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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)
Lord Hoffmann Lord Hope of Craighead
(ON APPEAL FROM THE QUEENS BENCH DIVISION OF THE HIGH COURTS OF JUSTICE)
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Goff of Chieveley which contains yet another major contribution to the law of restitution.
Were it not for one matter, I would be in full agreement with his views. But unfortunately he and the majority of your Lordships take the view that when established law is changed by a subsequent decision of the Courts, money rightly paid in accordance with the old established law is recoverable as having been paid under a mistake of law. I take the view that the monies are not recoverable since, at the time of payment, the payer was not labouring under any mistake.
The majority view is that the decision in Hazell v. London Borough of Hammersmith and Fulham  2 A.C. 1 established that the swaps agreements were void; that although the decision in Hazell post-dated the last of the payments made by Kleinworts to the local authorities the decision operated retrospectively so that under the law as eventually established Kleinworts were labouring under a mistake at the time they made each payment in thinking that they were liable to make such payment. Therefore, in their view, Kleinworts can recover payments made under a mistake of law. My view, on the other hand, is that although the decision in Hazell is retrospective in its effect, retrospection cannot falsify history: if at the date of each payment it was settled law that local authorities had capacity to enter into swap contracts, Kleinworts were not labouring under any mistake of law at that date. The subsequent decision in Hazell could not create a mistake where no mistake existed at the time.
There are two questions to be considered. First, when the common law is changed by later judicial decision, have all payments made on the basis of the previous law been made under a mistake of law? Second, in what circumstances can it be said that there was earlier law which was changed by judicial decision? Does there have to be a clear judicial decision overruled by a later judicial decision of a higher court or is it enough that, at the date of payment, there was a generally accepted view of the law which view was upset by the later decision?
Where the law is established by judicial decision subsequently overruled
I will take the case where the law has been established by a single decision of the Court of Appeal made in 1930. In 1990 the payer makes a payment which would only have been due to the payee if the Court of Appeal decision was good law. The payer was advised that the Court of Appeal decision was good law. In 1997 this House overruled the Court of Appeal decision. Is the plaintiff entitled to recover the payment made in 1990 on the ground of mistake of law?
There is, as I understand it, no dispute that in order to recover the plaintiff has to have been labouring under the mistake at the date of payment and to have made the payment because of that mistake. Certainly that position has been accepted by Kleinworts in their written reply and by my noble and learned friend, Lord Goff. The question is whether the subsequent overruling of the 1930 Court of Appeal decision requires the court to hold that at the date of payment (1990) the law (contrary to what the plaintiff had been advised) was not the law established by the Court of Appeal decision of 1930.
The theoretical position has been that judges do not make or change law: they discover and declare the law which is throughout the same. According to this theory, when an earlier decision is overruled the law is not changed: its true nature is disclosed, having existed in that form all along. This theoretical position is, as Lord Reid said, a fairy tale in which no-one any longer believes. In truth, judges make and change the law. The whole of the common law is judge-made and only by judicial change in the law is the common law kept relevant in a changing world. But whilst the underlying myth has been rejected, its progeny--the retrospective effect of a change made by judicial decision--remains. As Lord Goff in his speech demonstrates, in the absence of some form of prospective overruling, a judgment overruling an earlier decision is bound to operate to some extent retrospectively: once the higher court in the particular case has stated the changed law, the law as so stated applies not only to that case but also to all cases subsequently coming before the courts for decision, even though the events in question in such cases occurred before the Court of Appeal decision was overruled.
Therefore the precise question is whether the fact that the later overruling decision operates retrospectively so far as the substantive law is concerned also requires it to be assumed (contrary to the facts) that at the date of each payment the plaintiff made a mistake as to what the law then was. In my judgment it does not. The main effect of your Lordships' decision in the present case is to abolish the rule that money paid under a mistake of law cannot be recovered, which rule was based on the artificial assumption that a man is presumed to know the law. It would be unfortunate to introduce into the amended law a new artificiality, viz., that a man is making a mistake at the date of payment when he acts on the basis of the law as it is then established. He was not mistaken at the date of payment. He paid on the basis that the then binding Court of Appeal decision stated the law, which it did: the fact that the law was later retrospectively changed cannot alter retrospectively the state of the payer's mind at the time of payment. As Deane J. said in the High Court of Australia in University of Wollongong v. Merwally 158 C.L.R. 447 at p. 478:
If that be true of statutory legislation, the same must a fortiori be true of judicial decision. In my judgment, therefore, if a man has made a payment on an understanding of the law which was correct as the law stood at the date of such payment he has not made that payment under a mistake of law if the law is subsequently changed.
I am fortified in that view by considering what will be the effect of your Lordships' decision. A payment which was initially irrecoverable will subsequently become recoverable. Consider the hypothetical case I have put. A payment was made in 1990 when the Court of Appeal decision was still valid. Under the existing law, the claim in restitution should apparently have arisen at the date of such payment: see Baker v. Courage & Co.  1 K.B. 56. Yet at that date there could be no question of any mistake. It would not have been possible to issue a writ claiming restitution on the grounds of mistake of law until the 1997 decision had overruled the 1930 Court of Appeal decision. Therefore a payment which, when made, and for several years thereafter, was entirely valid and irrecoverable would subsequently become recoverable. This result would be subversive of the great public interest in the security of receipts and the closure of transactions. The position is even worse because all your Lordships consider that the claims to recover money paid under a mistake of law are subject to section 32(1)(c) of the Limitation Act 1980, i.e. that in such a case time will not begin to run until the "mistake" is discovered. A subsequent overruling of a Court of Appeal decision by the House of Lords could occur many decades after payments have been made on the faith of the Court of Appeal decision: in such a case "the mistake" would not be discovered until the later overruling. All payments made pursuant to the Court of Appeal ruling would be recoverable subject only to the possible defence of change of position.
With one possible exception, such judicial and other authority as there is favours the view that there is no relevant mistake of law if the payment is made on the basis of the law as it stood at the date of payment. As to non-judicial authority the Law Commission has taken the view that there would be no relevant mistake: Report No. 227 "Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments" (Cm. 2731), paras. 5.2-5.16. Not surprisingly, Professor Beatson shares that view: see 1995 R.L.R. 280 at p. 284; see also Professor Burrows Law of Restitution pp. 118-120.
As to judicial authority there is a dearth of decisions directly in point. Since the payment of money under a mistake of law was not recoverable in any event, there is little discussion as to what constitutes a mistake of law in that context. However, there are two English cases which throw some light. In Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329, the plaintiff had paid water rates to the defendant calculated in accordance with the law as it was held to be by the Court of Appeal. Subsequent to the date of payment, the House of Lords in the Dobbs case changed the law: if calculated under the changed law the plaintiff had overpaid. He sought to recover the overpayments on the ground that he had paid under compulsion and under a mistake of law. It was apparently accepted by the Court that if both these factors (i.e. compulsion and mistake of law) were present, the overpayment could be recovered. Counsel having submitted that the payments had been made in ignorance of the law, Lord Coleridge C.J. (who had been a member of the Court of Appeal overruled in Dobbs case) said:
In his judgment, Lord Coleridge dismissed the plaintiff's claim on the grounds both that there was no element of compulsion in the payment and that there was no relevant mistake of law. He said:
The other member of the court concurred but it is not clear on which of the two grounds. The decision therefore is not of major authority but it does show that Lord Coleridge was of the view that money was not paid under a mistake of law just because a later change in the law altered the law as it had been at the date of payment.
The other English case is Derrick v. Williams  2 All E.R. 559. In that case the plaintiff had accepted a payment into court on the basis that a Court of Appeal decision declared the law in a form which precluded the recovery of certain types of damages. Subsequently the House of Lords reversed the Court of Appeal decision and held that such damages were recoverable. The plaintiff in Derrick v. Williams was trying to re-open the matter on the grounds that the subsequent decision of the House of Lords showed that he had been proceeding under a mistake of law when he accepted the money paid in. He relied on the equitable principle set out in In re Roberts  1 Ch. 704 that a compromise made under a mistake of law can be set aside. The plaintiff's claim failed. Sir Wilfrid Greene M.R. said, at p. 565, that he rejected a contention that the mistake was one of fact and continued:
It is not clear to me whether this case was decided on the ground that payment into court raised special questions, or on the ground that there was no mistake of law because at the date of the withdrawal of the monies paid into court the law was as stated by the Court of Appeal and not as subsequently stated by the House of Lords. But the decision is at least consistent with the view that in deciding whether a person has acted under a mistake of law at a particular time, the question is whether they mistook the law as it then was without reference to subsequent retrospective change by later decisions.
In Commissioner of State Revenue v. The Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51 the High Court of Australia had to consider a payment made in pursuance of a statute which was subsequently repealed with retrospective effect, i.e. the case was analogous to that where the common law is changed by a later common law decision. The majority held that monies paid under the retrospectively repealed statute were not paid under a mistake of law at common law: see per Brennan J., p. 69 (with whom Toohey and McHugh JJ. agreed) and Dawson J. at p. 75. In my judgment this is strong authority in favour of the view which I hold.
The only authority pointing the other way is a recent case in the Court of Appeal decided since the conclusion of the argument in this case: Evans v. Governor of H.M. Prison Brockhill  (unreported). In that case the plaintiff had been sentenced to a term of imprisonment. She was detained by the Governor for a period correctly calculated in accordance with the law as then laid down by a series of decisions in the Divisional Court. That method of calculating the duration of the sentence was subsequently disapproved by a later decision of the Divisional Court which laid down (everyone has assumed correctly) a different method of calculation. If that new method of calculation was adopted the plaintiff had been detained for 59 days too long. The plaintiff claimed damages for false imprisonment. The majority (Lord Woolf M.R. and Judge L.J., Roch L.J. dissenting) held that the retrospective effect of the change in the law produced by the last Divisional Court decision prevented the Governor from relying as a defence on the law as it had been declared by the earlier Divisional Court decisions which at the time of the 59 days' detention laid down the relevant law. The Master of the Rolls described the result as being "highly artificial": it involved the acceptance of Lord Reid's fairy tale but he held that the Court of Appeal could not abandon the fairy tale. I do not propose to comment on that decision (which may be coming on appeal to your Lordships' House) beyond distinguishing it from the present case. In that case the question was one of substantive law: what was the correct duration of the sentence? In the view of the Court of Appeal, that fell to be determined by the law as finally declared. Once that view had been reached, the Court of Appeal were not concerned with the law as at the date of the detention: such law was irrelevant since it could provide no defence. On the other hand, in the present case what needs to be determined is not the substantive law at a particular time but the state of the mind of the payer at that time. Was he then under a mistake as to the law then current? That is a different question.
In my view therefore, if, at the date of payment, the law was settled by clear judicial authority then a payment in accordance with such law was not made under a mistake of law even if the law has subsequently been changed by later judicial decision. I am fortified in this view by the fact that the appellants in their written submissions in reply (paras. 32 and 33) expressly accepted this proposition. They concentrated their submissions on the question whether it is ever possible to establish that at a particular date the law was "settled" in the absence of a judicial decision to that effect. I find it surprising that the majority of your Lordships are finding the law to be that which neither of the parties contended for.
Settled law in the absence of judicial decision?
It is not suggested in the present case that before the decision of this House in Hazell there was any judicial decision which established that local authorities had the capacity to enter into swap agreements. What is said is that, even in the absence of such a decision, there was a "settled view" that local authorities had the necessary capacity and that swap agreements were therefore valid. It is not for your Lordships on these preliminary issues to seek to determine whether in fact there was such a settled view of the law. However, your Lordships do have to decide whether, if at the trial such a settled view is proved to have existed, it would prevent Kleinworts from recovering the monies paid on the basis of monies paid under a mistake of law.
Much commercial and property activity occurs on the basis of law which is not laid down by judicial decision. Such "law" consists of the practice and understanding of lawyers skilled in the field. If, before payment, the payer had sought advice in some cases he would have been told that the law was dubious: if having received such advice he paid over, he must have taken the risk that the law was otherwise and cannot subsequently recover what he has paid. In other cases, he would have been told that the law was clear and he could safely act on it. If in this latter case the payer acted on the law as so advised and subsequently a court held that the law was not as advised, can the payer recover his payment as monies paid under a mistake of law? In the ordinary case, the payer's adviser will just have given wrong legal advice: as a result the payment will have been paid under a mistake of law and will be recoverable. But in a limited number of cases, of which this may be one, it is not really possible to say that the legal adviser made a mistake in advising as he did. There are areas of the law which are sparsely covered by judicial decision, for example, real property, banking and regulatory law. In such areas the commercial world acts, and has to act, on the generally held view of lawyers skilled in the field. In such cases, a payer who sought advice would receive the same advice from everyone skilled in the field. It used to be said that the practice of conveyancers of repute was strong evidence of real property law: see In re Hollis' Hospital and Hague's Contract  2 Ch. 540 at 551. As late as the middle of this century, Denning L.J. said in In re Downshire Settled Estates  Ch. 218: "The practice of the profession in these cases is the best evidence of what the law is: indeed it makes law."
I doubt whether today anyone would claim that a uniform practice of the profession makes the law. But in the present context it does have a significant impact. In holding that money paid under a mistake of law is recoverable, an essential factor is that the retention of the money so paid would constitute an unjust enrichment of the payee. What constitutes the unjust factor is the mistake made by the payer at the date of payment. If, at the date of payment, it was settled law that payment was legally due, I can see nothing unjust in permitting the payee to retain monies he received at a time when all lawyers skilled in the field would have advised that he was entitled to receive them and the payer was bound to pay them. Again it is critical to establish the position at the time of payment: if, at that date, there was nothing unjust or unmeritorious in the receipt or retention of the monies by the payee in my judgment it was not an unjust enrichment for him subsequently to retain the monies just because the law was, in one sense, subsequently changed.
In New Zealand and Western Australia the legislatures have provided that monies shall not be recoverable on the grounds of mistake of law if paid at a time when there was a "common understanding" that they were payable: New Zealand Judicature Amendment Act 1958, section 94A(2); Western Australian Law Reform (Property, Perpetuities and Succession) Act 1962, section 23(1). The Law Commission (Report No. 227) was not happy with the concept of "common understanding" but did recommend that money should not be recoverable if paid "in accordance with a settled view of the law at the time"; see Report (supra), paras. 5.1-5.13 and draft Bill, clause 3. The Law Commission considered that the law fell to be treated as "settled" not only by judicial decision but also by reference to the legal advice which the payer would have received if he had sought it: