Judgment 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
(On Appeal from the Queens Bench Division of the High Courts of Justice)

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     Criticism of the rule: Although Bilbie v. Lumley was the origin of the rule, Brisbane v. Dacres, in which the whole question was fully argued and the decision in Bilbie v. Lumley reconsidered and affirmed in reasoned judgments, might more properly have been regarded as encapsulating the reasoning on which the rule was based. Unfortunately, however, since the rule became hardened into the form stated in Kelly v. Solari, many critics have concentrated their fire on Bilbie v. Lumley, and in particular on the easy target of what Lord Wright (in his Legal Essays and Addresses (1939) at p. xix) called the "hasty and ill-considered utterance" of Lord Ellenborough in which he invoked the maxim ignorantia juris non excusat. This maxim, it has been pointed out, is properly directed to cases in which the defendant was charged with wrongdoing, whether civil or criminal, and has no place in the law of quasi-contract; see Professor Keener's Law of Quasi-Contracts (1893) at pp. 85 et seq., and Professor Woodward's Law of Quasi-Contracts (1913) at pp. 54 et seq. No reliance was however placed on the maxim by the Court in Brisbane v. Dacres, only eleven years after Bilbie v. Lumley was decided, and seven years after Sir William Evans had published his criticism of the use of the maxim in that decision, after which (despite the sweeping words of Lord Brougham L.C. in Dixon v. Monkland Canal Company (1831) 5 Wilson & Shaw 445, 452) it should no longer have been regarded as providing the justification for the rule of non-recovery in English law. Professor Woodward was also critical of counsel (Mr. Wood) for failing to reply to Lord Ellenborough's enquiry. In this he was surely unjust. The enquiry, as reported, should in the context properly be understood as directed towards the existence of any authority in which the point had been decided; and the answer could properly have been made that there was none, as indeed was confirmed in Brisbane v. Dacres. Professor Corbin (Contracts, vol.3, para. 617, at p. 756) was later to attribute this "handy" rule to expediency. "When a court is convinced that restitution should not be decreed, in the pressure of work it is likely to seize upon the first plausible rule that becomes handy." I am bound to say that there is no evidence that the rule has any such origin; on the contrary, as the majority judgments in Brisbane v. Dacres show, the rule was perceived, after due deliberation, to rest on sound legal policy. This perception appears to have gained ground as the years passed by, fuelled by an an amalgam of fears on a number of scores--for example, that it would be easy to assert a mistake of law, which could not easily be refuted, and that this might be done in almost any case; that in many cases it would be inappropriate to reopen a settled transaction; and that the defendant, having received a payment made on the basis that it was due, might have put to use the money paid to him or otherwise have changed his position on the faith of the payment. This mixture was so potent that the good sense of excluding all possibilities of this kind by the adoption of one simple rule must have appeared most compelling. Indeed, it comes as no surprise to learn that the adoption of a similar rule was considered in Roman law, and that (in the view of some commentators) the controversy on the subject was resolved in favour of its adoption. It is, I believe, unhistorical for us now to castigate our legal ancestors for adopting a doctrine which was widely understood in their time to achieve practical justice. Indeed there is at least one scholar of distinction today who is reluctant to condemn the rule: see Professor Birks' Introduction to the Law of Restitution, 2nd ed. (1989) pp. 164-167; and the difficulties now faced in formulating satisfactory limits to a right to recover money paid under a mistake of law reveal that there was more sense in the rule than its more strident critics have been prepared to admit.

    The main criticisms of the rule are now widely perceived as threefold (see the Law Commission's Consultation Paper No. 120 on Restitution of Payments made under a Mistake of Law, paras. 2.24--2.26). First, the rule allows the payee to retain a payment which would not have been made to him but for the payer's mistake, whereas justice appears to demand that money so paid should be repaid unless there are special circumstances justifying its retention. Second, the distinction drawn between mistakes of fact (which can ground recovery) and mistakes of law (which cannot) produces results which appear to be capricious. It is usual here to compare the results in Bilbie v. Lumley and Kelly v. Solari, each concerned with an action by an underwriter to recover back money paid under an insurance policy under a mistake. In the former case, where he did not appreciate that the law enabled him to repudiate a policy for non-disclosure, his action failed; but in the latter, where he forgot that the premium had not been paid and so the policy had lapsed, his action was successful. The same comment can be made of the exceptions and qualifications to which the rule became subject. These are usefully listed in paras. 2.5--2.15 of the Law Commission's Report, Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994) (Cm. 2731) (Law Com. No. 227). They are well- known, and it is unnecessary for me to rehearse them in this opinion. It is however legitimate to comment that, apart from limits such as the recently recognised defence of change of position and an as yet undefined limit in cases in which the payment has been made in settlement of an honest claim, these exceptions and qualifications are heterogeneous and in truth betray an anxiety to escape from the confines of a rule perceived to be capable of injustice; and that, as a result, the law appeared to be arbitrary in its effect. Third, as a result of the difficulty in some cases of drawing the distinction between mistakes of fact and law, and the temptation for judges to manipulate that distinction in order to achieve practical justice in particular cases, the rule became uncertain and unpredictable in its application.

     Rejection of the mistake of law rule in the common law world: It is perhaps easier for us now to see that the policy underlying the rule can best be achieved, consistently with justice, by the recognition of a right of recovery subject to specified defences to cater for the fears which formerly appeared to require a blanket exclusion of recovery. However the blossoming of scholarly interest in the development of a coherent law of restitution did not occur in the common law world until the middle of the twentieth century, inspired by the pioneering work of Professors Seavey and Scott in the American Restatement of the Law of Restitution published in 1937. We may regret that it was not until late in the long history of the common law that this should have occurred, but now the judges are able to welcome the assistance which they receive from a number of distinguished writers on the subject. There can be no doubt that it is this scholarly work which has provided the prime cause for the rejection of the mistake of law rule, either by legislation or by judicial decision, in countries throughout the common law world. This is due not only to specific criticism of the mistake of law rule as such, but still more to the combined effect of two fundamental changes in the law: first, recognition that there exists a coherent law of restitution founded upon the principle of unjust enrichment, and second, within that body of law, recognition of the defence of change of position. This is due essentially to the work of scholars. Once that work had been published and widely read it was, I believe, inevitable that in due course both doctrines would be recognised by the judges, the time of such acceptance depending very much on the accidents of litigation. In fact, in England both were accepted by this House in 1991, in the same case-- Lipkin Gorman v. Karpnale Ltd. [1991] 2 A.C. 548. Once both had been recognised it became, in my opinion, also inevitable that the mistake of law rule should be abrogated, or at least reformulated, so that there should be a general right of recovery of money paid under a mistake, whether of fact or law, subject to appropriate defences. This is because a blanket rule of non-recovery, irrespective of the justice of the case, cannot sensibly survive in a rubric of the law based on the principle of unjust enrichment; and because recognition of a defence of change of position demonstrates that this must be proved in fact if it is to justify retention, in whole or in part, of money which would otherwise be repayable on the ground that the payee was unjustly enriched by its receipt. The combined effect is not only that the mistake of law rule can no longer be allowed to survive, but also that the law must evolve appropriate defences which can, together with the defence of change of position, provide protection where appropriate for recipients of money paid under a mistake of law in those cases in which justice or policy does not require them to refund the money. It is this topic which lies at the centre of the present appeals. As the argument before the Appellate Committee has demonstrated, the identification of such defences is by no means easy and, whatever your Lordships' House may decide, the topic is likely to continue to engage the attention of judges, scholars and law reformers for some years to come.

    I have referred to the fact that the mistake of law rule has already been abrogated in other common law jurisdictions, either by legislation or by judicial decision. This material is, of course, well known to lawyers in this country, and has, I know, been studied by all members of the Appellate Committee, not of course for the first time, and is regarded with great respect. However, since it is conceded in these appeals by the respondent local authorities that the mistake of law rule must at least be reformulated in the manner indicated by them, I trust that I will be forgiven if I do not lengthen this opinion by an express consideration of, in particular, the relevant judicial pronouncements. I refer, of course, to the dissenting opinion of Dickson J. (as he then was), with whom Laskin C.J. agreed, in Hydro Electric Commission of the Township of Nepean v. Ontario Hydro [1982] 1 R.C.S. 347, 357-370, later to be adopted by La Forest J., with whom (on this point) Lamer, Wilson and L'Heureux-Dubé JJ. agreed, in Air Canada v. British Columbia [1989] 1 S.C.R. 1161, 59 D.L.R. (4th) 161; and David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 C.L.R. 353. (I shall have to refer in particular to the dissenting judgment of Brennan J. (as he then was) in this case at a later stage, when I come to consider the proposed defence of honest receipt.) From countries which, on this topic, apply a system of law based on the civil law, I refer to the decisions of the Appellate Division of the Supreme Court of South Africa in Willis Faber Enthoven (Pty.) Ltd. v. Receiver of Revenue (1992) (4) SA 202, and of the Inner House of the Court of Session in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 S.C. 151, each of whom also rejected the mistake of law rule. The same conclusion was reached at an earlier date by legislation in New Zealand (see section 94A of the Judicature Act 1908, inserted by section 2 of the Judicature Amendment Act 1958) and Western Australia (see section 23 of the Law Reform (Property, Perpetuities and Succession) Act 1962). I shall have to refer to the New Zealand and Western Australian legislation at a later stage, when I come to consider the proposed exclusion of recovery in cases where payments have been made under a settled understanding of the law subsequently departed from by judicial decision. I should add that the mistake of law rule either never applied, or has been abrogated, in a number of States of the United States of America.

     The Law Commission: The Law Commission has, in its Report (Law Com. No. 227) on the subject (to which I have already referred), recommended that the mistake of law rule should be abrogated (see paras.3.1 et seq., and clause 2 of the draft Bill appended to the Report). For the reasons set out in paras. 3.8 -3.12 the Commission has recommended that this change should be introduced by legislation. This is a matter to which I will have to return later in this opinion.

    Comparative law. The Appellate Committee was helpfully provided with material showing the policy adopted in a number of civil law systems on the continent of Europe towards the recovery of money paid under a mistake of law. This demonstrates that, in the legal systems from which the material was drawn, there is no blanket rule excluding recovery of money paid under a mistake of law. It is of some interest that, in German law, recovery is not dependent on proof of mistake (whether of fact or law) by the claimant. Para. 12(1) of the BGB confers a right to recover benefits obtained without legal justification (ohne rechtlichen Grund). A similar approach is, I understand, adopted in Italian law and has also been adopted recently in France (see Cour de Cassation (Assemblé Plenière) 2.4.1993, D.1993.373). Para.814 of the BGB however provides that a person cannot reclaim a benefit conferred by him if he knew that he was not bound to confer it; but it seems that the burden rests on the recipient to prove the existence of such knowledge (a striking contrast with the common law, which requires the plaintiff to prove mistake). It is of some interest however that a number of these cases, in which it has been held that it is unnecessary for the plaintiff to prove that he was mistaken, have been concerned with the recovery of taxes: see in particular an early German case decided by the Reichsgericht in 1909 (29.10.1909, RGZ 72, 152), and the recent French case, referred to above, which adopted the same position. In such cases, as was recently held by this House in Woolwich Equitable Building Society v. Inland Revenue Commissioners [1993] A.C. 70, English law too dispenses with any requirement that the money should have been paid under a mistake and indeed goes further, allowing recovery even if the taxpayer pays in the belief that the money is not due. Here is food for thought for both German and English comparative lawyers. In this connection I wish to add in passing that, in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51, 57, Mason C.J. stated that in Woolwich the House of Lords was "unwilling to acknowledge that causative mistake of law is a basis of recovery"; but, with respect, no question of recovery on the ground of a mistake of law arose in that case, because the Woolwich Building Society throughout asserted that the money was not due.

    For present purposes, however, the importance of this comparative material is to reveal that, in civil law systems, a blanket exclusion of recovery of money paid under a mistake of law is not regarded as necessary. In particular, the experience of these systems assists to dispel the fears expressed in the early English cases that a right of recovery on the ground of mistake of law may lead to a flood of litigation, while at the same time it shows that in some cases a right of recovery, which has in the past been denied by application of the mistake of law rule, may likewise be denied in civil law countries on the basis of a narrower ground of principle or policy.

    Conclusion on the First Issue. For all these reasons, I am satisfied that your Lordships should, if you decide to consider the point yourselves rather than leave it to the Law Commission, hold that the mistake of law rule no longer forms part of English law. I am very conscious that the Law Commission has recommended legislation. But the principal reasons given for this were that it might be some time before the matter came before the House, and that one of the dissentients in the Woolwich case (Lord Keith of Kinkel) had expressed the opinion that the mistake of law rule was too deeply embedded to be uprooted judicially: [1993] A.C. 70, 154. Of these two reasons, the former has not proved to be justified, and the latter does not trouble your Lordships because a more robust view of judicial development of the law is, I understand, taken by all members of the Appellate Committee hearing the present appeals. Moreover, especially in the light of developments in other major common law jurisdictions, not to mention South Africa and Scotland, the case for abrogation is now so strong that the respondents in these appeals have not argued for its retention. In these circumstances I can see no good reason for postponing the matter for legislation, especially when we do not know whether or, if so, when Parliament may legislate. Finally I believe that it would, in all the circumstances, be unjust to deprive the Appellant, Kleinwort Benson, of the benefit of the decision of the House on this point. I would therefore conclude on Issue (1) that the mistake of law rule should no longer be maintained as part of English law, and that English law should now recognise that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution.

     Issue IA: Payments made under a settled understanding of the law.

    I turn now to a central question in these appeals. This relates to the fact that the payments of which recovery is sought in these cases were made under contracts which at the time were understood by all concerned to be valid and binding, so that the payments themselves were believed to be lawfully due under those contracts. This misunderstanding was, of course, removed by the decision of this House in Hazell [1992] 2 A.C. 1 that the contracts were beyond the powers of the local authorities involved and so void. The argument now advanced by the local authorities is that payments so made on the basis of a settled understanding of the law which is later changed by a judicial decision should not be recoverable on the ground of mistake of law.

    This argument is based upon a view propounded by the Law Commission in Consultation Paper No. 120, paras. 2.57-2.65 and, after consultation, adopted by the Commission in its Report (Law Com. No. 227), para. 5.3, and in section 3(1) of its draft Bill. The reasoning so adopted is set out in paras. 2.57 and 2.65 of the Consultation Paper as follows:

     "2.57 One question is the effect of a judicial alteration of the law. Where the general understanding of the law changes as a result of a court decision should a payment made on the basis of the former understanding of the law be recoverable? Where the law is changed by legislation it would seem beyond doubt that a payment made on the basis of the old law cannot be recovered on the basis of mistake because there is no mistake of law at the time the payment was made: at that time the law was indeed as the payer believed it to be. It seems clear to us that as a matter of policy the result should be no different where the law is effectively changed by judicial decision rather than legislation.

     "2.58 It can however be argued that a payment made before a judicial 'change' of the law is indeed made as a result of a mistake and therefore should be recoverable because of the commonly accepted theory of the operation of the common law that judicial decisions are declaratory and do not change the law. We believe that this would not be a desirable result: to interpret the impact of the common law in this manner is a mere fiction and should not be allowed to affect substantive rights. . . ."

In para.5.3 of its Report, it was stated that:

      "The Commission's provisional view was that it should not matter whether a change occurs through legislation or judicial decision: the payment should not be recoverable because in substance there has been no mistake."

In support of this proposition Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329 was cited. The Commission then considered at some length whether legislation was necessary to achieve this result, and concluded that it was. The exact terms of the proposed legislation were also considered at some length. In the result, section 3 of the draft Bill (at p. 196 of the Report) provides as follows:

      "3.--(1) An act done in accordance with a settled view of the law shall not be regarded as founding a mistake claim by reason only that a subsequent decision of a court or tribunal departs from that view.

      "(2) A view of the law may be regarded for the purposes of this section as having been settled at any time notwithstanding that it was not held unanimously or had not been the subject of a decision by a court or tribunal."

    The Law Commission's Consultation Paper and Report are, of course, concerned with legislative proposals for changes in the law, proposals which find their origin in a New Zealand statutory provision (section 94A(2) of the Judicature Act 1908, inserted by section 2 of the Judicature Amendment Act 1958) to which I shall refer later. In these appeals, however, your Lordships are concerned with the common law, albeit on the basis that the common law should now recognise that restitution may be granted in respect of money paid under a mistake of law. I therefore ask myself first whether, on the ordinary principles of the common law, any such provision as that proposed by the Law Commission should be held to apply. This raises the question of what is meant by the declaratory theory of judicial decisions, which has long been held to underlie judicial decision-making.

    The declaratory theory of judicial decisions. Historically speaking, the declaratory theory of judicial decisions is to be found in a statement by Sir Matthew Hale over 300 years ago, viz. that the decisions of the courts do not constitute the law properly so called, but are evidence of the law and as such "have a great weight and authority in expounding, declaring and publishing what the law of this Kingdom is": see Hale's History of the Common Law (6th ed.) p. 90. To the like effect, Blackstone (Commentaries, 6th ed., i, pp. 88-9) stated that "the decisions of courts are the evidence of what is the common law". In recent times, however, a more realistic approach has been adopted, as in Sir George Jessel's celebrated statement that rules of equity, unlike rules of the common law, are not supposed to have been established since time immemorial, but have been invented, altered, improved and refined from time to time: see In re Hallett's Estate (1880) 13 Ch. D. 696, 710. There can be no doubt of the truth of this statement; and we all know that in reality, in the common law as in equity, the law is the subject of development by the judges - normally, of course, by appellate judges. We describe as leading cases the decisions which mark the principal stages in this development, and we have no difficulty in identifying the judges who are primarily responsible. It is universally recognised that judicial development of the common law is inevitable. If it had never taken place, the common law would be the same now as it was in the reign of King Henry II; it is because of it that the common law is a living system of law, reacting to new events and new ideas, and so capable of providing the citizens of this country with a system of practical justice relevant to the times in which they live. The recognition that this is what actually happens requires, however, that we should look at the declaratory theory of judicial decision with open eyes and reinterpret it in the light of the way in which all judges, common law and equity, actually decide cases today.