Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12 (22 May 1996)

WESTDEUTSCHE LANDESBANK GIROZENTRALE
(REPONDENTS)

COUNCIL OF THE LONDON BOROUGH OF ISLINGTON

(APPPELLANT)

ON 22 MAY 1996

Lord Goff of Chieveley
Lord Browne-Wilkinson
Lord Slynn of Hadley
Lord Woolf
Lord Lloyd of Berwick

LORD GOFF OF CHIEVELEY

My Lords,

This appeal is concerned with a transaction known as an interest rate
swap. Under such a transaction, one party (the fixed rate payer) agrees to pay
the other over a certain period interest at a fixed rate on a notional capital
sum; and the other party (the floating rate payer) agrees to pay to the former
over the same period interest on the same notional sum at a market rate
determined in accordance with a certain formula. Interest rate swaps can
fulfil many purposes, ranging from pure speculation to more useful purposes
such as the hedging of liabilities. They are in law wagers, but they are not
void as such because they are excluded from the regime of the Gaming Acts
by section 63 of the Financial Services Act 1986.

One form of interest rate swap involves what is called an upfront
payment, i.e. a capital sum paid by one party to the other, which will be
balanced by an adjustment of the parties’ respective liabilities. Thus, as in the
present case, the fixed rate payer may make an upfront payment to the floating
rate payer, and in consequence the rate of interest payable by the fixed rate
payer is reduced to a rate lower than the rate which would otherwise have
been payable by him. The practical effect is to achieve a form of borrowing
by, in this example, the floating rate payer through the medium of the interest
rate swap transaction. It appears that it was this feature which, in particular,
attracted local authorities to enter into transactions of this kind, since they
enabled local authorities subject to rate-capping to obtain upfront payments
uninhibited by the relevant statutory controls.

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At all events, local authorities began to enter into transactions of this
kind soon after they came into use in the early 1980s. At that time, there was
thought to be no risk involved in entering into such transactions with local
authorities. Financially, they were regarded as secure: and it was assumed
that such transactions were within their powers. However, as is well-known,
in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2
A.C. 1 your Lordships’ House, restoring the decision of the Divisional Court,
held that such transactions were ultra vires the local authorities who had
entered into them. It is unnecessary for present purposes to examine the basis
of that decision; though I wish to record that it caused grave concern among
financial institutions, and especially foreign banks, which had entered into
such transactions with local authorities in good faith, with no idea that a rule
as technical as the ultra vires doctrine might undermine what they saw as a
perfectly legitimate commercial transaction. There then followed litigation in
which banks and other financial institutions concerned sought to recover from
the local authorities with which they had dealt the balance of the money paid
by them, together with interest. Out of the many actions so commenced, two

were selected as test cases. These were the present case, Westdeutsche
Landesbank Girozentrale v. Islington Borough Council, and Kleinwort Benson
Ltd. v. Sandwell Borough Council. Both cases came on for hearing before
Hobhouse J. Your Lordships are concerned only with the former case. In a
powerful judgment Hobhouse J, held that the plaintiffs (“the Bank”) were
entitled to recover from the defendants (“the Council”) the net balance
outstanding on the transaction between the parties, viz., the difference
between the upfront payment of £2.5m. paid by the Bank to the Council on
18 June 1987, and the total of four semi-annual interest payments totalling
£1,354,474.07 paid by the Council to the Bank between December 1987 and
June 1989, leaving a net balance of £1,145,525.93 which the judge ordered
the Council to pay to the Bank. He held the money to be recoverable by the
Bank either as money had and received by the Council to the use of the Bank,
or as money which in equity the Bank was entitled to trace into the hands of
the Council and have repaid out of the Council’s assets. He decided that the
Bank’s right to restitution at common law arose from the fact that the payment
made by the Bank to the Council was made under a purported contract which,
unknown to both parties, was ultra vires the Council and so void, no
consideration having been given for the making of the payment. The decision
by the judge, which was affirmed by the Court of Appeal, raised important
questions in the law of restitution, which are of great interest to lawyers
specialising in this field. Yet it is an extraordinary feature of the present
appeal to your Lordships’ House that the judge’s decision on the substantive
right of recovery at common law does not fall for consideration by your
Lordships’ House. The appeal of the Council is confined to one point only –
the question of interest.

The judge ordered that the Council should pay compound interest on
the sum awarded against them, calculated at six-monthly rests from 1 April
1990 to the date of judgment. The Court of Appeal affirmed the judge’s
decision to award compound interest but, allowing a cross-appeal by the Bank,

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ordered that interest should run from the date of receipt of the upfront
payment. Both the judge and the Court of Appeal held that they were entitled
to invoke against the Council the equitable jurisdiction to award compound
interest, on the basis that the Bank was entitled to succeed against the Council
in an equitable proprietary claim. The foundation for the Bank’s equitable
proprietary claim lay in the decision of this House in Sinclair v. Brougham
[1914] A.C. 398. Since that decision has for long been controversial, the
Appellate Committee invited argument on the question whether the House
should depart from the decision despite the fact that it has stood for many
years.

The shape of the case

Once the character of an interest swap transaction has been identified
and understood, and it is appreciated that, because the transaction was beyond
the powers of the Council, it was void ab initio, the basic question is whether
the law can restore the parties to the position they were in before they entered
into the transaction. That is, of course, the function of the law of restitution.
I feel bound to say that, in the present case, there ought to be no difficulty
about that at all. This is because the case is concerned solely with money.
All that has to be done is to order that each party should pay back the money
it has received – or, more sensibly, to strike a balance, and order that the
party who has received most should repay the balance; and then to make an
appropriate order for interest in respect of that balance. It should be as simple
as that. And yet we find ourselves faced with a mass of difficult problems,
and struggling to reconcile a number of difficult cases.

I must confess that, like all the judges who have been involved in these
cases, I too have found myself struggling in this way. But in the end I have
come to realise the importance of keeping my eyes on the simple outline of
the case which I have just described; and I have discovered that, if one does
that – if one keeps one’s eyes open above the thicket of case law in which we
can so easily become enclosed – the solution of the problem in the present case
becomes much more simple. In saying this, I do not wish in any way to
criticise the judges who have been grappling with the case at first instance and
in the Court of Appeal, within the confines of the doctrine of precedent by
which they are bound. On the contrary, they are entitled to our gratitude and
respect. The masterly judgment of Hobhouse J., in particular, has excited
widespread admiration. But it is the great advantage of a supreme court that,
not only does it have the great benefit of assistance from the judgments of the
courts below, but also it has a greater freedom to mould, and remould, the
authorities to ensure that practical justice is done within a framework of
principle. The present case provides an excellent example of a case in which
this House should take full advantage of that freedom.

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The three problems

There are three reasons why the present case has become so
complicated. The first is that, in our law of restitution, there has developed
an understanding that money can only be recovered on the ground of failure
of consideration if that failure is total. The second is that because, in
particular, of the well known but controversial decision of this House in
Sinclair v. Brougham [1914] A.C. 398. it has come to be understood that a
trust may be imposed in cases such as the present where the incapacity of one
of the parties has the effect that the transaction is void. The third is that our
law of interest has developed in a fragmentary and unsatisfactory manner, and
in consequence insufficient attention has been given to the jurisdiction to
award compound interest.

I propose at the outset to devote a little attention to each of these
matters.

(1) Total failure of consideration.

There has long been a desire among restitution lawyers to escape from
the unfortunate effects of the so-called rule that money is only recoverable at
common law on the ground of failure of consideration where the failure is
total, by reformulating the rule upon a more principled basis: and signs that
this will in due course be done are appearing in judgments throughout the
common law world, as appropriate cases arise for decision. It is fortunate
however that, in the present case, thanks (I have no doubt) to the admirable
researches of counsel, a line of authority was discovered which had escaped
the attention of the scholars who work in this field. This line of authority was
concerned with contracts for annuities which were void if certain statutory
formalities were not complied with. They were not therefore concerned with
contracts void by reason of the incapacity of one of the parties. Even so, they
were concerned with cases in which payments had been made, so to speak,
both ways; and the courts had to decide whether they could, in such
circumstances, do justice by restoring the parties to their previous positions.
They did not hesitate to do so, by ascertaining the balance of the account
between the parties, and ordering the repayment of the balance. Moreover the
form of action by which this was achieved was the old action for money had
and received what we nowadays call a personal claim in restitution at
common law. With this precedent before him, Hobhouse J. felt free to make
a similar order in the present case; and in this he was self-evidently right.

The most serious problem which has remained in this connection is the
theoretical question whether recovery can here be said to rest upon the ground
of failure of consideration. Hobhouse J. thought not. He considered that the
true ground in these cases, where the contract is void, is to be found in the
absence, rather than the failure, of consideration; and in this he was followed
by the Court of Appeal. This had the effect that the courts below were not

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troubled by the question whether there had been a total failure of
consideration.

The approach so adopted may have found its origin in the idea, to be
derived from a well known passage in the speech of Viscount Simon L.C. in
the Fibrosa case [1943] AC 32, 48, that a failure of consideration only
occurs where there has been a failure of performance by the other party of his
obligation under a contract which was initially binding. But the concept of
failure of consideration need not be so narrowly confined. In particular it
appears from the annuity cases themselves that the courts regarded them as
cases of failure of consideration; and concern has been expressed by a number
of restitution lawyers that the approach of Hobhouse J. is contrary to principle
and could, if accepted, lead to undesirable consequences: (see Professor Birks
in (1993) 23 W.A.L.R. 195; Mr. W. J. Swadling in [1994] R.L.R. 73; and
Professor Burrows in [1995] R.L.R. 15). However since there is before your
Lordships no appeal from the decision that the Bank was entitled to recover
the balance of the payments so made in a personal claim in restitution, the
precise identification of the ground of recovery was not explored in argument
before the Appellate Committee. It would therefore be inappropriate to
express any concluded view upon it. Even so, I think it right to record that
there appears to me to be considerable force in the criticisms which have been
expressed; and I shall, when considering the issues on this appeal, bear in
mind the possibility that it may be right to regard the ground of recovery as
failure of consideration.

(2) A proprietary claim in restitution

I have already stated that restitution in these cases can be achieved by
means of a personal claim in restitution. The question has however arisen
whether the Bank should also have the benefit of an equitable proprietary
claim in the form of a resulting trust. The immediate reaction must be – why
should it? Take the present case. The parties have entered into commercial
transaction. The transaction has, for technical reasons, been held to be void
from the beginning. Each party is entitled to recover its money, with the
result that the balance must be repaid. But why should the plaintiff Bank be
given the additional benefits which flow from a proprietary claim, for example
the benefit of achieving priority in the event of the defendant’s insolvency?
After all, it has entered into a commercial transaction, and so taken the risk
of the defendant’s insolvency, just like the defendant’s other creditors who
have contracted with it, not to mention other creditors to whom the defendant
may be liable to pay damages in tort.

I feel bound to say that I would not at first sight have thought that an
equitable proprietary claim in the form of a trust should be made available to
the Bank in the present case, but for two things. The first is the decision of
this House in Sinclair v. Brougham [1914] A.C. 398, which appears to
provide authority that a resulting trust may indeed arise in a case such as the
present. The second is that on the authorities there is an equitable jurisdiction

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to award the plaintiff compound interest in cases where the defendant is a
trustee. It is the combination of those two factors which has provided the
foundation for the principal arguments advanced on behalf of the Bank in
support of its submission that it was entitled to an award of compound
interest. I shall have to consider the question of availability of an equitable
proprietary claim, and the effect of Sinclair v. Brougham, in some depth in
a moment. But first I wish to say a few words on the subject of interest.

(3) Interest.

One would expect to find, in any developed system of law, a
comprehensive and reasonably simple set of principles by virtue of which the
courts have power to award interest. Since there are circumstances in which
the interest awarded should take the form of compound interest, those
principles should specify the circumstances in which compound interest, as
well as simple interest, may be awarded; and the power to award compound
interest should be available both at law and in equity. Nowadays, especially
since it has been established (see National Bank of Greece S.A. v. Pinios
Shipping Co. No. 1. The Maira [1990] 1 A.C. 637) that banks may, by the
custom of bankers, charge compound interest upon advances made by them
to their customers, one would expect to find that the principal cases in which
compound interest may be awarded would be commercial cases.

Sadly, however, that is not the position in English law. Unfortunately,
the power to award compound interest is not available at common law. The
power is available in equity; but at present that power is, for historical
reasons, exercised only in relation to certain specific classes of claim, in
particular proceedings against trustees for an account. An important I
believe the most important – question in the present case is whether that
jurisdiction should be developed to apply in a commercial context, as in the
present case.

Equitable proprietary claims

I now turn to consider the question whether an equitable proprietary
claim was available to the Bank in the present case.

Ever since the law of restitution began, about the middle of this
century, to be studied in depth, the role of equitable proprietary claims in the
law of restitution has been found to be a matter of great difficulty. The
legitimate ambition of restitution lawyers has been to establish a coherent law
of restitution, founded upon the principle of unjust enrichment; and since
certain equitable institutions, notably the constructive trust and the resulting
trust, have been perceived to have the function of reversing unjust enrichment,
they have sought to embrace those institutions within the law of restitution, if
necessary moulding them to make them fit for that purpose. Equity lawyers,
on the other hand, have displayed anxiety that in this process the equitable
principles underlying these institutions may become illegitimately distorted;

– 6 –

and though equity lawyers in this country are nowadays much more
sympathetic than they have been in the past towards the need to develop a
coherent law of restitution, and of identifying the proper role of the trust
within that rubric of the law, they remain concerned that the trust concept
should not be distorted, and also that the practical consequences of its
imposition should be fully appreciated. There is therefore some tension
between the aims and perceptions of these two groups of lawyers, which has
manifested itself in relation to the matters under consideration in the present
case.

In the present case, however, it is not the function of your Lordships’
House to write the agenda for the law of restitution, nor even to identify the
role of equitable proprietary claims in that part of the law. The judicial
process is neither designed for, nor properly directed towards, such
objectives. The function of your Lordships’ House is simply to decide the
questions at issue before it in the present case; and the particular question now
under consideration is whether, where money has been paid by a party to a
contract which is ultra vires the other party and so void ab initio, he has the
benefit of an equitable proprietary claim in respect of the money so paid.
Moreover the manner in which this question has arisen before this House
renders it by no means easy to address. First of all, the point was not debated
in any depth in the courts below, because they understood that they were
bound by Sinclair v. Brougham to hold that such a claim was here available.
But second, the point has arisen only indirectly in this case, since it is relevant
only to the question whether the court here has power to make an award of
compound interest. It is a truism that, in deciding a question of law in any
particular case, the courts are much influenced by considerations of practical
justice, and especially by the results which would flow from the recognition
of a particular claim on the facts of the case before the court. Here, however,
an award of compound interest provides no such guidance, because it is no
more than a consequence which is said to flow, for no more than historical
reasons, from the availability of an equitable proprietary claim. It therefore
provides no guidance on the question whether such a claim should here be
available.

In these circumstances I regard it as particularly desirable that your
Lordships should, so far as possible, restrict the inquiry to the actual questions
at issue in this appeal, and not be tempted into formulating general principles
of a broader nature. If restitution lawyers are hoping to find in your
Lordships’ speeches broad statements of principle which may definitively
establish the future shape of this part of the law, I fear that they may be
disappointed. I also regard it as important that your Lordships should, in the
traditional manner, pay particular regard to the practical consequences which
may flow from the decision of the House.

With these observations by way of preamble, I turn to the question of
the availability of an equitable proprietary claim in a case such as the present.
The argument advanced on behalf of the Bank was that the money paid by

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them under the void contract was received by the Council subject to a
resulting trust. This approach was consistent with that of Dillon L.J. in the
Court of Appeal: see [1994] 1 W.L.R. 938, 947. It is also consistent with the
approach of Viscount Haldane L.C. (with whom Lord Atkinson agreed) in
Sinclair v. Brougham [1914] A.C. 398, 420-421.

I have already expressed the opinion that, at first sight, it is surprising
that an equitable proprietary claim should be available in a case such as the
present. However before I examine the question as a matter of principle. I
propose first to consider whether Sinclair v. Brougham supports the argument
now advanced on behalf of the Bank.

Sinclair v. Brougham

The decision of this House in Sinclair v. Brougham has loomed very
large in both the judgments in the courts below and in the admirable
arguments addressed to the Appellate Committee of this House. It has long
been regarded as a controversial decision, and has been the subject of much
consideration by scholars, especially those working in the field of restitution.
I have however reached the conclusion that it is basically irrelevant to the
decision of the present appeal.

It is first necessary to establish what the case was about. The Birkbeck
Permanent Benefit Building Society decided to set up a banking business,
known as the Birkbeck Bank. The banking business was however held to be
ultra vires the objects of the building society; and there followed a spate of
litigation concerned with solving the problems consequent upon that decision.
Sinclair v. Brougham was one of those cases.

The case has been analysed in lucid detail in the speech of my noble
and learned friend. Lord Browne-Wilkinson, which I have read (in draft) with
great respect. In its bare outline, it was concerned with the distribution of the
assets of the Society, which was insolvent. There were four classes of
claimants. First, there were two classes of shareholders – the A shareholders
(entitled to repayment of their investment on maturity) and the B shareholders
(whose shares were permanent). Next, there was a numerous class of people
who had deposited money at the bank, under contracts which were ultra vires
and so void. Finally, there were the ordinary trade creditors of the Society.
By agreement, the A shareholders and the trade creditors were paid off first,
leaving only the claims of the depositors and the B shareholders. There were
sufficient assets to pay off the A shareholders, but not the depositors and
certainly not both. The question of how to reconcile their competing claims
arose for consideration on a summons by the liquidator for directions.

The problem arose from the fact that the contracts under which the
depositors deposited their money at the bank were ultra vires and so void.
That prevented them from establishing a simple contractual right to be repaid,
in which event they would have ranked with the ordinary trade creditors of the

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Society in the liquidation. As it was, they claimed to be entitled to repayment
in an action for money had and received in the same way as the Bank
claimed repayment in the case now before your Lordships. But the House of
Lords held that they were not entitled to claim on this ground. This was in
substance because to allow such a claim would permit an indirect enforcement
of the contract which the policy of the law had decreed should be void. In
those days, of course, judges still spoke about the common law right to
restitution in the language of implied contract, and so we find Lord Sumner
saying in a much quoted passage, at p. 452:

To hold otherwise would be indirectly to sanction an ultra

vires borrowing. All these causes of action are common species of the
genus assumpsit. All now rest, and long have rested, upon a notional
or imputed promise to repay. The law cannot de jure impute promises
to repay, whether for money had and received or otherwise, which, if
made de facto, it would inexorably avoid.”

This conclusion however created a serious problem because, if the
depositors had no claim, then, in the words of Lord Dunedin, at p. 436:

“The appalling result in this very case would be that the society’s
shareholders, having got proceeds of the depositors’ money in the form
of investments, so that each individual depositor is utterly unable to
trace his money, are enriched to the extent of some 500 per cent.”

As a matter of practical justice, such a result was obviously unacceptable: and
it was to achieve justice that the House had recourse to equity to provide the
answer. It is, I think, apparent from the reasoning of the members of the
Appellate Committee that they regarded themselves, not as laying down some
broad general principle, but as solving a particular practical problem. In this
connection it is, in my opinion, significant that there was a considerable
variation in the way in which they approached the problem. Viscount
Haldane, with whom Lord Atkinson agreed, did so, at p. 421, on the basis
that there arose in the circumstances “a resulting trust, not of an active
character.” Lord Dunedin based his decision upon a broad equity of
restitution, drawn from Roman and French law. He asked himself the
question, at p. 435: “Is English equity to retire defeated from the task which
other systems of equity have conquered?” – a question which he answered in
the negative. Lord Parker of Waddington, at pp. 441-442, attempted to
reconcile his decision with the established principles of equity by holding that
the depositors’ money had been received by the directors of the Society as
fiduciaries, with the effect that the depositors could thereafter follow their
money in equity into the assets of the Society. Lord Sumner, at p. 458,
considered that the case should be decided on equitable principles on which
there was no direct authority. He regarded the question as one of
administration, in which “the most just distribution of the whole must be
directed, so only that no recognised rule of law or equity be disregarded.”
Setting on one side the opinion of Lord Parker, whose approach I find very

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difficult to reconcile with the facts of the case. I do not discern in the
speeches of the members of the Appellate Committee any intention to impose
a trust carrying with it the personal duties of a trustee.

For present purposes. I approach this case in the following way. First,
it is clear that the problem which arose in Sinclair v. Brougham, viz. that a
personal remedy in restitution was excluded on grounds of public policy, does
not arise in the present case, which is not of course concerned with a
borrowing contract. Second, I regard the decision in Sinclair v. Brougham as
being a response to that problem in the case of ultra vires borrowing
contracts, and as not intended to create a principle of general application.
From this it follows, in my opinion, that Sinclair v. Brougham is not relevant
to the decision in the present case. In particular it cannot be relied upon as
a precedent that a trust arises on the facts of the present case, justifying on
that basis an award of compound interest against the Council.

But I wish to add this. I do not in any event think that it would be
right for your Lordships’ House to exercise its power under the Practice
Statement (Practice Statement (Judicial Precedent) [1966] 1 W.L.R. 1234) to
depart from Sinclair v. Brougham. I say this first because, in my opinion,
any decision to do so would not be material to the disposal of the present
appeal, and would therefore be obiter. But there is a second reason of
substance why, in my opinion, that course should not be taken. I recognise
that nowadays cases of incapacity are relatively rare, though the swaps
litigation shows that they can still occur. Even so, the question could still
arise whether, in the case of a borrowing contract rendered void because it
was ultra vires the borrower, it would be contrary to public policy to allow
a personal claim in restitution. Such a question has arisen in the past not only
in relation to associations such as the Birkbeck Permanent Benefit Building
Society, but also in relation to infants’ contracts. Moreover there is a
respectable body of opinion that, if such a case arose today, it should still be
held that public policy would preclude a personal claim in restitution, though
not of course by reference to an implied contract. That was the opinion
expressed by Leggatt L.J. in the Court of Appeal in the present case (see
[1994] 1 W.L.R. 938, 952E-F), as it had been by Hobhouse J.; and the same
view has been expressed by Professor Birks (see An Introduction to the Law
of Restitution (1985), at p. 374). I myself incline to the opinion that a
personal claim in restitution would not indirectly enforce the ultra vires
contract, for such an action would be unaffected by any of the contractual
terms governing the borrowing, and moreover would be subject (where
appropriate) to any available restitutionary defences. If my present opinion
were to prove to be correct then Sinclair v. Brougham will fade into history.
If not, then recourse can at least be had to Sinclair v. Brougham as authority
for the proposition that, in such circumstances, the lender should not be
without a remedy. Indeed, I cannot think that English law, or equity, is so
impoverished as to be incapable of providing relief in such circumstances.
Lord Wright, who wrote in strong terms (see [1938] C.L.J. 305) endorsing

– 10 –

the just result in Sinclair v. Brougham, would turn in his grave at any such
suggestion. Of course, it may be necessary to reinterpret the decision in that
case to provide a more satisfactory basis for it: indeed one possible suggestion
has been proposed by Professor Birks (see his An Introduction to the Law of
Restitution, pp. 396 et seq.). But for the present the case should in my
opinion stand, though confined in the manner I have indicated, as an assertion
that those who are caught in the trap of advancing money under ultra vires
borrowing contracts will not be denied appropriate relief.

The availability of an equitable proprietary claim in the present case

Having put Sinclair v. Brougham on one side as providing no authority
that a resulting trust should be imposed in the facts of the present case. I turn
to the question whether, as a matter of principle, such a trust should be
imposed, the Bank’s submission being that such a trust arose at the time when
the sum of £2.5m. was received by the Council from the Bank.

As my noble and learned friend Lord Browne-Wilkinson observes, it
is plain that the present case falls within neither or the situations which are
traditionally regarded as giving rise to a resulting trust, viz. (1) voluntary
payments by A to B. or for the purchase of property in the name of B or in
his and A’s joint names, where there is no presumption of advancement or
evidence of intention to make an out and out gift; or (2) property transferred
to B on an express trust which does not exhaust the whole beneficial interest.
The question therefore arises whether resulting trusts should be extended
beyond such cases to apply in the present case, which I shall treat as a case
where money has been paid for a consideration which fails.

In a most interesting and challenging paper published in Equity:
Contemporary Legal Developments (1992 ed. Goldstein). Professor Birks has
argued for a wider role for the resulting trust in the field of restitution, and
specifically for its availability in cases of mistake and failure of consideration.
His thesis is avowedly experimental, written to test the temperature or the
water. I feel bound to respond that the temperature of the water must be
regarded as decidedly cold: see. e.g., Professor Burrows in [1995] R.L.R. 15.
and Mr. W.J. Swadling in (1996) 16 Legal Studies 133.

In the first place, as Lord Browne-Wilkinson points out, to impose a
resulting trust in such cases is inconsistent with the traditional principles of
trust law. For on receipt of the money by the payee it is to be presumed that
(as in the present case) the identity of the money is immediately lost by
mixing with other assets of the payee, and at that lime the payee has no
knowledge of the facts giving rise to the failure of consideration. By the time
that those facts come to light, and the conscience of the payee may thereby be
affected, there will therefore be no identifiable fund to which a trust can
attach. But there are other difficulties. First, there is no general rule that the
property in money paid under a void contract does not pass to the payee: and
it is difficult to escape the conclusion that, as a general rule, the beneficial

– 11 –

interest to the money likewise passes to the payee. This must certainly be the
case where the consideration for the payment fails after the payment is made,
as in cases of frustration or breach of contract: and there appears to be no
good reason why the same should not apply in cases where, as in the present
case, the contract under which the payment is made is void ab initio and the
consideration for the payment therefore fails at the time of payment. It is true
that the doctrine of mistake might be invoked where the mistake is
fundamental in the orthodox sense of that word. But that is not the position
in the present case: moreover the mistake in the present case must be
classified as a mistake of law which, as at the law at present stands, creates
its own special problems. No doubt that much-criticised doctrine will fall to
be reconsidered when an appropriate case occurs: but I cannot think that the
present is such a case, since not only has the point not been argued but (as
will appear) it is my opinion that there is any event jurisdiction to award
compound interest in the present case. For all of these reasons I conclude, in
agreement with my noble and learned friend, that there is no basis for holding
that a resulting trust arises in cases where money has been paid under a
contract which is ultra vires and therefore void ab initio. This conclusion has
the effect that all the practical problems which would flow from the imposition
of a resulting trust in a case such as the present, in particular the imposition
upon the recipient of the normal duties of trustee, do not arise. The dramatic
consequences which would occur are detailed by Professor Burrows in his
article on Swaps and the Friction between Common Law and Equity in [1995]
R.L.R. 15, 27: the duty to account for profits accruing from the trust
property; the inability of the payee to rely upon the defence of change of
position: the absence of any limitation period: and so on. Professor Burrows
even goes so far as to conclude that the action for money had and received
would be rendered otiose in such cases, and indeed in all cases where the
payer seeks restitution of mistaken payments. However, if no resulting trust
arises, it also follows that the payer in a case such as the present cannot
achieve priority over the payee’s general creditors in the event of his
insolvency – a conclusion which appears to me to be just.

For all these reasons I conclude that there is no basis for imposing a
resulting trust in the present case, and I therefore reject the Bank’s submission
that it was here entitled to proceed by way of an equitable proprietary claim.
I need only add that, in reaching that conclusion, I do not find it necessary to
review the decision of Goulding J. in Chase Manhattan Bank N.A. v. Israel-
British Bank (London) Ltd. [1981] Ch. 105.

Interest

It is against that background that I turn to consider the question of
compound interest. Here there are three points which fall to be considered.
These are (1) whether the court had jurisdiction to award compound interest;
(2) if so, whether it should have exercised its jurisdiction to make such an
award in the present case; and (3) from what date should such an award of
compound interest run, if made.

– 12 –

It is common ground that in a case such as the present there is no
jurisdiction to award compound interest at common law or by statute. The
central question in the present case is therefore whether there is jurisdiction
in equity to do so. It was held below, on the basis that the Bank was entitled
to succeed not only in a personal claim at common law but also in a
proprietary claim in equity, that there was jurisdiction in equity to make an
order that the Council should pay compound interest on the sum adjudged due.
It was that jurisdiction which was exercised by Hobhouse J., whose decision
on the point was not challenged before the Court of Appeal, on the basis that
Sinclair v. Brougham [1914] A.C. 398 provided binding authority that a
proprietary claim was available to the Bank in this case. However since, in
my opinion. Sinclair v. Brougham provides no such authority, and no
proprietary claim is available to the Bank, the question now arises whether the
equitable jurisdiction to award compound interest may nevertheless be
exercised on the facts of the present case.

I wish however to record that Hobhouse J. was in no doubt that, if he
had jurisdiction to do so, he should award compound interest in this case. He
said (see [1994] 4 All E.R. at p. 955):

“Anyone who lends or borrows money on a commercial basis
receives or pays interest periodically and if that interest is not paid it
is compounded. … I see no reason why I should deny the plaintiff a
complete remedy or allow the defendant arbitrarily to retain part of the
enrichment which it has unjustly enjoyed.”

With that reasoning I find myself to be in entire agreement. The Council has
had the use of the Bank’s money over a period of years. It is plain on the
evidence that, if it had not had the use of the Bank’s money, it would (if free
to do so) have borrowed the money elsewhere at compound interest. It has
to that extent profited from the use of the Bank’s money. Moreover, if the
Bank had not advanced the money to the Council, it would itself have
employed the money on similar terms in its business. Full restitution requires
that, on the facts of the present case, compound interest should be awarded.
having regard to the commercial realities of the case. As the judge said, there
is no reason why the Bank should be denied a complete remedy.

It follows therefore that everything depends on the scope of the
equitable jurisdiction. It also follows, in my opinion, that if that jurisdiction
does not extend to apply in a case such as the present. English law will be
revealed as incapable of doing full justice.

It is right that I should record that the scope of the equitable
jurisdiction was not explored in depth in the course of argument before the
Appellate Committee, in which attention was concentrated on the question
whether a proprietary claim was available to the Bank in the circumstances of
the present case. In other circumstances, it might well have been appropriate
to invite further argument on the point. However, since it was indicated to

– 13 –

the Committee that the Council was not prepared to spend further money on
the appeal, whereupon it took no further part in the proceedings, and since the
relevant authorities had been cited to the Committee, I am satisfied that it is
appropriate that the point should now be decided by your Lordships’ House.

I wish also to record that I have had the opportunity of reading in draft
the speech of my noble and learned friend Lord Woolf, and that I find myself
to be in agreement with his reasoning and conclusion on the point. Even so,
I propose to set out in my own words my reasons for reaching the same
conclusion.

I shall begin by expressing two preliminary thoughts. The first is that,
where the jurisdiction of the court derives from common law or equity, and
is designed to do justice in cases which come before the courts, it is startling
to be faced by an argument that the jurisdiction is so restricted as to prevent
the courts from doing justice. Jurisdiction of that kind should as a matter of
principle be as broad as possible, to enable justice to be done wherever
necessary: and the relevant limits should be found not in the scope of the
jurisdiction but in the manner of its exercise as the principles are worked out
from case to case. Second, I find it equally startling to find that the
jurisdiction is said to be limited to certain specific categories of case. Where
jurisdiction is founded on a principle of justice. I would expect that the
categories of case where it is exercised should be regarded not as occupying
the whole field but rather as emanations of the principle, so that the possibility
of the jurisdiction being extended to other categories of case is not foreclosed.

It is with these thoughts in mind that I turn to the equitable jurisdiction
to award interest. In President of India v. La Pintada Compania Navigacion
S.A [1985] A.C. 104 Lord Brandon of Oakbrook, delivering a speech with
which the other members of the Appellate Committee agreed, described the
equitable jurisdiction in the following words, at p. 116:

“Chancery courts had further regularly awarded interest,
including not only simple interest but also compound interest, when
they thought that justice so demanded, that is to say in cases where
money had been obtained and retained by fraud, or where it had been
withheld or misapplied by a trustee or anyone else in a fiduciary
position.”

Later however he said, also at p. 116, that Courts of Chancery only awarded
compound, as distinct from simple, interest in two special classes of case.

With great respect I myself consider that, if the jurisdiction to award
compound interest is available where justice so demands, it cannot be so
confined as to exclude any class of case simply because that class of case has
not previously been recognised as falling within it. I prefer therefore to read
the passage quoted from Lord Brandon’s speech as Mason C.J. and Wilson
J. read it in Hungerfords v. Walker (1988) 171 C.L.R. 125, 148, as providing

– 14 –

examples (i.e., not exclusive examples) of the application of the underlying
principle of justice.

Now it is true that the reported cases on the exercise of the equitable
jurisdiction, which are by no means numerous, are concerned with cases of
breach of duty by trustees and other fiduciaries. In Attorney-General v. Alford
(1855) 4 De G.M. & G. 843, for example, which came before Lord
Cranworth L.C., the question arose whether an executor and trustee, who had
for several years retained in his hands trust funds which he ought to have
invested, should be chargeable with interest in excess of the ordinary rate of
simple interest. It was held that he should not be chargeable at a higher rate.
Lord Cranworth recognised that the court might in such a case impose interest
at a higher rate, or even compound interest. But he observed that if so the
court does not impose a penalty on the trustee. He said, at p. 851:

“What the court ought to do, I think, is to charge him only with
the interest which he has received, or which it is justly entitled to say
he ought to have received, or which it is so fairly to be presumed that
he did receive that he is estopped from saying that he did not receive
it.”

In cases of misconduct which benefits the executor, however, the court may
fairly infer that he used the money in speculation, and may, on the principle
‘In odium spoliatoris omnia praesumuntur’ assume that he made a higher rate,
if that was a reasonable conclusion.

Likewise in Burdick v. Garrick (1876) L.R. 5 Ch. App. 233, where
a fiduciary agent held money of his principal and simply paid it into his bank
account, it was held that he should be charged with simple interest only. Lord
Hatherley L.C., at pp. 241-242, applied the principle laid down in Attorney-
General v. Alford, namely that:

“… the Court does not proceed against an accounting party by way
of punishing him for making use of the Plaintiff’s money by directing
rests, or payment of compound interest, but proceeds upon this
principle, either that he has made, or has put himself in such a position
that he is to be presumed to have made, 5 per cent., or compound
interest, as the case may be …. If the Court finds . . . that the
money received has been invested in an ordinary trade, the whole
course of decision has tended to this, that the Court presumes that the
party against whom relief is sought has made that amount of profit
which persons ordinarily do make in trade, and in those cases the
Court directs rests to be made.”

For a more recent case in which the equitable jurisdiction was invoked, see
Wallersteiner v. Moir (No.2) [1975] Q.B. p. 373.

– 15 –

From these cases it can be seen that compound interest may be
awarded in cases where the defendant has wrongfully profited, or may be
presumed to have so profited, from having the use of another person’s money.
The power to award compound interest is therefore available to achieve justice
in a limited area of what is now seen as the law of restitution, viz. where the
defendant has acquired a benefit through his wrongful act (see Goff and Jones,
Law of Restitution, 4th ed., pp. 632 et seq.; Birks, Introduction to the Law of
Restitution, pp. 313 et seq.; Burrows, Law of Restitution, pp. 403 et seq.) The
general question arises whether the jurisdiction must be kept constrained in
this way, or whether it may be permitted to expand so that it can be exercised
to ensure that full justice can be done elsewhere in that rubric of the law. The
particular question is whether the jurisdiction can be exercised in a case such
as the present in which the Council has been ordered to repay the balance of
the Bank’s money on the ground of unjust enrichment, in a personal claim at
common law.

At this stage of the argument I wish to stress two things. The first is
that it is plain that the jurisdiction may, in an appropriate case, be exercised
in the case of a personal claim in equity. In both Alford’s case and Burdick
v. Garrick, the cases were concerned with the taking of an account, and an
order for payment of the sum found due. In each case the accounting party
was a fiduciary, who held the relevant funds on trust. But the jurisdiction is
not limited to cases in which a proprietary claim is being made and an award
of interest is sought as representing the fruits of the property so claimed. On
the contrary, the jurisdiction is in personam, and moreover an award of
interest may be made not only where the trustee or fiduciary has made a
profit, but also where it is held that he ought to have made a profit and has
not done so. Furthermore in my opinion the decision of the Court of Appeal
in In re Diplock [1948] Ch. 465 provides no authority for the proposition that
there is no jurisdiction to award compound interest where the claim is a
personal claim. It is true that in that case the Court of Appeal decided not to
award interest against a number of charities which had been held liable, in a
personal claim in equity, to repay legacies which had been paid to them in
error. But in so doing the Court simply followed an old decision of Lord
Eldon in Gittins v. Steele (1818) 1 Swanst. 199, 200, in which his judgment
was as follows:

“Where the fund out of which the legacy ought to have been
paid is in the hands of the Court making interest, unquestionably
interest is due. If a legacy has been erroneously paid to a legatee who
has no farther property in the estate, in recalling that payment I
apprehend that the rule of the court is not to charge interest; but if the
legatee is entitled to another fund making interest in the hands of the
court, justice must be done out of his share.”

The Court of Appeal in In re Diplock can have had no desire to make an
award of interest against the charities in the personal claim against them in
that case, and they must have been very content to follow uncritically this old

– 16 –

“rule of court.” But it does not follow that me rule or court went to the
jurisdiction of the court. It is more likely that it represented an established
practice which, as Lord Eldon’s brief judgment indicates, was subject to
exceptions. In any event the Court of Appeal was there concerned only with
simple interest: and in cases of the kind there under consideration, it seems
unlikely that any question of an award of compound interest would ever have
arisen.

I must confess that I find the reasoning which would restrict the
equitable jurisdiction to award compound interest to cases where the claim is
proprietary in nature to be both technical and unrealistic. This is shown by
the reasoning and conclusion of Hobhouse J. in Kleinwort Benson Ltd. v.
South Tyneside Metropolitan Borough Council [1994] 4 All E.R. 972, another
swap transaction case, in which the plaintiff bank had no proprietary claim.
The judge upheld the submission of the defendant council that, although they
were under a personal liability to make restitution both at law and in equity,
nevertheless the court had no jurisdiction to award compound interest on the
sum adjudged due. He said, at p. 994:

“If … the plaintiff is only entitled to a personal remedy which
will be the case where, although there was initially a fiduciary
relationship and the payer was entitled in equity to treat the sum
received by the payee as his, the payer’s, money and to trace it, but
because of subsequent developments he is no longer able to trace the
sum in the hands of the payee, then there is no subject matter to which
the rationale on which compound interest is awarded can be applied.
The payee cannot be shown to have a fund belonging to the payer or
to have used it to make profits for himself.”

This reasoning is logical, assuming the restricted nature of the equitable
jurisdiction to award compound interest. But if, as Lord Brandon of
Oakbrook stated, the jurisdiction is founded upon the demands of justice, it
is difficult to see the sense of the distinction which Hobhouse J. felt compelled
to draw. It seems strange indeed that, just because the power to trace
property has ceased, the court’s jurisdiction to award compound interest
should also come to an end. For where the claim is based upon the unjust
enrichment of the defendant, it may be necessary to have power to award
compound interest to achieve full restitution, i.e. to do full justice, as much
where the plaintiff’s claim is personal as where his claim is proprietary in
nature. Furthermore I know of no authority which compelled Hobhouse J. to
hold that he had no jurisdiction to award compound interest in respect of the
personal claim in equity in the case before him.

For these reasons I am satisfied that there is jurisdiction in equity to
award compound interest in the case of personal claims as well as proprietary
claims.

– 17 –

I turn next to the question whether the equitable jurisdiction can be
exercised in aid of common law remedies such as, for example, a personal
remedy in restitution, to repair the deficiencies of the common law. Here I
turn at once to Snell’s Equity, 29th ed. (1990), at p.28, where the first maxim
of equity is stated to be that “Equity will not suffer a wrong to be without a
remedy”. The commentary on this maxim in the text reads as follows:

“The idea expressed in this maxim is that no wrong should be
allowed to go unredressed if it is capable of being remedied by courts
of justice, and this really underlies the whole jurisdiction of equity.
As already explained, the common law courts failed to remedy many
undoubted wrongs, and this failure led to the establishment of the
Court of Chancery. But is must not be supposed that every moral
wrong was redressed by the Court of Chancery. The maxim must be
taken as referring to rights which are suitable for judicial enforcement,
but were not enforced at common law owing to some technical defect.”

To this maxim is attributed the auxiliary jurisdiction of equity. The
commentary reads as follows:

“Again, to this maxim may be traced the origin of the auxiliary
jurisdiction of the Court of Chancery, by virtue of which suitors at law
were aided in the enforcement of their legal rights. Without such aid
these rights would often have been ‘wrongs without remedies.’ For
instance, it was often necessary for a plaintiff in a common law action
to obtain discovery of facts resting in the knowledge of the defendant,
or of deeds, writings or other things in his possession or power. The
common law courts, however, had no power to order such discovery,
and recourse was therefore had to the Court of Chancery, which
assumed jurisdiction to order the defendant to make discovery on his
oath.”

The question which arises in the present case is whether, in the exercise of
equity’s auxiliary jurisdiction, the equitable jurisdiction to award compound
interest may be exercised to enable a plaintiff to obtain full justice in a
personal action of restitution at common law.

I start with the position that the common law remedy is, in a case such
as the present, plainly inadequate, in that there is no power to award
compound interest at common law and that without that power the common
law remedy is incomplete. The situation is therefore no different from that
in which, in the absence of jurisdiction at common law to order discovery,
equity stepped in to enable justice to be done in common law actions by
ordering the defendant to make discovery on oath. The only difference
between the two cases is that, whereas the equitable jurisdiction to order
discovery in aid of common law actions was recognised many years ago, the
possibility of the equitable jurisdiction to award compound interest being
exercised in aid of common law actions was not addressed until the present

– 18 –

case. Fortunately, however, judges of equity have always been ready to
address new problems, and to create new doctrines, where justice so requires.
As Sir George Jessel M.R. said, in a famous passage in his judgment in In re
Hallett’s Estate (1880) 13 Ch. D. 696. 710:

“I intentionally say modern rules, because it must not be
forgotten that the rules of Courts of Equity are not, like the rules of
the Common Law, supposed to have been established from time
immemorial. It is perfectly well known that they have been
established from time to time – altered, improved, and refined from
time to time. In many cases we know the names of the Chancellors
who invented them. No doubt they were invented for the purpose of
securing the better administration of justice, but still they were
invented.”

I therefore ask myself whether there is any reason why the equitable
jurisdiction to award compound interest should not be exercised in a case such
as the present. I can see none. Take, for example, the case of fraud. It is
well established that the equitable jurisdiction may be exercised in cases or
fraud. Indeed it is plain that, on the same facts, there may be a remedy both
at law and in equity to recover money obtained by fraud: see Johnson v. The
King (1904) AC 817. 822. per Lord Macnaghten. Is it to be said that, if the
plaintiff decides to proceed in equity, compound interest may be awarded: but
that if he chooses to proceed in an action at law, no such auxiliary relief will
be available to him? I find it difficult to believe that, at the end of the
twentieth century, our law should be so hidebound by forms of action as to
be compelled to reach such a conclusion.

For these reasons I conclude that the equitable jurisdiction to award
compound interest may be exercised in the case of personal claims at common
law, as it is in equity. Furthermore I am satisfied that, in particular, the
equitable jurisdiction may, where appropriate, be exercised in the case of a
personal claim in restitution. In reaching that conclusion, I am of the opinion
that the decision of Hobhouse J. in the Kleinwort Benson case that the court
had no such jurisdiction should not be allowed to stand.

I recognise that, in so holding, the courts would be breaking new
ground, and would be extending the equitable jurisdiction to a field where it
has not hitherto been exercised. But that cannot of itself be enough to prevent
what I see to be a thoroughly desirable extension of the jurisdiction, consistent
with its underlying basis that it exists to meet the demands of justice. An
action of restitution appears to me to provide an almost classic case in which
the jurisdiction should be available to enable the courts to do full justice.
Claims in restitution are founded upon a principle of justice, being designed
to prevent the unjust enrichment of the defendant: see Lipkin Gorman v.
Karpnale Ltd. [1991] 2 AC 548. Long ago, in Moses v. Macferlan (1760)
2 Burr. 1005, 1012, Lord Mansfield said that the gist of the action for money
had and received is that “the defendant, upon the circumstances of the case.

– 19 –

is obliged by the ties of natural justice and equity to refund the money.” It
would be strange indeed if the courts lacked jurisdiction in such a case to
ensure that justice could be fully achieved by means of an award of compound
interest, where it is appropriate to make such an award, despite the fact that
the jurisdiction to award such interest is itself said to rest upon the demands
of justice. I am glad not to be forced to hold that English law is so
inadequate as to be incapable of achieving such a result. In my opinion the
jurisdiction should now be made available, as justice requires, in cases of
restitution, to ensure that full justice can be done. The seed is there, but the
growth has hitherto been confined within a small area. That growth should
now be permitted to spread naturally elsewhere within this newly recognised
branch of the law. No genetic engineering is required, only that the warm sun
of judicial creativity should exercise its benign influence rather than remain
hidden behind the dark clouds of legal history.

I wish to add that I for my part do not consider that the statutory
power to award interest, either under section 3 of the Law Reform
(Miscellaneous Provisions) Act 1934 or under section 35A of the Supreme
Court Act 1981 (which, pursuant to section 15 of the Administration of Justice
Act 1982, superseded section 3 of the Act of 1934), inhibits the course of
action which I now propose. It is true that section 3(1) of the Act of 1934,
when empowering courts of record to award interest in proceedings for the
recovery of any debt or damages, did not authorise the giving of interest upon
interest. But I cannot see that it would be inconsistent with the intention then
expressed by Parliament later to extend the existing equitable jurisdiction to
award compound interest to enable courts to ensure that full restitution is
achieved in personal actions of restitution at common law. It is of course
common knowledge that, until the latter part of this century, the existence of
a systematic law of restitution, founded upon the principle of unjust
enrichment, had not been recognised in English law. The question whether
there should be a power to award compound interest in such cases, in order
to achieve full restitution, simply did not arise in 1934 and cannot therefore
have been considered by Parliament in that year. To hold that, because
Parliament did not then authorise an award of compound interest in
proceedings the nature of which was not then recognised, the Courts should
now be precluded from exercising the ordinary judicial power to develop the
law by extending an existing jurisdiction to meet a newly recognised need
appears to me to constitute an unnecessary and undesirable fetter upon the
judicial development of the law. It is not to be forgotten that there is
jurisdiction in equity, as well as at common law, to order restitution on the
ground of unjust enrichment; and I cannot see that section 3(1) of the 1934
Act would have precluded any extension of the existing equitable jurisdiction
to award compound interest to enable full restitution to be achieved in such
a case. Accordingly neither would section 3(1), which applied to all courts
of record, have precluded a similar extension of the jurisdiction to enable full
restitution to be achieved in actions at common law. Section 35A of the Act
of 1981 no doubt perpetuated the position as established by section 3(1) of the
Act of 1934, in that it too did not confer a power on the courts to award

– 20 –

compound interest: but I cannot see that this affects the position. In so far as
it is relevant to refer to the Report of the Law Commission (Cmnd. “229 of
7 April 1978) which preceded that enactment, it appears from the Report that
it was generally opposed to the introduction of any general power to award
compound interest: but there was no intention of interfering with the equitable
jurisdiction, and the problem which has arisen in the present case was not
addressed. I wish to add that such an extension of the equitable jurisdiction
as I propose would, in my opinion, be a case of equity acting in aid of the
common law. There is in my opinion no need, and indeed no basis, for
outlawing such a development as a case of equity acting in aid of the
legislature simply because the legislature, in conferring upon courts the power
to award simple interest, did not authorise the giving of compound interest.

It remains for me to say that I am satisfied, for the reasons given by

Hobhouse J., that this is a case in which it was appropriate that compound
interest should be awarded. In particular, since the Council had the free use
of the Bank’s money in circumstances in which, if it had borrowed the money
from some other financial institution, it would have had to pay compound
interest for it, the Council can properly be said to have profited from the
Bank’s money so as to make an award of compound interest appropriate.
However, for the reasons given by Dillon L.J., at pp. 947-949. I agree with
the Court of Appeal that the interest should run from the date of receipt of the
money.

Conclusion

For these reasons I would dismiss the appeal.

LORD BROWNE-WILKINSON

My Lords,

In the last decade many local authorities entered into interest rate swap
agreements with banks and other finance houses. In Hazell v. Hammersmith
and Fulham London Borough Council [1992] 2 A.C. 1 your Lordships held
that such contracts were ultra vires local authorities and therefore void. Your
Lordships left open the question whether payments made pursuant to such
swap agreements were recoverable or not. The action which is the subject
matter of this appeal is one of a number in which the court has had to
consider the extent to which monies paid under such an agreement are
recoverable.

An interest rate swap agreement is an agreement between two parties
by which each agrees to pay the other on a specified date or dates an amount
calculated by reference to the interest which would have accrued over a given

– 21 –

period on a notional principal sum. The rate of interest payable by each party
(on the same notional sum) is different. One rate of interest is usually fixed
and does not change (and the payer is called “the fixed rate payer”); the other
rate is a variable or floating rate based on a fluctuating interest rate such as
the six-month London Inter-bank Offered Rate (“LIBOR”) and the payer is
known as “the floating rate payer.” Normally the parties do not make the
actual payments they have contracted for but the party owing the higher
amount pays to the other party the difference between the two amounts.

In the present case the swap contract was concluded between the
respondent bank, Westdeutsche Landesbank Girozentrale (“the Bank”), and the
appellant, the Council of the London Borough of Islington (“the local
authority”), on 16 June 1987. The arrangement was to run for ten years
starting on 18 June 1987. The interest sums were to be calculated on a
notional principal sum of £25m. and were to be payable half-yearly. The
Bank was to be the fixed rate payer at a rate of 7.5 per cent. per annum and
the local authority was to be the floating rate payer at the domestic sterling
LIBOR rate. In addition, the Bank was to pay to the local authority on 18
June 1987 a sum of £2.5m. (“the upfront payment”) which payment was
made. As a result of the provision of the upfront payment the rate of interest
payable by the Bank as the fixed rate payer was agreed to be lower than what
would have been appropriate (9.43 per cent.) if the upfront payment had not
been made.

made:

Pursuant to the terms of the agreement, the following payments were

Date

18.06.87
18.12.87
20.06.88
19.12.88
19.06.89
Total :

Payment by Bank
to Council

£2,500,000

Payment by Council
to Bank

£ 172,345.89
£ 229,666.09
£ 259,054.56
£ 693,407.53
£1,354,474.07

Therefore the payments made by the Bank to the local authority exceed those
made by the local authority to the Bank to the extent of £1,145,525.93.

On 1 November 1989 the Divisional Court gave judgment in Hazell
declaring void swap transactions entered into by local authorities. The
decision applied to the contract between the parties in the present case.

– 22 –

As will appear it is of central importance to note the way in which the
local authority dealt with the upfront payment of £2.5m. made to it on 18 June
1987. The money was credited to a bank account of the local authority in
which there were other monies of the local authority, i.e. into a mixed
account. That account itself became overdrawn overnight on several dates in
June and July 1987. There was an overall debit balance on the account on 16
November 1987. The monies in the mixed account were used by the local
authority for its general expenditure. If the upfront payment had not been
received, the local authority would have had to borrow more money if it
could. The local authority had been, and was likely to be in the future, rate-
capped and one of the attractions to the local authority in the swap agreement
was that it obtained the upfront payment in a form which did not attract
statutory controls.

The Bank in this action sought recovery of the amounts paid by it
under the void agreement together with interest. On 12 February 1993
Hobhouse J. gave judgment in the Commercial Court for the Bank ordering
payment by the local authority to the Bank of the balance together with
compound interest on the balance as from 1 April 1990 with six-monthly rests.

The council appealed to the Court of Appeal against that order and the
Bank cross-appealed contending that compound interest should have been
ordered as from the date of receipt of the principal sum. i.e. 18 June 1987.

On 17 December 1993 the Court of Appeal (Dillon, Leggatt and
Kennedy L.JJ.) dismissed the local authority’s appeal and allowed the cross-
appeal by the Bank: (1994) 1 WLR 938. It held that the Bank was entitled to
recover the balance at law as money had and received (Dillon L.J., at p. 946:
Leggatt L.J., at p. 953E). It also held that the Bank was entitled to recover
the balance in equity on the ground that the local authority held the upfront
payment on a resulting trust and was therefore personally liable, as trustee,
to repay the bank (Dillon L.J., at p. 947A-E: Leggatt L.J., at p. 953G). The
Court of Appeal further held the local authority liable to pay compound
interest on the balance from time to time outstanding as from the date of
receipt of the upfront payment. The ability of the Court to award compound,
as opposed to simple, interest was founded on the equitable jurisdiction to
award compound interest as against a trustee or other person owing fiduciary
duties who is personally accountable and who has made use of the plaintiff’s
money: Dillon L.J., at pp. 949B-951E: Leggatt L.J., at pp. 953H-955.A.

The local authority now accepts that it is personally liable to repay the
balance to the Bank. The local authority appeals to your Lordships only
against the award of compound interest. But, as will appear, notwithstanding
the narrow scope of the appeal it raises profound questions for decision by
your Lordships.

– 23 –

Compound Interest in Equity

It is common ground that in the absence of agreement or custom the
court has no jurisdiction to award compound interest either at law or under
section 35A of the Supreme Court Act, 1981. It is also common ground that
in certain limited circumstances courts of equity can award compound interest.
Mr. Philipson, for the local authority, contends that compound interest can
only be ordered on a claim against a trustee or other person owing fiduciary
duties who in breach of such duty has used trust monies in his own trade. He
contends that compound interest cannot be awarded in this case since (a) the
local authority never held the upfront payment as a trustee or in a fiduciary
capacity and (b) in any event the local authority did not use the upfront
payment in its trade. Mr. Sumption, for the Bank, contends that compound
interest can be awarded in equity whenever the defendant is liable to disgorge
a benefit received whether or not he is a trustee or a fiduciary. Alternatively,
Mr. Sumption contends that the local authority did receive the upfront
payment as a trustee and as such is in equity accountable for the benefits it has
received, including the benefit of not having to borrow £2.5m. on the market
at compound interest.

In the absence of fraud Courts of Equity have never awarded
compound interest except against a trustee or other person owing fiduciary
duties who is accountable for profits made from his position. Equity awarded
simple interest at a time when courts of law had no right under common law
or statute to award any interest. The award of compound interest was
restricted to cases where the award was in lieu of an account of profits
improperly made by the trustee. We were not referred to any case where
compound interest had been awarded in the absence of fiduciary accountability
for a profit. The principle is clearly stated by Lord Hatherley L.C. in Burdick
v. Garrick, L.R. 5 Ch. App. 233, 241:

“The court does not proceed against an accounting party by way of
punishing him for making use of the plaintiff’s money by directing
rests, or payment of compound interest, but proceeds upon this
principle, either that he has made, or has put himself into such a
position as that he is to be presumed to have made, 5 per cent., or
compound interest, as the case may be.”

The principle was more fully stated by Buckley L.J. in Wallersteiner
v. Moir (No. 2) [1975] Q.B. 373, 397.

“Where a trustee has retained trust money in his own hands, he will
be accountable for the profit which he has made or which he is
assumed to have made from the use of the money. In Attorney-
General v. Alford, 4 De G.M. & G. 843, 851 Lord Cranworth L.C.
said:

– 24 –

“What the court ought to do, I think, is to charge him only with
the interest which he has received, or which it is justly entitled
to say he ought to have received, or which it is so fairly to be
presumed that he did receive that he is estopped from saying
that he did not receive it.’

“This is an application of the doctrine that the court will not allow a
trustee to make any profit from his trust. The defaulting trustee is
normally charged with simple interest only, but if it is established that
he has used the money in trade he may be charged compound interest
. . . The justification for charging compound interest normally lies in
the fact that profits earned in trade would be likely to be used as
working capital for earning further profits. Precisely similar equitable
principles apply to an agent who has retained monies of his principal
in his hands and used them for his own purposes: Burdick v.
Garrick.“

In President of India v. La Pintada Compania Navigacion S.A. [1985]
A.C. 104. 116 Lord Brandon (with whose speech the rest of their Lordships
agreed) considered the law as to the award of interest as at that date in four
separate areas. His third area was equity, as to which he said this :

“Thirdly, the area of equity. The Chancery courts, again differing
from the common law courts, had regularly awarded simple interest as
ancillary relief in respect of equitable remedies, such as specific
performance, rescission and the taking of an account. Chancery courts
had further regularly awarded interest, including not only simple
interest but also compound interest, when they thought that justice so
demanded, that is to say in cases where money had been obtained and
retained by fraud, or where it had been withheld or misapplied by a
trustee or anyone else in a fiduciary position. . . Courts of Chancery
only in two special classes of case, awarded compound, as distinct
from simple, interest.”

These authorities establish that in the absence of fraud equity only
awards compound (as opposed to simple) interest against a defendant who is
a trustee or otherwise in a fiduciary position by way of recouping from such
a defendant an improper profit made by him. It is unnecessary to decide
whether in such a case compound interest can only be paid where the
defendant has used trust monies in his own trade or (as I tend to think)
extends to all cases where a fiduciary has improperly profited from his trust.
Unless the local authority owed fiduciary duties to the Bank in relation to the
upfront payment, compound interest cannot be awarded.

Was there a Trust? The Argument for the Bank in Outline

The Bank submitted that, since the contract was void, title did not pass
at the date of payment either at law or in equity. The legal title of the Bank

– 25 –

was extinguished as soon as the money was paid into the mixed account,
whereupon the legal title became vested in the local authority. But, it was
argued, this did not affect the equitable interest, which remained vested in the
Bank (“the retention of title point”). It was submitted that whenever the legal
interest in property is vested in one person and the equitable interest in
another, the owner of the legal interest holds it on trust for the owner of the
equitable title: “the separation of the legal from the equitable interest
necessarily imports a trust.” For this latter proposition (“the separation of
title point”) the Bank, of course, relies on Sinclair v. Brougham [1914] A.C.
598 and Chase Manhattan Bank [1981] Ch. 105.

The generality of these submissions was narrowed by submitting that
the trust which arose in this case was a resulting trust “not of an active
character”: see per Viscount Haldane L.C. in Sinclair v. Brougham, at
p. 421. This submission was reinforced, after completion of the oral
argument, by sending to your Lordships Professor Peter Birks’ paper
‘Restitution and Resulting Trusts,” Goldstein, Equity: Contemporary Legal
Developments (1992). p. 335. Unfortunately your Lordships have not had the
advantage of any submissions from the local authority on this paper, but an
article by William Swadling “A new role for resulting trusts?” 16 Legal
Studies 133 puts forward counter arguments which I have found persuasive.

It is to be noted that the Bank did not found any argument on the basis
that the local authority was liable to repay either as a constructive trustee or
under the in personam liability of the wrongful recipient of the estate of a
deceased person established by In re Diplock [1948] Ch. 465. I therefore do
not further consider those points.

The Breadth of the Submission

Although the actual question in issue on the appeal is a narrow one, on
the arguments presented it is necessary to consider fundamental principles of
trust law. Does the recipient of money under a contract subsequently found
to be void for mistake or as being ultra vires hold the monies received on trust
even where he had no knowledge at any relevant time that the contract was
void? If he does hold on trust, such trust must arise at the date of receipt or,
at the latest, at the date the legal title of the payer is extinguished by mixing
monies in a bank account: in the present case it does not matter at which of
those dates the legal title was extinguished. If there is a trust two
consequences follow:

(a) the recipient will be personally liable, regardless of fault, for
any subsequent payment away of the monies to third parties
even though, at the date of such payment, the “trustee” was
still ignorant of the existence of any trust: see Burrows Swaps
and the Friction between Common Law and Equity [1995] RLR
15;

– 26 –

(b) as from the date of the establishment of the trust (i.e. receipt
or mixing of the monies by the “trustee”) the original payer
will have an equitable proprietary interest in the monies so long
as they are traceable into whomsoever’s hands they come other
than a purchaser for value of the legal interest without notice.

Therefore, although in the present case the only question directly in issue is
the personal liability of the local authority as a trustee, it is not possible to
hold the local authority liable without imposing a trust which, in other cases,
will create property rights affecting third parties because monies received
under a void contract are “trust property.”

The Practical Consequences of the Bank’s Argument

Before considering the legal merits of the submission, it is important
to appreciate the practical consequences which ensue if the Bank’s arguments
are correct. Those who suggest that a resulting trust should arise in these
circumstances accept that the creation of an equitable proprietary interest
under the trust can have unfortunate, and adverse, effects if the original
recipient of the monies becomes insolvent: the monies, if traceable in the
hands of the recipient, are trust monies and not available for the creditors of
the recipient. However, the creation of an equitable proprietary interest in
monies received under a void contract is capable of having adverse effects
quite apart from insolvency. The proprietary interest under the unknown trust
will, quite apart from insolvency, be enforceable against any recipient of the
property other than the purchaser for value of a legal interest without notice.

Take the following example, T (the transferor) has entered into a
commercial contract with Rl (the first recipient). Both parties believe the
contract to be valid but it is in fact void. Pursuant to that contract:

(i) T pays £1m. to Rl who pays it into a mixed bank account:

(ii) T transfers 100 shares in X company to Rl. who is registered
as a shareholder.

Thereafter Rl deals with the money and shares as follows:

(iii) Rl pays £50,000 out of the mixed account to R2 otherwise than
for value; R2 then becomes insolvent, having trade creditors
who have paid for goods not delivered at the time of the
insolvency.

(iv) Rl charges the shares in X company to R3 by way of equitable
security for a loan from R3.

If the Bank’s arguments are correct, Rl holds the £lm. on trust for T
once the money has become mixed in Rl’s bank account. Similarly Rl

– 27 –

becomes the legal owner of the shares in X company as from the date of his
registration as a shareholder but holds such shares on a resulting trust for T.
T therefore has an equitable proprietary interest in the monies in the mixed

account and in the shares.

T’s equitable interest will enjoy absolute priority as against the
creditors in the insolvency of R2 (who was not a purchaser for value)
provided that the £50,000 can be traced in the assets of R2 at the date of its
insolvency. Moreover, if the separation of title argument is correct, since the
equitable interest is in T and the legal interest is vested in R2, R2 also holds
as trustee for T. In tracing the £50,000 in the bank account of R2, R2 as
trustee will be treated as having drawn out “his own” monies first, thereby
benefitting T at the expense of the secured and unsecured creditors of R2.
Therefore in practice one may well reach the position where the monies in the
bank account of R2 in reality reflect the price paid by creditors for goods not
delivered by R2: yet, under the tracing rules, those monies are to be treated
as belonging in equity to T.

So far as the shares in the X company are concerned. T can trace his
equitable interest into the shares and will take in priority to R3, whose
equitable charge to secure his loan even though granted for value will pro
tanto be defeated.

All this will have occurred when no one was aware, or could have
been aware, of the supposed trust because no one knew that the contract was
void.

I can see no moral or legal justification for giving such priority to the
right of T to obtain restitution over third parties who have themselves not been
enriched, in any real sense, at T’s expense and indeed have had no dealings
with T. T paid over his money and transferred the shares under a supposed
valid contract. If the contract had been valid, he would have had purely
personal rights against Rl. Why should he be better off because the contract
is void?

My Lords, wise judges have often warned against the wholesale
importation into commercial law of equitable principles inconsistent with the
certainty and speed which are essential requirements for the orderly conduct
of business affairs: see Barnes v. Addy (1874) L.R. 9 Ch.App. 244. 251,
255; Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana
[1983] 2 A.C. 694, 703-704. If the Bank’s arguments are correct, a
businessman who has entered into transactions relating to or dependent upon
property rights could find that assets which apparently belong to one person
in fact belong to another; that there are “off-balance-sheet” liabilities of which
he cannot be aware; that these property rights and liabilities arise from
circumstances unknown not only to himself but also to anyone else who has
been involved in the transactions. A new area of unmanageable risk will be
introduced into commercial dealings. If the due application of equitable

– 28 –

principles forced a conclusion leading to these results, your Lordships would
be presented with a formidable task in reconciling legal principle with
commercial common sense. But in my judgment no such conflict occurs.
The resulting trust for which the Bank contends is inconsistent not only with
the law as it stands but with any principled development of it.

The Relevant Principles of Trust Law

(i) Equity operates on the conscience of the owner of the legal
interest. In the case of a trust, the conscience of the legal
owner requires him to carry out the purposes for which the
property was vested in him (express or implied trust) or which
the law imposes on him by reason of his unconscionable
conduct (constructive trust).

(ii) Since the equitable jurisdiction to enforce trusts depends upon
the conscience of the holder of the legal interest being affected,
he cannot be a trustee of the property if and so long as he is
ignorant of the facts alleged to affect his conscience, i.e. until
he is aware that he is intended to hold the property for the
benefit of others in the case of an express or implied trust, or,
in the case of a constructive trust, of the factors which are
alleged to affect his conscience.

(iii) In order to establish a trust there must be identifiable trust
property. The only apparent exception to this rule is a
constructive trust imposed on a person who dishonestly assists
in a breach of trust who may come under fiduciary duties even
if he does not receive identifiable trust property.

(iv) Once a trust is established, as from the date of its establishment
the beneficiary has, in equity, a proprietary interest in the trust
property, which proprietary interest will be enforceable in
equity against any subsequent holder of the property (whether
the original property or substituted property into which it can
be traced) other than a purchaser for value of the legal interest
without notice.

These propositions are fundamental to the law of trusts and I would
have thought uncontroversial. However, proposition (ii) may call for some
expansion. There are cases where property has been put into the name of X
without X’s knowledge but in circumstances where no gift to X was intended.
It has been held that such property is recoverable under a resulting trust:
Birch v. Blagrave (1755) Amb. 264: Childers v. Childers (1875) 1 De G. &
J. 482: In re Vinogradoff [l935] W.N. 68: In re Muller [1953] N.Z.L.R. 879.
These cases are explicable on the ground that, by the time action was brought.
X or his successors in title have become aware of the facts which gave rise to
a resulting trust: his conscience was affected as from the time of such

– 29 –

discovery and thereafter he held on a resulting trust under which the property
was recovered from him. There is, so far as I am aware, no authority which
decides that X was a trustee, and therefore accountable for his deeds, at any
time before he was aware of the circumstances which gave rise to a resulting
trust.

Those basic principles are inconsistent with the case being advanced
by the Bank. The latest time at which there was any possibility of identifying
the “trust property” was the date on which the monies in the mixed bank
account of the local authority ceased to be traceable when the local authority’s
account went into overdraft in June 1987. At that date, the local authority had
no knowledge of the invalidity of the contract but regarded the monies as its
own to spend as it thought fit. There was therefore never a time at which
both (a) there was defined trust property and (b) the conscience of the local
authority in relation to such defined trust property was affected. The basic
requirements of a trust were never satisfied.

I turn then to consider the Bank’s arguments in detail. They were
based primarily on principle rather than on authority. I will deal first with the
Bank’s argument from principle and then turn to the main authorities relied
upon by the Bank. Sinclair v. Brougham and Chase Manhattan Bank.

The Retention of Title Point

It is said that, since the Bank only intended to part with its beneficial
ownership of the monies in performance of a valid contract, neither the legal
nor the equitable title passed to the local authority at the date of payment.
The legal title vested in the local authority by operation of law when the
monies became mixed in the bank account but, it is said, the Bank “retained”
its equitable title.

I think this argument is fallacious. A person solely entitled to the full
beneficial ownership of money or property, both at law and in equity, does
not enjoy an equitable interest in that property. The legal title carries with it
all rights. Unless and until there is a separation of the legal and equitable
estates, there is no separate equitable title. Therefore to talk about the Bank
“retaining” its equitable interest is meaningless. The only question is whether
the circumstances under which the money was paid were such as, in equity,
to impose a trust on the local authority. If so, an equitable interest arose for
the first time under that trust.

This proposition is supported by In re Cook [1948] Ch. 212;
Vandervell v. I.R.C. [1967] 2 AC 291, 311g, per Lord Upjohn, and 317F,
per Lord Donovan; Commissioner of Stamp Duties (Queensland) v. Livingston
[1965] AC 694, 712B-E; Underhill and Hayton, Law of Trusts and Trustees,
15th ed. (1995), p. 866.

– 30 –

The Separation of Title Point

The Bank’s submission, at its widest, is that if the legal title is in A
but the equitable interest in B. A holds as trustee for B.

Again I think this argument is fallacious. There are many cases where
B enjoys rights which, in equity, are enforceable against the legal owner, A.
without A being a trustee, e.g. an equitable right to redeem a mortgage,
equitable easements, restrictive covenants, the right to rectification, an
insurer’s right by subrogation to receive damages subsequently recovered by
the assured: Lord Napier and Ettrick v. Hunter [1993] A.C. 713. Even in
cases where the whole beneficial interest is vested in B and the bare legal
interest is in A. A is not necessarily a trustee, e.g. where title to land is
acquired by estoppel as against the legal owner: a mortgagee who has fully
discharged his indebtedness enforces his right to recover the mortgaged
property in a redemption action, not an action for breach of trust.

The Bank contended that where, under a pre-existing trust, B is entitled
in an equitable interest in trust property, if the trust property comes into the
hands of a third party. X (not being a purchaser for value of the legal interest
without notice). B is entitled to enforce his equitable interest against the
property in the hands of X because X is a trustee for B. In my view the third
party, X, is not necessarily a trustee for B: B’s equitable right is enforceable
against the property in just the same way as any other specifically enforceable
equitable right can be enforced against a third party. Even if the third party,
X, is not aware that what he has received is trust property B is entitled to
assert his title in that property. If X has the necessary degree of knowledge,
X may himself become a constructive trustee for B on the basis of knowing
receipt. But unless he has the requisite degree of knowledge he is not
personally liable to account as trustee: In re Diplock [1948] Ch. 465 at page
478: In re Montagu ‘s Settlement [1987] Ch. 264. Therefore, innocent receipt
of property by X subject to an existing equitable interest does not by itself
make X a trustee despite the severance of the legal and equitable titles.
Underhill and Hayton, Law of Trusts and Trustees, 15th ed., pp. 569-370,
whilst accepting that X is under no personal liability to account unless and
until be becomes aware of B’s rights, does describe X as being a constructive
trustee. This may only be a question of semantics: on either footing, in the
present case the local authority could not have become accountable for profits
until it knew that the contract was void.

Resulting Trust

This is not a case where the Bank had any equitable interest which pre-
dated receipt by the local authority of the upfront payment. Therefore, in
order to show that the local authority became a trustee, the Bank must
demonstrate circumstances which raised a trust for the first time either at the
date on which the local authority received the money or at the date on which
payment into the mixed account was made. Counsel for the Bank specifically

– 31 –

disavowed any claim based on a constructive trust. This was plainly right
because the local authority had no relevant knowledge sufficient to raise a
constructive trust at any time before the monies, upon the bank account going
into overdraft, became untraceable. Once there ceased to be an identifiable
trust fund, the local authority could not become a trustee: In re Goldcorp
Exchange Ltd [1995] 1 AC 74. Therefore, as the argument for the Bank
recognised, the only possible trust which could be established was a resulting
trust arising from the circumstances in which the local authority received the
upfront payment.

Under existing law a resulting trust arises in two sets of circumstances:

1. 1. Where A makes a voluntary payment to B or pays (wholly or
    in part) for the purchase of property which is vested either in
    B alone or in the joint names of A and B. there is a
    presumption that A did not intend to make a gift to B: the
    money or property is held on trust for A (if he is the sole
    provider of the money) or in the case of a joint purchase by A
    and B in shares proportionate to their contributions. It is
    important to stress that this is only a presumption, which
    presumption is easily rebutted either by the counter-
    presumption of advancement or by direct evidence of A’s
    intention to make an outright transfer: see Underhill and
    Hayton (supra) p. 317 et seq.; Vandervell v. I.R.C. [1967] 2
    A.C. 291 at 312 et seq.; In re Vandervell (No. 2) [1974] Ch.
    269 at 288 et seq.
  2. Where A transfers property to B on express trusts, but the
    trusts declared do not exhaust the whole beneficial interest:
    ibid. and Barclays Bank v. Quistclose Investments Ltd. [1970]
    A.C. 567.

Both types of resulting trust are traditionally regarded as examples of trusts
giving effect to the common intention of the parties. A resulting trust is not
imposed by law against the intentions of the trustee (as is a constructive trust)
but gives effect to his presumed intention. Megarry J. in In re Vandervell
(No. 2) suggests that a resulting trust of type (B) does not depend on intention
but operates automatically. I am not convinced that this is right. If the settlor
has expressly, or by necessary implication, abandoned any beneficial interest
in the trust property, there is in my view no resulting trust: the undisposed-of
equitable interest vests in the Crown as bona vacantia: see In re West Sussex
Constabulary’s Widows, Children and Benevolent (1930) Fund Trusts [1971]
Ch. 1.

Applying these conventional principles of resulting trust to the present
case, the Bank’s claim must fail. There was no transfer of money to the local
authority on express trusts: therefore a resulting trust of type (B) above could

– 32 –

not arise. As to type (A) above, any presumption or resulting trust is rebutted
since it is demonstrated that the Bank paid, and the local authority received,
the upfront payment with the intention that the monies so paid should become
the absolute property of the local authority. It is true that the parties were
under a misapprehension that the payment was made in pursuance of a valid
contract. But that does not alter the actual intentions of the parties at the date
the payment was made or the monies were mixed in the bank account. As the
article by William Swadling (supra) demonstrates the presumption of resulting
trust is rebutted by evidence of any intention inconsistent with such a trust,
not only by evidence of an intention to make a gift.

Professor Birks, whilst accepting that the principles I have stated
represent “a very conservative form” of definition of a resulting trust (page
360), argues from restitutionary principles that the definition should be
extended so as to cover a perceived gap in the law of “subtractive unjust
enrichment’ (p. 368) so as to give a plaintiff a proprietary remedy when he
has transferred value under a mistake or under a contract the consideration for
which wholly fails. He suggests that a resulting trust should arise wherever
the money is paid under a mistake (because such mistake vitiates the actual
intention) or when money is paid on a condition which is not subsequently
satisfied.

As one would expect, the argument is tightly reasoned but I am not
persuaded. The search for a perceived need to strengthen the remedies of a
plaintiff claiming in restitution involves, to my mind, a distortion of trust
principles. First, the argument elides rights in property (which is the only
proper subject matter of a trust) into rights in “the value transferred”: see p.
361. A trust can only arise where there is defined trust property: it is
therefore not consistent with trust principles to say that a person is a trustee
of property which cannot be defined. Second, Professor Birks’ approach
appears to assume (for example in the case of a transfer of value made under
a contract the consideration for which subsequently fails) that the recipient will
be deemed to have been a trustee from the date of his original receipt of
money, i.e. the trust arises at a time when the “trustee” does not, and cannot,
know that there is going to be a total failure of consideration. This result is
incompatible with the basic premise on which all trust law is built, viz. that
the conscience of the trustee is affected. Unless and until the trustee is aware
of the factors which give rise to the supposed trust, there is nothing which can
affect his conscience. Thus neither in the case of a subsequent failure of
consideration nor in the case of a payment under a contract subsequently
found to be void for mistake or failure of condition will there be
circumstances, at the date of receipt, which can impinge on the conscience of
the recipient, thereby making him a trustee. Thirdly, Professor Birks has to
impose on his wider view an arbitrary and admittedly unprincipled
modification so as to ensure that a resulting trust does not arise when there
has only been a failure to perform a contract, as opposed to total failure of
consideration: see pp. 356-359 and 362. Such arbitrary exclusion is designed
to preserve the rights of creditors in the insolvency of the recipient. The fact

– 33 –

that it is necessary to exclude artificially one type of case which would
logically fall within the wider concept casts doubt on the validity of the
concept.

If adopted, Professor Birks’ wider concepts would give rise to all the
practical consequences and injustices to which I have referred. I do not think
it right to make an unprincipled alteration to the law of property (i.e. the law
of trusts) so as to produce in the law of unjust enrichment the injustices to
third parties which I have mentioned and the consequential commercial
uncertainty which any extension of proprietary interests in personal property
is bound to produce.

The Authorities

Three cases were principally relied upon in direct support of the
proposition that a resulting trust arises where a payment is made under a void
contract.

(A) Sinclair v. Brougham [1914] A.C. 398

The case concerned the distribution of the assets of the Birkbeck
Building Society, an unincorporated body which was insolvent. The Society
had for many years been carrying on business as a bank which, it was held,
was ultra vires its objects. The bank had accepted deposits in the course of
its ultra vires banking business and it was held that the debts owed to such
depositors were themselves void as being ultra vires. In addition to the
banking depositors, there were ordinary trade creditors. The Society had two
classes of members, the A shareholders who were entitled to repayment of
their investment on maturity and the B shareholders whose shares were
permanent. By agreement, the claims of the ordinary trade creditors and of
the A shareholders had been settled. Therefore the only claimants to the
assets of the Society before the Court were the ultra vires depositors and the
B shareholders, the latter of which could take no greater interest than the
Society itself.

The issues for decision arose on a summons taken out by the liquidator
for directions as to how he should distribute the assets in the liquidation. In
the judgments, it is not always clear whether this House was laying down
general propositions of law or merely giving directions as to the proper mode
in which the assets in that liquidation should be distributed. The depositors
claimed, first, in quasi contract for money had and received. They claimed
secondly, as the result of an argument suggested for the first time in the
course of argument in the House of Lords (at p. 404), to trace their deposits
into the assets of the Society.

– 34 –

Money had and received

The House of Lords was unanimous in rejecting the claim by the ultra
vires depositors to recover in quasi-contract on the basis of monies had and
received. In their view, the claim in quasi-contract was based on an implied
contract. To imply a contract to repay would be to imply a contract to exactly
the same effect as the express ultra vires contract of loan. Any such implied
contract would itself be void as being ultra vires.

Subsequent developments in the law of restitution demonstrate that this
reasoning is no longer sound. The common law restitutionary claim is based
not on implied contract but on unjust enrichment: in the circumstances the
law imposes an obligation to repay rather than implying an entirely fictitious
agreement to repay: Fibrosis v. Fairborn [1943] AC 32, 63-64 per Lord
Wright; Peavey & Matthews Pty. Ltd. v. Paul [1987] 69 I.E. 579, 583,
603: Lipkin Gorman v. Karpnale Ltd [1991] 2 A.C. 548, 578C: Woolwich
Equitable Building Society v. I.R.C. [1993] AC 70. In my judgment, Your
Lordships should now unequivocally and finally reject the concept that the
claim for monies had and received is based on an implied contract. I would
overrule Sinclair v. Brougham on this point.

It follows that in Sinclair v. Brougham the depositors should have had
a personal claim to recover the monies at law based on a total failure or
consideration. The failure of consideration was not partial: the depositors
had paid over their money in consideration of a promise to repay. That
promise was ultra vires and void: therefore the consideration for the payment
of the money wholly failed. So in the present swaps case (though the point
is not one under appeal) I think the Court of Appeal were right to hold that
the swap monies were paid on a consideration that wholly failed. The essence
of the swap agreement is that, over the whole term of the agreement, each
party thinks he will come out best: the consideration for one party making a
payment is an obligation on the other party to make counter-payments over the
whole term of the agreement.

If in Sinclair v. Brougham the depositors had been held entitled to
recover at law, their personal claim would have ranked part passu with other
ordinary unsecured creditors, in priority to the members of the Society who
could take nothing in the liquidation until all creditors had been paid.

The claim in rem.

The House of Lords held that, the ordinary trade creditors having been
paid in full by agreement, the assets remaining were to be divided between the
ultra vires depositors and the members of the Society pro rata according to
their respective payments to the Society. The difficulty is to identify any
single ratio decidendi for that decision. Lord Haldane (with whom Lord
Atkinson agreed) and Lord Parker gave fully reasoned judgments (considered

– 35 –

below). Lord Dunedin apparently based himself on some “super-eminent”
equity (not a technical equity) in accordance with which the Court could
distribute the remaining assets of the Society: see pp. 434 and 436. The
members (by which presumably he means the Society) were not in a fiduciary
relationship with the depositors: it was the directors not the Society which
had mixed the monies: 438. This indicates that he was adopting the approach
of Lord Parker: yet he concurred in the judgment of Lord Haldane: 438. I
can only understand his judgment as being based on some super-eminent
jurisdiction in the Court to do justice as between the remaining claimants in
the course of a liquidation.

Lord Sumner plainly regarded the case as a matter of doing justice in
administering the remaining assets in the liquidation, all other claims having
been eliminated: p. 459. He said, at p. 458:

The question is one of administration. The liquidator, an officer of
the Court, who has to discharge himself of the assets that have come
to his hands, asks for directions, and, after hearing all parties
concerned, the Court has the right and the duty to direct him how to
distribute all the assets. … In my opinion, if precedent fails, the
most just distribution of the whole must be directed, so only that no
recognised rule of law or equity be disregarded.”

Lord Haldane (p. 418) treated the case as a tracing claim: could the
depositors follow and recover property with which, in equity, they had “never
really parted”: p. 418. After holding that the parties could not trace at law
(pp. 418-420) he said that the monies could be traced in equity “based upon
trust”: p. 420. The only passage in which he identifies the trust is at p. 421:
“The property was never converted into a debt, in equity at all events, and
there has been throughout a resulting trust, not of an active character, but
sufficient, in my opinion, to bring the transaction within the general
principle.” He treats the Society itself (as opposed to its directors) as having
mixed the depositors’ money with its own money, but says that such mixing
was not a breach of fiduciary duty by the Society but authorised by the
depositors: it was intended that “the Society should be entitled to deal with
[the depositors’ money] freely as its own”: pp. 422-423. On that ground he
distinguished In re Hallett’s Estate case (a trustee is taken to have drawn his
own money first) and held that the mixed monies therefore belonged to the
depositors and members pro rata.

Like others before me, I find Lord Haldane’s reasoning difficult, if not
impossible, to follow. The only equitable right which he identifies arises
under “a resulting trust, not of an active character” which, as I understand it,
existed from the moment when the Society received the money. Applying the
conventional approach, the resulting trust could only have arisen because
either the depositors were treated as contributors to a fund (a resulting trust
of type (A) above) or because the “trust” on which the monies were paid to
the Society had failed (a resulting trust of type (B)). Yet the finding that the

– 36 –

Society was not in breach of fiduciary duty because it was the intention or the
parties that the Society should be free to deal with the money as its own
(p. 423) is inconsistent with either type of resulting trust. Such an intention
would rebut the presumption of resulting trust of type (A) and is inconsistent
with a payment on express trusts which fail, i.e. with a type (B) resulting
trust. Therefore the inactive resulting trust which Lord Haldane was referring
to was, as Professor Birks points out, not a conventional one: indeed there
is no trace of any such trust in earlier or later authority. The question is
whether the recognition of such a trust accords with principle and the demands

of certainty in commercial dealings.

As to the latter, Lord Haldane’s theory, if correct, gives rise to all the
difficulties which I have noted above. Nor does the theory accord with
principle. First, it postulates that the Society became a trustee at a time when
it was wholly ignorant of the circumstances giving rise to the trust. Second,
since the depositors’ money was intended to be mixed with that of the Society,
there was never any intention that there should be a separate identifiable trust
fund, an essential feature of any trust. Third, and most important, if Lord
Haldane’s approach were to be applicable in an ordinary liquidation it is quite
incapable of accommodating the rights of ordinary creditors. Lord Haldane’s
inactive resulting trust, if generally applicable, would give the depositors (and
possibly the members) rights having priority not only to those of ordinary
trade creditors but also to those of some secured creditors, e.g. the common
form security for bank lending, a floating charge on the company’s assets.
The monies of both depositors and members are, apparently, trust monies and
therefore form no part of the company’s assets available to pay creditors,
whether secured or unsecured. This seems to be an impossible conclusion.
Lord Haldane appreciated the difficulty, but did not express any view as to
what the position would be if there had been trade creditors in competition:
see at pp. 421-422 and 425-426.

Lord Parker analysed the matter differently. He held that the
depositors had paid their money not to the Society itself but to the directors,
who apparently held the monies on some form of Quistclose trust: the money
had been paid by the depositors to the directors to be applied by them in
making valid deposits with the Society and, since such deposit was impossible,
the directors held the monies on a trust for the depositors: see pp. 441-442
and 444. It is to be noted that Lord Parker does not at any time spell out the
nature of the trust. However, he held that the directors owed fiduciary duties
both to the depositors and to the members of the Society. Therefore it was
not a case in which a trustee had mixed trust monies with his own monies (to
which Hallett’s case would apply) but of trustees (the directors) mixing the
monies of two innocent parties to both of whom they owed fiduciary duties:
the depositors and members therefore ranked part passu: p. 442.

I find the approach of Lord Parker much more intelligible than that of
Lord Haldane: it avoids finding that the Society held the money on a resulting
trust at the same time as being authorised to mix the depositors’ money with

– 37 –

its own. In In re Diplock [1948] Ch. 465 the Court of Appeal found the ratio
of Sinclair v. Brougham to lie in Lord Parker’s analysis. But, quite apart
from the fact that no other member of the House founded himself on Lord
Parker’s analysis, it is in some respects very unsatisfactory. First, the finding
that the depositors’ monies were received by the directors, as opposed to the
Society itself, is artificial. Although it was ultra vires the Society to enter
into a contract to repay the monies, it was not ultra vires the Society to
receive monies. Second, Lord Parker’s approach gives depositors and
members alike the same priority over trade creditors as does that of Lord
Haldane. The fact is that any analysis which confers an equitable proprietary
interest as a result of a payment under a void contract necessarily gives
priority in an insolvency to the recovery of the ultra vires payment. Lord
Parker too was aware of this problem: but he left the problem to be solved
in a case where the claims of trade creditors were still outstanding. Indeed
he went further than Lord Haldane. He appears to have thought that the
Court had power in some cases to postpone trade creditors to ultra vires
depositors and in other cases to give the trade creditors priority: which course
was appropriate he held depended on the facts of each individual case: pp.
444 and 445. There is much to be said for the view that Lord Parker, like
Lord Haldane and Lord Sumner, was dealing only with the question of the due
administration of assets of a company in liquidation. Thus he says, at p.449
“Nor, indeed, am I satisfied that the equity to which effect is being given in
this case is necessarily confined to a liquidation. It is, however, unnecessary
for your Lordships to decide these points.” This makes it clear that he was
not purporting to do more than decide how the assets of that society in that
liquidation were to be dealt with.

As has been pointed out frequently over the 80 years since it was
decided, Sinclair v. Brougham is a bewildering authority: no single ratio
decidendi can be detected: all the reasoning is open to serious objection: it
was only intended to deal with cases where there were no trade creditors in
competition and the reasoning is incapable of application where there are such
creditors. In my view the decision as to rights in rem in Sinclair v. Brougham
should also be overruled. Although the case is one where property rights are
involved, such overruling should not in practice disturb long-settled titles.
However, Your Lordships should not be taken to be casting any doubt on the
principles of tracing as established in In re Diplock.

If Sinclair v. Brougham, in both its aspects, is overruled the law can
be established in accordance with principle and commercial common sense:
a claimant for restitution of monies paid under an ultra vires, and therefore
void, contract has a personal action at law to recover the monies paid as on
a total failure of consideration; he will not have an equitable proprietary claim
which gives him either rights against third parties or priority in an insolvency;
nor will he have a personal claim in equity, since the recipient is not a trustee.

– 38 –

(B) Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd.
[1981] Ch. 105

In that case Chase Manhattan, a New York bank, had by mistake paid
the same sum twice to the credit of the defendant, a London bank. Shortly
thereafter, the defendant bank went into insolvent liquidation. The question
was whether Chase Manhattan had a claim in rem against the assets of the
defendant bank to recover the second payment.

Goulding J. was asked to assume that the monies paid under a mistake
were capable of being traced in the assets of the recipient bank: he was only
concerned with the question whether there was a proprietary base on which
the tracing remedy could be founded: p. 116b. He held that, where money
was paid under a mistake, the receipt of such money without more constituted
the recipient a trustee: he said that the payer “retains an equitable property
in it and the conscience of [the recipient] is subjected to a fiduciary duty to
respect his proprietary right”: p. 119d-e.

It will be apparent from what I have already said that I cannot agree
with this reasoning. First, it is based on a concept of retaining an equitable
property in money where, prior to the payment to the recipient bank, there
was no existing equitable interest. Further, I cannot understand how the
recipient’s “conscience” can be affected at a time when he is not aware of any
mistake. Finally, the Judge found that the law of England and that of New
York were in substance the same. I find this a surprising conclusion since the
New York law of constructive trusts has for a long time been influenced by
the concept of a remedial constructive trust, whereas hitherto English law has
for the most part only recognised an institutional constructive trust: see Metall
& Rohstoff v. Donaldson Inc. [1990] 1 Q.B. 391, 478-480. In the present
context, that distinction is of fundamental importance. Under an institutional
constructive trust, the trust arises by operation of law as from the date of the
circumstances which give rise to it: the function of the court is merely to
declare that such trust has arisen in the past. The consequences that flow
from such trust having arisen (including the possibly unfair consequences to
third parties who in the interim have received the trust property) are also
determined by rules of law, not under a discretion. A remedial constructive
trust, as I understand it, is different. It is a judicial remedy giving rise to an
enforceable equitable obligation: the extent to which it operates
retrospectively to the prejudice of third parties lies in the discretion of the
court. Thus for the law of New York to hold that there is a remedial
constructive trust where a payment has been made under a void contract gives
rise to different consequences from holding that an institutional constructive
trust arises in English law.

However, although I do not accept the reasoning of Goulding J., Chase
Manhattan may well have been rightly decided. The defendant bank knew of
the mistake made by the paying bank within two days of the receipt of the
monies: see at p. 115a. The judge treated this fact as irrelevant (p. 114f)

– 39 –

but in my judgment it may well provide a proper foundation for the decision.
Although the mere receipt of the monies, in ignorance of the mistake, gives
rise to no trust, the retention of the monies after the recipient bank learned of
the mistake may well have given rise to a constructive trust: see Snell’s
Equity p. 193: Pettit Equity and the Law of Trusts 7th edn. 168: Metall and
Rohstoff v. Donaldson Inc. [1990] 1 Q.B. 391 at pp. 473-474.

In this case the father of the intended husband, in consideration of the
son’s intended marriage with Miss H., made a marriage settlement under
which the income was payable to the husband for life and after his death to
the wife for life or until her remarriage, with remainder to the issue of the
intended marriage. There was an ultimate trust, introduced by the words “If
there should not be any child of the said intended marriage who attains a
vested interest . . . ,” for an artificial class of the husband’s next of kin. The
marriage took place. Many years later a decree of nullity on the grounds of
non-consummation had the effect of rendering the marriage void ab initio.
The income was paid to the husband until his death which occurred 19 years
after the decree of nullity. The question was whether the trust capital was
held under the ultimate trust for the husband’s next-of-kin or was payable to
the settlor’s estate. It was held that the settlor’s estate was entitled.

The judgment is very confused. It is not clear whether the judge was
holding (as I think correctly) that in any event the ultimate trust failed because
it was only expressed to take effect in the event of the failure of the issue of
a non-existent marriage (an impossible condition precedent) or whether he
held that all the trusts of the settlement failed because the beneficial interests
were conferred in consideration of the intended marriage and that there had
been a total failure of consideration. In either event, the decision has no
bearing on the present case. On either view, the fund was vested in trustees
on trusts which had failed. Therefore the monies were held on a resulting
trust of type (B) above. The decision casts no light on the question whether,
there being no express trust, monies paid on a consideration which wholly
fails are held on a resulting trust.

The stolen bag of coins

The argument for a resulting trust was said to be supported by the case
of a thief who steals a bag of coins. At law those coins remain traceable only
so long as they are kept separate: as soon as they are mixed with other coins
or paid into a mixed bank account they cease to be traceable at law. Can it
really be the case, it is asked, that in such circumstances the thief cannot be
required to disgorge the property which, in equity, represents the stolen coins?
Monies can only be traced in equity if there has been at some stage a breach
of fiduciary duty, i.e. if either before the theft there was an equitable
proprietary interest (e.g. the coins were stolen trust monies) or such interest
arises under a resulting trust at the time of the theft or the mixing of the

– 40 –

monies. Therefore, it is said, a resulting trust must arise either at the time or
the theft or when the monies are subsequently mixed. Unless this is me law,
there will be no right to recover the assets representing the stolen monies once
the monies have become mixed.

I agree that the stolen monies are traceable in equity. But the
proprietary interest which equity is enforcing in such circumstances arises
under a constructive, not a resulting, trust. Although it is difficult to find
clear authority for the proposition, when property is obtained by fraud equity
imposes a constructive trust on the fraudulent recipient: the property is
recoverable and traceable in equity. Thus, an infant who has obtained
property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2
K.B. 235, 244: R. Leslie Ltd. v. Shiell [1914] 3 K.B. 607. Monies stolen
from a bank account can be traced in equity: Bankers Trust Co. v. Shapira
[1980] 1 W.L.R. 1274, 1282c-e. See also McCormick v. Grogan L.R. 4
H.L. 82, 97.

Restitution and equitable rights

Those concerned with developing the law of restitution are anxious to
ensure that, in certain circumstances, the plaintiff should have the right to
recover property which he has unjustly lost. For that purpose they have
sought to develop the law of resulting trusts so as to give the plaintiff a
proprietary interest. For the reasons that I have given in my view such
development is not based on sound principle and in the name of unjust
enrichment is capable of producing most unjust results. The law of resulting
trusts would confer on the plaintiff a right to recover property from, or at the
expense of, those who have not been unjustly enriched at his expense at all,
e.g. the lender whose debt is secured by a floating charge and all other third
parties who have purchased an equitable interest only, albeit in all innocence
and for value.

Although the resulting trust is an unsuitable basis for developing
proprietary restitutionary remedies, the remedial constructive trust, if
introduced into English law, may provide a more satisfactory road forward.
The court by way of remedy might impose a constructive trust on a defendant
who knowingly retains property of which the plaintiff has been unjustly
deprived. Since the remedy can be tailored to the circumstances of the
particular case, innocent third parties would not be prejudiced and
restitutionary defences, such as change of position, are capable of being given
effect. However, whether English law should follow the United States and
Canada by adopting the remedial constructive trust will have to be decided in
some future case when the point is directly in issue.

The date from which interest is payable

The Court of Appeal held that compound interest was payable by the
local authority on the balance for the time being outstanding, such interest to

– 41 –

start from the date of the receipt by the local authority of the upfront payment
of £2.5m. on 18 June 1987. Although, for the reasons I have given, I do not
think the Court should award compound interest in this case. I can see no
reason why interest should not start to run as from the date of payment of the
upfront payment. I agree with the judgment of Leggatt L.J. in the Court of
Appeal (at p. 955) that there is no good ground for departing from the general
rule that interest is payable as from the date of the accrual of the cause of
action.

Equity acting in aid of the common law

Since drafting this speech I have seen, in draft, the speeches of my
noble and learned friends Lord Goff of Chieveley and Lord Woolf. Both
consider that compound interest should be awarded in this case on the grounds
that equity can act in aid of the common law and should exercise its
jurisdiction to order compound interest in aid of the common law right to
recover monies paid under an ultra vires contract.

I fully appreciate the strength of the moral claim of the bank in this
case to receive full restitution, including compound interest. But I am unable
to accept that it would be right in the circumstances of this case for your
Lordships to develop the law in the manner proposed. I take this view for
two reasons.

First, Parliament has twice since 1934 considered what interest should
be awarded on claims at common law. Both the Law Reform (Miscellaneous
Provisions) Act, 1934, section 3(1) and its successor, section 35A of the
Supreme Court Act, 1981, make it clear that the Act does not authorise the
award of compound interest. However both Acts equally make it clear that
they do not impinge on the award of interest in equity. At the time those Acts
were passed, and indeed at all times down to the present day, equity has only
awarded compound interest in the limited circumstances which I have
mentioned. In my judgment, your Lordships would be usurping the function
of Parliament if, by expanding the equitable rules for the award of compound
interest, this House were now to hold that the court exercising its equitable
jurisdiction in aid of the common law can award compound interest which the
statutes have expressly not authorised the court to award in exercise of its
common law jurisdiction.

Secondly, the arguments relied upon by my noble and learned friends
were not advanced by the Bank at the hearing. The local authority would
have a legitimate ground to feel aggrieved if the case were decided against
them on a point which they had had no opportunity to address. Moreover,
in my view it would be imprudent to introduce such an important change in
the law without this House first having heard full argument upon it. Although
I express no concluded view on the points raised, the proposed development
of the law bristles with unresolved questions. For example, given that the
right to interest is not a right which existed at common law but is solely the

– 42 –

creation of statute, would equity in tact be acting in aid of the common law
or would it be acting in aid of the legislature? Does the principle that equity
acts in aid of the common law apply where there is no concurrent right of
action in equity? If not, in the absence of any trust or fiduciary relationship
what is the equitable cause of action in this case? What were the policy
reasons which led Parliament to provide expressly that only the award of
simple interest was authorised? In what circumstances should compound
interest be awarded under the proposed expansion of the equitable rules? In
the absence of argument on these points it would in my view be imprudent to
change the law. Rather, the whole question of the award of compound
interest should be looked at again by Parliament so that it can make such
changes, if any, as are appropriate.

For these reasons, which are in substance the same as those advanced
by my noble and learned friend Lord Lloyd of Berwick. I am unable to agree
with the views of Lord Goff of Chieveley and Lord Woolf.

Conclusion

I would allow the appeal and vary the judgment of the Court of Appeal
so as to order the payment of simple interest only as from 18 June 1987 on
the balance from time to time between the sums paid by the Bank to the local
authority and the sums paid by the local authority to the Bank.

LORD SLYNN OF HADLEY

My Lords,

For the reasons given by my noble and learned friend Lord Browne-
Wilkinson I agree that Sinclair v. Brougham should be departed from and that
it should be held that in this case the local authority was neither a trustee of,
nor in a fiduciary position in relation to, the monies which it had received
from the Bank, nor had it improperly profited from the use of those monies.
For the reasons which he gives no resulting trust could arise on the present
facts.

It follows that if, as I think, Lord Brandon of Oakbrook in President
of India v. La Pintada Compania Navigacion S.A. [1985] A.C. 104, 116, was
right to say that in the Court of Chancery the award of compound interest was
limited to situations “where money had been obtained and retained by fraud,
or where it had been withheld or misapplied by a trustee or anyone else in a
fiduciary position.” Courts of Chancery would not have awarded compound
interest in a case like the present.

– 43 –

It is common ground that compound interest could not have been
awarded at common law as presently formulated nor under the statutory
provisions in section 3 of the Law Reform (Miscellaneous Provisions) Act
1934 nor under section 35A of the Supreme Court Act 1981 as inserted by the
Administration of Justice Act 1982.

But for the legislation I would have accepted that it was open to your
lordships to hold that, in the light of the development of the law of restitution,
the courts could award compound interest, either by modifying the common
law rule or by resorting to equity to act in aid of the common law right to
recover monies paid under a void transaction. As to whether it would have
been right to do so in general terms, or whether it would have been right to
limit the cases in which compound interest should be awarded, or whether
compound interest should be awarded at all I am not, on the restricted
arguments advanced in this case, prepared to comment.

I do not, however, consider that it would be right on this appeal to
enlarge the cases in which compound interest can be awarded when Parliament
has twice in relatively recent times limited statutory interest to simple interest.
This is a matter which should be considered by Parliament when the merits
or disadvantages of giving the courts power to award compound interest could
be examined in a context wider than the present case.

Accordingly in agreement with my noble and learned friends Lord
Browne-Wilkinson and Lord Lloyd of Berwick, and despite the forceful
reasoning of my noble and learned friends Lord Goff of Chieveley and Lord
Woolf, I would allow the appeal and vary the judgment of the Court of
Appeal so as to award simple interest from 18 June 1987.

LORD WOOLF

My Lords,

This appeal raises directly only one issue of law. It is whether the
courts have jurisdiction to make an order for the payment of compound
interest ancillary to an order for restitution when a contract is ultra vires. All
the judges in the courts below concluded that there was jurisdiction to do so.

In this case an order was made in favour of the respondent bank as
against the local authority appellant which was the recipient of the ultra vires
payment. There is no dispute that there was jurisdiction to make an order for
the payment of simple interest. The dispute is limited to the order for
compound interest.

– 44 –

It is accepted that if there is jurisdiction to make the order this is a
case in which this achieves a just result. There is only one other issue raised
by the appeal and that is as to the date from which the interest should be paid.

The transaction was a commercial transaction. The local authority in
calculating the balance which it had to repay the respondents was given credit
for the sums which it had paid by way of notional interest under the contract
prior to it being appreciated that the contract might be ultra vires. If the
transaction had not taken place the local authority would have had to borrow
(if it could find a way of lawfully doing so) the sum paid to it by the bank on
terms which would be likely to involve compound interest being recoverable
in proceedings for default. (Here see National Bank of Greece v. Pinios
Shipping Co. No. 1, The Maira [1990] 1 A.C. 637 as to commercial
transactions with banks). The bank could have lent that sum on the same
basis.

Hobhouse J., the judge at first instance reflected the commercial justice
of the situation in the passage in his judgment ([1994] 4 All E.R. at p. 955)
in which he set out succinctly why he considered compound interest was
payable:

“[The local authority] has kept that sum and has not made any
restitution. In this situation I see no reason why I should not exercise
my equitable jurisdiction to award compound interest. Simple interest
does not reflect the actual value of money. Anyone who lends or
borrows money on a commercial basis receives or pays interest
periodically and if that interest is not paid it is compounded (e.g.
Wallersteiner v. Moir (No. 2) [1975] 1 All E.R. 849, [1975] Q.B. 373
and National Bank of Greece S.A. v. Pinios Shipping Co. No. 1, The
Maira [1990] 1 All E.R. 78, [1990] 1 A.C. 637). I see no reason why
I should deny the plaintiff a complete remedy or allow the defendant
arbitrarily to retain part of the enrichment which it has unjustly
enjoyed. There are no special factors which have to be taken into
account. No question of insolvency is involved nor is there any basis
for any persuasive argument to the contrary.”

This being the situation I am relieved that I am of the opinion that the
judges in the courts below were correct in concluding that in the
circumstances of this case they were entitled to award compound interest.
Any other decision would be inconsistent with the court’s ability to grant full
restitution. It would be a further unhappy aspect, from a commercial stand
point, of the history of this case in particular and the swaps litigation as a
whole. This commenced with the decision, to which I was a party at first
instance, of Hazell v. Hammersmith and Fulham London Borough Council
[1992] 2 A.C. 1. It is no secret that the decision at first instance in that case,
which was approved by this House, caused dismay among some of those
concerned with the standing abroad of the commercial law of this country.
That concern is likely to be increased if the outcome of this litigation is that

– 45 –

this appeal has to be allowed by this House because the courts have no
jurisdiction to grant compound interest.

The position is not improved by the fact that such is the confused state
of English law as to the extent of its jurisdiction to award interest that the
hearing before their Lordships involved four days of argument. Argument
that could have lasted even longer but for counsel for the local authority
courteously informing their Lordships that because of the costs which the local
authority was incurring on the appeal he was required by his clients to curtail
his argument.

The argument had been extended by their Lordships themselves raising
the issue as to the correctness of a decision of this House of some 80 years
standing (Sinclair v. Brougham [1914] A.C. 398). That case does not directly
involve the courts’ equitable jurisdiction to award interest. Yet the issue as
to whether the case was correctly decided still needed to be raised because the
reasoning in that case was inconsistent with the submissions of the local
authority. The fact that counsel was required to take the course of seeking to
limit his argument does put in question whether the way appeals are managed
before the House and the resources available to their Lordships are ideal for
meeting both the contemporary needs of litigants and their Lordships’
responsibilities for the proper development of the law.

I have had the considerable advantage of being able to read in draft the
admirably reasoned speeches of Lord Goff of Chieveley and Lord Browne-
Wilkinson. That reasoning convinces me that the bank is not entitled to
proceed by way of an equitable proprietary claim and that the recipient of a
sum of money paid under an ultra vires contract should not be regarded as
owing either the duties of a trustee or fiduciary to the payer of that sum.
Further then that it is not necessary for me to go. This avoids the dangers
which Lord Browne-Wilkinson identifies could flow from the wholesale
importation into commercial law of equitable principles. I am also in
agreement with Lord Goff’s reasoning as to compound interest being able to
be awarded where one party is under a duty to make restitution to another,
this being a consequence of the development of the law of restitution.

The Significance of the Difference Between Equitable Principles and Remedies

Such a wholesale importation is not necessarily the consequence of a
finding that the courts have the equitable jurisdiction to make an order for the
payment of compound interest in conjunction with the grant of a remedy of
restitution. We are concerned here primarily not with equitable principles of
substantive law but with the possible existence of an equitable remedy.
Compound interest, if it is recoverable, will be recoverable in the
circumstances of this case in equity because of the absence of any statutory or
common law remedy which will prevent the local authority being unjustly
enriched at the expense of the bank if compound interest is not payable.

– 46 –

The situation is one in which compound interest would be awarded
because it would be unconscionable to allow the local authority to make a
profit out of a contract which was void because it had exceeded its own
powers. This is very much an analogous situation to those where equity has
traditionally provided remedies. Perhaps the best example is provided by
specific performance. It is unnecessary to inquire whether the right which is
being enforced by an order of specific performance is one recognised by the
common law or equity. What does matter is whether it is equitable to grant
the remedy and whether an award of damages in lieu would be an adequate
remedy.

In addition, if the contract had not been void and the local authority
had failed to make the payments required the bank might well, as I will seek
to show, have been fully protected by its remedy in damages at common law.
Because there is no contract damages are not available. Here the situation is
very much in keeping with those where equity traditionally mitigates the
inadequacy of a common law remedy without having to invoke the substantive
equitable law principles. This situation is described in Snell’s Equiry. 29th
ed., ch. 2. s. 4. p. 26:

“Between them, equitable interests, mere equities, floating equities and
the great doctrines of equity cover most of the field of equity: and they
are all concerned to a greater or lesser degree with the rights of
property. Yet although the existence of such rights has long been an
important factor in deciding whether equity will intervene, it is not
essential. Equitable remedies, though often used in aid of property
rights, are also often used in other cases. The underlying principle is
the inadequacy of the common law remedy of damages. Thus the
equitable remedies of rescission and injunction may be employed in
relation to contracts for personal services: and injunctions are
sometimes granted in cases of tort which involve no rights of property.
In this sense there may be equities unrelated to property.”

In the same sense it can be said there may be equities unrelated to a
breach of trust or fiduciary duty. I would add that equity does not only come
to the aid of a claimant where damages are an inadequate remedy. It can also
do so when one of the other common law remedies is inadequate. I would
take as an example the remedy of an account. The advantages of the equitable
remedy over the common law remedy have resulted in the latter remedy being
supplanted by the former. It may well be that the editors of Snell ‘s Equity did
not have in mind the power to award interest when writing the paragraph I
have set out. The paragraph is nonetheless of general application and there
is no reason why it should not apply to the equitable remedy of awarding
interest in the same way as it applies to other equitable remedies. The award
of interest is only distinct from other remedies in that it is usually awarded as
an ancillary to some other remedy.

– 47 –

I therefore accept Mr. Sumption’s submission on behalf of the bank
that where there is a duty to make restitution equity can achieve full restitution
by granting, when it is appropriate to do so, simple or compound interest in
addition to requiring repayment of the principal sum. For this to be the
position the defendant must have made an actual or presumed profit or a profit
which he is presumed to have derived from his having been the recipient of
a principal sum which he has not repaid. The compound interest will not be
payable as of right. The remedy of awarding interest, like other equitable
remedies will be discretionary. Interest will only be awarded when it accords
with equitable principles to make the award.

I appreciate that Mr. Sumption did not advance the argument in favour
of the grant of compound interest on the basis that I have put forward.
However, he came before your Lordships” House not expecting Sinclair v.
Brougham to be challenged. He had no reason in his printed case to do other
than base his argument on the fact that the local authority was a fiduciary.
Before your Lordships he made clear that while he was arguing that the local
authority was a fiduciary he was also contending that, if there was power to
order restitution, equity could, as I have already indicated, achieve full
restitution. This is also clear from the statements in the bank’s case to which
I will refer shortly.

The Absence of Previous Authority

There may be no clear previous authority to support this conclusion but
this is not surprising where the relatively new jurisdiction of ordering
restitution is involved. What is more important than the absence of clear
support in the authorities for the grant of compound interest is the absence
from the existing authorities of any statement of principle preventing the
natural development of a salutary equitable jurisdiction enabling compound
interest to be awarded. The jurisdiction is clearly desirable if full restitution
in some cases is to be achieved. It is relevant here to repeat what is stated at
the outset in the bank’s case under the heading “The Position in Principle”:

“1. ‘Any civilised system of law is bound to provide remedies for
cases of what has been called unjust enrichment or unjust benefit, that
is to prevent a man from retaining the money of or some benefit
derived from another which it is against conscience that he should
keep’: Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour
Ltd. [1943] AC 32, 61 (Lord Wright), approved in Woolwich
Equitable Building Society v. Inland Revenue Commissioners [1993]
A.C. 70, 197, 202 (H.L.).”

Restitution is an area of the law which is still in the process of being
evolved by the courts. In relation to restitution there are still questions
remaining to be authoritatively decided. One question, which was still
undecided until the decision on this appeal, is whether its legitimacy is derived
from the common law or equity or both. In order to decide whether

– 48 –

compound interest is payable in this case I do not consider it is necessary to
decide which is the correct answer to that question, but I am content to
assume that the cause of action is one at common law. If the principal sum
is repayable as money had and received rather than under some trust or
because of the existence of a fiduciary duty it is still unconscionable for the
local authority to retain the benefit it made from having received payment
under a contract it purported to make which was outside its powers. The fact
that, until the law was clarified by the decision in this case, the local authority
may reasonably not have appreciated that it should make restitution is not
critical. What is critical is that the payment of compound interest is required
to achieve restitution. A defendant may perfectly reasonably not regard
himself as having been a trustee until the court so decides but this does not
effect the remedies which the court has jurisdiction to grant. The jurisdiction
of the court to grant remedies has to be judged in the light of what the court
decides.

As to the date from which the interest should run I am in agreement
with Lord Browne-Wilkinson that the decision or the Court of Appeal should
not be disturbed.

(Unjust Enrichment Creates the Required Relationship

There are a great many situations where interest as an equitable
remedy has been awarded. Examples are conveniently set out in Halsbury’s
Laws of England 4th ed. vol. 32, paragraph 109. The principle which
connects those examples is stated in the first sentence of the paragraph. It is
the existence of a “particular relationship . . . between the creditor and
debtor”. The “particular relationship” in this case arises out of the right of
the bank to restitution and the fact that the local authority would be unjustly
enriched if it retained what it had received. That made the local authority an
accounting party. The bank had to give credit for the sums it had received
and the local authority had to pay the balance which was still due or what it
had received. What it had received included the use or the money. The
approach is precisely that indicated in the passage of the judgement of Lord
Hatherley, L.C. in Burdick v. Garrick already cited by Lord Browne-
Wilkinson. It is the making of the award not as a punishment but to disgorge
a profit made or presumed to have been made out of the payment of a sum of
money which should not have been made. Here this was because the contract
was void as being ultra vires. There would be no difference of principle if the
contract was void for mistake.

No Distinction of Principle Between Simple and Compound Interest

If the case is one where there is jurisdiction to award equitable interest
then whether compound or simple interest is recoverable depends on the facts
of the particular case. If it is not a situation where the defendant would have
earned compound interest then as in Burdick v. Garrick there would be no

– 49 –

profit of compound interest so it will not be awarded. Simple interest will
awarded instead.

The Law Commission’s Approach

In Law of Contract, Report on Interest (1978 Cmnd. 7229), the Law
Commission decided not to make any recommendations for change as to the
equitable jurisdiction. It is, however, interesting to note the following
paragraphs of the report:

“10. Thirdly, there is the equitable jurisdiction. Interest may be
awarded as ancillary relief in respect of equitable remedies such as
specific performance, rescission or the taking of an account.
Furthermore, the payment of interest may be ordered where money has
been obtained and retained by fraud, or where it has been withheld or
misapplied by an executor or a trustee or anyone else in a fiduciary
position.

. . .

“21. The equitable jurisdiction: The equitable jurisdiction to award
interest and to fix the rate at which it should be paid is extensive. It
includes, for example, the power to order the payment of interest
where money has been obtained or withheld by fraud or where it has
been misapplied by someone in a fiduciary position. In such cases the
court has an inherent power to order the payment of interest at
whatever rate is equitable in the circumstances and may direct that
such interest be compounded at appropriate intervals. Our view is that
it would not be appropriate to impose statutory controls upon the
exercise of the equitable jurisdiction to award interest, beyond those
controls that are already in existence. We invited criticisms of this
view in our working paper but no one disagreed with us. Accordingly,
we make no recommendations for change in relation to the equitable
jurisdiction.”

From what I have said already it is clear that I agree with the
statements in those paragraphs in so far as the equitable jurisdiction to award
interest is regarded as “ancillary relief” but not in so far as they suggest that
it is only equitable remedies in relation to which there can be the ancillary
jurisdiction to award interest. The paragraphs are perfectly satisfactory as
long as they are not regarded as exhaustive. It has to be remembered that the
Law Commission were not intending to make any recommendations as to the
equitable interest.

The fact that the paragraphs accept that compound interest is payable
in the case of fraud perhaps suggests that it is not intended to limit the relief
to situations which only give an entitlement to an equitable remedy. In many
cases of fraud the appropriate remedy will be common law damages. It is

– 50 –

true in the first of the only two cases referred to by the Law Commission.
Johnson v. The King [1904] AC 817, 821, the Privy Council appeared to
think that interest was not payable in the case of an overpayment by mistake.
However the authority relied on for this conclusion was the decision of The
London, Chatham and Dover Railway Co. v. South Eastern Railway Co.
[1893] A.C. 429. Lord Macnaghten regarded “the law as settled by the
judgment” of this House in that case. It is a case to which I will refer later
but it was not concerned with the equitable jurisdiction to grant interest, only
the common law jurisdiction. What is of interest is what Lord Macnaghten
said as to the power to award interest if there had been fraud. He said:

“In order to guard against any possible misapprehension of their
Lordships’ views, they desire to say that, in their opinion, there is no
doubt whatever that money obtained by fraud and retained by fraud
can be recovered with interest, whether the proceedings be taken in a
Court of equity or in a Court of law, or in a Court which has a
jurisdiction both equitable and legal, as the Supreme Court of Sierra
Leone possesses under the Ordinance of November 10. 1881.”
(emphasis added)

Lord Macnaghten did not consider that it mattered whether the proceedings
were based on a common law or equitable cause of action.

The other case referred to in the Report is Wallersteiner v. Moir (No.
2) [1975] Q.B. 373. That case is a clear authority for the existence of an
equitable jurisdiction and that it can be exercised where there is breach of a
fiduciary duty but the court was not concerned with extent of that jurisdiction.
It was accepted by all the members of the Court of Appeal that the jurisdiction
was frequently exercised in the case of breach of trust and of a fiduciary duty
but there is nothing in the judgments to suggest that the jurisdiction is limited
to those situations. Indeed Lord Denning M.R. clearly did not regard it as
being so limited. He said, at p. 388:

“The reason is because a person in a fiduciary position is not allowed
to make a profit out of his trust: and, if he does, he is liable to account
for that profit or interest in lieu thereof.

“In addition, in equity interest is awarded whenever a
wrongdoer deprives a company of money which it needs for use in its
business. It is plain that the company should be compensated for the
loss thereby occasioned to it. Mere replacement of the money – years
later – is by no means adequate compensation, especially in days of
inflation. The company should be compensated by the award of
interest. That was done by Sir William Page Wood V.-C. (afterwards
Lord Hatherley) in one of the leading cases on the subject, Atwool v.
Merryweather (1867) L.R. 5 Eq. 464n., 468-469. But the question
arises: should it be simple interest or compound interest? On general
principles I think it should be presumed that the company (had it not

– 51 –

been deprived of the money) would have made the most beneficial use
open to it: cf. Armory v. Delamirie (1723) 1. Stra. 505. It may be
that the company would have used it in its own trading operations: or
that it would have used it to help its subsidiaries. Alternatively, it
should be presumed that the wrongdoer made the most beneficial use
of it. But, whichever it is, in order to give adequate compensation,
the money should be replaced at interest with yearly rests, i.e.
compound interest.”

This was a broader approach than that adopted by Buckley or Scarman L.JJ.

There remains a further case to which I should make reference before
leaving the authorities as to the equitable jurisdiction. It is President of India
v. La Pintada Compania Navigacion S.A. [1985] A.C. 104. This is the
leading case as to the common law and statutory jurisdictions to which I will
return later. I refer to it for the leading speech of Lord Brandon of Oakbrook
with which the other members of the House agreed. Lord Brandon reviewed
the different jurisdictions to award interest. While doing so he made the
following dicta about the equitable jurisdiction (Lord Brandon also referred to
the equitable jurisdiction (pp. 118-121) but he was then dealing with the
position as to interest in the Admiralty Court and I do not consider those
references are of any help here):

“Thirdly, the area of equity. The Chancery Courts, again
differing from the common law courts, had regularly awarded simple
interest as ancillary relief in respect of equitable remedies, such as
specific performance, rescission and the taking of an account.
Chancery courts had further regularly awarded interest, including not
only simple interest but also compound interest, when they thought that
justice so demanded, that is to say in cases where money had been
obtained and retained by fraud, or where it had been withheld or
misapplied by a trustee or anyone else in a fiduciary position.

. . .

“The first point is that neither the Admiralty Court, nor Courts of
Chancery, awarded interest, except in respect of moneys for which
they were giving judgment. The second point is that the Admiralty
Court never, and Courts of Chancery only in two special classes of
case, awarded compound, as distinct from simple, interest.”

The House had been referred in the course of argument to the report of the
Law Commission and I suspect that Lord Brandon restricted the jurisdiction
of the courts to award interest to equitable remedies following what was stated
in that report. Likewise as to the distinction which he drew between the
jurisdictions to award simple and compound interest. According to the report
of argument, counsel did not address the House on the limits of the equitable
jurisdiction. Therefore although any statement of Lord Brandon is entitled to

– 52 –

the greatest respect I do not regard these two dicta as indicating that Lord
Brandon held a considered opinion inconsistent with my views, which I have
set out above. It may well be that he was doing no more than describing the
situations where in the past the equitable jurisdiction had been exercised.

The position where the claim is based on a personal equity

Lord Browne-Wilkinson, in his speech, points out that two arguments
were not advanced on behalf of the bank. The first is that the local authority
should be liable to make the repayments as a constructive trustee. There is
no need for me to make any comment about this argument. The second

argument which was not advanced is that the bank was entitled to repayment

because of the existence of a personal equity based on the decision in In re
Diplock [1948] Ch. 465. This is a point which it is necessary for me to
consider because of the decision of Hobhouse J. in Kleinwort Benson Ltd. v.
South Tyneside Metropolitan Borough Council [1994] 4 All E.R. 972,
although the decision in In re Diplock dealt with very different circumstances
from those which exist here. The court in In re Diplock was concerned with
the personal equitable liability of a legatee to repay the executors of an estate
of a deceased person a sum which was wrongly paid to them out of the estate.
In the Kleinwort Benson case, Hobhouse J. decided that the existence of a
personal equitable cause of action did not create a power to award compound
interest. This conclusion is inconsistent with the view which I have expressed
that there is a power to award compound interest in the circumstances of this
case.

Personal equitable rights are not confined to the situation considered
in In re Diplock. For example, a personal equitable right to contribution can
exist between co-sureties. This is regarded as being an application of an
equitable approach to restitution to a situation where the remedy at law is not
normally satisfactory. It exists without there having to be any proprietary
right which could give rise to the difficulties to which Lord Browne-Wilkinson
has referred.

The Kleinwort Benson case also involved a local authority which had
entered into a swap transaction which was void. Hobhouse J. distinguished
the Kleinworth Benson case from the present case because in that case there
was no reliance on an equitable proprietary claim for repayment of the sum
which had been paid under the void swap contract. In the Kleinwort Benson
case, the local authority accepted that prima facie they were under a personal
liability to make restitution in law and in equity to the bank but argued it was
not open to a court to award compound interest where only remedies in
personam were established.

Hobhouse J. decided that the local authority’s submissions were
correct. At pp. 994G-995C he said as follows:

– 53 –

“The position is therefore that if a plaintiff is entitled to a
proprietary remedy against a defendant who has been unjustly
enriched, the court may but is not bound to order the repayment of the
sum with compound interest. If on the other hand the plaintiff is only
entitled to a personal remedy which will be the case where, although
there was initially a fiduciary relationship and the payer was entitled
in equity to treat the sum received by the payee as his, the payer’s,
money and to trace it, but because of subsequent developments he is
no longer able to trace the sum in the hands of the payee, then there
is no subject matter to which the rationale on which compound Interest
is awarded can be applied. The payee cannot be shown to have a fund
belonging to the payer or to have used it to make profits for himself.
The legal analysis which is the basis of the award of compound interest
is not applicable. (It is possible that in some cases there might be an
intermediate position where it could be demonstrated that the fiduciary
had, over part of the period, profited from holding a fund as a
fiduciary even though he no longer held the fund at the date of trial
and that in such a case the court might make some order equivalent to
requiring him to account for those profits: but that is not the situation
which I am asked to consider in the present case.)

“Although the original equitable right in both situations is the
same at the outset, that is to say at the time when the payment was
made and received, the two situations do not continue to be the same
and are not the same at the time of trial when the remedy comes to be
given. The payee no longer has property of the payer. The payer is
confined to personal rights and remedies analogous to those recognised
by the common law in the action for money had and received. In such
a situation only simple interest can be awarded even though the
plaintiff is relying upon a restitutionary remedy. Simple interest was
awarded in Woolwich Building Society v. I.R.C. [1992] 3 All E.R.
737, [1993] AC 70 and in BP Exploration (Libya) v. Hunt (No. 2)
[1982] 1 All E.R. 925, [1979] 1 W.L.R. 783 and both those cases
involved an application of restitutionary principles which carried with
them remedies in personam (see also O’Sullivan v. Management
Agency and Music Ltd. [1985] 3 All E.R. 351, [1985] Q.B. 428.)”

The three cases cited by the judge to support his proposition that
simple interest only could be awarded do not in fact assist to determine the
question of principle which is at stake here. In both the Woolwich and the BP
Exploration cases, the claim which was advanced was limited to statutory
interest. The position as to compound interest was not considered. In the
O’Sullivan case, it was conceded that in relation to part of the claim
compound interest was payable and, in fact, it was awarded. Only simple
interest was paid in relation to the balance of the claim, but this was not
because of any lack of jurisdiction; it was because it was only appropriate to
award simple interest in the circumstances of that case.

– 54 –

If Hobhouse J.’s reasoning is correct, then even if there had been an
equitable claim in rem which would justified the award of compound interest,
that would cease to be the situation if the right to trace were lost. That this
would create an unsatisfactory state of affairs is demonstrated by the
contrasting decisions to which the judge came in this case and in the Kleinwort
Benson case. The power of the court to award compound interest would
depend upon circumstances over which the claimant would have no control.
This is inconsistent with the commercial realities to which the judge referred
in the passage which I have cited from his judgment in this case.

Contrary to the view expressed by Hobhouse J., the rationale on which
compound interest is awarded is independent of whether or not there is any
property capable of being traced still in the payee’s hands. The critical issue
is whether, as has happened in this case, the authority was able to make a
profit (which would include making a saving in the interest which it had to
pay) from the fact it had received a sum of money to which it was not
entitled. Even in the case of a claim in rem, the profit is distinct from the
traceable property. If this were not the position the payee by returning the
property to the payer prior to the proceedings could defeat the right which a
claimant would otherwise have to compound interest.

Hobhouse J. refers to In re Diplock in order to identify the distinction
between personal and proprietary equitable remedies. He cites a passage from
the very long judgment of the Court of Appeal in that case, at p. 521.
However, although this is not clear, I would regard that passage as dealing
only with equitable proprietary remedies. He also refers to a further passage
in the judgment in In re Diplock. at p. 517, which he does not cite. He
presumably refers to the sentence in the judgment which indicates the view of
the Court of Appeal that:

“… upon their personal claims the appellants are not entitled to any
interest. The same may not however be true as regards the claim in
rem, at least where the appellants are able to ‘trace’ their proprietary
interest into some specific investment.”

It is therefore probable that Hobhouse J. was influenced in coming to his
decision by the judgment of the Court of Appeal in In re Diplock. However,
that judgment provides a shaky foundation for Hobhouse J.’s decision. The
passage to which he refers can. and should, in my judgment, be regarded as
doing no more than indicating the decision on the merits of the situation which
the Court of Appeal was considering in In re Diplock. A situation which is
very different from that which exists here. There was no commercial
relationship between the parties. The overpaid legatees’ liability was
secondary and they were charities. In those circumstances if they had actually
made a profit from the overpayment which could be traced it would have been
reasonable to award interest but if they had not it would not have been
reasonable to do so. I would draw attention here to the following passage of

– 53 –

the judgment of the Court of Appeal in In re Diplock which indicates the
Court of Appeal’s general approach:

“Since the original wrong payment was attributable to the blunder of
the personal representatives, the right of the unpaid beneficiary is in
the first instance against the wrongdoing executor or administrator: and
the beneficiary’s direct claim in equity against those overpaid or
wrongly paid should be limited to the amount which he cannot recover
from the party responsible. In some cases the amount will be the
whole amount of the payment wrongly made …” (at p. 503).

I would also draw attention to the only passage of the Court of
Appeal’s judgment which gives any reason for their conclusion as to interest
which is in these terms:

“We should add that … in our judgment the respondents are liable
under this head of their claim for the principal claimed only and not
for any interest. This last result appears to follow from the case of
Gittins v. Steele (1818) 1 Swan 200, 36 English Reports 356, cited in
Roper at p. 461, where the language of Lord Eldon L. C. in the case
is cited:

‘If a legacy has been erroneously paid to a legatee who has no
farther property in the estate, in recalling that payment I
apprehend that the rule of the court is not to charge interest:
but if the legatee is entitled to another fund making interest in
the hands of the court, justice must be done out of his share.'”

The judgment of Lord Eldon in this case is extremely short. The
Court of Appeal has cited the whole of the judgment except the opening
sentence which reads:

“Where the fund out of which the legacy ought to have been paid is in
the hands of the Court making interest, unquestionably interest is due.”

In fact, interest was therefore ordered to be paid in that case at 4 per
cent. The short judgment of Lord Eldon was in proceedings which followed
an earlier judgment (reported (1818) 1 Swan 25, 36 English Reports p. 283).
Having examined the case in both reports, I find they provide no support for
a general proposition that equity could not in an appropriate case award
interest in support of a personal equitable claim. The case supports the
contrary view. In the circumstances which Lord Eldon is considering, the
legatee had as far as one can tell benefited financially from the early payment
and, that being so, the decision is merely an example of the fact that if a
payee has benefited financially from his being unjustly enriched, an order for
interest will be made. It is relevant that as interest had been earned (in the
hands of the court), interest was payable.

– 56 –

Before leaving In re Diplock it is important to note mat in re Diplock
was not concerned with whether compound interest was payable: it was
concerned with whether any interest, simple or compound, was payable. The
view that no interest, not even simple, was payable was understandable on the
facts but not otherwise.

While, therefore, it is not necessary on my approach to decide whether
the sums paid by the bank are recoverable from the local authority in equity
or in common law, it is necessary for me to indicate that Hobhouse J. was
wrong in his judgment in the Kleinwort Benson case in deciding that he would
have no power to award compound interest if, as he thought was the case, the
bank was entitled to a personal equitable remedy which would enable it to
obtain judgment for the sums which had been paid.

There is one more aspect of Hobhouse J.’s judgment to which I should
refer. In his review of the authorities. Hobhouse J. drew attention to two
lines of authority, one where simple interest is being awarded, and the second
where compound interest being awarded. In the former situation, the court,
according to Hobhouse J., is concerned to compensate the party for what he
has lost in consequence of not receiving the money to which he was entitled.
In the latter situation the court is concerned with the benefit which the payee
has derived as a result of the payment having been made. The distinction is
a valid one if what is being considered is the right to interest on the one hand
under the statute or common law and on the other in equity. The distinction
is not valid if a different position is being considered, namely, whether simple
or compound interest should be awarded in equity. Equity, in the case of both
simple and compound interest, will look at the benefit which the payee has
derived. If it is equitable so to do, the payee will be ordered to pay simple
or compound interest depending upon the benefit which has resulted from the
payment.

The Position at Common Law and by Statute

I should now deal shortly with the situation as to interest at common
law and by statute. At common law the power to award interest was linked
to the power to award damages. While the equitable jurisdiction was
concerned to prevent profit by the recipient of funds to which he was not
entitled, the common law was concerned with the loss suffered by the payer
of the funds. The statutory jurisdiction differed from the common law
because initially there had to be a judgment for the payment of a debt or
damages before interest could be awarded and the legislator was dealing with
the generality of those situations.

As to the common law position a convenient starting point is provided
by the decision of this House in the London, Chatham and Dover Railway
Company case which I have already cited. In that case the Lord Chancellor.
Lord Herschell, and the other members of this House, came to the conclusion
with considerable reluctance that at common law where there was no

– 57 –

agreement or statutory provision which permitted the payment of interest a
court had no power to award interest, whether simple or compound, by way
of damages for the late payment of a debt. The view of the House was rather
surprising because the members reluctantly followed a decision of Lord
Tenterden CJ. in Page v. Newman 9 B. & C. 378, based on convenience in
preference to an earlier and more” liberal” line of authorities including a
decision of Lord Mansfield in Eddowes v. Hopkins 1 Douglas 376, and Lord
Ellenborough in De Havilland v. Bowerbank 1 Camp. 50. Lord Mansfield
stated the position in these terms:

“… ‘that though by the common law book debts do not of course
carry interest, it may be payable in consequence of the usage of
particular branches of trade or of a special agreement’ (which of
course is beyond question), ‘or in cases of long delay under vexatious
and oppressive circumstances if a jury in their discretion shall think fit
to allow it.”

Lord Ellenborough included among four categories of situations where interest
was payable that where the money had been actually used and interest made
on it.

After the decision in the London, Chatham and Dover Railway
Company case it was generally accepted that at common law, apart from
statute and some limited exceptions, there was no power to award simple or
compound interest for the late payment of a sum of money.

This situation which was regarded as unsatisfactory by this House in
1893 was ameliorated in 1934 by the intervention of the legislature. Section
3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 considerably
extended the power which was contained in Lord Tenterden’s Act [1833] (3
and 4 Wm. 4. c. 42). The Act of 1934 so far as relevant provided:

“(1) In any proceedings tried in any court of record for the recovery
of any debt or damages, the court may, if it thinks fit, order that there
shall be included in the sum for which judgment is given interest at
such rate as it thinks fit on the whole or any part of the debt or
damages for the whole or any part of the period between the date when
the cause of action arose and the date of the judgment: Provided that
nothing in this section – (a) shall authorise the giving of interest upon
interest; or (b) shall apply in relation to any debt upon which interest
is payable as of right whether by virtue of any agreement or otherwise;
or (c). . .”

It is to be noted that section 3 of the Act of 1934 makes it abundantly
clear that it does not authorise the giving of compound interest and that it
confines the power to award interest to situations where there is a “sum for
which judgment is given.” The latter point was a cause of considerable

– 58 –

injustice. It enabled a debtor to prevent a court exercising; the power under
section 3 of the Act of 1934 by making a late payment but a payment prior to
any judgment being given. To remedy that situation, the Supreme Court Act
1981 was amended by the Administration of Justice Act 1982 by adding a new
section, section 35A. Section 35A is still the current relevant statutory
provision. It makes clear:

“(a) that it is still only simple interest which is payable. That it only
applies to the recovery of a debt or damages and that interest is to be
paid at ‘such rate as the court thinks fit or as rules of court may
provide’ (subsection (1));

(b) that the section does not apply when for whatever reason
interest on a debt already runs (subsection (4)).

The Act of 1982 followed the Report on interest by the Law
Commission (Cmnd. 7229) of 7 April 1978 to which I have already referred.
Parliament did not implement by the Act of 1982 all the recommendations of
the Law Commission as to changes which should be made. In particular, it
did not accede to the suggestion of the Law Commission that there should be
a statutory standard rate of interest for reasons of administrative convenience.
Instead, it retained the court’s existing wide statutory discretion.

There are two more cases to which I need to refer. The first is
Wadsworth v. Lydall [1981] 1 W.L.R. 598, and the second is President of
India v. La Pintada Compania Navigacion S.A., to which I have already
referred. The decision in Wadsworth v. Lydall received express approval in
La Pintada. I refer to Wadsworth v. Lydall for three reasons. The first is
that it brings out clearly that despite the decision of this House in the London,
Chatham and Dover Railway Company case, there is no inherent common law
bias against the award of compound interest at common law. What is required
for compound interest to be payable is that the contract either expressly or
impliedly provides for the payment of compound interest or there is a breach
of the contract and the breach is such that compound interest will be regarded
as flowing from the breach in accordance with the second limb of the principle
laid down in Hadley v. Baxendale (1854) 9 Exchequer 341. The second
reason is that while prior to the decision in Wadsworth v. Lydall it could
legitimately be thought that the situations where compound interest would be
awarded at common law were necessarily of a commercial nature, this is not
an essential requirement. The situations where it was clearly established that
compound interest was recoverable (as, for example, in the case of bills of
exchange or banking transactions) should be regarded not so much as
independent exceptions to a general rule but as examples of the application of
a general rule where in accordance with ordinary contractual principles

– 59 –

compound interest should be recoverable. The third reason why I refer to
Wadsworth v. Lydall is that it clearly demonstrates that notwithstanding the
period which has elapsed since the decision in the London, Chatham and
Dover Railway Co. case, in 1893, the courts will be prepared to limit the
application of that decision where this can be done in accordance with
principle and it is appropriate to do so.

Wadsworth v. Lydall was a decision of the Court of Appeal. The facts
were straightforward. The defendant and the plaintiff had an informal
partnership agreement under which the partnership held an agricultural
tenancy of a farm and the plaintiff lived in the farmhouse. When the
partnership was dissolved the plaintiff and the defendant agreed that the
plaintiff would give up possession of the farm by a specified date when he
would receive £10,000 from the defendant. On the strength of that agreement
the plaintiff entered into a further agreement with a third party to purchase
another property on terms which required him to pay the £10,000, which by
[hen he should have received from the defendant, to the third party. Only part
of the £10,000 was paid by the defendant to the plaintiff prior to his
completing his transaction with the third party. The plaintiff therefore had to
take out a mortgage from the third party for the balance. In an action which
he brought against the defendant the plaintiff claimed as special damages the
interest and costs he incurred due to his having to obtain the mortgage.

The trial judge disallowed those two items of special damage but the
plaintiff succeeded in recovering them as a result of the decision of the Court
of Appeal. In relation to the argument that the Court of Appeal were bound
to conclude that the appeal failed because of the combined effect of the
decision in the London, Chatham and Dover Railway Co. case and because of
the provisions of the Law Reform (Miscellaneous) Provisions Act 1934,
Brightman L.J. said as follows, at p. 603:

“In my view the court is not so constrained by the decision of the
House of Lords. In The London, Chatham and Dover Railway Co. v.
The South Eastern Railway Co. [1893] A.C. 429 the House of Lords
was not concerned with a claim for special damages. The action was
an action for an account. The House was concerned only with a claim
for interest by way of general damages. If a plaintiff pleads and can
prove that he has suffered special damage as a result of the defendant’s
failure to perform his obligation under a contract, and such damage is
not too remote on the principle of Hadley v. Baxendale (1854) 9 Exch.
341, I can see no logical reason why such special damage should be
irrecoverable merely because an obligation on which the defendant
defaulted was an obligation to pay money and not some other type of
obligation.”

The facts of the La Pintada case are not important. Its significance is
that the approach of this House was that Parliament had chosen to remedy

– 60 –

some of the injustices caused by the common law rule as laid down in the
decision in the London, Chatham and Dover Railway Co. case, and the
restrictive language of section 3(1) of the Act of 1934. Due deference to the
intention of Parliament therefore prevented any further departure from the
House’s earlier decision in relation to interest. So the earlier decision would
still apply to general damages.

In his speech, Lord Brandon of Oakbrook, at p. 122 identified:

“… three cases in which the absence of any common law remedy for
damage or loss caused by the late payment of a debt may arise.”

For convenience he described these cases as case 1, case 2 and case 3. Case
1 is where a debt is paid late, before any proceedings for its recovery have
been begun. Case 2 is where a debt is paid late, after proceedings for its
recovery have begun, but before they have been concluded. Case 3 is where
a debt remains unpaid until, as a result of proceedings for its recovery being
brought and prosecuted to a conclusion, a money judgment is given in which
the original debt becomes merged.

Having examined the history and origins of the common law rule and
the interventions by the legislature. Lord Brandon described qualification of
the common law rule made in Wadsworth v. Lydall. at p. 129, as being
important, and set out his conclusions as follows:

“First, an ideal system of justice would ensure that a creditor should
be able to recover interest both on unpaid debts in case 1, and also in
respect of debts paid late or remaining unpaid in cases 2 and 3.
Secondly, if the legislature had not intervened twice in this field since
the London, Chatham and Dover Railway Co. case, first by the Act of
1934 and more recently by the Act of 1982, and if the Court or” Appeal
had not limited the scope of that case by its decision in Wadsworth v.
Lydall [1981] 1 W.L.R. 598, I should have thought that a strong, if
not an overwhelming, case would have been made out for your
Lordships’ House, in order to do justice to creditors in all three cases
1, 2 and 3, to depart from the decision in the London, Chatham and
Dover Railway case [1893] A.C. 429. But, thirdly, since the
legislature has made the two interventions in this field to which I have
referred, and since the scope of the London, Chatham and Dover
Railway case has been qualified to a significant extent by Wadsworth
v. Lydall [1981] 1 W.L.R. 598, I am of the opinion, for three main
reasons, that the departure sought by the respondents would not now
be justified.”

The first of the reasons Lord Brandon gave for his conclusion was that
the greater part of the injustice has already been remedied by the intervention
of the legislature and judicial qualification of the scope of the decision in the

– 61 –

London, Chatham and Dover Railway case. The second was that Parliament
had given effect in legislation to some of the recommendations of the Law
Commission but had not given effect to further recommendations which meant
that for the House to intervene would be to intervene in a manner which
would conflict with the policy indicated by Parliament. The third reason was
that the intervention would create for creditors a remedy as of right rather
than a discretionary remedy which would be again contrary to the policy of
Parliament as indicated in the Acts of 1934 and 1982.

The Reasoning in the Pintada Case Does Not Apply to Equitable Interest

In relation to that reasoning it is important to note that none of the
three reasons directly apply to the issue at present before their Lordships.
The first reason does not directly apply to the present case because neither the
legislation nor the decision in Wadsworth v. Lydall addresses the injustice
demonstrated by the facts of this case. The injustice arises because, contrary
to the intention of the parties, there is no contract. The inroads which have
been made on the decision in the London, Chatham and Dover Railway case
by Wadsworth v. Lydall can only apply where there is a contract under which
either interest is expressly payable or the situation is one where the second
limb of the rule in Hadley v. Baxendale applies to a breach of contract. The
second reason given by Lord Brandon does not apply because the Law
Commission made no recommendation as to the equitable remedy of interest.
The third reason does not apply because if the court has jurisdiction to award
interest in equity, like other equitable remedies, the remedy will be
discretionary.

I therefore do not find anything in Lord Brandon’s reasoning which
makes it inappropriate to extend the right in equity so that it extends to the
recovery of compound interest ancillary to a restitutionary remedy. In this
case this is particularly true because if there had been a contract and non
payment of the sums due under the contract by the local authority the bank
may well, if proceedings resulted, have received compound interest as special
damages.

The Desirability of the Equitable Jurisdiction being Extended

A decision in favour of the bank in this case, will mark a further
improvement in the powers of the English courts. An improvement the need
for which has so frequently been recognised. While the improvement is
consistent with the decision of this House in the La Pintada case, it should be
noted that that decision has not been free from criticism. In a typically
closely reasoned article the late Dr. F. A. Mann in the Law Quarterly Review
(1985), 101 L.Q.R. at p. 30 was not impressed by the reasoning of the House.
Dr. Mann, at p. 34, found it difficult to understand, if interest, including
compound interest, was recoverable under the second limb under the rule in
Hadley v. Baxendale:

– 62 –

“why it should not also be recoverable under the first limb, where
damages are such ‘as may fairly and reasonably be considered arising
naturally, i.e. according to the usual course of things’ from the
breach?”

As Dr. Mann pointed out, to say that interest considered as damages is too
remote is an argument which at the present time is no longer realistic or
persuasive and which can only be described as an “empty phrase.” The
modern test should be whether the debtor could reasonably foresee that in the
ordinary course of things the loss was likely to occur or was on the cards.
Who would refuse to impute such knowledge to a debtor? Who would venture
to suggest that a defaulting debtor could not reasonably foresee interest as the
creditor’s loss flowing from the failure to pay.

Dr. Mann did not distinguish between simple and compound interest.
However, if what he said with regard to simple interest is true then adopting
the same approach it must equally apply to compound interest. Dr. Mann’s
final comment was. at p. 47:

“The history of interest, particularly in the field of Admiralty, displays
a lack of legal analysis and a degree of positivism and inflexibility
which show the common law of England at its worst.”

In my judgment, their Lordships should avoid leaving the equitable
jurisdiction of the English courts open to the same criticism.

Lord Browne-Wilkinson and Lord Lloyd of Berwick (whose speech I
have also had the advantage of reading in draft) do not regard this as a case
in which it would be appropriate to extend the law in the way I would wish.
Their arguments, which are based on the legislative history as to interest and.
in the case of Lord Lloyd, also based on La Pintada. I have dealt with
already, However, as to the suggestion of usurpation of the role of parliament
I do remind myself of the approach of Lord Brandon of Oakbrook in the
passage of his speech in La Pintada which I have previously cited. Both Lord
Browne-Wilkinson and Lord Lloyd also make the additional point that the
local authority could feel aggrieved if this appeal were to be decided on the
approach which Lord Goff and I would adopt. Here I take a different view.
If their Lordships had not raised the issue of the correctness and scope of the
decision in Sinclair v. Brougham, the bank would have succeeded. The local
authority were only prepared to argue this point with reluctance. As I have
indicated, the local authority also wanted the argument curtailed. In these
circumstances they can hardly complain if they lacked the opportunity of
dealing with the detail of your Lordships’ reasoning.

In my recollection of his argument Mr. Sumption made it clear that his
argument was not totally dependent on establishing that the local authority was
a fiduciary. I have already set out how his case described the position in

– 63 –

principle. I would also refer to paragraph 13 of his case and the footnote
thereto, where he said:

“13. Quite apart from the proprietary claim, the Bank also has a
personal claim in equity to require Islington to account for its
property: Snell’s Equity, 29th ed. (1990), 284-287.¹ (emphasis added)

“¹ In Sinclair v. Brougham it was held that there was no
personal claim in equity or at law, because to allow such a
claim would be indirectly to enforced an invalid borrowing
contract: see, in particular, pages 414, 418 (Viscount Haldane
L.C.). This part of the decision has been subjected to powerful
and justified criticism by Lord Wright: (1938) 6 C.L.J. 805.
But even if correct it has no application to a restitutionary
claim, whether at law or in equity, arising out of a void swap
contract since such restitution would not be legally or
financially equivalent to enforcement of the contract itself.”
(emphasis added).

The passage in Snell refers to a personal claim in equity where their
is a breach of trust. However, the footnote makes reasonably clear that Mr.
Sumption was applying the same approach as I would to a restitutionary claim
“whether at law or in equity”.

For these reasons I would dismiss the appeal.

LORD LLOYD OF BERWICK

My Lords,

It was common ground before your Lordships that the Bank is entitled
to recover the principal sum of £1,145,526 in a common law action for money
had and received. Judgment for that sum would carry simple interest at the
appropriate rate under section 35A of the Supreme Court Act 1981.
Hobhouse J. and the Court of Appeal have held (albeit for different reasons)
that the Bank has an alternative claim to recover the principal sum in equity,
and that the equitable cause of action entitles the Bank to claim a discretionary
award of compound interest, depending on the facts of the particular case.
The issue in the appeal as it came before your Lordships was whether the
courts below were right in this respect. Thus the Bank’s argument is stated
succinctly in paragraph 11 of the respondent’s printed case as follows:

“The Bank’s submission in summary is that where money is paid either
(i) pursuant to a contract which is void, or (ii) under a fundamental
mistake of fact or law, the money is impressed in the hands of the

– 64 –

payee with a trust in favour of the payer. The payee is then
accountable to the payer not only for the principal but for the entire
benefit which he has obtained from his possession of the principal in
the intervening period.”

A little later it is said, in paragraph 12(5):

“The separation of the legal from the equitable interest necessarily
imports a trust.”

In support of his argument Mr. Sumption relied, as he had in the courts
below, on Sinclair v. Brougham [1914] A.C. 398. He also relied on the
speech of Lord Brandon of Oakbrook in President of India v. La Pintada
[1985] A.C. 104, 116b. It was not suggested in the respondent’s printed case
that Lord Brandon’s formulation of the equitable jurisdiction to award
compound interest was incomplete, or insufficient for the Bank’s purposes.
Nor was it suggested that the decision of Hobhouse J. in the parallel decision
of Kleinwort Benson Ltd. v. South Tyneside Metropolitan Borough Council
[1994] 4 All E.R. 972, (in which he declined to make an award of compound
interest in favour of the bank, on the ground that the bank was in that case
confined to its common law action for money had and received) was wrongly
decided.

The local authority, in paragraph 5.1 of the appellant’s case, stated the
issue for decision in similar terms:

“Both parties accept that compound, as opposed to simple, interest is
payable only if Islington received the money under the void interest
rate swaps agreement as fiduciary: President of India v. La Pintada
Compania Navigacion [ 1985] A.C. 104. 116.”

The whole thrust of the appellant’s case was directed to showing that the local
authority was not a fiduciary when it received the money, and did not become
a fiduciary thereafter. Sinclair v. Brougham could be distinguished. It had
never been suggested that the mere failure to pay back the principal sum
rendered the local authority a fiduciary, otherwise “every overdue debtor
would be a fiduciary liable to compound interest.”

Both parties, therefore, came before your Lordships on the basis that
Sinclair v. Brougham was correctly decided, for whatever it did decide. But
in the course of the argument your Lordships indicated that the House would
be willing to reconsider the correctness of that decision. For the reasons
given by my noble and learned friend Lord Browne-Wilkinson. I agree that
Sinclair v. Brougham was wrongly decided on both the points discussed in his
speech, and should be overruled. I understand that all your Lordships are
agreed that the Bank has failed to make good its claim that it has an equitable
cause of action against the local authority for breach of duty as trustee or

– 65 –

fiduciary. It follows that the ground on which the courts below awarded
compound interest cannot be supported. The local authority has succeeded on
the only issue on which the parties came before your Lordships.
Accordingly, I would be content to allow the appeal, and leave it at that.

But my noble and learned friend Lord Woolf is of the view that, even
though the Bank has failed to prove any breach of trust or fiduciary duty, it
may nevertheless be entitled to claim compound interest by way of a general
equitable remedy ancillary to its common law claim for money had and
received: and his views receive the powerful support of my noble and learned
friend Lord Goff of Chieveley.

I have naturally considered these views with the greatest care: for there
is much force in the argument that the local authority ought, injustice, to pay
compound interest, if it would have had to pay compound interest (as no doubt
it would) on sums borrowed by way of more orthodox bank lending. But I
regret that in my opinion the House cannot, or at any rate should not, hold
that there is any such power in equity to make good the supposed defects of
the common law remedy. I have come to that conclusion for three main
reasons.

In the first place the point in question, which is one of great general
importance, was scarcely argued. This was not the fault of counsel. The
point only emerged from the background once it became apparent that Sinclair
v. Brougham might fall to be reconsidered. By then there was no time to
develop the argument. Thus the decision of Hobhouse J. in the Kleinwort
Benson case, which would have to be overruled if the point is good, was only
mentioned by Mr. Philipson at the very end of his argument, and then only
in connection with the date from which interest should run. The decision was
never mentioned by Mr. Sumption at all.

Nor did Mr. Sumption seek to question the reasoning or conclusion of
the House in President of India v. La Pintada. On the contrary, he relied on
Lord Brandon’s speech as an accurate summary of the equitable jurisdiction
to award compound interest in the two special classes of case to which Lord
Brandon referred. I may be wrong, but I do not recall any reference to the
comments expressed by Mason C.J. and Wilson J. in Hungerfords v. Walker
[1988] 171 C.L.R. 125. It is accepted that to decide the compound interest
point in favour of the Bank would mean breaking new ground, and would be
extending the equitable jurisdiction to a field where it has never before been
exercised. I do not think it right to take so momentous a course, involving
such widespread ramifications, on the back of such inadequate argument.
Above all I cannot regard it as fair to decide the case against the local
authority on the alternative argument when through no fault of their own, they
have not had a proper opportunity to deal with the argument.

Secondly, I have difficulty in reconciling an award of compound
interest as an equitable remedy available in support of the common law claim

– 66 –

for money had and received with the ratio decidendi of the House in President
of India v. La Pintada. The facts of that case were that the charterers were
between two and six years late in paying sums due to the owners by way of
freight and demurrage. The owners claimed interest in respect of the late
payment. The question was referred to arbitration, and the umpire awarded
compound interest in favour of the owners for the whole period of the delay.
One of the questions of law for the court was whether the umpire had
jurisdiction to award interest in respect of the late payment. Mr. Saville Q.C.
launched a frontal attack on London, Chatham and Dover Railway Co. v.
South Eastern Railway Co. [1893] A.C. 429, in which it was held that a claim
for interest by way of general damages will not lie at common law for late
payment of a debt, in the absence of some custom binding on the parties, or
some express or implied agreement. In giving the leading speech, Lord
Brandon said, at p. 129, that other things being equal there was “a strong, if
not an overwhelming, case” for departing from decision in London, Chatham
and Dover Railway Co. v. South Eastern Railway Co. in order to do justice
to creditors. But with regret he felt unable to take that course. I return to his
reasons later. All the other noble Lords shared Lord Brandon’s regret. Lord
Roskill said, at p. 111:

“It has long been recognised that London, Chatham and Dover Railway
Co. v. South Eastern Railway Co. left creditors with a legitimate sense
of grievance and an obvious injustice without remedy. I think the
House in 1893 recognised those consequences of the decision, but then
felt compelled for historical reasons to leave that injustice
uncorrected.”

Like Lord Brandon, he felt unable to depart from the London, Chatham and
Dover Railway case, and called for the injustice to be remedied by further
legislation.

I quote these passages in order to make the point that if Mr. Saville
Q.C., for the owners, could have detected some way of supporting the
umpire’s award of compound interest, he would have found a ready ear. He
pointed out in the course of his argument that the equitable jurisdiction to
award compound interest had survived the passing of the Act of 1934, as had
the Admiralty jurisdiction, and he argued that these “exceptional” jurisdictions
should be regarded as the rule, and not vice versa. But this argument did not
prevail. When Lord Brandon said, at p. 116, that “the Admiralty Court
never, and Courts of Chancery only in two special classes of case” awarded
compound, as distinct from simple, interest (my emphasis), he meant, I think,
exactly what he said. Moreover, he regarded it as a point of importance. I
cannot, therefore, agree that he was only giving examples of the application
of a more general equitable jurisdiction to grant ancillary relief by way of
compound interest. To my mind the immediate context, and the shape of the
case as a whole, make quite clear that that was not his meaning.

– 67 –

It may be said that in President of India v. La Pintada the claim was
for payment of a debt due under a contract, whereas in the present case the
claim is for money had and received. But why should that make any
difference? It is true that the common law action for money had and received
can be given a restitutionary label: and that “restitution” may be said to be
incomplete unless compound interest is included in the award. But the label
cannot change the underlying reality. The cause of action remains a common
law action for the return of money paid in pursuance of an ineffective
contract. If compound interest cannot be recovered in a claim for debt due
under a contract (in the absence of custom, or some express or implied
agreement to that effect) I cannot see any reason in principle, or logic, why
it should be recoverable in the case of money paid under a contract which
turns out to be ineffective.

It is said, nevertheless, that the reasoning which led Lord Brandon to
reject the owners’ claim for compound interest does not apply to the different
facts of the present case. Lord Brandon identified three main reasons for his
conclusion. It is to the second reason, at p. 130, that I would draw attention.
I will quote the reason in full:

“My second main reason is that, when Parliament has given effect by
legislation to some recommendations of the Law Commission in a
particular field, but has taken what appears to be a policy decision not
to give effect to a further such recommendation, any decision of your
Lordships’ House which would have the result of giving effect, by
another route, to the very recommendation which Parliament appears
to have taken that policy decision to reject, could well be regarded as
an unjustifiable usurpation by your Lordships’ House of the functions
which belong properly to Parliament, rather than as a judicial exercise
in departing from an earlier decision on the ground that it has become
obsolete and could still, in a limited class of cases, continue to cause
some degree of injustice.”

It is true that the Law Commission made no recommendation for changing the
equitable jurisdiction to award interest, and so Parliament cannot be said to
have taken a policy decision to reject any such recommendation. But the
underlying objection remains. Parliament has on two occasions, first in 1934,
and then in 1981, remedied injustices which had long been apparent in the
power to award interest at common law. On the latter occasion it did so in
the light of the view expressed by the Law Commission that the equitable
jurisdiction to award interest was working satisfactorily, and called for no
change. To extend the equitable jurisdiction for the first time to cover a
residual injustice at common law, which Parliament chose not to remedy,
would, I think, be as great a usurpation of the role of the legislature, and as
clear an example of judicial law-making, as it would have been in President
of India v. La Pintada. If it is thought desirable that the courts should have
a power to award compound interest in common law claims for money had
and received, then such a result can now only be brought about by Parliament.

– 68 –

My third reason for rejecting the Bank’s claim for compound interest
is that I am by no means certain that the policy considerations all point in
favour of change. It is presumably in commercial transactions that the
discretionary power to award compound interest would most frequently be
used, on the ground that the money received by the payee would otherwise
have had to be borrowed at compound interest. But it is in just such
transactions that the need for certainty is paramount. Disputes which would
otherwise be settled on the basis of simple interest would be fought in the
hope of persuading the court that an award of compound interest was
appropriate. It is interesting to note that it was on this very ground that Lord
Tenterden C.J. rejected the solution proposed by Best C.J. in Arnott v.
Redfern (1826) 3 Bing. 353. In Page v. Newman (1829) 9 B. & C. 378, Lord
Tenterden said, at p. 380:

“If we were to adopt as a general rule that which some of the
expressions attributed to the Lord Chief Justice of the Common Pleas
in Arnott v. Redfern which it seemed to warrant, viz. that interest is
due wherever the debt has been wrongfully withheld after the plaintiff
has endeavoured to obtain payment of it, it might frequently be made
a question at nisi prius whether the proper means had been used to
obtain payment of the debt, and such as the party ought to have used.
That would be productive of great inconvenience.”

As one who has in the past attempted to keep open the availability of equitable
remedies in commercial disputes, I am now conscious of the strength of the
arguments the other way: see Scandinavian Trading Tanker Co. A.B. v. Flota
Petrolera Ecuatoriana [1983] 2 A.C. 694, disapproving dicta of Lloyd J. in
Afovos Shipping Co. S.A. v. R. Pagnan & Fratelli [1980] 2 Lloyd’s Rep. 469.
It is, of course, true that even an award of simple interest lies in the discretion
of the court, as does the rate of interest. But in the great majority of cases
it is not difficult to predict the amount of simple interest which is likely to be
awarded. Compound interest, on the other hand, is not so predictable. It
presents wider room for disagreement. Disputes would be likely to end up in
court, and this would, in the words of Lord Tenterden. “be productive of
great inconvenience.” Despite the weight which must attach to the views of
my noble and learned friends Lord Goff of Chieveley and Lord Woolf. I
would allow the appeal.