Kleinwort Benson Ltd v Lincoln City Council (Kleinwort Benson Ltd v Kensington and Chelsea Royal London Borough Council, Kleinwort Benson Ltd v Southwark London Borough Council, Kleinwort Benson Ltd v Birmingham City Council (No 2))

Money paid under a mistake of law is recoverable in restitution on the same general basis as money paid under a mistake of fact, subject to ordinary restitutionary defences. A judicial decision declaring the law applies retrospectively. A payment made under a settled understanding which is later shown to be wrong may therefore have been mistaken.

Neither the recipient’s honest belief in entitlement nor full performance of a void contract creates a special bar to recovery. Each mistaken payment is considered separately. An action to recover money paid under a mistake of law falls within section 32(1)(c) of the Limitation Act 1980, so limitation begins when the mistake was, or could with reasonable diligence have been, discovered.

The appellant bank entered into interest rate swap transactions with four local authorities. After Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1 established that such transactions were beyond a local authority’s powers and void, the bank sought restitution of its net payments.

The authorities repaid £388,114.72 paid within six years of the proceedings. The remaining £423,094.18 was prima facie time-barred. The bank alleged that those payments had been made under the mistaken belief that binding contracts existed and invoked section 32(1)(c) of the Limitation Act 1980.

Langley J, bound by Court of Appeal authority, held that the pleaded facts disclosed no cause of action based on mistake of law. He certified a direct appeal to the House of Lords. The consolidated appeals concerned whether mistake of law could ground restitution, whether settled understandings or honest receipt barred recovery, whether completed transactions were different, and whether section 32(1)(c) applied.

1. Appeals allowed by a majority of three to two. Lord Goff delivered the leading speech. Lord Hoffmann and Lord Hope agreed that all four appeals should be allowed. Lord Browne-Wilkinson and Lord Lloyd would have dismissed them because they considered that abolition of the mistake-of-law rule should not occur without protection for payments made under settled law and appropriate limitation reform.

2. Recovery for mistake of law. Per Lord Goff, Lord Hoffmann and Lord Hope, the rule preventing restitution of money paid under a mistake of law no longer formed part of English law. The distinction between mistakes of fact and law was inconsistent with restitution founded on unjust enrichment. Money paid because the payer mistakenly believed that it was legally due was prima facie recoverable, subject to established restitutionary defences.

3. Judicial declarations and settled understandings. Per Lord Goff, Lord Hoffmann and Lord Hope, judicial decisions state the law applicable to earlier events as well as future comparable cases. The bank could therefore have been mistaken when paying under transactions later declared void by Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1. English law contained no general defence merely because the payment accorded with a settled understanding of the law. Lord Browne-Wilkinson and Lord Lloyd dissented on this point.

4. Proposed defences and completed transactions. The House rejected the proposed defence that the recipient honestly believed itself entitled to retain the payment. Existing defences, including change of position and compromise, supplied principled protection. Full performance of a void contract did not defeat recovery for mistake. Each payment generated a separate cause of action when made, and completion could not retrospectively extinguish rights already accrued.

5. Limitation. The House held that section 32(1)(c) of the Limitation Act 1980 applies to mistakes of law. Its language contains no restriction to mistakes of fact, and its equitable origin supported application to both kinds of mistake. The pleaded claims therefore fell within the postponement provision. All four appeals were allowed with costs.

1. House of Lords: By a majority of three to two, allowed all four consolidated appeals with costs: [1999] 2 AC 349.

2. Queen’s Bench Division: Langley J answered the first preliminary issue against the bank because he was bound by Court of Appeal authority. He did not determine the second issue and certified a direct appeal under section 12 of the Administration of Justice Act 1969.