,781 and interest, without prejudice to the authority’s right to appeal. No citation for that order is stated.