Kleinwort Benson Ltd v. Lincoln City Council; Kleinwort Benson Ltd v. Mayor etc of the London Borough of Southwark and Others; Kleinwort Benson Ltd v. Birmingham City Council; Kleinwort Benson Ltd v. Mayor etc of the London Borough of Kensington and Chelsea and Others

The House of Lords held that the traditional rule denying restitution for money paid under a mistake of law should be abandoned. The court treated the law of restitution as governed by the principle of unjust enrichment and recognised that payments made under a mistake of law are, subject to recognised defences, recoverable. The court also held that section 32(1)(c) of the Limitation Act 1980 applies to claims for relief from the consequences of a mistake of law. The court examined proposed limits on recovery — notably a defence based on a "settled view" of the law and a wide "honest receipt" defence — and the majority rejected those as part of the common law, preferring established restitutionary defences (including change of position, compromise/settlement and others developed by the courts) to regulate finality.

The appeals arose from payments under interest-rate swap contracts later held ultra vires by this House in Hazell; the Lords concluded that those payments could be recovered in restitution for mistake of law unless a specific defence (proved on the facts) barred recovery. Lord Browne-Wilkinson dissented, preferring that Parliament, not the court, should effect this change.

The appellants, Kleinwort Benson Ltd, were merchant bankers who entered into interest-rate swap transactions with various local authorities and made net payments under those transactions. Following this House's decision in Hazell v. Hammersmith and Fulham London Borough Council that such swaps were ultra vires and void, Kleinwort sought restitution of sums paid, relying on mistake of law so as to engage the postponement provision of section 32(1)(c) of the Limitation Act 1980 and avoid the six-year limitation period in section 5.

Procedural posture: Langley J. in the Queen's Bench Division ordered two preliminary issues (whether the pleaded facts disclosed a cause of action in mistake and whether section 32(1)(c) applied). He answered Issue (1) negatively and granted a leapfrog certificate under the Administration of Justice Act 1969 s.12 to the House of Lords. The House considered additionally whether completed (fully performed) transactions barred restitution and whether proposed defences should limit recovery.

Issues framed:

• Whether the common-law rule that money paid under a mistake of law is generally irrecoverable should be retained or abandoned.
• If abolished, whether there should be an exception where payments were made in accordance with a settled understanding of the law later changed by judicial decision (the "settled view" defence), or a defence that the defendant honestly believed on learning of the payment that he was entitled to retain it (the "honest receipt" defence).
• Whether payments made under a void contract that has been fully performed can be recovered for mistake of law.
• Whether section 32(1)(c) of the Limitation Act 1980 applies to mistakes of law.

Court's reasoning (concise): The majority (led by Lord Goff, with Lord Hoffmann and Lord Hope agreeing) reasoned that the rule excluding recovery for mistake of law was inconsistent with the modern unjust enrichment framework and with the recognition of the change-of-position defence; the proper course was to allow restitution for mistakes of law subject to ordinary restitutionary defences rather than to preserve an anomalous blanket rule. The majority rejected Brennan J.'s proposed wide "honest receipt" defence as unnecessary and imprudently broad, preferring to rely on established defences (notably change of position and defence based on compromise or settlement). The majority also rejected a general judicially-created bar for payments made in accordance with a "settled understanding" of the law and held that completed transactions are not immune from restitution where payments were made under a mistake of law. Finally, the House held that section 32(1)(c) postpones the running of limitation where the action is for relief from the consequences of a mistake of law. Lord Browne-Wilkinson dissented, arguing that payments made in reliance on then-settled law are not made under a mistake and expressing concern about the retrospective consequences and the need for Parliament to regulate limitation if mistake of law claims were to be widely permitted.

Relief sought: restitution of payments said to have been made under a mistake of law and a declaration that section 32(1)(c) applies so that limitation is postponed until discovery.

Practical note: The court recognised that the change creates potential policy and limitation issues and signalled that legislative consideration (including by the Law Commission) of appropriate limitation rules might be desirable.

Appeal allowed. The House held (majority) that the old rule barring recovery for money paid under a mistake of law should be abandoned; money paid under a mistake of law is in principle recoverable under the law of unjust enrichment subject to restitutionary defences (including change of position). Section 32(1)(c) of the Limitation Act 1980 applies to mistakes of law. The court rejected a general judicial "settled view of the law" bar and a broad "honest receipt" defence as part of the common law; completed transactions do not of themselves preclude recovery. Lord Browne-Wilkinson dissented, urging that Parliament should effect any change and that payments made in accordance with settled law were not made under a mistake.

Leapfrog appeal from the Queen's Bench Division (Langley J. had ordered trial of preliminary issues and answered Issue (1) adversely to the claimant). Leave to appeal direct to the House of Lords granted under section 12 of the Administration of Justice Act 1969; reported judgment of the House of Lords in Kleinwort Benson Ltd v. Lincoln City Council and others [1998] UKHL 38.