Editorial Committee of the Cambridge Law Journal

Restitution. Mistake of Law. Reform in Haste, Repent at LeisureAuthor(s): Steve HedleySource: The Cambridge Law Journal, Vol. 58, No. 1 (Mar., 1999), pp. 21-25Published by: Cambridge University Press on behalf of Editorial Committee of the Cambridge LawJournalStable URL: http://www.jstor.org/stable/4508519 .

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C.L.J. Cclse and Comment 21

REsTlTurIoN-MISTAKE OF LAW-REFORM IN HASTE, REPENT AT LEISURE

IN Kleinwort Benson v. Lincoln City Council t1998] 3 W.L.R. 1095 the House of Lords heard consolidated appeals arising out of the failure of interest rate swap transactions entered into between various banks and local authorities. Having paid out considerable sums under the swap arrangements, the banks were disconcerted to find them declared ultra vires and void (Hazell v. Hammersmith and Fulham L.B.C. [1992] 2 A.C. 1). The Lords have now held that sums paid by the banks may be recovered back, by action in restitution for mistake. In so holding, they have abrogated the rule that a mistake of law is not actionable, and denied (at least on these facts) any defence that the parties acted on the basis of sCsettled law".

Unconventionally, the more significant parts of the decision were reached without argument by counsel, at any stage of the proceedings. There was no reasoned judgment at first instance, Langley J. correctly concluding that the authonties compelled him to deny liability. The "leap-frog" procedure was invoked to bypass the Court of Appeal. Lord Goff referred to the "arguments of exceptional quality' the Lords had heard, but this was misleading, as no one argued for the old mistake-of-law rule, or denied the "settled law" defence. lncredibly, the Lords accepted that mistake of law should be actionable (saying that they were mightily impressed that no one dared argue the contrary) yet have left us in doubt over the defence of settled law-if the case denies the existence of the defence (as the head-note writers claim, but I dispute below), the Lords have accepted a position for which no one had argued. The result is a significant extension of liability, supported by very little by way of analysis, and a denial of most of the principles which might rein the liability in.

Other than valedictory accounts of the "mistake of law" rule, there is little to the opinions beyond analysis of the defences available to the newly-expanded liability for "mistake", the nature of which is largely left implicit. The defences of settlement, compromise and change of position were each referred to briefly; a possible defence of "honest receipt" was canvassed but rejected. Three other defences were analysed in greater detail.

One defence was that the payment was made on the basis of aw apparently settled at that time. There were really two quite distinct suggestions: firstly that there should be a defence of "settled law", and secondly that the existence of a settled view made it impossible to prove liability. The latter argument is that to act on settled law does not involve a mistake (the law is as the parties imagine it to be), and it cannot be turned into a mistake by later events. So even

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22 The Cambridge Law Journal [1999]

though later legal rulings may be retrospective, none the less "retrospectivity cannot falsify history" and there is no mistake on vvhich to base liability.

The courts usually apply the law as they now understand it, even though this is necessarily in some respects a retroactive application. This is often said to embody a fiction that the law has always been as the court now declares it to be. But that does not conclude the matter. Lords Browne-Wilkinson and Lloyd argued that the fiction of retroactive eSect, like any other fiction, should be applied only where useful. The real question was whether, for the purpose of liabiltty for mistake, new decisions were to be treated as having always been the law; and they saw no reason to hold that they were. Lords Goff and Hoffmann, by contrast, denied that tlle fiction could be applicable for some purposes but not others. Indeed, Lord GoF could not see how any legal system capable of change could apply the fiction selectively, except by a system of prospective overruling ---to which he apparently had deep-seated, if vaguely articulated, objections.

What of Lord Hope? Here the head-note writers of both the Weekly Lcvv Reports and the A/l England Reports (at [1998] 4 All E. R 513) have been wrong-footed, for they say that Lord Hope agreed with Lords Goff and HoSmann Now it is true that, once liclbfXityfor mistake is evstelblisSled, Lord Hope denies any defence of "settled law". Yet when considering whether there is an actionable mistake at all, he sees no scope for retroactivity: "It is the state of the law at the time of the payment which will determine whether or not the payment was or was not legally dlle to be paid, and it is the state of mind of the payer at the time of the payment which will determine whether he paid under a mistake" ([1998] 3 W.L.R. 1 148H-1 149A). SO he too refused to accept that there can be ';retroactive" mistakes. But Lord Hope stressed that it is not every novel decision that c}anges the law. Others merely fill in gaps in the fabric, establishing a clear rule where none was apparent before. In that situation, the new decision must, faute de mieux, be treated as having always been correct. With much of this Lord Eloyd at least agreed, but Lord Hope went further. Just as some mistakes of fact are only discoverable with hindsight, so equally some mistakes of law are eSectively undiscoverable at the time-yet none the less with hindsight were clearly mistakes. And he doubted whether the law could ever be said to have been "changed" unless some particular aUthOr;tY had been OVertUrned.

SO it aPPeArS that LOrd HOPe would denY l;ab;litY in a CaSe Where "Settled laW" WaS later OVertUrned; bUt he denied there WaS anY SCSettIed laWIt here. FOr LOrdS BrOWnC-WilkinSOn and L10Yd, bY

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C.L.J. Case and Comment 23

contrast, whether a particular rule was "settled" was a more open-

ended question, which they preferred to remit to a lower court. This

creates a ticklish situation in the law of precedent. A majority held

that "settled law" defeats liability, and a majority held that it did not

do so here, Lord Hope forming part of both majorities. As it is, the

proposition stated in both head-notes, that a plea of"settled law"

never defeats liability, is one which two Lords supported but three

denied. What proposition of law will ultimately be regarded as the

ratio of the case remains to be seen. The second defence was that of limitation. The limitation period

here is six years. But six years from when? The Lords unanimously

agreed that the case was within Limitation Act 1980, s. 32(1)(c),

which provides that, in actions "for relief from the consequences of a

miseake", time does not run ;'until the plaintiff has discovered the . . .

mistake . . . or could with reasonable diligence have discovered it".

This has the startling consequence, given the majority's broad view

of liability, that whenever the courts overrule a precedent, anyone

who has paid money on the basis of that precedent may claim their

money back-whether the payment was made six months, six years

or even six centuries ago! This is very hard to swallow. All of the

Lords invited the Law Commission to reconsider the matter.

Ironically, it is Lords GoW and Hoffmann, who so breezily deny that

they should have waited for legislation, who admit most clearly that

the courts are out of their depth here. Indeed, Lord Goff called for a

reconsideration by the Law Commission "as a matter of some

urgency". lt was, of course, precisely considerations of this kind that

led Lords Browne-Wilkinson and Lloyd to deny liability in the first

place. While Lord Lloyd did not doubt that Parliament will eventually

act, "in the meantime there will be an inevitable period of intense

uncertainty", which could have been avoided by leaving Parliament

to enact a more complete solution. It is on the final defence, of"full performance", that the weakness

of analysis is most apparent. Claims to unravel swap arrangements

were originally brought as actions for money paid on a failure (or

possibly absence) of consideration. (See especially Kleinwort Benson

v. South Tyneside M.B.C. [1994] 4 All E.R. 972.) It was only where

limitation defeated those claims that they were re-cast as claims for

mistake. But has this reformulation of the claims magically changed

their nature, or simply changed the label? If the banks' real complaint

is that they did not get what they paid for, then we need to test this

by asking whether the swap transactions had in fact been completely

perfornzed. The Lords' unanimous rejection of the "full performance"

defence implies a different view of the law: that simistake and

"failure of consideration" are entirely different heads of the law of

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24 The Cambridge Law Journal [1999]

restitution, and it is mere coincidence that the claims here could have

been put either way. Yet this is a complex issue, which could have

been side-stepped, and on which no argument was heard.

There is much to be said on the other side. In restitution, as in

contract, we must distinguish between mistakes common to both

parties and mistakes made only by one. So we distinguish between

"failure of basis" cases, where the plaintiffs did not get what they

paid for, and the rather rare cases where the plaintiffs did not realise

who they were paying, or perhaps even that they were making a

payment at all. (It is only in the second class of case that the mistake

has proprietary consequences.) The distinction is vital, for to insist in

most cases on a failure of basis confines the liability within sensible

bounds, as the payee necessarily had notice of the basis. As it is, their

Lordships seem to contemplate a broad liability for mistake, liability

being complete on proof that the plaintiff was subjectively mistaken

and that the mistake caused the making of the payment (even where

the "mistake" is a fiction of law in the first place!). The obvious

objection on grounds of commercial certainty, forcefully made by Lords Browne-Wilkinson and Lloyd, is not answered by the majority. I can only assume that the majority's fascination with "unjust enrichment" has made them forget all other considerations; and I can

only hope that this infatuation is temporary. As it is, there is a ready

objection to the "full performance" argument here, which Lord Goff

indeed gave, and is much to be preferred to his other reasons: that

allowing the defence here is incompatible with the ultra vires

principle, as it allows the parties to validate their unlawful conduct

simply by completing it.

What, then, are we to make of the decision? The opinions are

feverish with the desire of the Law Lords to make their mark on

history, by abrogating a notoriously bad rule. Lord Browne-Wilkinson

seems especially mortified that, when the time came to abolish the

rule, he felt forced to dissent. And as Lord Lloyd noted, it would be

absurd to say that the Lords do not have the right to abolish it.

However, as he went on, it is another question whether they are the

right body to do it. If they cannot do so without causing avoidable

chaos, both commercial or doctrinal; if they cannot change all that

needs changing, so that the law they lay down is worse than the law

they abrogated; if their courage fails them half-way, so that placing sensible limits on their new rule is resisted as an illegitimate

"legislative act" ([1998] 3 W.L.R. 1139f, per Lord Hoffmann); if the

main motivation for change is a modish theory, on which sharply-

differing views are held; if there was no opportunity for forensic

argument on the main points; then this is an issue that should have

been left to others.

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C.L.J. Case and Comment 25

If the Lords want the glory of deciding on such major changes to

the law, they must also take on the responsibilities that go with it.

And these responsibilities now remain for others to perform. There

is no reason to fear a "flood of claims", for while a majority of the

Lords ignored the need for certainty of transaction, no doubt the

rest of the judiciary will not. But liability has now been stated in

such broad terms that the judges will be forced down very strange

by-ways in their efforts to limit it. There is no risk of the floodgates

opening; the real pity is the legal fees that will be wasted in

establishing the precise conceptual basis for closing them.

Steve Hedley

C.L.J. Case and Comment 25

If the Lords want the glory of deciding on such major changes to

the law, they must also take on the responsibilities that go with it.

And these responsibilities now remain for others to perform. There

is no reason to fear a "flood of claims", for while a majority of the

Lords ignored the need for certainty of transaction, no doubt the

rest of the judiciary will not. But liability has now been stated in

such broad terms that the judges will be forced down very strange

by-ways in their efforts to limit it. There is no risk of the floodgates

opening; the real pity is the legal fees that will be wasted in

establishing the precise conceptual basis for closing them.

Steve Hedley

PROPRIETARY ESTOPPEL AND WILLS

When is a promise to benefit someone on one's death an enforceable

promise? This was the question for the High Court in Gillett v. Holt

and Another [1998] 3 All E.R. 917. As Carnwath J. recognised, the

difficulty lies in reconciling proprietary estoppel with the principle that "[s]ubject to specific exceptions (such as for dependants), the

right to decide, and change one's mind as to, the devolution of one's

estate is a basic and well understood feature of English law".

The defendant was a farmer who never married. In the 1950s the

plaintiff, then in his teens, started to work for the defendant and they became close friends. There was talk of the defendant adopting the

plaintiff. From time to time from the mid-1960s onwards the

defendant assured the plaintiff that he would receive the whole, or

substantially the whole, of his estate when he died. In 1983 the

defendant gave the plaintiff and his wife 20 per cent. of the shares in his farming business. The picture changed in the early 1990s when

the defendant met Mr. Wood, the second defendant. A strong

relationship developed and Mr. Wood moved in with the defendant. The defendant had made a will which provided that almost all his estate was to pass to the plaintiff but this will was now revoked. Several new wills were made until, in 1995, the defendant made his current will, under which the plaintiff was to receive nothing.

The plaintiff argued that the defendant was bound to bequeath his estate to him: he had been led to believe that the defendant would do so, and had acted on this belief to his detriment in

accepting unreasonably low pay for thirty years. His claim failed. Carnwath J. explained:

[I]n the application of [proprietary estoppel] to statements about the intended contents of a will, the facts must be looked at against the ordinary presumption that such intentions are subject

PROPRIETARY ESTOPPEL AND WILLS

When is a promise to benefit someone on one's death an enforceable

promise? This was the question for the High Court in Gillett v. Holt

and Another [1998] 3 All E.R. 917. As Carnwath J. recognised, the

difficulty lies in reconciling proprietary estoppel with the principle that "[s]ubject to specific exceptions (such as for dependants), the

right to decide, and change one's mind as to, the devolution of one's

estate is a basic and well understood feature of English law".

The defendant was a farmer who never married. In the 1950s the

plaintiff, then in his teens, started to work for the defendant and they became close friends. There was talk of the defendant adopting the

plaintiff. From time to time from the mid-1960s onwards the

defendant assured the plaintiff that he would receive the whole, or

substantially the whole, of his estate when he died. In 1983 the

defendant gave the plaintiff and his wife 20 per cent. of the shares in his farming business. The picture changed in the early 1990s when

the defendant met Mr. Wood, the second defendant. A strong

relationship developed and Mr. Wood moved in with the defendant. The defendant had made a will which provided that almost all his estate was to pass to the plaintiff but this will was now revoked. Several new wills were made until, in 1995, the defendant made his current will, under which the plaintiff was to receive nothing.

The plaintiff argued that the defendant was bound to bequeath his estate to him: he had been led to believe that the defendant would do so, and had acted on this belief to his detriment in

accepting unreasonably low pay for thirty years. His claim failed. Carnwath J. explained:

[I]n the application of [proprietary estoppel] to statements about the intended contents of a will, the facts must be looked at against the ordinary presumption that such intentions are subject

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