Kleinwort Benson Ltd v. Lincoln City Council Kleinwort; Benson Ltd v. Mayor etc of the London Borough of Southwark and Others Kleinwort; Benson Ltd v. Birmingham City Council Mayor etc of the London Borough of Kensington and Chelsea and Others 38; [1999] 2 AC 349; [1998] 4 All ER 513; [1998] 3 WLR 1095 (29th October, 1998) [1998] UKHL 38

House of Lords

Between

Kleinwort Benson LtdAppellant

Lincoln City Council Kleinwort; Benson Ltd v. Mayor etc of the London Borough of Southwark and Others Kleinwort; Benson Ltd v. Birmingham City Council Mayor etc of the London Borough of Kensington and Chelsea and Others 38; [1999] 2 AC 349; [1998] 4 All ER 513; [1998] 3 WLR 1095 (29th October, 1998)Respondent

Before

Lord Browne-Wilkinson

Lord Goff of Chieveley

Lord Lloyd of Berwick

Lord Hoffmann

Lord Hope of Craighead

Date 29 October 1998

Kleinwort Benson Ltd v. Lincoln City Council Kleinwort; Benson Ltd v. Mayor etc of the London Borough of Southwark and Others Kleinwort; Benson Ltd v. Birmingham City Council Mayor etc of the London Borough of Kensington and Chelsea and Others

[1998] UKHL 38

;

[1999] 2 AC 349

;

[1998] 4 All ER 513

;

[1998] 3 WLR 1095

(29th October, 1998)

HOUSE OF LORDS

Lord Browne-Wilkinson Lord Goff of Chieveley Lord Lloyd of Berwick Lord Hoffmann Lord Hope of Craighead

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

KLEINWORT BENSON LTD. (APPELLANTS)

LINCOLN CITY COUNCIL (RESPONDENTS)

KLEINWORT BENSON LTD. (APPELLANTS)

MAYOR ETC. OF THE LONDON BOROUGH OF SOUTHWARK AND OTHERS (RESPONDENTS)

KLEINWORT BENSON LTD. (APPELLANTS)

BIRMINGHAM CITY COUNCIL (RESPONDENTS)

KLEINWORT BENSON LTD. (APPELLANTS)

MAYOR ETC. OF THE LONDON BOROUGH OF KENSINGTON AND CHELSEA AND OTHERS (RESPONDENTS)

(ON APPEAL FROM THE QUEENS BENCH DIVISION OF THE HIGH COURTS OF JUSTICE)

ON 29 OCTOBER 1998

LORD BROWNE-WILKINSON

My Lords,

I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Goff of Chieveley which contains yet another major contribution to the law of restitution.

Were it not for one matter, I would be in full agreement with his views. But unfortunately he and the majority of your Lordships take the view that when established law is changed by a subsequent decision of the Courts, money rightly paid in accordance with the old established law is recoverable as having been paid under a mistake of law. I take the view that the monies are not recoverable since, at the time of payment, the payer was not labouring under any mistake.

The majority view is that the decision in Hazell v. London Borough of Hammersmith and Fulham [1992] 2 A.C. 1 established that the swaps agreements were void; that although the decision in Hazell post-dated the last of the payments made by Kleinworts to the local authorities the decision operated retrospectively so that under the law as eventually established Kleinworts were labouring under a mistake at the time they made each payment in thinking that they were liable to make such payment. Therefore, in their view, Kleinworts can recover payments made under a mistake of law. My view, on the other hand, is that although the decision in Hazell is retrospective in its effect, retrospection cannot falsify history: if at the date of each payment it was settled law that local authorities had capacity to enter into swap contracts, Kleinworts were not labouring under any mistake of law at that date. The subsequent decision in Hazell could not create a mistake where no mistake existed at the time.

There are two questions to be considered. First, when the common law is changed by later judicial decision, have all payments made on the basis of the previous law been made under a mistake of law? Second, in what circumstances can it be said that there was earlier law which was changed by judicial decision? Does there have to be a clear judicial decision overruled by a later judicial decision of a higher court or is it enough that, at the date of payment, there was a generally accepted view of the law which view was upset by the later decision?

Where the law is established by judicial decision subsequently overruled

I will take the case where the law has been established by a single decision of the Court of Appeal made in 1930. In 1990 the payer makes a payment which would only have been due to the payee if the Court of Appeal decision was good law. The payer was advised that the Court of Appeal decision was good law. In 1997 this House overruled the Court of Appeal decision. Is the plaintiff entitled to recover the payment made in 1990 on the ground of mistake of law?

There is, as I understand it, no dispute that in order to recover the plaintiff has to have been labouring under the mistake at the date of payment and to have made the payment because of that mistake. Certainly that position has been accepted by Kleinworts in their written reply and by my noble and learned friend, Lord Goff. The question is whether the subsequent overruling of the 1930 Court of Appeal decision requires the court to hold that at the date of payment (1990) the law (contrary to what the plaintiff had been advised) was not the law established by the Court of Appeal decision of 1930.

The theoretical position has been that judges do not make or change law: they discover and declare the law which is throughout the same. According to this theory, when an earlier decision is overruled the law is not changed: its true nature is disclosed, having existed in that form all along. This theoretical position is, as Lord Reid said, a fairy tale in which no-one any longer believes. In truth, judges make and change the law. The whole of the common law is judge-made and only by judicial change in the law is the common law kept relevant in a changing world. But whilst the underlying myth has been rejected, its progeny--the retrospective effect of a change made by judicial decision--remains. As Lord Goff in his speech demonstrates, in the absence of some form of prospective overruling, a judgment overruling an earlier decision is bound to operate to some extent retrospectively: once the higher court in the particular case has stated the changed law, the law as so stated applies not only to that case but also to all cases subsequently coming before the courts for decision, even though the events in question in such cases occurred before the Court of Appeal decision was overruled.

Therefore the precise question is whether the fact that the later overruling decision operates retrospectively so far as the substantive law is concerned also requires it to be assumed (contrary to the facts) that at the date of each payment the plaintiff made a mistake as to what the law then was. In my judgment it does not. The main effect of your Lordships' decision in the present case is to abolish the rule that money paid under a mistake of law cannot be recovered, which rule was based on the artificial assumption that a man is presumed to know the law. It would be unfortunate to introduce into the amended law a new artificiality, viz., that a man is making a mistake at the date of payment when he acts on the basis of the law as it is then established. He was not mistaken at the date of payment. He paid on the basis that the then binding Court of Appeal decision stated the law, which it did: the fact that the law was later retrospectively changed cannot alter retrospectively the state of the payer's mind at the time of payment. As Deane J. said in the High Court of Australia in University of Wollongong v. Merwally 158 C.L.R. 447 at p. 478:

If that be true of statutory legislation, the same must a fortiori be true of judicial decision. In my judgment, therefore, if a man has made a payment on an understanding of the law which was correct as the law stood at the date of such payment he has not made that payment under a mistake of law if the law is subsequently changed.

I am fortified in that view by considering what will be the effect of your Lordships' decision. A payment which was initially irrecoverable will subsequently become recoverable. Consider the hypothetical case I have put. A payment was made in 1990 when the Court of Appeal decision was still valid. Under the existing law, the claim in restitution should apparently have arisen at the date of such payment: see Baker v. Courage & Co.

[1910] 1 KB 56

. Yet at that date there could be no question of any mistake. It would not have been possible to issue a writ claiming restitution on the grounds of mistake of law until the 1997 decision had overruled the 1930 Court of Appeal decision. Therefore a payment which, when made, and for several years thereafter, was entirely valid and irrecoverable would subsequently become recoverable. This result would be subversive of the great public interest in the security of receipts and the closure of transactions. The position is even worse because all your Lordships consider that the claims to recover money paid under a mistake of law are subject to section 32(1)( c ) of the Limitation Act 1980, i.e. that in such a case time will not begin to run until the "mistake" is discovered. A subsequent overruling of a Court of Appeal decision by the House of Lords could occur many decades after payments have been made on the faith of the Court of Appeal decision: in such a case "the mistake" would not be discovered until the later overruling. All payments made pursuant to the Court of Appeal ruling would be recoverable subject only to the possible defence of change of position.

With one possible exception, such judicial and other authority as there is favours the view that there is no relevant mistake of law if the payment is made on the basis of the law as it stood at the date of payment. As to non-judicial authority the Law Commission has taken the view that there would be no relevant mistake: Report No. 227 " Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments " (Cm. 2731), paras. 5.2-5.16. Not surprisingly, Professor Beatson shares that view: see 1995 R.L.R. 280 at p. 284; see also Professor Burrows Law of Restitution pp. 118-120.

As to judicial authority there is a dearth of decisions directly in point. Since the payment of money under a mistake of law was not recoverable in any event, there is little discussion as to what constitutes a mistake of law in that context. However, there are two English cases which throw some light. In Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329, the plaintiff had paid water rates to the defendant calculated in accordance with the law as it was held to be by the Court of Appeal. Subsequent to the date of payment, the House of Lords in the Dobbs case changed the law: if calculated under the changed law the plaintiff had overpaid. He sought to recover the overpayments on the ground that he had paid under compulsion and under a mistake of law. It was apparently accepted by the Court that if both these factors (i.e. compulsion and mistake of law) were present, the overpayment could be recovered. Counsel having submitted that the payments had been made in ignorance of the law, Lord Coleridge C.J. (who had been a member of the Court of Appeal overruled in Dobbs case) said:

In his judgment, Lord Coleridge dismissed the plaintiff's claim on the grounds both that there was no element of compulsion in the payment and that there was no relevant mistake of law. He said:

The other member of the court concurred but it is not clear on which of the two grounds. The decision therefore is not of major authority but it does show that Lord Coleridge was of the view that money was not paid under a mistake of law just because a later change in the law altered the law as it had been at the date of payment.

The other English case is Derrick v. Williams [1939] 2 All E.R. 559. In that case the plaintiff had accepted a payment into court on the basis that a Court of Appeal decision declared the law in a form which precluded the recovery of certain types of damages. Subsequently the House of Lords reversed the Court of Appeal decision and held that such damages were recoverable. The plaintiff in Derrick v. Williams was trying to re-open the matter on the grounds that the subsequent decision of the House of Lords showed that he had been proceeding under a mistake of law when he accepted the money paid in. He relied on the equitable principle set out in In re Roberts

[1905] 1 Ch 704

that a compromise made under a mistake of law can be set aside. The plaintiff's claim failed. Sir Wilfrid Greene M.R. said, at p. 565, that he rejected a contention that the mistake was one of fact and continued:

It is not clear to me whether this case was decided on the ground that payment into court raised special questions, or on the ground that there was no mistake of law because at the date of the withdrawal of the monies paid into court the law was as stated by the Court of Appeal and not as subsequently stated by the House of Lords. But the decision is at least consistent with the view that in deciding whether a person has acted under a mistake of law at a particular time, the question is whether they mistook the law as it then was without reference to subsequent retrospective change by later decisions.

In Commissioner of State Revenue v. The Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51 the High Court of Australia had to consider a payment made in pursuance of a statute which was subsequently repealed with retrospective effect, i.e. the case was analogous to that where the common law is changed by a later common law decision. The majority held that monies paid under the retrospectively repealed statute were not paid under a mistake of law at common law: see per Brennan J., p. 69 (with whom Toohey and McHugh JJ. agreed) and Dawson J. at p. 75. In my judgment this is strong authority in favour of the view which I hold.

The only authority pointing the other way is a recent case in the Court of Appeal decided since the conclusion of the argument in this case: Evans v. Governor of H.M. Prison Brockhill [1998] (unreported). In that case the plaintiff had been sentenced to a term of imprisonment. She was detained by the Governor for a period correctly calculated in accordance with the law as then laid down by a series of decisions in the Divisional Court. That method of calculating the duration of the sentence was subsequently disapproved by a later decision of the Divisional Court which laid down (everyone has assumed correctly) a different method of calculation. If that new method of calculation was adopted the plaintiff had been detained for 59 days too long. The plaintiff claimed damages for false imprisonment. The majority (Lord Woolf M.R. and Judge L.J., Roch L.J. dissenting) held that the retrospective effect of the change in the law produced by the last Divisional Court decision prevented the Governor from relying as a defence on the law as it had been declared by the earlier Divisional Court decisions which at the time of the 59 days' detention laid down the relevant law. The Master of the Rolls described the result as being "highly artificial": it involved the acceptance of Lord Reid's fairy tale but he held that the Court of Appeal could not abandon the fairy tale. I do not propose to comment on that decision (which may be coming on appeal to your Lordships' House) beyond distinguishing it from the present case. In that case the question was one of substantive law: what was the correct duration of the sentence? In the view of the Court of Appeal, that fell to be determined by the law as finally declared. Once that view had been reached, the Court of Appeal were not concerned with the law as at the date of the detention: such law was irrelevant since it could provide no defence. On the other hand, in the present case what needs to be determined is not the substantive law at a particular time but the state of the mind of the payer at that time. Was he then under a mistake as to the law then current? That is a different question.

In my view therefore, if, at the date of payment, the law was settled by clear judicial authority then a payment in accordance with such law was not made under a mistake of law even if the law has subsequently been changed by later judicial decision. I am fortified in this view by the fact that the appellants in their written submissions in reply (paras. 32 and 33) expressly accepted this proposition. They concentrated their submissions on the question whether it is ever possible to establish that at a particular date the law was "settled" in the absence of a judicial decision to that effect. I find it surprising that the majority of your Lordships are finding the law to be that which neither of the parties contended for.

Settled law in the absence of judicial decision?

It is not suggested in the present case that before the decision of this House in Hazell there was any judicial decision which established that local authorities had the capacity to enter into swap agreements. What is said is that, even in the absence of such a decision, there was a "settled view" that local authorities had the necessary capacity and that swap agreements were therefore valid. It is not for your Lordships on these preliminary issues to seek to determine whether in fact there was such a settled view of the law. However, your Lordships do have to decide whether, if at the trial such a settled view is proved to have existed, it would prevent Kleinworts from recovering the monies paid on the basis of monies paid under a mistake of law.

Much commercial and property activity occurs on the basis of law which is not laid down by judicial decision. Such "law" consists of the practice and understanding of lawyers skilled in the field. If, before payment, the payer had sought advice in some cases he would have been told that the law was dubious: if having received such advice he paid over, he must have taken the risk that the law was otherwise and cannot subsequently recover what he has paid. In other cases, he would have been told that the law was clear and he could safely act on it. If in this latter case the payer acted on the law as so advised and subsequently a court held that the law was not as advised, can the payer recover his payment as monies paid under a mistake of law? In the ordinary case, the payer's adviser will just have given wrong legal advice: as a result the payment will have been paid under a mistake of law and will be recoverable. But in a limited number of cases, of which this may be one, it is not really possible to say that the legal adviser made a mistake in advising as he did. There are areas of the law which are sparsely covered by judicial decision, for example, real property, banking and regulatory law. In such areas the commercial world acts, and has to act, on the generally held view of lawyers skilled in the field. In such cases, a payer who sought advice would receive the same advice from everyone skilled in the field. It used to be said that the practice of conveyancers of repute was strong evidence of real property law: see In re Hollis' Hospital and Hague's Contract

[1899] 2 Ch 540

at 551. As late as the middle of this century, Denning L.J. said in In re Downshire Settled Estates

[1953] Ch. 218

"The practice of the profession in these cases is the best evidence of what the law is: indeed it makes law."

I doubt whether today anyone would claim that a uniform practice of the profession makes the law. But in the present context it does have a significant impact. In holding that money paid under a mistake of law is recoverable, an essential factor is that the retention of the money so paid would constitute an unjust enrichment of the payee. What constitutes the unjust factor is the mistake made by the payer at the date of payment. If, at the date of payment, it was settled law that payment was legally due, I can see nothing unjust in permitting the payee to retain monies he received at a time when all lawyers skilled in the field would have advised that he was entitled to receive them and the payer was bound to pay them. Again it is critical to establish the position at the time of payment: if, at that date, there was nothing unjust or unmeritorious in the receipt or retention of the monies by the payee in my judgment it was not an unjust enrichment for him subsequently to retain the monies just because the law was, in one sense, subsequently changed.

In New Zealand and Western Australia the legislatures have provided that monies shall not be recoverable on the grounds of mistake of law if paid at a time when there was a "common understanding" that they were payable: New Zealand Judicature Amendment Act 1958, section 94A(2); Western Australian Law Reform (Property, Perpetuities and Succession) Act 1962, section 23(1). The Law Commission (Report No. 227) was not happy with the concept of "common understanding" but did recommend that money should not be recoverable if paid "in accordance with a settled view of the law at the time"; see Report (supra), paras. 5.1-5.13 and draft Bill, clause 3. The Law Commission considered that the law fell to be treated as "settled" not only by judicial decision but also by reference to the legal advice which the payer would have received if he had sought it:

My Lords,

I agree with the views of the Law Commission and would therefore have held that Kleinworts would not be entitled to recover on the grounds of mistake of law if at the time of payment Kleinworts were, or if they had sought advice would have been, advised by all lawyers skilled in the field that the swaps agreement were valid.

My Lords,

in these circumstances I find myself in a quandary. I am convinced that the law should be changed so as to permit monies paid under a mistake of law to be recovered. I also accept, for the reasons given by my noble and learned friend Lord Goff, that the relevant limitation period applicable to such a claim would be that laid down by section 32(1)( c ) of the Limitation Act 1980, i.e. six years from the date on which the mistake was, or could with reasonable diligence have been, discovered. The majority of your Lordships consider that such claim will arise when the law (whether settled by existing authority or by common consensus) is changed by a later decision of the courts. The consequence of this House in its judicial capacity introducing such a fundamental change would be as follows. On every occasion in which a higher court changed the law by judicial decision, all those who had made payments on the basis that the old law was correct (however long ago such payments were made) would have six years in which to bring a claim to recover money paid under a mistake of law. All your Lordships accept that this position cannot be cured save by primary legislation altering the relevant limitation period. In the circumstances, I believe that it would be quite wrong for your Lordships to change the law so as to make money paid under a mistake of law recoverable since to do so would leave this gaping omission in the law. In my judgment the correct course would be for the House to indicate that an alteration in the law is desirable but leave it to the Law Commission and Parliament to produce a satisfactory statutory change in the law which, at one and the same time, both introduces the new cause of action and also properly regulates the limitation period applicable to it.

I would dismiss these appeals.

LORD GOFF OF CHIEVELEY

My Lords,

There are before your Lordships consolidated appeals in four actions, each of which arises from the unravelling of one or more interest rate swap transactions which, following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, proved to be void. The process of unravelling transactions of this kind has produced a host of problems, so much so that Professor Andrew Burrows stated in 1995 (see [1995] R.L.R. 15) that "it is no exaggeration to say that one could write a book on the restitutionary consequences of the decision in Hazell ." I fear that any such book will be growing in length as the cases, including the present appeals, pass through the courts.

The nature of an interest rate swap transaction is now very well known. The description usually referred to is that of the Divisional Court in Hazell [1990] 2 Q.B. 697, 739-741, the transactions in the present cases being of the simple type there described. The essence of such a transaction is that one party, known as the fixed rate payer, agrees to pay to the other party over a certain period interest at a fixed rate on a notional capital sum; and the other party, known as 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. In practice, a balance is struck at each relevant date and the party who then owes the greater sum will pay the difference to the other party.

Interest rate swaps can fulfil many purposes, ranging from pure speculation to more useful purposes such as the hedging of liabilities. One form of interest rate swap involves an upfront payment, i.e. a capital sum paid at the outset by one party to the other, which will be balanced by an adjustment of the parties' respective liabilities. The practical result of this is to achieve a form of borrowing. 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, though they must in the process have been storing up trouble for themselves in the future.

The appellant in each of the four consolidated appeals is Kleinwort Benson Ltd., a bank which was an early participant in the market for interest rate swaps. Each of the respondents is a local authority. They may be described in brief as Birmingham City Council, Southwark London Borough Council, Kensington and Chelsea London Borough Council and Lincoln City Council. Kleinwort Benson entered into interest rate swap transactions with each of the respondents. Following the decision of this House in Hazell , Kleinwort Benson commenced proceedings against each of the respondents claiming restitution of the sums it had paid to them under these transactions. The total of the net payments made under them by Kleinwort Benson was £811,208.90.

There are two features of these transactions which are of particular relevance to the present appeals, no doubt flowing from the fact that Kleinwort Benson participated in interest rate swaps at an early stage. The first is that, at the time when proceedings were commenced by Kleinwort Benson, each of the transactions was fully performed by both parties according to its terms across the whole of the agreed period. The second is that not all of the sums paid by Kleinwort Benson to the respondents were paid within the six year limitation period expiring with the date of the issue of the writ. Of the net sum of £811, 208.90 paid by Kleinwort Benson, £388, 114.72 was paid within the six year period, and £423,094.18 represented earlier payments. The former sum has been paid by the relevant local authorities to Kleinwort Benson. The latter sum is in issue, and is the subject of the cases now under appeal.

The claim of Kleinwort Benson in each of these cases is that the money in question was paid by it under a mistake, viz. a mistaken belief that it was paid pursuant to a binding contract between it and the relevant local authority. The claims have been formulated in this way to avoid the six year time limit by bringing them within section 32(1)( c ) of the Limitation Act 1980. Section 32(1) provides that:

It is plain however that here the mistake relied upon is a mistake of law; and under the law as it stands at present restitution will in general not be granted in respect of money paid under a mistake of that kind. It follows that, in the present proceedings, Kleinwort Benson is seeking a decision that that long-established rule should no longer form part of the English law of restitution -a decision which, as all parties to the present litigation recognise, can only be made by your Lordships' House. As a result, on 12 July 1996 Langley J. (I understand by consent) made the following orders in each of the four actions. First of all, he ordered the trial of two preliminary issues, viz.(1) whether the facts pleaded by the Plaintiff disclosed a cause of action in mistake; and

(2) whether, if the answer to (1) was "Yes," such a mistake was one in respect of which the Plaintiff could rely on section 32(1)( c ) of the Limitation Act 1980. The first of these two issues raised directly the question whether money paid under a mistake of law is recoverable in restitution. In each of the actions Langley J. gave a negative answer to Issue (1), on the basis that he was bound by Court of Appeal authority to do so; and accordingly he did not give an answer to Issue (2). Next, he granted a certificate for an appeal (commonly called a leapfrog appeal) directly to your Lordships' House pursuant to section 12 of the Administration of Justice Act 1969. Leave to appeal was duly granted by this House, which further ordered that the parties should have leave to present arguments arising from the fact that each of the interest rate swap transactions had been fully performed, thus adding a third issue to the two which were the subject of Langley J.'s order.

As a result of the basis on which the appeals have come before the House, the Appellate Committee has exceptionally lacked the benefit of reasoned judgments of the courts below. However the loss of that benefit has substantially been offset by arguments of exceptional quality addressed to the Committee by Counsel--Mr. Richard Southwell Q.C. and Mr. Rhodri Davies for the appellant, Kleinwort Benson, and Mr. Nicholas Underhill Q.C., Mr. Charles Béar and Mr. Mark West for the respondent local authorities. I sensed that some, if not all, of these members of the Bar are seasoned warriors in the continuing battle of the swaps.

I propose to consider the Issues in the following order. I shall first consider Issue (1) as ordered by Langley J., which raises the question whether the rule precluding recovery of money paid under a mistake of law should remain part of English law. As part of that Issue I shall also consider whether, if the answer to that question is "No," there should be an exception to recovery on the ground of mistake of law (A) in cases where the money has been paid under a settled understanding of the law which has subsequently been changed by judicial decision, or (B) in cases where the money has been the subject of an honest receipt by the defendant. I shall refer to these two Issues as Issue (1A) and Issue (1B) respectively. I shall then consider the Issue concerned with the impact upon recovery of the fact that all the interest rate swap transactions in question were fully performed. I shall refer to that Issue as Issue (2). Finally I shall turn to consider the second Issue as ordered by Langley J. which raises the question whether, on the true construction of section 32(1)( c ) of the Act of 1980, the subsection applies to mistakes of law. That I shall refer to as Issue (3).

Issue 1 Whether the present rule, under which in general money is not recoverable in restitution on the ground that it was paid under a mistake of law, should be maintained as part of English law.

In argument before the Appellate Committee Kleinwort Benson presented in its written case a fully developed argument for the abrogation of what I will, for convenience, call the mistake of law rule. This did not however evoke a comparable argument by the local authorities in defence of the rule. On the contrary, their submission was not that the rule should be retained, but rather that it should be reformulated. Their primary argument was that the House should not itself embark upon any such reformulation, but should leave that task to the Law Commission which already has the matter under consideration. Such a course would benefit the local authorities because, quite apart from the fact that it is uncertain when, if ever, the Law Commission's proposed reforms will be enacted, they would not, if enacted as proposed, be retrospective in effect. Their secondary argument was that, if the House did decide to abrogate the present rule, it should do so in terms which provided a defence in cases in which the money has been paid under a settled understanding of the law, or in which the money has been the subject of an honest receipt by the defendant. Such defences would recognise that the payee has, in such circumstances, a legitimate interest in retaining the payment, based on the need for certainty and finality in transactions.

Faced with this situation, it might be thought that your Lordships need do no more than accept that the present rule should no longer remain in its present form, and then proceed to consider whether reformulation of the rule should be undertaken by this House or by the Law Commission and, if the former, whether the newly recognised right to recover money paid under a mistake of law should be subject to certain special limits as proposed by the local authorities. I myself do not consider that such a course would be appropriate. What is in issue at the heart of this case is the continued existence of a long standing rule of law, which has been maintained in existence for nearly two centuries in what has been seen to be the public interest. It is therefore incumbent on your Lordships to consider whether it is indeed in the public interest that the rule should be maintained, or alternatively that it should be abrogated altogether or reformulated. Having said this, however, your Lordships are fully entitled to recognise that the local authorities are in truth adopting a realistic stance that, in the light of prolonged criticism of the rule by scholars working in the field of restitution, and of recent decisions by courts in other major common law jurisdictions, the case for retention of the rule in its present form can no longer sensibly be advanced before your Lordships' House. In these circumstances I do not have to consider this aspect of the case in as much depth as might otherwise be regarded as appropriate, though I have discovered that consideration of the case as a whole has cast light on the formulation of the limits to the right of recovery which lie at the heart of the case as presented to your Lordships' House.

How the rule became established : The origin of the rule is, as is very well known, the decision of the Court of King's Bench in Bilbie v. Lumley (1802) 2 East 469 . There an underwriter paid a claim under a policy which he was entitled in law to repudiate for non-disclosure. Although he knew the relevant facts, he was not aware of their legal significance. He then claimed to recover the money he had paid. In the brief report of the case by East it is recorded that Lord Ellenborough C.J. asked plaintiff's counsel (Mr. Wood, later Baron Wood)

No answer being given, Lord Ellenborough gave judgment against the plaintiff. In his short judgment as reported, his reasoning is to be found in two sentences, at p. 472:

"Every man must be taken to be cognisant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case."

Previous authority, such as it was (see Jackson , History of Quasi-Contract , pp. 58-61), shows no distinction being drawn between mistakes of fact and law; on the face of the law reports the suggestion that a mistake of law did not ground recovery appears to have emerged for the first time in an obiter dictum of Buller J. in Lowry v. Bourdieu (1780) 2 Doug. 468, 471, the rule of non-recovery being based by him on the maxim ignorantia juris non excusat--an observation invoked by Lord Ellenborough in Bilbie v. Lumley , 2 East 469, 472. In 1802 Sir William Evans published an Essay on the Action for Money Had and Received. (This has since been published in [1998] R.L.R. , the text having been prepared for publication by Professor Peter Birks and Dr. Lionel Smith of Oxford University; copies were helpfully supplied by Professor Birks to Members of the Appellate Committee and to Counsel shortly before the hearing of the present appeals.) In his Essay (dedicated to Sir Richard Law, shortly to be ennobled as Lord Ellenborough) Sir William strongly supported the opinion of Vinnius that money paid by mistake is recoverable, whether the mistake is one of fact or law, and criticised the contrary view of Pothier denying recovery where the mistake is one of law. In a later publication in 1806 (his translation of Pothier's Treatise on Obligations ), Sir William, disappointed by his dedicatee's decision in Bilbie v. Lumley four years earlier, maintained at greater length but with great courtesy his opinion that money paid under a mistake of law was generally recoverable on that ground. In particular he stressed the limited field of application of the maxim ignorantia juris non excusat. He stated, at pp.394-395:

The overall impression is that, in the eighteenth century, it was widely understood that no distinction should be drawn in the present context between mistakes of fact and law, but that towards the end of the century the view was emerging that a mistake of law should not ground recovery. This view must have been more widely held than the single dictum in Lowry v. Bourdieu suggests, having regard to the strong terms in which Lord Ellenborough expressed his judgment in Bilbie v. Lumley , and the account given by Gibbs J. (in Brisbane v. Dacres (1813) 5 Taunt. 143, 155-157) of his experience as counsel in Chatfield v. Paxton and of the universal opinion among the practitioners in the Court of King's Bench that where money was paid with knowledge of the facts it could not be recovered on the ground of mistake.

The decision in Bilbie v. Lumley was followed and applied by the majority of the Court of King's Bench in Brisbane v. Dacres (Chambre J. dissenting). There the commander of a naval vessel, H.M.S. Arethusa, had paid to the Admiral in command a proportion of freight received for the carriage of publicly owned bullion on board the Arethusa in the belief that this was due to the Admiral as a matter of usage. On later discovering that the money was not due because the usage had been discontinued, he sought to recover it from the Admiral's widow and executrix. It is important to observe that the decision in Bilbie v. Lumley was expressly challenged in this case. Here full argument was heard on the point, unlike Bilbie v. Lumley itself which appears to have been decided on the basis of counsel's concession. Judgment was reserved, and fully reasoned judgments were delivered by all members of the Court. Although the maxim ignorantia juris non excusat was invoked by counsel, no member of the Court founded his judgment upon it; indeed the dissenting judge, Chambre J., 5 Taunt. 143, 158- 159 stated (perhaps rather too narrowly) that the maxim applied only in cases of "delinquency," and all the other judges appear to have considered that it had no role to play in the recovery of money paid by mistake. The question whether it was against conscience for the defendant to retain the money was expressly addressed, notably in the judgment of the Chief Justice, Sir James Mansfield, and was answered by him in the negative, because the admiral acted (as all admirals then did) in accordance with what was generally believed to be his accustomed right, and in particular because he might have changed his position on the faith of the payment. However, the ratio decidendi is perhaps most clearly stated in the leading judgment of Gibbs J. when he said, at p. 152:

See also p. 160, per Heath J. Such a conclusion might have provided the basis for a more sophisticated development of this branch of the law, founded upon a prima facie right of recovery subject to specific defences. Unfortunately, however, this was not to be so. It seems that the rule hardened, as rules are liable to do. In Wilson and M'Lellan v. Sinclair (1830) 3 Wilson & Shaw 398, 409, Lord Brougham L.C. stated that since Brisbane v. Dacres it had been considered an established point that the mistake must be "in the fact." Furthermore, Kelly v. Solari (1841) 9 M. & W. 54, 55 Parke B. said of Bilbie v. Lumley that "All that that case decides is, that money paid with full knowledge of all the facts cannot be recovered back by reason of its having been paid in ignorance of the law," a statement which was reflected in the judgment of Lord Abinger C.B. at pp. 57-58. These statements were made in the context of a case concerned with mistake of fact, the issue being whether means of knowledge, as opposed to full knowledge, of the facts was enough to preclude recovery. Even so, the observations of the judges appear to have reflected an accepted opinion that money paid under a mistake of law was not recoverable as such. At all events the existence of the mistake of law rule became well established in the course of the nineteenth century, and in the twentieth century it was regularly applied by courts of first instance and on occasion by the Court of Appeal. It has however never fallen for consideration by your Lordships' House before the present appeals, which are now being heard after many years of criticism of the rule by scholars specialising in the law of restitution, and after the rule itself has been discarded in a number of major common law jurisdictions.

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

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

Rejection of the mistake of law rule in the common law world : It is perhaps easier for us now to see that the policy underlying the rule can best be achieved, consistently with justice, by the recognition of a right of recovery subject to specified defences to cater for the fears which formerly appeared to require a blanket exclusion of recovery. However the blossoming of scholarly interest in the development of a coherent law of restitution did not occur in the common law world until the middle of the twentieth century, inspired by the pioneering work of Professors Seavey and Scott in the American Restatement of the Law of Restitution published in 1937. We may regret that it was not until late in the long history of the common law that this should have occurred, but now the judges are able to welcome the assistance which they receive from a number of distinguished writers on the subject. There can be no doubt that it is this scholarly work which has provided the prime cause for the rejection of the mistake of law rule, either by legislation or by judicial decision, in countries throughout the common law world. This is due not only to specific criticism of the mistake of law rule as such, but still more to the combined effect of two fundamental changes in the law: first, recognition that there exists a coherent law of restitution founded upon the principle of unjust enrichment, and second, within that body of law, recognition of the defence of change of position. This is due essentially to the work of scholars. Once that work had been published and widely read it was, I believe, inevitable that in due course both doctrines would be recognised by the judges, the time of such acceptance depending very much on the accidents of litigation. In fact, in England both were accepted by this House in 1991, in the same case-- Lipkin Gorman v. Karpnale Ltd.

[1991] 2 AC 548

. Once both had been recognised it became, in my opinion, also inevitable that the mistake of law rule should be abrogated, or at least reformulated, so that there should be a general right of recovery of money paid under a mistake, whether of fact or law, subject to appropriate defences. This is because a blanket rule of non-recovery, irrespective of the justice of the case, cannot sensibly survive in a rubric of the law based on the principle of unjust enrichment; and because recognition of a defence of change of position demonstrates that this must be proved in fact if it is to justify retention, in whole or in part, of money which would otherwise be repayable on the ground that the payee was unjustly enriched by its receipt. The combined effect is not only that the mistake of law rule can no longer be allowed to survive, but also that the law must evolve appropriate defences which can, together with the defence of change of position, provide protection where appropriate for recipients of money paid under a mistake of law in those cases in which justice or policy does not require them to refund the money. It is this topic which lies at the centre of the present appeals. As the argument before the Appellate Committee has demonstrated, the identification of such defences is by no means easy and, whatever your Lordships' House may decide, the topic is likely to continue to engage the attention of judges, scholars and law reformers for some years to come.

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

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

Comparative law . The Appellate Committee was helpfully provided with material showing the policy adopted in a number of civil law systems on the continent of Europe towards the recovery of money paid under a mistake of law. This demonstrates that, in the legal systems from which the material was drawn, there is no blanket rule excluding recovery of money paid under a mistake of law. It is of some interest that, in German law, recovery is not dependent on proof of mistake (whether of fact or law) by the claimant. Para. 12(1) of the BGB confers a right to recover benefits obtained without legal justification (ohne rechtlichen Grund). A similar approach is, I understand, adopted in Italian law and has also been adopted recently in France (see Cour de Cassation (Assemblé Plenière) 2.4.1993, D.1993.373). Para.814 of the BGB however provides that a person cannot reclaim a benefit conferred by him if he knew that he was not bound to confer it; but it seems that the burden rests on the recipient to prove the existence of such knowledge (a striking contrast with the common law, which requires the plaintiff to prove mistake). It is of some interest however that a number of these cases, in which it has been held that it is unnecessary for the plaintiff to prove that he was mistaken, have been concerned with the recovery of taxes: see in particular an early German case decided by the Reichsgericht in 1909 (29.10.1909, RGZ 72, 152), and the recent French case, referred to above, which adopted the same position. In such cases, as was recently held by this House in Woolwich Equitable Building Society v. Inland Revenue Commissioners

[1993] AC 70

, English law too dispenses with any requirement that the money should have been paid under a mistake and indeed goes further, allowing recovery even if the taxpayer pays in the belief that the money is not due. Here is food for thought for both German and English comparative lawyers. In this connection I wish to add in passing that, in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51 , 57, Mason C.J. stated that in Woolwich the House of Lords was "unwilling to acknowledge that causative mistake of law is a basis of recovery"; but, with respect, no question of recovery on the ground of a mistake of law arose in that case, because the Woolwich Building Society throughout asserted that the money was not due.

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

Conclusion on the First Issue . For all these reasons, I am satisfied that your Lordships should, if you decide to consider the point yourselves rather than leave it to the Law Commission, hold that the mistake of law rule no longer forms part of English law. I am very conscious that the Law Commission has recommended legislation. But the principal reasons given for this were that it might be some time before the matter came before the House, and that one of the dissentients in the Woolwich case (Lord Keith of Kinkel) had expressed the opinion that the mistake of law rule was too deeply embedded to be uprooted judicially:

[1993] AC 70

, 154. Of these two reasons, the former has not proved to be justified, and the latter does not trouble your Lordships because a more robust view of judicial development of the law is, I understand, taken by all members of the Appellate Committee hearing the present appeals. Moreover, especially in the light of developments in other major common law jurisdictions, not to mention South Africa and Scotland, the case for abrogation is now so strong that the respondents in these appeals have not argued for its retention. In these circumstances I can see no good reason for postponing the matter for legislation, especially when we do not know whether or, if so, when Parliament may legislate. Finally I believe that it would, in all the circumstances, be unjust to deprive the Appellant, Kleinwort Benson, of the benefit of the decision of the House on this point. I would therefore conclude on Issue (1) that the mistake of law rule should no longer be maintained as part of English law, and that English law should now recognise that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution.

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

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

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

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

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

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

The declaratory theory of judicial decisions . Historically speaking, the declaratory theory of judicial decisions is to be found in a statement by Sir Matthew Hale over 300 years ago, viz. that the decisions of the courts do not constitute the law properly so called, but are evidence of the law and as such "have a great weight and authority in expounding, declaring and publishing what the law of this Kingdom is": see Hale's History of the Common Law (6th ed.) p. 90. To the like effect, Blackstone (Commentaries , 6th ed., i, pp. 88-9) stated that "the decisions of courts are the evidence of what is the common law". In recent times, however, a more realistic approach has been adopted, as in Sir George Jessel's celebrated statement that rules of equity, unlike rules of the common law, are not supposed to have been established since time immemorial, but have been invented, altered, improved and refined from time to time: see In re Hallett's Estate

(1880) 13 Ch D 696

, 710. There can be no doubt of the truth of this statement; and we all know that in reality, in the common law as in equity, the law is the subject of development by the judges - normally, of course, by appellate judges. We describe as leading cases the decisions which mark the principal stages in this development, and we have no difficulty in identifying the judges who are primarily responsible. It is universally recognised that judicial development of the common law is inevitable. If it had never taken place, the common law would be the same now as it was in the reign of King Henry II; it is because of it that the common law is a living system of law, reacting to new events and new ideas, and so capable of providing the citizens of this country with a system of practical justice relevant to the times in which they live. The recognition that this is what actually happens requires, however, that we should look at the declaratory theory of judicial decision with open eyes and reinterpret it in the light of the way in which all judges, common law and equity, actually decide cases today.

When a judge decides a case which comes before him, he does so on the basis of what he understands the law to be. This he discovers from the applicable statutes, if any, and from precedents drawn from reports of previous judicial decisions. Nowadays, he derives much assistance from academic writings in interpreting statutes and, more especially, the effect of reported cases; and he has regard, where appropriate, to decisions of judges in other jurisdictions. In the course of deciding the case before him he may, on occasion, develop the common law in the perceived interests of justice, though as a general rule he does this "only interstitially", to use the expression of O.W. Holmes J. in South Pacific Co. v. Jensen (1917) 244 U.S. 2095, 221. This means not only that he must act within the confines of the doctrine of precedent, but that the change so made must be seen as a development, usually a very modest development, of existing principle and so can take its place as a congruent part of the common law as a whole. In this process, what Maitland has called the "seamless web", and I myself ( The Search for Principle , Proc. Brit. Acad. vol. LXIX (1983) 170, 186) have called the "mosaic", of the common law, is kept in a constant state of adaptation and repair, the doctrine of precedent, the "cement of legal principle", providing the necessary stability. A similar process must take place in codified systems as in the common law, where a greater stability is provided by the code itself; though as the years pass by, and decided cases assume a greater importance, codified systems tend to become more like common law systems.

Occasionally, a judicial development of the law will be of a more radical nature, constituting a departure, even a major departure, from what has previously been considered to be established principle, and leading to a realignment of subsidiary principles within that branch of the law. Perhaps the most remarkable example of such a development is to be found in the decisions of this House in the middle of this century which led to the creation of our modern system of administrative law. It is into this category that the present case falls; but it must nevertheless be seen as a development of the law, and treated as such.

Bearing these matters in mind, the law which the judge then states to be applicable to the case before him is the law which, as so developed, is perceived by him as applying not only to the case before him, but to all other comparable cases, as a congruent part of the body of the law. Moreover when he states the applicable principles of law, the judge is declaring these as constituting the law relevant to his decision. Subject to consideration by appellate tribunals, and (within limits) by judges of equal jurisdiction, what he states to be the law will, generally speaking, be applicable not only to the case before him but, as part of the common law, to other comparable cases which come before the courts, whenever the events which are the subject of those cases in fact occurred.

It is in this context that we have to reinterpret the declaratory theory of judicial decision. We can see that, in fact, it does not presume the existence of an ideal system of the common law, which the judges from time to time reveal in their decisions. The historical theory of judicial decision, though it may in the past have served its purpose, was indeed a fiction. But it does mean that, when the judges state what the law is, their decisions do, in the sense I have described, have a retrospective effect. That is, I believe, inevitable. It is inevitable in relation to the particular case before the court, in which the events must have occurred some time, perhaps some years, before the judge's decision is made. But it is also inevitable in relation to other cases in which the law as so stated will in future fall to be applied. I must confess that I cannot imagine how a common law system, or indeed any legal system, can operate otherwise if the law is be applied equally to all and yet be capable of organic change. This I understand to be the conclusion reached in Cross and Harris on Precedent in English Law , 4th ed., from which I have derived much assistance, when at p. 33 they ask the question:

"what can our judges do but make new law and how can they prevent it from having retrospective effect?"

This is also the underlying theme of Lord Coulsfield's evidence to the Scottish Law Commission quoted in para. 3.14 of their Discussion Paper No. 99, Judicial Abolition of the Error of Law Rule and its Aftermath (1996) (which I have read with interest and respect) in which, in the light of the decision of the Inner House in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SC 151 , and especially the notable judgment of my noble and learned friend Lord Hope of Craighead in that case, they reconsider and resile from their previous proposal that Scots law should adopt a "settled understanding of the law" provision along the lines proposed by our own Law Commission. The only alternative, as I see it, is to adopt a system of prospective overruling. But such a system, although it has occasionally been adopted elsewhere with, I understand, somewhat controversial results, has no place in our legal system. I wish to add that I do not regard the declaratory theory of judicial decision, as I have described it, as an aberration of the common law. Since I regard it as an inevitable attribute of judicial decision-making, some such theory must, I imagine, be applied in civil law countries, as in common law countries; indeed I understand that a declaratory theory of judicial decision applies in Germany, though I do not know its precise form.

It is in the light of the foregoing that I have to ask myself whether the Law Commission's "settled understanding of the law" proposal forms part of the common law. This, as I understand the position, requires that I should consider whether parties in the position of Kleinwort Benson were mistaken when they paid money to local authorities under interest swap agreements which they, like others, understood to be valid but have later been held to be void. To me, it is plain that the money was indeed paid over under a mistake, the mistake being a mistake of law. The payer believed, when he paid the money, that he was bound in law to pay it. He is now told that, on the law as held to be applicable at the date of the payment, he was not bound to pay it. Plainly, therefore, he paid the money under a mistake of law, and accordingly, subject to any applicable defences, he is entitled to recover it. It comes as no surprise to me that, in the swaps litigation, it appears to have been assumed that money paid pursuant to interest rate swap agreements was paid under a mistake which, in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1994] 4 All E.R. 890, 931E, was inevitably held by Hobhouse J. to have been a mistake of law and so, on the law as it then stood, irrecoverable on that basis. Not surprisingly, there is very little previous authority on the question whether in such circumstances the money has been paid under a mistake of law; but such authority as there is supports this view. The case most frequently cited in this context is Henderson v. Folkestone Waterworks Co ., briefly reported in (1885) 1 T.L.R. 329. This case is referred to in para. 2.65 of the Law Commission's Consultation Paper No. 120, and was relied on in argument by Mr. Underhill Q.C. on behalf of the respondent local authorities. In my opinion, however, it does not assist his argument. The plaintiff was rated by the defendant water company at a rate which was legal under a decision which was subsequently reversed by the House of Lords. He then sought to recover the excess; in answer to the defendants' argument that the payment was voluntary and so irrecoverable, he claimed that he paid the money under compulsion. This argument was rejected by a Divisional Court, consisting of Lord Coleridge C.J. and A. L. Smith J., on the ground that the money, having been paid voluntarily under a mistake of law, could not be recovered back. The only passage relied on is contained in an expostulation, in the course of argument, by Lord Coleridge, who had been party to the decision reversed by the House of Lords, when he said:

"I had held the contrary, and two eminent Judges agreed with me. Can that be put as ignorance of law?"

Little or no importance can however be attached to this intervention in the present context, since both members of the Court rejected the plaintiff's claim on the ground that the money was paid voluntarily under a mistake of law, and was therefore irrecoverable.

In Derrick v. Williams [1939] 2 All E.R. 559, following the reversal by the House of Lords in Rose v. Ford [1937] A.C. 826 of the decision of the Court of Appeal that damages could not be recovered for loss of expectation of life, the plaintiff brought a fresh action seeking to recover such damages notwithstanding that in a previous action on the same facts he had taken out of court money paid in on the basis that no such damages were recoverable. The Court of Appeal held that he could not do this, and dismissed the second action. But in the course of his judgment Sir Wilfrid Greene M.R. made it plain that the plaintiff had acted under a mistake of law in taking the money out of court in the first action. He said, at p. 565E:

The same view is expressed by Professor Burrows in his Law of Restitution , 4th ed. (1993) at pp. 118-119, where he points out that in the common law the jurisprudential tradition is that "changes" are retrospective. He continues:

He then proceeds to rehearse the arguments for and against legislative change of the law in this respect.

The question then arises whether, having regard to the fact that the right to recover money paid under a mistake of law is only now being recognised for the first time, it would be appropriate for your Lordships' House so to develop the law on the lines of the Law Commission's proposed reform as a corollary to the newly developed right of recovery. I can see no good reason why your Lordships' House should take a step which, as I see it, is inconsistent with the declaratory theory of judicial decision as applied in our legal system, under which the law as declared by the judge is the law applicable not only at the date of the decision but at the date of the events which are the subject of the case before him, and of the events of other cases in pari materia which may thereafter come before the courts. I recognise, of course, that the situation may be different where the law is subject to legislative change. That is because legislation takes effect from the moment when it becomes law, and is only retrospective in its effect to the extent that this is provided for in the legislative instrument. Moreover even where it is retrospective, it has the effect that as from the date of the legislation a new legal provision will apply retrospectively in place of that previously applicable. It follows that retrospective legislative change in the law does not necessarily have the effect that a previous payment was, as a result of the change in the law, made under a mistake of law at the time of payment. (I note in parenthesis that in Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 69 A.L.J.R. 51, the High Court of Australia was divided on the question whether the retrospective legislation there under consideration had the effect that a previous payment had been made under a mistake of law.) As I have already pointed out, this is not the position in the case of a judicial development of the law. But, for my part, I cannot see why judicial development of the law should, in this respect, be placed on the same footing as legislative change. In this connection, it should not be forgotten that legislation which has an impact on previous transactions can be so drafted as to prevent unjust consequences flowing from it. That option is not, of course, open in the case of judicial decisions.

At this point it is, in my opinion, appropriate to draw a distinction between, on the one hand, payments of taxes and other similar charges and, on the other hand, payments made under ordinary private transactions. The former category of cases was considered by your Lordships' House in Woolwich Equitable Building Society v. Inland Revenue Commissioners

[1993] AC 70

, in which it was held that at common law taxes exacted ultra vires were recoverable as of right, without the need to invoke a mistake of law by the payer. Moreover reference was made, in the course of the hearing, to the various statutory provisions (usefully summarised in the Law Commission's Consultation Paper (Law Com. No. 120) at pp. 74-84) which regulate the repayment of overpaid tax. For present purposes it is of interest that, in the case of some taxes (including income and corporation tax), no relief is given "in respect of an error or mistake as to the basis on which the liability . . . ought to have been computed where the return was in fact made on the basis of or in accordance with the practice generally prevailing at the time when the return was made:" see the proviso to section 33(2) of the Taxes Management Act 1970.

Two observations may be made about the present situation. (I of course have it in mind that this is the subject of proposals for legislative reform contained in the Law Commission's Report (Law Com. No. 227), but your Lordships are concerned with the law as it stands at present.) The first observation is that, in our law of restitution, we now find two separate and distinct regimes in respect of the repayment of money paid under a mistake of law. These are(1) cases concerned with repayment of taxes and other similar charges which, when exacted ultra vires, are recoverable as of right at common law on the principle in Woolwich , and otherwise are the subject of statutory regimes regulating recovery; and

(2) other cases, which may broadly be described as concerned with repayment of money paid under private transactions, and which are governed by the common law. The second observation is that, in cases concerned with overpaid taxes, a case can be made in favour of a principle that payments made in accordance with a prevailing practice, or indeed under a settled understanding of the law, should be irrecoverable. If such a situation should arise with regard to overpayment of tax, it is possible that a large number of taxpayers may be affected; there is an element of public interest which may militate against repayment of tax paid in such circumstances; and, since ex hypothesi all citizens will have been treated alike, exclusion of recovery on public policy grounds may be more readily justifiable.

In the present case, however, we are concerned with payments made under private law transactions. It so happens that a significant number of payments were in fact made under interest rate swap agreements with local authorities before it was appreciated that they were void; but the number is by no means as great as might conceivably occur in the case of taxes overpaid in accordance with a prevailing practice, or under a settled understanding of the law. Moreover the element of public interest is lacking. In cases such as these I find it difficult to understand why the payer should not be entitled to recover the money paid by him under a mistake of law, even if everybody concerned thought at the time that interest rate swap agreements with local authorities were valid.

Of course, I recognise that the law of restitution must embody specific defences which are concerned to protect the stability of closed transactions. The defence of change of position is one such defence; the defences of compromise, and settlement of an honest claim (the scope of which is a matter of debate), are others. It is possible that others may be developed from judicial decisions in the future. But the proposed "settled understanding of the law" defence is not, overtly, such a defence. It is based on the theory that a payment made on that basis is not made under a mistake at all. Once that reasoning is seen not to be correct, the basis for the proposed defence is, at least in cases such as the present, undermined.

I wish further to add that the proposal that a payment made under a settled understanding of the law, later proved to be erroneous, should be irrecoverable, does not depend upon the lapse of any period of time after the date of the payment in question. Take the present case. Suppose that, shortly after the payment by Kleinwort Benson to a local authority of the first sum due under an interest rate swap contract, it transpires that the contract was ultra vires the local authority and so void, and that the sum so paid was therefore not due. Let it also be assumed that there have been relatively few transactions of this kind with local authorities, but enough for it to be said that that sum was paid on the basis of a settled understanding that the money was lawfully due. I find it difficult to accept that, for that reason alone, the payment would be irrecoverable as having been paid under a mistake of law. Indeed it is an remarkable feature of the proposed principle that, the longer ago the payment was made, the less likely is it to have been made under a settled understanding of the law. An appropriately drawn limitation statute would surely produce a more just result. This is a point to which I will return later in this opinion.

For these reasons alone, therefore, I would reject the argument of the local authorities on this point. But I wish to refer also to the insecure foundation upon which the proposed provision is based, arising from the difficulty of defining the circumstances in which it should apply. The New Zealand statutory provision (section 94A(2) of the Judicature Act 1908) excludes relief in respect of "any payment made at a time when the law requires or allows, or is commonly understood to require or allow , the payment to be made or enforced, by reason only that the law is subsequently changed or shown not to have been as it was commonly understood to be at the time of payment". The Western Australian statutory provision (section 23(2) of the Law Reform (Property, Perpetuities and Succession) Act 1962) takes the same form. It is recognised, however, that the concept of "common understanding" of the law has given rise to difficulty (see, e.g., Bell Bros. Pty. Ltd. v. Shire of Serpentine--Jarrahdale [1969] W.A.R. 155) and, on this score at least, the statutory provision has been the subject of criticism. In this country the Law Commission has attempted to improve on the New Zealand statute by referring not to a common understanding of the law, but instead to a "settled view of the law" which has been departed from by a subsequent judicial decision. However, as Mr. Southwell Q.C. pointed out in argument, there could be much scope for argument over what constituted a settled view of the law. Take the case of interest rate swap agreements. These were assumed by the banks (and indeed by others concerned) to be within the powers of local authorities; but this assumption appears to have been based on practical grounds, rather than on advice about the legal position. Nor do the local authorities appear to have addressed the legal position until after the matter was raised by the Audit Commission in 1987, over five years after agreements of this kind began to be entered into by local authorities. Had the point arisen under a statute in the form recommended by the Law Commission, it would have been necessary to consider whether the above circumstances gave rise to a "settled view of the law." It is only necessary to pose the question to realise how difficult it would have been to answer it in the present case, and very possibly in the case of other payments made under private transactions. For this reason alone it comes as no surprise that the Law Reform Commission of British Columbia decided (see their Report No. 51 (1981) at pp. 68 et seq.) not to recommend the adoption of any such provision in that Province, though they also considered (at p. 72) that the New Zealand statutory provision "goes far beyond what is required". The Law Reform Committee of South Australia (see their Report No. 84 (1984) at p. 31) likewise did not recommend the adoption of any such provision, though three years later the Law Reform Commission of New South Wales (see their Paper No. 53 (1987) at paras. 5.20--5.29) proposed the legislative adoption of a similar but not identical provision. In Scotland, as I have already recorded, the Scottish Law Commission at first recommended its adoption, but later resiled from that recommendation. That this whole topic is one of great difficulty can perhaps best be seen in the Scottish Law Commission's Discussion Paper No. 99, in which the rival arguments for and against legislative reform are rehearsed in some detail, and the difficulties exposed. This division of opinion does not encourage statutory adoption of a provision in these or comparable terms, still less its recognition as part of the common law of this country.

Issue IB--Honest receipt : This issue arises from a principle proposed by Brennan C.J. (then Brennan J.) in David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1991-1992) 175 C.L.R. 353 at p. 399. It reads as follows:

This principle was expressly proposed in order to achieve a degree of certainty in past transactions. As Brennan C.J. said (at p. 398):

"Unless some limiting principle is introduced, the finality of any payment would be as uncertain as the governing law."

In this part of the law there has long been concern, among common law judges, about what is sometimes called the finality of transactions, and sometimes the security of receipts. This concern formed a significant part of the amalgam of concerns which led to the rule that money paid under a mistake of law was irrecoverable on that ground. Now that that rule has been abrogated throughout the common law world, attention has of course shifted to the formulation of appropriate defences to the right of recovery. The principle proposed by Brennan C.J. is, I believe, the most far-reaching of the defences to the right of recovery that has yet been proposed.

Anything which falls from Brennan C.J. is, of course, entitled to great respect. But I have to state at once that this proposal seems to have been stillborn. Of the judges who sat with Brennan C.J. on the David Securities case, none supported this proposal. I know of no judicial support which the proposal has since received, nor of any support from any of the Law Commissions which have considered this part of the law. The reason for this lack of support is, I believe, that the proposal is generally regarded as being wider than is necessary to meet the perceived mischief.

I start from the proposition that money paid under a mistake of law is recoverable on the ground that its receipt by the defendant will, prima facie, lead to his unjust enrichment, just as receipt of money paid under a mistake of fact will do so. There may of course be circumstances in which, despite the mistaken nature of the payment, it is not regarded as unjust for the defendant to retain the money so paid. One notable example is change of the defendant's position. Another is the somewhat undefined circumstance that the payment was made in settlement of an honest claim. Yet, Brennan C.J.'s proposed defence is so wide that, if it was accepted, these other defences would in practice cease to have any relevance in the case of money paid under a mistake of law. Moreover in many cases of this kind the mistake is shared by both parties, as for example in the case of the appeals now under consideration. In such cases, recovery by the plaintiff would automatically be barred by Brennan C.J.'s proposed defence. So sweeping is the effect of the defence that it is not perhaps surprising that it has not received support from others.

In my opinion, it would be most unwise for the common law, having recognised the right to recover money paid under a mistake of law on the ground of unjust enrichment, immediately to proceed to the recognition of so wide a defence as this which would exclude the right of recovery in a very large proportion of cases. The proper course is surely to identify particular sets of circumstances which, as a matter of principle or policy, may lead to the conclusion that recovery should not be allowed; and in so doing to draw on the experience of the past, looking for guidance in particular from the analogous case of money paid under a mistake of fact, but also drawing upon the accumulated wisdom to be found in the writings of scholars on the law of restitution. However, before so novel and far-reaching defence as the one now proposed can be recognised, a very strong case for it has to be made out; and I can discover no evidence of a need for so wide a defence as this. In particular, experience since the recognition of the right of recovery of money paid under a mistake of law in the common law world does not appear to have revealed any such need.

For these reasons, with all respect to Brennan C.J., I am unable to accept that the defence proposed by him forms part of the common law.

Issue 2--Completed transactions : This issue was added, by leave of your Lordships' House, to the issues set out in the order of Langley J. It arose from a footnote to an Article by Professor Peter Birks entitled No Consideration: Restitution after Void Contracts (1993) 23 University of Western Australia Law Review 195. In the Article, Professor Birks was concerned to criticise the conclusion of Hobhouse J. in the Westdeutsche case [1994] 4 All E.R. 890 that the basis of recovery of money paid under void interest rate swaps agreements was absence of consideration, his preferred view being that the true ground of recovery was failure of consideration. It formed part of his argument that a party who has received full performance under such a contract cannot recover the value of his performance, i.e. the money he has paid to the other party, because in such circumstances there has been no failure of consideration for his payment. He has received what he wanted, and therefore there was no unjust factor to provide a reason for restitution. However, in a section of the Article entitled "The alternative of restitution for mistake," he reached the conclusion in the text that it seemed that, if the remedy of recovery of money paid under a mistake was available in cases of mistake of law, his earlier conclusion would be largely cancelled out. This was because, since the effect of a mistake must be judged at the time when it was made, "it would seem to follow that if the mistake causes the transfer where the plaintiff never subsequently receives a complete performance, it must equally cause it in the case of complete performance" (see p. 229). Moreover "in the context of void contracts, no valid bargain being in issue, the mistaken party cannot be barred from restitution because he received something from the other, provided only that he can make counter-restitution to the court's satisfaction" (see p. 230). His conclusion in the text (at p. 231) was that it was "undeniable that, at least in jurisdictions with a liberal regime for mistake, the refutation of Hobhouse J.'s novel doctrine will have few practical consequences."

However on p. 230 he added a footnote which appears to have been an afterthought. In this he said:

The question for consideration on this Issue is whether the thesis contained in the footnote is well-founded.

It has to be said at once that the argument set out in the text of the section of the Article entitled The alternative of restitution for mistake , from which I have quoted, is most formidable. It is well established that the cause of action for the recovery of money paid under a mistake of fact accrues at the time of payment. As authority for this proposition it is usual to cite Baker v. Courage & Co.

[1910] 1 KB 56

, a decision of Hamilton J. (later Lord Sumner) which, so far as I am aware, has never been questioned. So if an agreement such as those presently under consideration, under which a series of payments falls to be made, is held to have been void so that each payment has been made under a mistake of law, i.e. the mistaken belief of the payer that he was liable to make the payment, the cause of action for the recovery of the money so paid will accrue, in respect of each payment, on the date when the payment was made. This will be true of each payment; and if the performance of the supposed contract is completed, it will be as true of the final payment as it will have been of all the previous payments. It follows that, if the argument in Professor Birks' footnote is correct, at the moment when the final payment is made under such a contract, not only will the final payment itself be irrecoverable despite the fact that it was made under precisely the same mistake as the previous payments made by him, but the payer will somehow be divested of his accrued right to recover all those previous payments.

In the light of this analysis, the only possible basis for the thesis in Professor Birks' footnote would seem to be that, in the context of void contracts, failure of consideration should be allowed to trump mistake of law as a ground for recovery of benefits conferred. However an equally strong argument may perhaps be made in favour of mistake of law trumping failure of consideration, though either approach is antagonistic to the usual preference of English law to allow either of two alternative remedies to be available, leaving any possible conflict to be resolved by election at a late stage. Neither of these two solutions was however relied upon in argument in the present case; and it is in any event difficult to see how Professor Birks' proposal in his footnote can here be reconciled with the consequences of invalidity arising from the application of the ultra vires doctrine. As a result, following the decision of the House of Lords in Hazell , it was ordered and declared that the items of account (irrespective whether they represented payments or receipts) appearing in the capital markets fund account of the local authority in that case ( Hammersmith and Fulham London Borough Council ) for the years under challenge were contrary to law (see [1992] 2 A.C. 1, 43H-44A per Lord Templeman, with whose opinion the other members of the Appellate Committee agreed). Of the interest rate swap transactions entered into by the Council, some were closed transactions, and a number were profitable, but no exceptions were made for these in the declarations so made. As Mr. Southwell Q.C. submitted on behalf of Kleinwort Benson, it is incompatible with the ultra vires rule that an ultra vires transaction should become binding on a local authority simply on the ground that it has been completed. Moreover the ultra vires rule is not optional; it applies whether the transaction in question proves to have been profitable or unprofitable. If the argument in Professor Birks' footnote is right, the result would be that effect would be given to a contract which public policy has declared to be void.

In my opinion, these points are unanswerable; and they are reinforced by further arguments advanced by Professor Burrows in his Article entitled Swaps and the Friction between Common Law and Equity in [1995] R.L.R. 15 at pp. 18-19. I would accordingly decide this Issue in favour of Kleinwort Benson.

Issue 3--Does section 32(1)(c) of the Limitation Act 1980 apply to mistakes of law : Section 32(1) of the Limitation Act 1980 provides as follows:

The question which arises under this Issue is whether the actions brought by Kleinwort Benson for the recovery on the ground of mistake of law of money paid to the local authorities under void interest swaps agreements are actions for relief from the consequences of a mistake within section 32(1)( c ).

The precursor of section 32(1)( c ) of the Limitation Act 1980 was section 26( c ) of the Limitation Act 1939, which was in the same terms. That provision was enacted following upon the 5th Interim Report of the Law Revision Committee (Cmnd. 5334). Paragraph 23 of the Report stated that the equitable rule (that time should only run under the Statutes of Limitation from the time at which the mistake was, or could with reasonable diligence have been, discovered) did not apply to cases which fell exclusively within the cognisance of a court of law (here referring to Baker v. Courage

[1910] 1 KB 56

). Having stated that the position was unsatisfactory, it recommended that in all cases when relief was sought from the consequences of a mistake, the equitable rule should prevail.

The submission of Kleinwort Benson was that their actions for the recovery on the ground of mistake of law of money paid under void interest swap agreements were actions for relief from the consequences of a mistake within section 32(1)( c ) of the Act of 1980. In support of this submission, they relied, first, on In re Diplock

[1948] Ch. 465

, in which the Court of Appeal stated (at pp. 515-516) that section 26 of the Act of 1939 would operate to postpone the running of time in the case of an action at common law to recover money paid under a mistake of fact, and would likewise apply to an analogous claim in equity to recover money paid under a mistake of law. Second, they relied on the judgment of Pearson J. in Phillips-Higgins v. Harper [1954] 1 Q.B. 411, in which he stated (at p. 418) with reference to section 26 of the Act of 1939 that the essential question was whether the action was for relief from the consequences of a mistake, a familiar example of which was an action for the recovery of money paid in consequence of a mistake. On this basis, it was submitted, Kleinwort Benson's causes of action in the present cases fell clearly within section 32(1)(c) of the Act of 1980.

In answer to this submission, the submission of the local authorities was twofold. First, they submitted that there was no mistake on the part of Kleinwort Benson; but I have already explained that I am satisfied that they indeed paid the money in question under a mistake of law. Second, they submitted that section 32(1)( c ) does not on its true construction apply to mistakes of law. In this connection they relied in particular on the fact that the mistake of law rule was in full force in 1939, when the provision was first enacted; and they further submitted that the words of the subsection, which referred to a mistake being "discovered", showed that the legislature was referring to mistakes of fact rather than mistakes of law--of which it would not be apt to refer to such a mistake being "discovered", still less "discovered with reasonable diligence". In my opinion, however, this verbal argument founders on the fact that the pre-existing equitable rule applied to all mistakes, whether they were mistakes of fact or mistakes of law: see, e.g., Earl Beauchamp v. Winn (1873) LR 6 HL 223 , 232-5, and the dicta from In re Diplock to which I have already referred.

I recognise that the effect of section 32(1)( c ) is that the cause of action in a case such as the present may be extended for an indefinite period of time. I realise that this consequence may not have been fully appreciated at the time when this provision was enacted, and further that the recognition of the right at common law to recover money on the ground that it was paid under a mistake of law may call for legislative reform to provide for some time limit to the right of recovery in such cases. The Law Commission may think it desirable, as a result of the decision in the present case, to give consideration to this question indeed they may think it wise to do so as a matter of some urgency. If they do so, they may find it helpful to have regard to the position under other systems of law, notably Scottish and German law. On the section as it stands, however, I can see no answer to the submission of Kleinwort Benson that their claims in the present case, founded upon a mistake of law, fall within the subsection.

Conclusion : In the result, I would answer the questions posed for your Lordships under the various Issues as follows:

Issue 1 : The present rule, under which in general money is not recoverable in restitution on the ground that it has been paid under a mistake of law, should no longer be maintained as part of English law, from which it follows that the facts pleaded by Kleinwort Benson in each action disclose a cause of action in mistake.

Issue 1A : There is no principle of English law that payments made under a settled understanding of the law which is subsequently departed from by judicial decision shall not be recoverable in restitution on the ground of mistake of law.

Issue 1B : It is no defence to a claim in English law for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to retain the money or property.

Issue 2 : There is no principle of English law that money paid under a void contract is not recoverable on the ground of mistake of law because the contract was fully performed.

Issue 3 : Section 32(1)( c ) of the Limitation Act 1980 applies in the case of an action for the recovery of money paid under a mistake of law.

It follows that all four appeals must be allowed with costs.

LORD LLOYD OF BERWICK

My Lords,

Of the sums claimed by Kleinwort Benson Ltd. £388,114 has already been repaid by the four local authorities, either voluntarily, or pursuant to proceedings brought under R.S.C. Order 14 on the basis that there had been a total failure of consideration. The claim for the balance of £423,094 is prima facie time-barred. In order to meet this difficulty, the plaintiffs rely on the alternative ground of mistake. They say that the payments made by the plaintiffs were made on the basis of a mistaken belief that there existed binding contracts between the plaintiffs and the defendants. In answer to the defendants' plea of limitation, they rely on section 32(1)( c ) of the Limitation Act 1980, which provides that when an action is for relief from the consequences of a mistake, the period of limitation does not begin to run until the mistake is discovered, or could with reasonable diligence have been discovered. For the reasons given by my noble and learned friend Lord Goff, I agree that if there was here a mistake on which the plaintiffs can rely, then they could not have discovered the mistake until the House gave judgment in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1; I agree also that the plaintiffs are entitled to rely on section 32(1)( c ) of the Limitation Act, with the result that time did not begin to run until the date of the judgment in Hazell , namely 24 January 1991.

Was there then a mistake on which the plaintiffs can rely? It is common ground that if there was a mistake, the mistake was one of law. For well over a century the courts have recognised and enforced a distinction between mistakes of fact and mistakes of law. The rule has been that, unlike mistake of fact, money paid under a mistake of law cannot be recovered. In a dissenting speech in Woolwich Equitable Building Society v. I.R.C.

[1993] AC 70

, 154 Lord Keith of Kinkel described the rule as being "too deeply embedded in English jurisprudence to be uprooted judicially." So it is not surprising that Langley J. did not give a reasoned judgment when the case came before him at first instance. He was bound by authority to give judgment on the preliminary issues in favour of the defendants. Nor do we have the assistance of reasoned judgments in the Court of Appeal, since the appeal came direct to the House under the leap-frog procedure.

The mistake of law rule has been so heavily and effectively criticised in recent years that Mr. Nicholas Underhill Q.C. wisely did not seek to defend it. Lord Goff's speech demonstrates with compelling force that the rule is indeed indefensible. Instead of defending the rule, Mr. Underhill submits first that the rule should be abrogated by Parliament rather than by the House in its judicial capacity, and secondly that if the rule is abrogated without any safeguards, there may be undesirable side effects. In particular Mr. Underhill is concerned by what he called his paradigm case of a long-standing decision of the Court of Appeal subsequently overruled by the House of Lords. Should a person who has paid money on the faith of the Court of Appeal decision be entitled to recover his money when the decision is overruled by the House of Lords, perhaps many years later? Is there in truth in such a case any mistake at all? or, is it not more accurate to say that there has merely been a failure to predict a change in the law? I shall attempt to deal with each of these submissions in turn.

As to the first, Mr. Underhill invited your Lordships to exercise restraint. The mistake of law rule has stood for many years, and legislation to abolish the rule (so far as one can ever foretell such things) appears, he said, to be imminent. It would be wrong to pre-empt the legislature, especially as changes in other parts of the law might prove necessary. By way of example, there might have to be an amendment to the Limitation Act 1980. For mistake of law cannot have been in mind when section 32(1)( c ) was enacted.

I am not persuaded. Indeed I can imagine few areas of the law in which it would be more appropriate for the House to take the initiative. The mistake of law rule is judge made law. There are no considerations of social policy involved. The proposed change is consistent with, and less far-reaching than the change effected by the House in the Woolwich case. In Scotland the Inner House abrogated the mistake of law rule in Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SLT 299 (despite the strong authority of Lord Brougham L.C. to the contrary), even though legislation might also have been said to be imminent following on the Scottish Law Commission discussion paper (1993) No. 95: Recovery of Benefits Conferred under Error of Law. Elsewhere, in Canada, Australia and South Africa, the rule has been abolished by judicial decision. And we have the recommendation of the English Law Commission Report on Restitution (1994) (Cm. 2731) (Law Com. No. 227). It is true that the Law Commission was itself in favour of leaving the change to Parliament. But the Law Commission was not to know that the opportunity for judicial decision would come so soon; in contrast, the prospect of legislation is still uncertain, and perhaps remote. For these reasons I would reject Mr. Underhill's first submission. The critics of the mistake of law rule have waited long enough. The plaintiffs in these proceedings should have the benefit of a change which is long overdue. That is not to say that the plaintiffs will necessarily succeed when the case comes on for trial. But at least the mistake of law rule should not stand in their way as it would if we were to wait for Parliament to take a hand.

I turn to Mr. Underhill's second submission. Here, as it seems to me, he starts more than half way home. For Mr. Southwell conceded in his reply (in my view correctly) that if parties enter into a contract in accordance with a decision of a Court of Appeal, (it is not suggested that there was such a decision in the present case) and if the Court of Appeal decision is subsequently overruled by the House of Lords there could be no question of claiming restitution on the ground of mistake. For when the parties entered into the contract the law was as they believed it to be. How then could they claim to have been mistaken?

But even more important than Mr. Southwell's concession is the Law Commission Report itself. Annexed to the report is a draft Bill. Clause 2 abrogates the mistake of law rule.

It provides:

Clause 3(1) provides:

Clause 3(1) is clearly consistent with Mr. Southwell's concession, and covers Mr. Underhill's paradigm case. But it goes wider. For it is not confined to cases where the law is settled by reason of a prior decision of the Court of Appeal. It covers other cases as well. It is this wider aspect of clause 3(1) of the draft Bill which has caused Mr. Southwell's concern.

But before I come to that concern, there is a more general point to be made. Clause 3(1) of the draft Bill implements the recommendation in paragraph 5.13 of the report. It reads as follows:

That recommendation was the result of very extensive consultation by the Commission. The arguments for and against the recommendation are set out in paragraphs 5.1--5.13 of the report. In paragraph 5.9 the Commission ask a number of questions which others have asked. How "settled" does a view or understanding of the law have to be before a payment based on that view or understanding becomes irrecoverable? The answer given in paragraph 5.10 is as follows:

The Law Commission recommendations have been accepted by two successive governments of different political persuasions. No doubt if a bill were introduced in the form proposed by the Law Commission, an amendment might be proposed and carried to delete clause 3. We cannot tell. But for your Lordships to accept half the package proposed by the Law Commission and reject the other half, would cause me some disquiet. If that is to be the result, then the argument against pre-empting Parliament becomes much stronger. I shall return to this point at the end of my speech.

What then are the reasons for not accepting clause 3 of the draft Bill as it stands? At the outset there is, as so often, a question of terminology. Some of the commentators regard a provision such as is found in clause 3 of the bill as providing the payee with a defence. This is the language used by the Scottish Law Commission, and by my noble and learned friend Lord Hope. I, for my part, find it easier to think of clause 3 as a safeguard (another term used by the Scottish Law Commission) rather than a defence. The safeguard is needed because law, unlike facts, can change. Facts are immutable, law is not. Where, therefore, mistake of law is relied on to ground a claim for restitution, it is necessary to define what one means by "mistake." That, as it seems to me, is the function of clause 3. It does not create a defence to a general right of recovery. It is not like the defence of change of position recognised by the House in Lipkin Gorman v. Karpnale

[1991] 2 AC 548

. Clause 3 is more in the nature of a defining clause. Its purpose is to clarify and de-limit what is meant by "mistake" in cases where the law has changed.

This brings us to the central question. Nobody now suggests that the common law is static. It is capable of adapting itself to new circumstances. Is it then capable of being changed? or is it only capable of being developed? The common sense answer is that the common law is capable of being changed, not only by legislation, but also by judicial decision. This is nowhere clearer than when a long-standing decision of the Court of Appeal is overruled. Indeed in a system such as ours, where the Court of Appeal is bound by its own previous decisions, the main justification for the existence of a second tier appeal is that it enables the House to re-direct the law when it has taken a wrong turning. I am not thinking of landmark cases such as Donoghue v. Stevenson

[1932] AC 562

or Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.

[1964] AC 465

. I am thinking of more ordinary cases, of which there may be one or two a year, in which a line of recent Court of Appeal authority is overturned. By way of example one can take two cases from the field of building contracts: Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689 overruling Dawnays Ltd. v. F. G. Minter Ltd. and Trollope & Colls Ltd. [1971] 1 W.L.R. 1205, and Beaufort Developments (N.I.) Ltd. v. Gilbert-Ash N.I. Ltd. and others

[1998] 2 WLR 860

overruling Northern Regional Health Authority v. Derek Crouch Construction Co. Ltd. [1984] Q.B. 644. Or there are the less frequent cases in which long-standing decisions are overruled, such as Hindcastle Ltd. v. Barbara Attenborough Associates Ltd.

[1997] AC 70

overruling Stacey v. Hill [1901] 1 K.B. 660 and Attorney-General for Hong Kong v. Reid

[1994] 1 AC 324

disapproving Lister & Co. v. Stubbs (1890) 45 Ch.D.1.

What then is the House doing when it overrules a line of Court of Appeal authority? First and foremost it is determining what the law is in relation to the case which it is deciding. It will then apply that law to the facts of the particular case. Since the transaction giving rise to the case will have occurred in the past, it can be said that to that very limited extent (and the same is true of every decision of every court) it is applying the law retrospectively.

An inevitable consequence of determining the law in relation to a particular case is that the same law will apply to other cases as yet undecided, in which the same point arises. This is so whether the transaction in question lies in the past or the future. So again, to that limited extent, it can be said that the decision operates retrospectively. But that, as it seems to me, is the full extent of any retrospective effect. There is no way in which the decision can be applied retrospectively to cases which have already been decided. Nor is there any logical reason why there should be. It is the function of the court to decide what the law is, not what it was. So when the House of Lords overrules a line of Court of Appeal decisions it does not, and cannot, decide those cases again. The law as applied to those cases was the law as decided at the time by the Court of Appeal. The House of Lords can say that the Court of Appeal took a wrong turning. It can say what the law should have been. But it cannot say that the law actually applied by the Court of Appeal was other than what it was. It cannot, in my learned and noble friend Lord Browne- Wilkinson's vivid expression, falsify history.

It follows that in such a case the House of Lords is doing more than develop the law. It is changing the law, as common sense suggests, and as Mr. Southwell was right to concede. If this view of what happens is inconsistent with the declaratory theory of the Court's function, then it is time we said so. It always was a fairy tale.

If it is right that the House of Lords can change the law by overruling a previous decision of the Court of Appeal, it must follow that a person relying on the old law was under no mistake at the time, and cannot claim to have been under a mistake ex post facto because the law is subsequently changed. This is obviously true where the law is changed by legislation. In my opinion it is equally true when the law is changed by judicial decision. The point is put clearly by the Scottish Law Commission in Discussion Paper No. 99, Judicial Abolition of the Error of Law Rule and its Aftermath (1996) paragraph 3.33 when summarising the views of the Court of Session judges:

The next question is whether the same reasoning applies where there is no previous decision of the Court of Appeal directly in point. Can the House of Lords "change" the law in those circumstances, or can it only develop the law? I can see no difference in principle. The English common law is not confined to decided cases. In the field of commercial law, for example, the custom of merchants has always been a fruitful source of law. It is true that a custom can be challenged in a court of law. But it does not need a court of law to establish a custom. Custom is binding on the parties irrespective of any judicial decision. Where therefore a long established custom is rejected by a court of law on the ground that it is inconsistent with statute, the law is "changed" just as much as when a decision of the Court of Appeal is overruled by the House of Lords. I repeat some sentences from the Law Commission Report No. 227 which I have already quoted:

I agree with these observations. There may of course be cases where there is a dispute whether the law was settled at the time of the transaction. But as the Law Commission again point out, this is just the sort of common sense question which the courts are particularly well qualified to answer.

There are two policy reasons which support the Law Commission's view point. The prospect of transactions being reopened many years after the event by a subsequent decision of the Court of Appeal or House of Lords is not one which the law should favour, especially in the field of commerce. It is true that in many cases the defendant would be able to rely on change of position as a defence. But this would not necessarily be so in every case. Certainty and finality, as has been said so often, are twin policy objectives of the highest importance in formulating legal principles.

Secondly, Mr. Underhill points out that if payer and payee are at one in believing the law to be in accordance with a settled understanding, there would appear to be no moral obligation resting on the payee to repay when the law is subsequently changed. Why, asks Mr. Underhill, should the payee's conscience be affected? Where is the unjust factor?

In my opinion this is a strong argument in favour of the Law Commission's proposals. For if the payee's conscience is affected in such a case, it would seem that it ought also to be affected if the law is subsequently changed by legislation. Yet nobody suggests that a subsequent change in the law by legislation can ground a claim in restitution.

Even when the legislation is retrospective, it by no means follows, as Lord Goff points out, that a previous payment will have been made under a mistake of law at the time of payment. My noble and learned and friend Lord Hope is of the same opinion. The correct analysis in his view is that there will have been no mistake of law when the payment was made. I respectfully agree. If the retrospective legislation positively requires a transaction to be reopened, the liability to repay will arise, not because the payee's conscience is affected, but by operation of statute: see Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 69 A.L.J.R. 51 per Brennan J. at p. 69. But if that be so, it is difficult to defend, on policy grounds, a different rule for changes in the law effected by judicial decision. Appellate courts ought to be encouraged to change the law in those rare cases where change is needed. They should not be inhibited by the fear of reopening past transactions.

The policy arguments in favour of the Law Commission's proposals do not mean that, if the proposals are adopted, your Lordships would be indulging in a legislative act. As I have tried to demonstrate, clause 3 of the proposed Bill is in the nature of a defining clause. It tells us what mistake of law means. If your Lordships are entitled to abolish the judge-made mistake of law rule, as I firmly believe we should, we are surely entitled to define what it is that we are abolishing: quo modo oritur eodem solvitur.

Mr. Southwell argued that if your Lordships were to accept the Law Commission's proposal on settled law, it would neutralise much of the benefit flowing from the abolition of the mistake of law rule. I agree that the restricted definition of mistake of law contained in clause 3(1) of the draft bill will confine the operation of clause 2. That, after all, is its purpose. I do not agree that it will render the whole exercise futile, or even much less beneficial. Clause 3(1) only removes those cases from the operation of clause 2 where there has been a subsequent change of the law, or where, in the language of clause 3(1) itself, a court "departs from" a settled view of the law. In all other cases where a mistake of law has in the past precluded a claim in restitution, for example, where a plaintiff has been wrongly advised as to the law, whether settled or otherwise, clause 2 will have full effect.

It is said that the Scottish Law Commission in its 1996 Discussion Paper resiled from the view expressed in its 1993 Discussion Paper No. 95, Recovery of Benefits Conferred under Error of Law. In the former paper the Commission favoured a statutory provision precluding repetition in cases where there has been a change in the law, or in the common understanding of the law, by subsequent judicial decision. The reason why they favoured such a provision was because they regarded the safeguard as "too important to be left to the uncertainties of judicial decisions:" see paragraph 2.123. In the latter paper the Commission changed its mind as to the need for a statutory provision. In other words the Commission came down against the first and second of the possible options outlined in the paper, both of which envisaged a statutory bar to recovery. Instead it favoured the third possible option, namely to leave the development of safeguards to the courts. No doubt it was influenced in its view by the intervening decision of the Inner House in Morgan Guaranty Trust Company of New York v. Lothian Regional Council 1995 SLT 299 . Whereas, therefore, it is true to say that, for a variety of reasons, the Commission resiled from its former preference for a statutory safeguard, it did not express any view one way or the other, certainly no strong view, against a "settled law exception" being implemented by the court.

Much of Mr. Southwell's final submissions were devoted to showing that the decision of the House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 did not change the law. There had been no previous decision of any court that swap transactions were intra vires, nor was there any settled law to that effect. So far as any previous judicial decision is concerned he is, of course, right. But whether or not it was settled law that the transactions were intra vires it is still too soon to say. Mr. Southwell specifically accepted towards the end of his reply that if the House were to agree with the Law Commission's proposals then the question whether there was a settled view of the law in this case would have to go back to the trial judge; see also paragraph 7 of Mr. Southwell's closing submissions in writing. Mr. Underhill expressed some surprise at Mr. Southwell's concession. But he nevertheless agreed.

In the course of his speech Lord Goff tests his view of the law by applying it to the facts of the present case. He pre-supposes that the payer at the date of payment believed that he was bound to pay. The payer is then told in Hazell's case that, on the law applicable at the date of payment, he was not bound to pay. Lord Goff concludes that the payer paid under a mistake of law. But this assumes that the law applicable at the date of payment was the same as the law stated in Hazell's case. If it was, then of course the payer must have been mistaken. But if Hazell's case changed the law, then it would not follow. My noble and learned friend may well be right that Hazell's case did not change the law. But it was common ground, as I understand it, that we are not yet in a position to say one way or the other.

The only other point on which I would, with diffidence, disagree with my Lord is where, towards the end of his speech, he assumes, for the purpose of argument, that the plaintiffs paid on the basis of a settled understanding of the law, later proved to be erroneous, but nevertheless holds that the payment would not for that reason alone be irrecoverable. For the reasons already mentioned, I find this hard to accept. I agree that the payment might be recoverable on some other ground, for example, total failure of consideration, assuming the claim was not time-barred, but not on the grounds on mistake. For if there really was a settled understanding of the law, then that was the law at the time of payment. The payer was not mistaken. The subsequent change in the law could not create a cause of action which, ex hypothesi, did not exist at the relevant time. Even if the change were to come very soon after the payment it would make no difference.

I have not discussed any of the authorities, since on the crucial question whether we should adopt the Law Commission's settled law proposal, I do not regard the authorities, with one exception, as being of great assistance. The exception is the Royal Insurance Australia Ltd. case, 69 A.L.J.R. 51 and, in particular, the observations of Brennan J. at page 69 and Dawson J. at page 75.

Mr. Underhill invited your Lordships to give some guidance as to how, if the question of settled law is to be remitted to the trial judge, that question should be approached. I do not think it would be desirable to say much in that connection, save to draw attention to paragraph 5.11 of the Law Commission Report No. 227. That paragraph provides all the guidance that can usefully be given at this stage. Thus it is not enough that there should be a "common understanding", if by common understanding is meant only the common understanding of the parties. It must be a common understanding shared by their lawyers, and indeed by lawyers in general. The essential requirement is that the plaintiff should be able to prove that he made a mistake. At one extreme he will fail if he paid in accordance with what lawyers generally believed to be the law at the time of payment, whether he obtained legal advice or not. At the other extreme he would fail if the law gave rise to serious doubts; for if lawyers differed among themselves, it could not be said that one view rather than another was mistaken.

Last of all it is said that if Hazell's case did indeed change the law, it would mean that these plaintiffs alone among many others would have failed to recover. But the others have recovered on the ground of failure of consideration, as indeed have the plaintiffs. It is only because these plaintiffs are now seeking to recover in respect of payments which are prima facie time- barred that they are relying on mistake of law at all.

For the above reasons, I would answer the questions formulated by Lord Goff as follows:

Issue 1: Subject to the answer to Issue 1A, the facts pleaded in the statement of claim disclosed a cause of action in mistake;

Issue 1A: Monies paid on the basis of a settled view of the law which has been subsequently overturned by judicial decision are not recoverable;

Issue 1B, 2 & 3: As proposed by Lord Goff.

But a majority of your Lordships are of a different view. What are the consequences? One consequence is that in all those cases where the House of Lords has overruled a previous decision of the Court of Appeal it would be open to those who have entered into transactions in reliance on the previous decision to seek to re-open their transactions. This is a consequence which, in the commercial field at any rate, I view with alarm. My noble and learned friend Lord Hoffmann accepts that there is a problem, but considers that the solution can be left to Parliament. It is reasonable to assume that Parliament would start with the Law Commission's proposals, which, as I have said, successive governments of both main parties have accepted. But in the meantime there will be an inevitable period of intense uncertainty. If your Lordships are not willing to adopt the Law Commission's solution as it stands, it is surely better to let Parliament adopt that solution, or some other solution, before our decision rather than after.

For myself, I would want to allow the appeal, if I could, along the lines of the Law Commission's proposals. But as that is not to be, I consider the second best course is to leave the abolition of the mistake of law rule to Parliament, as the Law Commission itself envisaged. Like my noble and learned friend Lord Browne-Wilkinson therefore I would dismiss these appeals.

LORD HOFFMANN

My Lords,

It is no mere form of words to say that I have had the privilege of reading in draft the speech of my noble and learned friend Lord Goff of Chieveley. It is, if I may be allowed respectfully to say so, one of the most distinguished of his luminous contributions to this branch of the law. On all but one of the questions debated before your Lordships, I understand that it commands unanimous assent. It would therefore be superfluous for me to add anything of my own. But I should say something on the issue which divides your Lordships, because I have to confess that on this point I have changed my mind. At the end of the argument I was of opinion, perhaps not in a very focused way, that a person who pays in accordance with what was then a settled view of the law has not made a mistake. In fact it seemed to me that one could go further and say that if he had acted in accordance with a tenable view of the law, he had not made a mistake. In the first case he was right, and in the second neither right nor wrong, but in both cases his state of mind could be better described as a failure to predict the outcome of some future event (scilicet, a decision of this House) than a mistake about the existing state of the law.

On reflection, however, I have come to the conclusion that this theory was wrong, both in its stronger ("tenable view") and in its weaker ("settled view") form. The reason, I think, is that it looks at the question of what counts as a mistake in too abstract a way, divorced from its setting in the law of unjust enrichment.

The problem arises because(1) the law requires that a mistake should have been as to some existing fact or (on the view which your Lordships now take) the then existing state of the law but

(2) a judicial statement of the law operates retrospectively. So the question is whether the retrospectivity of the law- making process enables one to say that holding a contrary view of the law at an earlier stage was a mistake. This question cannot be answered simply by taking a robust, common sense stion at the time of payment, and that one does not believe in fairy stories. It is easy to understand the expostulation of Lord Coleridge C.J. in Henderson v. Folkestone Waterworks Co. (1885) 1 T.L.R. 329 at the suggestion that, because his judgment had been reversed by the House of Lords, he had been "ignorant of the law." The common sense notion of a mistake as to an existing state of affairs is that one has got it wrong when, if one had been better informed, one could have got it right. But common sense does not easily accommodate the concept of retrospectivity. This is a legal notion. If the ordinary man was asked whether Lord Coleridge had made a mistake, he would no doubt have said that in the ordinary sense, which might carry some reflection on his competence as a judge, he had not. But if he was asked whether he should be treated for the purposes of some legal rule as having made a mistake, he might say "I don't know. You tell me that the later decision operated retrospectively, which means that at least for some purposes, it must be assumed to have been the law at the time. Therefore it may be that for some purposes a person who held the contrary view should be treated as having made a mistake. It all depends upon the context. You had better ask a lawyer."

The lawyer would, I think, start by considering why, in principle, a person who had paid because he held some mistaken belief should be entitled to recover. The answer is that it is prima facie unjust for the recipient to retain the money when, if the payer had known the true state of affairs, he would not have paid. It has never been suggested that, in the case of a mistake of fact, he could not recover if everyone would probably have shared the same false belief. On the contrary, there was once a view that he should not be able to recover if a reasonable person in his position would not have shared his false belief, but this was repudiated in Kelly v. Solari (1841) 9 M. & W. 54. Since then, it has not mattered whether the person making the payment could have discovered the true state of affairs or not.

The distinction therefore does not turn upon the fact that the person making the payment could not have discovered the true state of affairs about the law any more than about the facts. It turns upon the purely abstract proposition that in principle (and leaving aside the problem of Schrödinger's cat) the truth or falsity of any proposition of existing fact could have been ascertained at the time, whereas the law, as it was subsequently be declared to have been, could not.

One must therefore ask why, in the context of unjust enrichment, this should make a difference. In both cases it has turned out that the state of affairs at the time was not (or was deemed not to have been) what the payer thought. In the case of a mistake of fact, it is because things were actually not what he believed them to be. In the case of a mistake of law, it is by virtue of the retrospectivity of the decision. Does the principle of unjust enrichment require that this retrospectivity should be carried through into the question of whether the payer made a mistake?

In my view, it would be very anomalous if it did not. Imagine a client who has paid under what he thought to be a legal obligation. He had not consulted a lawyer at the time, but seeks advice after a case in the House of Lords which decides that the obligation was void. The lawyer tells him that according to the House of Lords, he need not have paid. He asks whether he can recover his money on the grounds of mistake. On the "settled view" theory, the lawyer has to say:

"No, because if you had consulted me at the time, I would have told you that you were certainly right to pay. Therefore you made no mistake."

The client asks:

"Does that mean that the obligation was actually valid? If so, what has made it invalid?"

The lawyer has to answer "No, the House of Lords has told us that it was always void. Nevertheless, you made no mistake. On the other hand, if lawyers had regarded it as a doubtful point, or if any lawyer would have told you then that the obligation was void, so that it would have been extremely foolish of you not to have sought advice, then you would have been able to recover."

My Lords,

it seems to me that the imaginary client would have great difficulty in understanding how these distinctions can arise out of a rule giving a remedy for unjust enrichment. In each case he thought that the obligation was valid and it has subsequently turned out that it was not. In principle, the question should not turn upon what other people might have thought was the law but upon what he thought was the law. And this has turned out to have been wrong, however many lawyers might have agreed with him at the time. So there ought to be a remedy in all cases or none. I should mention that Mr. Southwell Q.C. said in his written submissions in reply that if someone made a payment because he had been told that the Court of Appeal had decided that a person in such circumstances should do so, he would not be treated as having made a mistake when the decision was subsequently reversed. But he thought that the answer would be different if he had not been told of the decision but came to the same conclusion on first principles or by accident. He commented that this was an absurdity, which might be thought to cast doubt upon the soundness of the proposition. I think it is wrong. It does not matter why the payer thought that the law required him to pay. Retention is prima facie unjust if he paid because he thought he was obliged to do so and it subsequently turns out that he was not.

An analogy was drawn in argument between a retrospective decision of a court and a retrospective Act of Parliament. A failure to predict the latter, it was said, could not possibly be a mistake and therefore why should the former. I do not myself see why, in principle, if an Act of Parliament requires that the law be deemed to have been different on an earlier date, it should not follow that a person who acted in accordance with the law as it then was should be deemed to have made a mistake. This was the view of Mason C.J. in Commissioner of State Revenue v. Royal Insurance Australia Ltd. [1992] 182 C.L.R. 51 and I respectfully think that in principle he was right. But usually the question will turn upon the construction of the statute: it may provide expressly for the refund of money declared not to be owing, or such an obligation may be implied, or it may be argued that the failure to provide expressly for repayment showed a Parliamentary intention that transactions under the previous law should not be disturbed. I find the analogy of a retrospective Act of Parliament, which can deal with the consequences of its retrospectivity, unhelpful in dealing with a change of law by judicial decision. The judges who change the law can use only the common law to remedy any injustices which compliance with the previous law may have caused.

I therefore do not think that there are any reasons of principle for distinguishing cases in which a subsequent decision changes a settled view of the law, or, for that matter, settles what was previously an unsettled view of the law. The enrichment of the recipient is in each case unjust because he has received money which he would not have received if the payer had known the law to be what it has since been declared to have been.

There is, however, another ground for adopting the "settled view" theory and that is simply in order to preserve the security of past transactions. The argument is that where the law was thought to have been settled, there are likely to have been many transactions entered into in reliance upon it. Therefore a rule which uniformly denies recovery in such cases would, on balance, do less harm than good.

The adoption of the "settled view" rule on these grounds would be a legislative act in a sense in which the abrogation of the mistake of law rule would not. The latter rule is, as my noble and learned friend Lord Goff of Chieveley has amply demonstrated, not founded upon any defensible logic or principle. It is the proper business of your Lordships in a judicial capacity to clarify and develop the common law by restating rules in accordance with principle, even when this may require the correction of ancient heresies. But the adoption of the "settled view" rule would be founded purely upon policy; upon a utilitarian assessment of the advantages of preserving the security of transactions against the inevitable anomalies, injustices and difficulties of interpretation which such a rule would create. That is not a course which I think your Lordships should take.

I accept that allowing recovery for mistake of law without qualification, even taking into account the defence of change of position, may be thought to tilt the balance too far against the public interest in the security of transactions. The most obvious problem is the Limitation Act, which as presently drafted is inadequate to deal with the problem of retrospective changes in law by judicial decision. But I think that any measures to redress the balance must be a matter for the legislature. This may suggest that your Lordships should leave the whole question of the abrogation of the mistake of law rule to the legislature, so that the change in the law and the necessary qualifications can be introduced at the same time. There is obviously a strong argument for doing so, but I do not think that it should prevail over the desirability of giving in this case what your Lordships consider to be a just and principled decision.

I should say in conclusion that your Lordships' decision leaves open what may be difficult evidential questions over whether a person making a payment has made a mistake or not. There may be cases in which banks which have entered into certain kinds of transactions prefer not to raise the question of whether they involve any legal risk. They may hope that if nothing is said, their counter-parties will honour their obligations and all will be well, whereas any suggestion of a legal risk attaching to the instruments they hold might affect their credit ratings. There is room for a spectrum of states of mind between genuine belief in validity, founding a claim based on mistake, and a clear acceptance of the risk that they are not. But these questions are not presently before your Lordships.

LORD HOPE OF CRAIGHEAD

My Lords,

The background to these consolidated appeals is to be found in sections 5 and 32(1)( c ) of the Limitation Act of 1980. Section 5 of that Act provides that an action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued. Section 32(1)( c ) provides that, where in the case of any action for which a period of limitation is provided by the Act the action is for relief from the consequences of a mistake, the period of limitation shall not begin to run until the plaintiff has discovered the mistake or could with reasonable diligence have discovered it.

Interest rate swap contracts first came into use in about 1981, and in the following year they began to be used by local authorities. But it was not until 30 May 1989 that Anthony John Hazell, the auditor appointed by the Audit Commission for Local Authorities in England and Wales to audit the accounts of Hammersmith and Fulham London Borough Council, applied to the court for a declaration that the items of account appearing in the capital market fund account relating to the interest rate swaps which had been entered into by that local authority were contrary to law and for an order for rectification of the accounts. By that date a very large number of similar transactions had been entered into by numerous other local authorities. Following the decision of this House in Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1 that, having regard to the provisions and limitations of the Local Government Act 1972 regulating the function of borrowing, interest rate swaps were ultra vires local authorities, actions were begun by both banks and local authorities to obtain restitution under interest rate swap contracts which, as a result of that decision, were held to be void. In those cases where the contracts had only recently been entered into there was no limitation problem. But in some others, particularly some of those involving Kleinwort Benson Limited which was one of the first of several merchant banks to have attracted business in this field, this was not so. In their case, where the contracts had been entered into more than six years previously, the limitation defence was available.

The right of a party to a void interest rate swap contract to recover its net payments by an action for money had and received was established by the decision of Hobhouse J. in Westdeutsche Landesbank Girozentale v. Islington London Borough Council [1994] 4 All E.R. 890. His decision on this point was upheld by the Court of Appeal. No question of limitation was raised in the Westdeutsche case. But in Kleinwort Benson Ltd. v. Sandwell Borough Council , in which certain of the issues of law arising on the pleadings were tried together with the Westdeutsche case - as to which there had been a full trial of the action on an agreed statement of facts supplemented by oral evidence called by both sides--the limitation defence was raised in regard to the first of four swaps, as the limitation period had been exceeded in the case of that swap. Following dicta in In re Diplock's Estate

[1948] Ch. 465

, 514, Hobhouse J. held that section 5 of the Limitation Act 1980 applied to causes of action for money had and received. His decision that the limitation defence applied was not challenged in the Court of Appeal.

No issue was raised in the Sandwell case as to whether the exception under section 32(1)( c ), as the action was for relief from the consequences of a mistake, was available. The ground on which the plaintiffs had a prima facie right to recover the net payments was held by Hobhouse J. to be absence of consideration: [1994] 4 All E.R. 890, 936E. The plaintiffs had submitted that mistake gave them an additional ground on which they could base their claim. But Hobhouse J. held at p. 931E-F that the critical matter of which they were unaware was the provisions of the Local uot;had the payer taken advice from a qualified legal practitioner who was onal Court and the House of Lords in Hazell . He said that lack of knowledge of a statutory provision and its legal effect was an error of law, with this result:

"The plaintiffs accept that in this court I am bound by authority to hold that a mistake of law does not give a right to recover money at common law as money had and received."

The swaps in the present cases involve a number of payments which were made more than six years before the writs were issued. The respondents seek to rely on the limitation defence in regard to these payments. So, in order to obtain the full restitution which would not otherwise be available to them, Kleinwort Benson have renewed their alternative cause of action on the ground of mistake. They contend that section 32(1)( c ) of the Limitation Act 1980 applies where the mistake is one of law.

The first of the three issues, as stated in the Agreed Statement of Facts and Issues, relates to this alternative cause of action. It is whether the facts pleaded by Kleinwort Benson in the relevant paragraphs of their Points of Claim disclose a cause of action in mistake. The answers to be given to the other two issues, as to whether recovery is available in the case of those swap contracts which been fully performed--the "closed swaps" - and as to the limitation point, depend upon the answer which is to be given to the first issue. The primary question is whether there is a cause of action in mistake for money paid under a mistake of law.

Although this question has come before us in these appeals on preliminary issues it is, I think, necessary to have regard to at least part of the factual background. This is particularly important in the context of the discussion as to whether Kleinwort Benson were acting under a mistake of law when they made the payments. So I should like to begin by summarising my understanding of the facts before I turn to the questions of law which we must decide.

The Facts

The Points of Claim state that the payments were made by Kleinwort Benson on the basis of a mistaken belief that they were being made pursuant to a binding contract. No details are given of the circumstances or nature of the alleged mistake, and there has been no request for further and better particulars. The pleadings appear to have been framed on the assumption that there was no issue as to whether or not Kleinwort Benson were acting under a mistake when they made the payments, the only issue being whether the mistake was a mistake of law. It seems to have been assumed also, while the argument was being developed before Hobhouse J. in Westdeutsche , that all the payments in that case were made under a mistake. In the event it was sufficient for his purpose that there was no evidence of or allegation in either case that the relevant bank was mistaken as to any actual fact: p. 931E. He did not need to examine the matter further. The circumstances of the mistake affecting the payment made by Westdeutsche to Islington had however been the subject of evidence. It was in the light of that evidence that Hobhouse J. made findings at pp. 930J-931E which I think are of some help as background to this case-- although it cannot, of course, be assumed that the facts here are exactly the same, as the judge in this case has not heard any evidence.

In the Islington case the investment banker employed by Westdeutsche was telephoned in June 1987 by a firm of interest swap brokers asking whether the bank would be interested in becoming a party to a swaps transaction with a local authority. He assumed that any reputable local authority would not enter into transactions which it was not empowered to do. He believed that the swap contract was a proper contract for Islington to undertake. He was confirmed in this belief by his knowledge that local authorities had been engaging in the swaps market for a number of years as ordinary participants in that market. So he assumed that in making his agreement with Islington he was entering into a legal contract with them. He was a commercial man, not a lawyer. There was no evidence that he sought legal advice before he entered into the contract.

His position can be seen from the narrative which Hobhouse J. provided at pp. 896E-898D to have been unremarkable. A sophisticated market had developed since interest rate swaps first came into use in about 1981. It involved institutions in the position of market makers and a corps of money brokers. As it became more complex it was recognised that it needed to become more organised. A set of standard terms and conditions was formulated by the British Bankers Association in association with the Foreign Exchange Currency Deposit Brokers Association. The parties to these contracts were normally regular participants in the money markets. Local authorities were among the participants in the money markets, and they were regarded as being institutions of unquestioned solvency. It was assumed that interest rate swaps could legitimately be entered into with them as an ancillary to their statutory borrowing and lending powers. The Chartered Institute of Public Finance and Accountancy received advice to this effect in the latter part of 1983. The absence of any legal risk was based on what was understood to be the effect of para. 20 of Schedule 13 to the Local Government Act 1972.

This assumption continued to be acted upon uncritically until 1987. In August of that year the Audit Commission and its officers made statements which for the first time called into question their legality. The advice of counsel was obtained that, unless they were actual hedging transactions in relation to actual loans that fell within the powers of a local authority, interest rate swap contracts were not within the powers of a local authority under the Act of 1972. On 14 July 1988 a press release was issued by the Commission publishing that advice and warning that auditors might challenge items arising from such transactions that were not permitted by the statute.

It appears therefore that at the time when the transactions in the present case were entered into there was a general understanding, which was shared by banks and local authorities as regular participants in the money markets, that interest rate swap contracts were within the borrowing and lending powers of local authorities. This understanding appears to have based upon commercial assumptions which developed within the money markets, not as a result of initiatives taken on legal advice by either party to the transactions. When advice was taken by the Chartered Institute it confirmed what was already understood to be the position in the money markets. The formulation of standard clauses for use in the basic interest swap contracts - although not designed specifically for use in transactions with local authorities - no doubt added to the general understanding that there was no legal risk. It does not appear that any auditor of local authority accounts expressed doubt on the matter until the issue was first raised in 1987 by the Audit Commission.

The Mistake of Law Rule

On the primary question whether the time has now come to end the rule that payments made under a mistake of law are not recoverable, I agree with my noble and learned friend Lord Goff of Chieveley that we should decide the point now rather than leave this task to the Law Commission. Mr. Underhill Q.C. said that he was not seeking to uphold the rule in its traditional form. What he sought to do was to draw attention to the problems which might arise if it were to be removed without regard to the consequences. He went on to develop arguments as to how those problems might be met in a way which, in these cases, would provide the local authorities with a defence. For my part, I think that the case for a departure from the traditional rule is now unanswerable. But I also agree with my noble and learned friend that the taking of this step gives rise to difficult questions of policy and analysis.

Three considerations have persuaded me that the mistake of law rule should no longer form part of English law.

The first relates to the ground of the decision by Lord Ellenborough C.J. in Bilbie v. Lumley (1802) 2 East 469 , following Buller J. in Lowrie v. Bourdieu (1780) 2 Dougl. 468. The maxim ignorantia juris non excusat, upon which Lord Ellenborough based his decision, had featured regularly in debates among the civilian lawyers as to whether a person who paid money under an error of law could obtain a remedy. The pleadings in the Scottish case of Stirling v. Earl of Lauderdale (1733) Mor 2930 , the relevant passages from which are to be found in the opinion which I delivered in Morgan Guaranty Trust Company of New York v. Lothian Regional Council 1995 SC 151 , 162-163, show that it was an important part of the petitioner's argument in the Stirling case that the maxim did not apply only to the law of delict. It had been applied by the many of the great civilian Commentators to the case of indebiti solutio, to the effect that no action was competent where the sum was paid under an error of law. This argument was met by the response that, while some Commentators were of that view, others were of the contrary opinion. The petitioner's main point was that the great rule of equity is nemo debet locupletior cum alterius jactura. The maxim that every man is presumed to know the law ought to be applied equally to the recipient, who had taken what he ought to be presumed to have known was not due to him.

In the light of this background Lord Wright's description, in the Preface to his Legal Essays and Addresses (1939) at p. xix, of Lord Ellenborough's use of the maxim as "hasty and ill-considered" may seem to have been rather harsh. Anyone who was familiar with the debate which had been going on among the civilian lawyers for centuries would have recognised the use of the maxim in this context as a legitimate part of the argument. The Scottish institutional writer Erskine, Institutes III iii 54 (1773) wrote:

"Civilians are not agreed whether it takes place where one pays the indebitum through a mistake in law; because by a known maxim ignorantia juris neminem excusat."

But there is now wide support for the view that the maxim is out of place in this field and that it cannot serve as the foundation for the rule barring recovery of monies paid under a mistake: Hydro-Electric Commission of the Township of Nepean v. Ontario Hydro [1982] 1 R.C.S. 347, 358-361, per Dickson J.; David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1991-92) 175 C.L.R. 353 , 402 per Dawson J. agreeing with the reasoning of Mason C.J. and four other members of the High Court on this point; Willis Faber Enthoven (Pty.) Ltd. v. Receiver of Revenue 1992 (4) SA 202, 221-223 per Hefer J.A.; Morgan Guaranty Trust Co. of New York v. Lothian Regional Council 1995 SC 151 , 164 in my own opinion and 174 per Lord Cullen.

The second consideration relates to the principle of unjust enrichment itself, which now lies at the heart of the law of restitution in English law. The principle was stated by Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd.

[1943] AC 32

, 61, in words which restated in the English language the maxim nemo debet locupletari aliena jactura of the civil law:

In Ontario Hydro at pp. 367-368 Dickson J. said:

"Once a doctrine of restitution or unjust enrichment is recognized, the distinction as to mistake of law and mistake of fact becomes simply meaningless."

In Air Canada v. British Columbia (1989) 59 D.L.R. (4 th ) 161, 192 La Forest J. said that he had no hesitation in following Dickson J.'s lead in these matters:

In David Securities , 175 C.L.R. 353 , 375 Mason C.J. and others, after referring to the statement by Dickson J. and to the description by Deane J. in Pavey & Matthews Pty Ltd v. Paul

(1987) 162 CLR 221

, 256-257 of unjust enrichment as a "unifying legal concept", said:

In the same case at p. 393 Brennan J. said:

In answer to his own question he said that he agreed with the majority in rejecting the distinction as critical to the question whether the defendant has been unjustly enriched. He went on to say that he did not see the distinction between mistakes of fact and mistakes of law as being immaterial to the question whether the payment was recoverable. This is a qualification to which I must return later. For the present it is sufficient to note his agreement with the majority on the absence of any good ground for the distinction. Similar views were expressed in Willis Faber and in Morgan Guaranty after a review of the civilian authorities. The unanimity which has been expressed on this point, in which common law jurisdictions are at one with those whose roots lie in the civil law, gives powerful recognition to the unifying effect of the principle of unjust enrichment. I do not think that the law of England, having accepted the principle, can continue to resist its consequences.

The third consideration relates to the practical effects of the distinction. I do not need to elaborate on this point. As Mr. Southwell Q.C. explained, the rule is subject to numerous exceptions and qualifications. I wish to mention only a few examples. Relief may be given where the error of law is one as to the construction of a private contract between the two parties which affects them only: Cooper v. Phibbs (1867) LR 2 HL 149 ; Earl Beauchamp v. Winn (1873) LR 6 HL 223 ; see also British Hydro- Carbon Chemicals Ltd. and British Transport Commission, Petitioners 1961 S.L.T. 280, per Lord Kilbrandon. And there is the exception which was described by Lord Denning in Kiriri Cotton Co. Ltd. v. Dewani

[1960] AC 192

, 204 which applies where there is "something more" in addition to the mistake of law such as something in the defendant's conduct which shows that he was the one who was primarily responsible for the mistake. Experience has shown that in practice the rule has tended to lead to unjust results and to a desire to avoid the consequences. It is unsatisfactory that the law should have had to resort to exceptions and qualifications, the subsequent application of which to other cases can give rise to difficulty.

Was There a Mistake?

Subject to any defences that may arise from the circumstances, a claim for restitution of money paid under a mistake raises three questions:(1) was there a mistake?

(2) did the mistake cause the payment? and

(3) did the payee have a right to receive the sum which was paid to him?

The first question arises because the mistake provides the cause of action for recovery of the money had and received by the payee. Unless the payer can prove that he acted under a mistake, he cannot maintain an action for money had and received on this ground. The second question arises because it will not be enough for the payer to prove that he made a mistake. He must prove that he would not have made the payment had he known of his mistake at the time when it was made. If the payer would have made the payment even if he had known of his mistake, the sum paid is not recoverable on the ground of that mistake. The third question arises because the payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground.

In the present case the second and third questions do not appear to present any difficulty. But the first question raises an issue of very real importance. The answer which is given to it will have significant implications for the future development of the law of restitution on the ground of unjust enrichment.

In my opinion the proper starting point for an examination of this issue is the principle on which the claim for restitution of these payments is founded, which is that of unjust enrichment. The essence of this principle is that it is unjust for a person to retain a benefit which he has received at the expense of another, without any legal ground to justify its retention, which that other person did not intend him to receive. This has been the basis for the law of unjust enrichment as it has developed both in the civilian aken advice from a qualified legal practitioner who was y civilian and partly common law. On the whole, now that the common law systems see their law of restitution as being based upon this principle, one would expect them to apply it, broadly speaking, in the same way and to reach results which, broadly speaking, were similar: Zweigert and Kotz, An Introduction to Comparative Law , 2 nd ed. (1987), vol.II, pp. 262-263, 267.

What, then, is the function of mistake in the field of restitution on the ground of unjust enrichment? The answer, one may say, is that its function is to show that the benefit which has been received was an unintended benefit. A declaration of intention to confer the benefit, even if unenforceable, will be enough to justify the retention of the enrichment. A mistake, on the other hand, will be enough to justify the restitutionary remedy, on the ground that a benefit which cannot be legally justified should not be retained where it was a mistaken--and thus unintended--benefit.

It may be helpful to mention the material we were given to illustrate its function in the civilian systems. The details vary as between the major civil codes. But in simple terms, the law looks for the absence of a legal justification for the enrichment: Zweigert and Kotz , p. 232. If the payer paid in the mistaken belief that he was under a duty to pay, it is prima facie unjust that the payee should be allowed to retain what he received. But the burden of proving that the payer knew that there was no duty, and was not mistaken, is on the recipient: Englard, International Encyclopedia of Comparative Law , (1991) vol. X, pp. 8-9, para. 5.13. Mistake in this context means lack of knowledge, and it makes no difference whether this is of fact or of law: Englard , p. 18, para. 5.30. As for the concept of enrichment, a person is enriched when he receives a payment which the payer was not bound by any obligation to make to him. The payee is entitled to retain the payment if it was made to him voluntarily, as in the case of a gift. The enrichment is unjust if the person who made the payment did not do so voluntarily and there was no obligation to confer the benefit: Zweigert and Kotz , p. 261.

The approach of the common law is to look for an unjust factor, something which makes it unjust to allow the payee to retain the benefit: Birks , An Introduction to the Law of Restitution , 2 nd ed. (1989), pp. 140 et seq. It is the mistake by the payer which, as in the case of failure of consideration and compulsion, renders the enrichment of the payee unjust. The common law accepts that the payee is enriched where the sum was not due to be paid to him, but it requires the payer to show that this was unjust. Whereas in civilian systems proof of knowledge that there was no legal obligation to pay is a defence which may be invoked by the payee, under the common law it is for the payer to show that he paid under a mistake. My impression is that the common law tends to place more emphasis on the need for proof of a mistake. But the underlying principle in both systems is that of unjust enrichment. The purpose of the principle is to provide a remedy for recovery of the enrichment where no legal ground exists to justify its retention. But does it matter whether the mistake is one of fact or one of law?

To answer this question one must have in mind both the state of mind of the payer and the state of the facts or the law about which there is said to have been a mistake. The state of mind of the payer must be related to the time when the payment was made. So also must the state of the facts or the law. That is the time as at which it must be determined whether the payment was or was not legally justified. I agree with Brennan J.'s observation in David Securities that the right to recover the amount paid by mistake accrues at the moment when the sum is received by the payee: see also Baker v. Courage & Co.

[1910] 1 KB 56

. The point of the inquiry is to show that, had the payer known the true state of the facts or the law at that time, he would not have made the payment to the payee.

The inquiry will not be a difficult one, where the mistake is said to have been one of fact, if the facts have not changed since the date of the payment and the payer is able to show that he paid due to a misunderstanding of them, to incorrect information or to ignorance. In such a case the requirements for recovery will normally be satisfied. Nor is it difficult to deal with the case where the facts have changed. In such a case proof that the alleged state of the facts at the time did not emerge until afterwards will usually be sufficient to show that there was, at the time of payment, no mistake. The case may be more difficult where the mistake is said to have been a mistake of law. But I do not think that there is any essential difference in principle. A question of law may be as capable of being answered as precisely and with as much certainty as a question of fact, or it may be- -as are some questions of fact--a matter of opinion.

Nor is there any essential difference as between fact and law in regard to the payer's state of mind. This may vary from one of complete ignorance to a state of ample knowledge but a misapplication of what is known to the facts. The mistake may have been caused by a failure to take advice, by omitting to examine the available information or by misunderstanding the information which has been obtained. Or it may have been due to a failure to predict correctly how the court would determine issues which were unresolved at the time of the payment, or even to foresee that there was an issue which would have to be resolved by the court. As Mason C.J. said in David Securities , p. 374 the concept of mistake includes cases of sheer ignorance as well as of positive but incorrect belief.

Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong--and that is so whether the issue is one of fact or one of law. As for mistake, this may arise where there is no suggestion that the law has changed since the payment was made. If it can be demonstrated by reference to statute or to case law that the law was overlooked or was applied wrongly, the position will be the same as that where the mistake was one as to the state of the facts. It is very unusual for a statute to provide for the law to be changed retrospectively, but this is not unknown: see the War Damage Act 1965. If the law is changed retrospectively by statute, so that a payment which was legally due when it was paid has now become undue, the correct analysis will be that there was no mistake at the time when it was made. The enrichment will have been due to the fact that the law was changed retrospectively by the statute.

What then is the position where the fact that the payment was not legally due at the time when it was made was only revealed later by subsequent case law? In posing this question I am not dealing with the situation where a judgment of the court that a sum is due has become final and been acted upon, but is afterwards overruled by a higher court in a different case. The law of unjust enrichment does not disturb transactions of that kind. Where the payment is made because the court has held that the sum is due to be paid to the payee, the obligation to pay is to be found in the order which has been made by the court. I am dealing with the case where the payment was made on the understanding that the law on the point was settled and that understanding was shown by subsequent case law to have been wrong.

The answer to this question may be said to depend upon whether the decision in question has changed the law or has merely declared what the law always was. óKóóK We were reminded of Lord Reid's observation that to say that the judges never change the law is a fairy tale: (1972-73) J.S.P.T.L. 22. Experience has shown that the judges do from time to time change the law, in order to adapt it to changed social conditions or in response to other factors which show that the law has become out of date. But it would be equally wrong to say that the judges never declare the law. It may simply be that there was a gap which needed to be filled, or that there was a defect in thinking which needed to be revealed so that a point could be clarified. And to overturn an established line of authority is one thing. It is quite another where there was no previous decision on a point which no-one had sought to bring before the court previously. It may be said that a view of the law can be regarded as settled even where there is no case law at all on the subject, because all those interested in it have acted on a common understanding of what the law requires. But I would find it difficult to accept that a judge who said that that common understanding was wrong, and that the law was different from what everyone previously had thought it was, had changed the law. It would seem to be more accurate to say that, as it was for the judge to say what the law was, he was merely declaring what the law was and that he was not changing it.

On the whole it seems to me to be preferable to avoid being drawn into a discussion as to whether a particular decision changed the law or whether it was merely declaratory. It would not be possible to lay down any hard and fast rules on this point. Each case would have to be decided on what may in the end be a matter of opinion, about which there may be room for a good deal of dispute. It is better to face up to the fact that every decision as to the law by a judge operates retrospectively, and to concentrate instead on the question--which I would regard as the critical question--whether the payer would have made the payment if he had known what he is now being told was the law. 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 due to be paid, and it is the state of mind of the payer at the time of payment which will determine whether he paid under a mistake. But there seems to me to be no reason in principle why the law of unjust enrichment should insist that that mistake must be capable of being demonstrated at the same time as the time when the payment was made. A mistake of fact may take some time to discover. If there is a dispute about this, the question whether there was a mistake may remain in doubt until the issue has been resolved by a judge. Why should this not be so where the mistake is one of law?

In the present case we have no evidence about the state of the law at the time of the payments other than what can be derived from the agreed facts. But the background, as it can be discovered from the judgment of Hobhouse J. in the Westdeutsche case, is reasonably clear. He said at p. 931E that the effect of the statutory provisions of which the relevant bank had previously been unaware was subsequently "declared" by the Divisional Court and the House of Lords in the Hazell case. His choice of language seems to me to have been entirely appropriate. There had been no previous judicial decision on the point until the practice in the money markets was challenged for the first time in that case by the district auditor. Nor is it suggested that an opinion had been expressed about it which could be regarded as authoritative in the sense that it was binding on all parties including the auditor. If it were necessary to decide this point, I do not think that it would be right to say that the decision in the Hazell case "changed" the law. What it did was to clarify a point which had been overlooked and was in need of determination by the court. But the situation seems to me to be no different in principle from one where the facts are shown, as a result of inquiries which at the time of the payment were overlooked or not thought to be necessary, to have been different from what they had been thought to be at the time of the payment by the payer. Prima facie the Bank is entitled to restitution on the ground of mistake.

The Defences

The question is whether the removal of the mistake of law rule requires, on grounds of public policy, that there should nevertheless be defences in mistake of law cases which are not available in mistake cases generally. It is appropriate as a first step however to recognise that the defences which are available generally already cover much of the ground where to allow recovery would lead to injustice. At this early stage it may be unwise to assume, until the matter has been tested on a case by case basis, that there are significant gaps in mistake of law cases which still need to be filled. Despite the careful study which has been given to this subject by the two Law Commissions, I would be inclined to proceed cautiously at this stage.

The initial requirements already mentioned which the plaintiff must satisfy will do much to sort out those case which deserve a remedy and those which do not. He must show that he acted under a mistake which caused him to pay a sum which the payee was not legally entitled to receive. A payment made in the knowledge that there was a ground to contest liability will be irrecoverable: see Kelly v. Solari (1841) 9 M. & W. 54, 58 per Lord Abinger C.B. Then there are the defences of undoubted general application, as well as that of estoppel which requires no elaboration. The first is that of change of position which was recognised in Lipkin Gorman v. Karpnale Ltd .

[1991] 2 AC 548

. One of the examples which were given of its application by Lord Goff was where the plaintiff pays to the defendant under a mistake of fact and the defendant, while acting in good faith, pays the money or part of it to a charity. I think that it would be equally unjust to require the defendant to make restitution in such a case where the plaintiff pays the money under a mistake of law. The nature of the mistake makes no difference to the defendant who is acting in good faith. Mason C.J. seems to have been viewing this defence as applicable generally when he said in David Securities at p. 385 that a defence of change of position was necessary to ensure that enrichment of the recipient was prevented only where this would be unjust in a case where the defendant had acted to his or her detriment on the faith of the receipt.

Then there is the defence that the money was paid as, or as part of, a compromise. Brennan J. in the same case said at p. 395 that, where a claim is satisfied by accord and satisfaction, a payment made in satisfaction is made in discharge of an obligation created by the accord: it is unaffected by any mistake as to the validity of the compromise. That must be so, irrespective whether the mistake is as to the facts or the law regarding its validity. In the Ontario Hydro case Dickson J. said at p. 380 that there was a head of public policy which recognised that there was a need to preserve the validity of compromises freely entered into with advice. I think that it is possible to find a more principled basis for the defence, as Brennan J. has suggested. But my main point is that it is available irrespective of the nature of the mistake.

It has been suggested that it should be a defence that the money was paid in settlement of an honest claim: Goff and Jones , The Law of Restitution , 3 rd ed. (1986), pp. 118-119. In the Ontario Hydro case at p. 364 Dickson J. accepted that a payment made in these circumstances would be irrecoverable, even if later events indicated that the payer was foolish to have acceded to the request for payment. It is not clear from his brief comment whether he saw this defence as one which would be relevant in mistake of law cases only. But in his summary of Dickson J.'s analysis in the Air Canada case at p. 191 La Forest J. treats this defence as one which would be applicable to any case of enrichment at the plaintiff's expense. In David Securities Mason C.J. in the majority judgment at p. 374 uses the expression "honest claim" to distinguish a voluntary payment which is made irrespective of the validity or invalidity of the obligation from the case where the payment is made under compulsion or undue influence. It is clear that the majority saw such factual circumstances, if relevant, as applicable to mistake of fact cases as well as to mistake of law cases. This was one reason why they regarded the mistake of law rule as broader and, as they put it, more preclusive than was necessary.

In the Westdeutsche case Hobhouse J. said at p. 934 that the principle of voluntary payments could not be applied unless there was a conscious appreciation by the payer that the contracts were or might be void, and that on the evidence in the Islington case there clearly was no voluntary assumption of risk in any respect that was relevant. It is not clear, as there has been no evidence, whether there was a voluntary assumption of risk in any of the cases which are before us in these appeals. So I would not be prepared to say that it was a defence which in these cases was available. It is sufficient for my purpose that, while the precise limits of it have still to be clarified, it is a defence which applies generally irrespective of the nature of the mistake.

Two defences have however been suggested which are designed specifically for cases where the mistake was a mistake of law. I take first the defence which was formulated in David Securities by Brennan J. in his dissenting opinion at pp. 398-399. He said that it should be a defence to a claim for money paid or property transferred under a mistake of law that the defendant honestly believed when he learned of the payment or transfer that he was entitled to receive and to retain the money or the property. I regret that, while I have derived much assistance from his judgment, I am unable to agree with him on this point. I have some difficulty in seeing why this defence, if there is merit in it as a means of preventing recovery where this would be unjust, should be confined to mistake of law cases. If an honest belief on the part of the payee can overcome the fact that it is prima facie unjust that the payer should not be able to recover what he paid under a mistake, why should this not be so in all cases? The reason, I think, is that in mistake of fact cases such a defence has never been recognised. To admit it now in such cases would be to run counter to many authorities. The defence seems to me to be based on expediency not on principle, and in any event to be too wide. But there are other objections. It does not sit easily with the defence of change of position. Indeed, in mistake of law cases, that defence would become unnecessary. The element of good faith would seem to be enough even though the defendant had not acted on the faith of the receipt. I think that this shows that it is lacking in principle. It would also tend to perpetuate the distinction between mistakes of fact and mistakes of law, which is itself undesirable. The Law Commissions have not supported it. I would not favour the adoption of the defence as part of English law.

There remains the defence of common understanding or of settled law, to which Mr. Underhill devoted much of his argument under this chapter. This clearly is a defence which would be applicable only to the mistake of law cases, and there is some justification for it on grounds of public policy. It would tend to support certainty in the law and to preserve settled transactions. In one or other of its formulations it has been supported by various Law Commissions, but in neither case can it be said that that support has been unqualified. The "common understanding" defence has become part of the law in New Zealand and in Western Australia: see the New Zealand Judicature Amendment Act 1958, section 94A(2); the Western Australian Law Reform (Property, Perpetuities and Succession) Act 1962, section 23(1). But in other jurisdictions these provisions have been criticised. The Law Reform Commission of British Columbia, Report No 51, Benefits Conferred under a Mistake of Law (1981), pp. 70-72 said, after careful analysis, that they presented formidable problems of definition and proof. A Western Australian case, Bell Bros. Pty. Ltd. v. Shire of Serpentine-Jarrahdale [1969] W.A.R. 155, was referred to in order to illustrate some of the difficulties. They concluded that the court had ample tools for limiting recovery, and that the protection offered by these provisions went far beyond what was required. Neither the Law Commission nor the Law Commission for Scotland, although initially attracted by them, have recommended their adoption in this country.

The "settled law" defence is the one favoured by the Law Commission, after consultation, in its Report (No. 227) Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994), para. 5.13. They have recommended that a restitutionary claim in respect of any payment, service or benefit that has been made, rendered or conferred under a mistake of law should not be permitted merely because it was done in accordance with a settled view of the law at the time, which was later departed from by a subsequent judicial decision. The Scottish Law Commission in its Discussion Paper (No. 95) Recovery of Benefits Conferred under Error of Law (1993), para. 2.125 invited comments on their provisional view that provision should be made by statute to preclude the re-opening of settled payment transactions following a change in the law, or in the common understanding of the law, effected by a judicial decision. But in a subsequent Discussion Paper (No. 99) Judicial Abolition of the Error of Law Rule and its Aftermath (1996), para. 3.51 which was published following the Morgan Guaranty case they proposed that a statutory bar to this effect should not be introduced. On balance, after further consultation with the judiciary among others and after examining the difficulties, they were of the view that the case for a bar was not sufficiently strong to justify the intervention of a statute.

One of the objections to the "settled law" defence is that it is incapable of precise definition. Each case would have to be decided on the evidence, that would create uncertainty, and it is difficult to predict the absurdities which may result. One point however does appear to emerge from the discussions so far. This is that a payment made on a settled view of the law is more likely to be excusable, and thus to be one where restitution would more obviously be justified, than a payment made as a result of one man's mistake or ignorance. Yet a mistake of law which only the payer himself had made would not be caught by the defence. As Mr. Southwell said, the worse the legal advice the more likely the payer could show that the defence was not applicable. But I do not need to elaborate on this point. The valuable work done by the Scottish Law Commission has shown a need for caution which I consider to be entirely justified. I would not favour the introduction of such a defence judicially. Nor do I think that it would be right to apply it to this case, even if its recognition were to be thought to be desirable on grounds of public policy. The fact that restitution has already been given in many of the interest swap cases, albeit on the ground of failure of consideration, would create a situation which I would find unacceptable. Unless the defence can satisfy the test of denying restitution in all cases on the same facts it ought not, in fairness to all parties, to be applied in any of them.

The Completed Swaps

The reason why the swap contracts were held to be void was that they were ultra vires the local authorities. The purpose of the ultra vires doctrine is to protect the public: Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 A.C. 1, p. 36F-G per Lord Templeman. So it is a legitimate criticism of Mr. Underhill's argument for the local authorities that if, as he has contended, there is no claim for money had and received in the case of a completed swap the result will have been to give practical effect to a transaction which, on the doctrine of ultra vires, did not legally exist. All the items of account appearing within the capital markets fund account of the local authority in the Hazell case were held to be contrary to law, and the accounts were ordered to be rectified. This order extended to the swaps transactions which were entered into after July 1988 when the local authority was advised by the auditor that the transactions were of doubtful validity. It would be unsatisfactory if restitution were to be possible only in the case of the uncompleted transactions. That would leave any balance in favour of the local authorities without any item in the accounts which could properly be attached to it. It would not be possible for the bank to re-open the transactions as they are void. The grounds of decision in Hazell suggest that no distinction should be made between ultra vires transactions on the ground that in the one case they were completed and in the other they were not.

In my opinion the law of restitution should provide a remedy in these cases irrespective of the stage which the transactions had reached. In expressing his decision on the Sandwell case in Westdeutsche Hobhouse J. said at p. 930F-G that it was irrelevant to the existence of a cause of action in connection with the payments made under the first Sandwell swap that the contract was fully performed. The Court of Appeal reached the same conclusion in the Guinness Mahon case. I agree with those decisions, and I have nothing to add to what my noble and learned friend Lord Goff has said about them. But restitution in those cases was not given on the ground of mistake, which is the ground on which Kleinwort Benson needs to succeed if they are to be successful in meeting the defence of limitation which has been raised by the local authorities.

Had it not been for what Professor Birks has said in footnote 137 at p. 230 of his article No Consideration: Restitution After Void Contracts (1993) 23 University of Western Australia L.R. 195, I would not have thought that there was any difficulty about restitution on the ground of mistake in the case of the completed swaps. The assumption on which I proceed is that each payment was made on either side in the belief that the sum was legally due to the other party under the contract. The mistake was the same throughout the progress of the transaction. The right to recover each payment on the ground of mistake accrued when the sum was received by the payee. I do not think that it makes any difference whether there was a single payment or a series of payments or, where there was a series, whether the transaction was interrupted or had run its course. Each payment is to be looked at separately.

Professor Birks' argument is that after the execution of the proposed contract the force of this type of mistake is spent because the matter has proceeded to the point where the only prejudice which might be entailed - non-performance by the other party - never in fact eventuated. It was only the antecedent liability which was defective. But this seems to be inconsistent with the principle that the cause of action is complete when the payment is made and received by the payee. Brennan J.in David Securities at p. 390 said that it is at that moment that it can be determined whether and to what extent the payee has been unjustly enriched. The argument also assumes, wrongly in my opinion, that the payer's mistake was that the payee was obliged to reciprocate. That is not the basis of the claim for restitution on the ground of mistake. The mistake which the payer made was in believing that he was obliged to make the payment because it was legally due to the payee. A further difficulty is that it produces a result which is one-sided and unjust. The local authorities, unlike Kleinwort Benson, can say that the transactions which they entered into were beyond their capacity. As their accounts must be rectified the transactions, although closed, must be re-opened to enable them to recover the money which they had no power to pay out. In a case where the bank was the net beneficiary it cannot retain the net benefit which it received in the form of ultra vires payments from the local authorities. It would be unjust if the bank was not to be able to recover its net loss in those cases where the balance lies the other way.

Professor Burrows has given convincing reasons for rejecting this argument: Swaps and the Friction between Common Law and Equity [1995] R.L.R. 15, 18-19. I also am unpersuaded by Professor Birks on this point. In my opinion completed transactions are in the same position as transactions which were not completed when restitution is claimed on the ground of mistake.

Limitation

Kleinwort Benson's purpose in claiming restitution of the ground of mistake has been to pre-empt the limitation defence by the local authorities. The final question is whether, on the assumption that restitution on the ground of mistake is available, Kleinwort Benson can take the benefit of the postponement provision in section 32(1)( c ) of the Limitation Act 1980. The answer to it depends on whether the action is one for relief from the consequences of a mistake within the meaning of that subsection.

There is no difficulty about the language. The word "mistake" appears in the subsection without qualification. There is nothing in the words used in it which restricts its application to a mistake of fact. The origin of the section suggests that the absence of restriction was intentional. In its 5 th Interim Report (Statutes of Limitation) (1936) (Cmd. 5334), pp. 31-32, para. 23 the Law Revision Committee recommended that the equitable rule of postponement should prevail in all cases where relief was sought from the consequences of a mistake, and that time should only run from the moment when the mistake was discovered or could with reasonable diligence have been discovered. This recommendation was put into effect in section 26( c ) of the Limitation Act 1939, of which section 32(1)( c ) is a re-enactment. In In re Diplock

[1948] Ch.465

, 515 the Court of Appeal said that section 26( c ) of the 1939 Act would operate to postpone the running of time in the case of an action to recover money paid under a mistake of fact.

But the distinction between mistake of fact and mistake of law as a ground for recovery is not absolute. Relief is available where the mistake of law relates to private rights: Earl Beauchamp v. Winn (1873) LR 6 HL 223 . Private agreements made under a mistake of law may be set aside, and relief will be given in respect of payments made under such agreements. Other examples may be given where a cause of action for relief will be available although the mistake was one of law. In Regina v. Tower Hamlets London Borough Council, Ex parte Chetnik Developments Ltd. [1988] A.C. 858, 874H-877C Lord Bridge referred to a substantial line of authority showing circumstances in which the court would not permit the mistake of law rule to be invoked. These include payments made under an error of law to or by a trustee in bankruptcy as an officer of the court: Ex parte James (1874) L.R. 9 Ch. App. 609. It is hard to see why in those cases the equitable rule which allows for the postponement of the limitation period should not apply, to the effect that time will not run until the claimant knew of the mistake or ought with reasonable diligence to have known of it. If the postponement can apply in these examples of mistake of law, I think that it ought to apply to mistakes of law generally.

The objection may be made that time may run on for a very long time before a mistake of law could have been discovered with reasonable diligence, especially where a judicial decision is needed to establish the mistake. It may also be said that in some cases a mistake of law may have affected a very large number of transactions, and that the potential for uncertainty is very great. But I do not think that any concerns which may exist on this ground provide a sound reason for declining to give effect to the section according to its terms. The defence of change of position will be available, and difficulties of proof are likely to increase with the passage of time. I think that the risk of widespread injustice remains to be demonstrated. If the risk is too great that is a matter for the legislature. The problem does not arise under the statutory scheme which applies in Scotland. The prescriptive period of five years under section 6 of the Prescription and Limitation (Scotland) Act 1973 applies to any obligation based on redress of unjustified enrichment: Schedule I, para.1( b ). It may be extended only where the creditor was induced to refrain from making a claim by fraud or error induced by the debtor's words or conduct or was under a legal disability. Mistake on its own is not a ground for relief. It may be that even in mistake of fact cases where restitution is available under English law some further restriction of the circumstances where indefinite postponement is available may be appropriate. But that is a matter which is best considered by the Law Commission.

In my opinion Kleinwort Benson will be entitled to the benefit of section 32(1)( c ) of the Act of 1980 if they can show that the payments which they seek to recover were made under a mistake of law.

In the result I would answer each of the questions under the Issues which are before us in the terms proposed by my noble and learned friend Lord Goff of Chieveley. I too would allow these appeals.

Cited in 149 later judgments

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