(ii) Payments to Discharge a Liability Which Does Not Exist

In Woolwich Equitable Building Society v IRC^[1] a majority of the House of Lords recognized that the payment of tax to the Revenue, after a tax demand which the Revenue was not authorized to make, was recoverable. Although the actual ground of restitution was the fact that the tax had been paid to a public authority which was not entitled to receive it,^[2] both Lords Goff and Browne-Wilkinson referred to the fact that the claimant would not have received any consideration for the payment.^[3] This was because the claimant had paid the money to the Revenue in the expectation that this would discharge its tax liability. But since there was no liability to discharge, there could no legal basis for the payment.

(iii) The Swaps Litigation

The most important example of the ground of absence of basis in operation arises from the cases which formed the so-called ‘swaps litigation’. In these cases the claimants had entered into interest rate swap transactions with the defendants in circumstances where such transactions were null and void. Essentially an interest rate swap transaction is a speculative contract whereby two parties gamble on how interest rates will change. The simplest form of transaction involves an agreement between two parties whereby each one agrees to pay a sum of money to the other over a stated number of years, which is divided into accounting periods. This money is calculated by reference to the interest which would have accrued during each accounting period on a notional capital sum. The rate ofinterest of one party will be fixed, whereas that of the other party will be floating, meaning that it will be assessed by reference to a variable market rate. At the end of each accounting period one party will be liable to pay the other. Whether it is the fixed or the floating rate payer who will be liable depends on the movements of the interest rates. Often in the course of a swaps transaction the floating rate of interest would vary above and below the fixed rate of interest, meaning that at some stage in the course of the transaction each party would be liable to pay the other. Essentially, such swaps transactions involve the parties gambling on the fluctuation of interest rates.

From the early 1980s local authorities began to enter into such interest rate swap transactions with a number of different financial institutions. In 1990, however, the House of Lords held that such transactions were beyond the statutory powers of the local authorities and so were void.^{[4] [5] [6]} This was because participation of local authorities in such transactions could not be considered to be incidental to their power to lend and borrow money, simply because these transactions did not involve the lending or borrowing of money. Consequently, the party who had paid the most under such transactions, either the local authority or the financial institution depending on the particular circumstances of the case, brought restitutionary claims to recover the balance of the money paid. A large number of such actions were instigated and certain characteristic actions were identified and were pursued as test cases. The most important of these was Westdeutsche Landesbank Girozentrale v Islington LBC,³⁶⁵ which was heard with Kleinwort Benson Ltd v Sandwell Borough Council before Hobhouse J, although his decision in respect of the latter case was not the subject of an appeal. In both of these cases it was the banks which sought restitution of the balance of the money from the local authorities at common law. There were two obstacles in the way of the claim.

• (1) Sinclair v Brougham. In Sinclair v Brougham³⁶⁶ the House of Lords held that an action for money had and received could not succeed if the award of restitution would involve the indirect enforcement of an invalid transaction. Consequently, restitutionary relief would be unavailable, as it was in that case, where the claimant sought restitution of an ultra vires loan, because the value of the restitutionary remedy would be the same as the amount of the loan, so the effect of restitution would be to repay and so enforce the loan. In Westdeutsche Landesbank both Hobhouse J and the Court of Appeal held that this principle was inapplicable to the facts of the case simply because the interest rate swaps transaction was not a borrowing transaction, but was a futures contract which does not, by its very nature, involve the lending of any money. Consequently, if the defendant local authority was required to make restitution to the bank this would not involve the indirect enforcement of the transaction, since the effect of restitution would simply be to restore the parties to the position they occupied before the transaction was entered into. Even where the transaction involves a loan it now appears that restitution of the money lent could be awarded, simply because it is now recognized that the obligation to make restitution is imposed by law and is independent of the contractual obligation to repay the loan.^[7] Consequently, the rule in Sinclair v Brougham is no longer applicable.
• (2) Identifying the ground of restitution. The second obstacle to the claim concerned the identification of a relevant ground of restitution. The claimants could not rely on mistake since the only mistake made was one of law, concerning the legal validity of the payment and, since the mistake of law bar still applied, there was nothing to suggest that any of the exceptions to it were applicable. Equally, the claimants could not rely on total failure of basis since, save for two transactions, the claimants had been paid some money in the course of the transaction. However, Hobhouse J recognized that the claim could succeed by virtue of the ground of absence of basis for the claimants’ payment to the defendant. This analysis was endorsed by the Court of Appeal.^[8]

This recognition of absence of basis as a ground of restitution is not free from difficulty. Despite the explicit recognition of the ground in Westdeutsche Landesbank whether it does exist remains uncertain and, even if it does exist, its ambit and relevance^[9] is unclear. Five particular problems can be identified.

(1) The Effect of Subsequent Decisions

Although absence of basis was clearly recognized by Hobhouse J and the Court of Appeal in Westdeutsche Landesbank, its status must be reconsidered in the light of the House of Lords decision in that case. Unfortunately, the decision of that court is of little assistance, since it was much more concerned with the nature of the equitable proprietary claim than with the claim for money had and received. Nevertheless, the judgments of Lords Goff and Browne-Wilkinson do provide some clues as to whether absence of basis is a valid ground of restitution. Although Lord Goff declined to express any concluded view, he did say that there was considerable force in the criticisms which had been expressed concerning the validity of absence of basis as a ground of restitution, and he would have preferred that the ground of restitution was failure of basis.^[10] Although this does not constitute a clear rejection of absence of basis, it seems that, in the light of Lord Goff’s earlier description of the requirement of total failure of basis as being unprincipled and producing unfortunate effects, he was assuming that restitution should have been awarded on the ground of partial failure of basis. But he did not at any stage explicitly state this, and anyway his comments were obiter since the question of the ground of restitution for the purposes of a common law restitutionary action was not the subject of an appeal.

Lord Browne-Wilkinson, on the other hand, did appear to recognize the validity of absence of basis as a ground of restitution, although he too used the language of total failure of basis. In his analysis of Sinclair v Brougham³ 1 he suggested that the claimants in that case should have succeeded in their common law claim for recovery of money, which had been lent to a building society pursuant to a transaction which was ultra vires the building society. He specifically recognized that the ground of restitution in that case should have been total failure of basis.³⁷² Crucially, he concluded that the basis had failed totally, even though the building society had done what it had promised to do, because the claimants had paid money to the building society ‘in consideration of a promise to repay. That promise was ultra vires and void; therefore the consideration for the payment of the money wholly failed.’³⁷³

In the light of this reasoning he went on to endorse the decision of the Court of Appeal in Westdeutsche Landesbank, that money had been paid to the defendant on a basis which had wholly failed. But, even though Lord Browne-Wilkinson used the language of failure of basis, his emphasis on the fact that the transaction was ultra vires and void means that his analysis is actually indistinguishable from that of Hobhouse J. At the very least Lord Browne-Wilkinson could not be referring to the notion of total failure of basis as it is normally used, because the claimants in Sinclair v Brougham had received a factual benefit in that their money was deposited with the defendant. The only way that this basis could fail totally is if it failed as a matter of law, since the defendant lacked the capacity to receive the claimants’ money. It is this notion of legal failure of basis, arising from the fact that the contract was void, which is identical to the approach of Hobhouse J, which is, if anything, clearer and more honest because he is prepared to call it absence of basis rather than total failure of basis.

The clear division of opinion between Lords Goff and Browne-Wilkinson, and the failure of the other judges to address this issue, means that it is not possible to conclude that absence of basis has no role as a ground of restitution in English law. Consequently, the judgments of Hobhouse J and the Court of Appeal continue to be of vital importance to the recognition of absence of basis as a ground of restitution.

Since the decision of the House of Lords in Westdeutsche Landesbank the Court of Appeal reconsidered the nature of the restitutionary claim arising from payments made under an interest rate swap transaction in Guinness Mahon and Co Ltd v Kensington and Chelsea Royal LBC.³⁷⁴ The claimant bank’s restitutionary claim against a local authority succeeded, although the actual ground of restitution is difficult to identify with certainty. Morritt LJ considered that the ground of restitution was total failure of basis and that this was the ground which was relied on in Westdeutsche Landesbank itself, even though he accepted that the defendant had performed its part of the transaction.³⁷⁵ But he also recognized that the reason why there was a total failure of basis was simply because the contract was ultra vires.³⁷⁶ This is a virtually identical approach to that adopted by Lord Browne-Wilkinson in Westdeutsche Landesbank. Waller LJ doubted whether absence of ^{[11] [12] [13] [14] [15] [16]}

basis was an appropriate ground of restitution.³⁷⁷ For Robert Walker LJ the choice between total failure of basis and absence of basis was simply a matter of terminology.³⁷⁸ Although the approaches of the three judges suggest a tendency to prefer total failure to absence of basis, it is clear that they all treated the notion of failure of basis differently in the context of void contracts, essentially because the basis had failed as a matter of law rather than fact.

The Court of Appeal had a further opportunity to consider absence of basis in Haugesund Kommune v Depfa ACS Bank.³⁷⁹ A bank had lent money to Norwegian public authorities in circumstances where the authorities lacked the capacity to borrow the money. It followed that the bank was unable to sue on the contract of loan, which was void. The question then was whether the bank could obtain a restitutionary remedy to recover the value of the loan. Aiken LJ indicated³⁸⁰ that whether the ground of restitution was analysed as total failure or absence of basis was simply a matter of choosing the most apt terminology, but it was without legal significance. But the distinction is not simply a matter of semantics. Where money has been paid by the claimant to the defendant and the claimant has received some benefit in return it will generally not be possible to conclude that the basis has failed totally. That is what occurred in Haugesund Kommune, since the bank, having lent money to the public authorities, had received quarterly payments of interest and other payments so that the basis had factually not failed totally, save if the payments could be apportioned.³⁸¹ But, since the payments were made pursuant to a void contract, they were never validly received by the claimant as a matter of law and could legitimately be ignored: the basis had not failed but was absent. Legal analysis is much clearer if total failure and absence of basis remain distinct.

The cases subsequent to the decisions of the trial judge and the Court of Appeal in Westdeutsche Landesbank are not necessarily inconsistent with the recognition of a ground of absence of basis. On some occasions that ground has even been specifically identified, most notably in Primlake Ltd (In Liquidation) v Matthews Associates³⁸² where Lawrence Collins J recognized the ground of ‘absence of consideration in the sense of no legal basis for the payments’.

(2) The Relationship Between Absence of Basis and Total Failure of Basis Even though absence of basis was specifically relied on to enable restitution of money to be awarded, it is odd that Hobhouse J in Westdeutsche Landesbank awarded restitution both on the ground of total failure of basis, in respect of those transactions where only the claimant had paid money to the defendant without receiving anything in return, and absence of basis, in respect of those transactions where the claimant and the defendant had both paid money to the other party and the claimant was simply seeking to recover the net payment from the defendant. If absence of basis is recognized it should be applicable in all cases where money has been paid under a transaction which is void, and the question of whether or not the claimant received any benefit under the transaction should be irrelevant, save that the claimant should be required to make counter-restitution to the defendant. ^{[17] [18] [19] [20] [21] [22]}

(3) Fully Executed Transactions

One of the interest rate swap transactions in Kleinwort Benson Ltd v Sandwell Borough Council³⁸³ was fully executed, in that the agreed period of the transaction had expired before the House of Lords declared that it was ultra vires. But, despite this, the restitutionary claim still succeeded on the ground of absence of basis, because of the assumption that any benefit which the claimant had received under the transaction was not validly received since the transaction was void from the outset. But should restitutionary relief be available to re-open a transaction once it is complete?

Birks argued that a distinction should be drawn between those transactions which are closed, meaning that they are fully executed, and those which remain open.^{[23] [24]} He asserted that where a transaction is fully executed it is not possible to conclude that the claimant’s intention that the defendant should retain the money paid has been vitiated in any way, so there is consequently no reason why restitution should be awarded in such circumstances. In other words, the claimant has received exactly that for which he or she had bargained. Birks’s rejection of the argument that restitution should be awarded even where the transaction has been executed is weakened by his recognition that, where there is a relevant mistake, the claimant can obtain restitution by reason of mistake even where the transaction has been fully executed.³⁸⁵ He was forced to accept that restitution will be awarded in such circumstances because, for mistake to operate as a ground of restitution, it is sufficient that the mistake was operative at the time the benefit was received by the defendant. Subsequent events are irrelevant to establish the mistake, although they may enable the defendant to plead a defence of change of position.

In fact, there is no difficulty in allowing restitution in respect of a fully executed swaps transaction even where the ground of restitution is absence of basis. This was recognized by the Court of Appeal in Guinness Mahon and Co Ltd v Kensington and Chelsea Royal London BC.³⁸⁶ The claimant bank had entered into an interest rate swap transaction with the defendant local authority which the parties agreed would last for five years, until 1987. By the end of the agreement the defendant had received over ?380,000 more than it had paid. Subsequently, this type of agreement was declared void and so the claimant sought restitution of the net amount which the defendant had received, even though the agreement was fully executed. The Court of Appeal held that the claim should succeed because there was no basis for distinguishing between open and closed transactions. This must be right if the basis for restitution is absence of basis arising from the fact that the transaction was null and void. If there never was any transaction, the question of whether the apparent transaction had been completely performed or not is totally irrelevant. The court particularly stressed that, if the transaction had been completely performed, the defendant had no better right to the money than if it had only been partly performed. This conclusion also avoids the unjust situation which would arise if the claimant was able to recover every payment made to the defendant until the penultimate payment, but would not be able to recover a penny once the final payment had been made.

(4) Nullity of Purpose

Whilst it is clear that absence of basis should be an appropriate ground of restitution where a benefit has been transferred under a contract which is a nullity, is it possible for the claimant to rely on absence of basis where no contract has been made, but the benefit was transferred for a particular purpose which was a nullity? For example, if the claimant has entered into an agreement with the defendant which is subject to contract, it has already been seen that if the claimant pays money to the defendant in the expectation that a contract will be made and no contract is forthcoming, the claimant might be able to recover the money on the ground of total failure of basis, even though the defendant never promised that a contract would be made.^[25] If, however, the claimant received some benefit from the defendant in return for the payment, it would not be possible for the claimant to rely on the ground of total failure of basis.^{[26] [27] [28] [29]} But, if the contract could never be made as a matter of law, would the claimant be able to recover the money on the ground of absence of basis? This question was identified but was not answered in Friends’ Provident Life Office v Hillier Parker May and Rowland.³⁸⁹ The better view is that if, as a matter of law, no contract could validly be made the expected basis could never be obtained and so the claimant should be able to obtain restitution on the ground of absence of basis in exactly the same way as occurred in Westdeutsche Landesbank itself.

(5) Policy of Invalidity

When considering whether restitution is available where a benefit has been transferred to the defendant pursuant to a void transaction, it is important to consider whether the policy which makes the transaction void would be undermined by awarding restitu- tion.^{3 0} This is because it would be inconsistent for the law to invalidate the transaction on one hand but to allow restitution on the other if it has the effect of actually enforcing the transaction. Typically, this issue will arise where a transaction has been rendered void by statute. The relevance of the policy of invalidity was specifically considered by the Court of Appeal in Haugesund Kommune v Depfa ACS Bank,³⁹¹ where the policy of the Norwegian statute which rendered the loan transaction void was examined and it was held that it would not be undermined by allowing the lender to recover the loan from the borrower by means of a claim in restitution rather than by suing on the void contract, even though the effect was the same. In reaching this conclusion it was considered to be significant that the lender had not taken the risk that the contract with the public authority might be void because of the public authority’s lack of capacity. If the borrower had been a private citizen who lacked capacity for reasons of social protection of people who are vulnerable to exploitation, the policy in favour of protecting such a person would be undermined if they were found liable to make restitution of what they had borrowed. Consequently, in such a case, the policy behind the invalidity of the loan transaction should also bar the restitutionary claim. Similarly, at a time when gambling contracts were void,^[30] it was held that money paid to the winner by the loser could not be recovered by the loser on the ground that the transaction was void, because this would undermine the policy of the statute rendering such contracts void.^[31]

• [1] [1993] AC 70. 362 See p 398, below.
• [2] 363 Woolwich Equitable Building Society v IRC [1993] AC 70, 166 (Lord Goff), 197-8 (Lord Browne-
• [3] Wilkinson).
• [4] Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1.
• [5] [1994] 4 All ER 890 (Hobhouse J); [1994] 1 WLR 938 (Court of Appeal); [1996] AC 669 (House ofLords). The decisions of Hobhouse J and the Court of Appeal are the most important in respect of theidentification and definition of absence of basis as a ground of restitution. The House of Lords was moreconcerned with proprietary restitutionary claims in Equity: see Chapter 21.
• [6] Sinclair v Brougham [1914] AC 398.
• [7] As recognized in Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579, [2012] QB 549.
• [8] Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 1 WLR 938. See also Kleinwort BensonLtd v Birmingham City Council [1996] QB 380, 393 (Evans LJ) and 394 (Saville LJ).
• [9] See Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579, [2012] QB 549, [62] (Aikens LJ).See p 375, below.
• [10] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 683.
• [11] [1914] AC 398. 372 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 710.
• [12] 373 Ibid.
• [13] 374 [1999] QB 215. This decision was commended by Lord Hope in Kleinwort Benson Ltd v Lincoln CC
• [14] [1999] 2 AC 349,415.
• [15] Guinness Mahon and Co Ltd v Kensington and Chelsea Royal LBC [1999] QB 215, 224.
• [16] Ibid, 227.
• [17] Ibid, 231.
• [18] Ibid, 239. See also Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579, [2012] QB 549, [62]
• [19] (Aikens LJ). 379 [2010] EWCA Civ 579, [2012] QB 549.
• [20] Ibid, [62]. 381 Goss v Chilcott [1996] AC 788. See p 321, above.
• [21] 382 [2006] EWHC 1227 (Ch), [2007] 1 BCLC 666, [335] (Lawrence Collins J). See also Dorchester upon
• [22] Medway CC v Kent CC, The Times, 5 March 1998.
• [23] [1994] 4 All ER 890. 2 Birks, ‘No Consideration: Restitution after Void Contracts’, 206.
• [24] 385 Ibid, 229. 386 [1999] QB 215.
• [25] See, for example, Chillingworth v Esche [1924] 1 Ch 97, discussed at p 316, above.
• [26] See Sharma v Simposh Ltd [2011] EWCA Civ 1383, [2013] Ch 23.
• [27] [1997] QB 85, 99 (Auld LJ).
• [28] See the decision of the High Court of Australia in Equuscorp Pty Ltd v Haxton [2012] HCA 7.
• [29] [2010] EWCA Civ 579, [2012] QB 549.
• [30] Under the Gaming Act 1845. This Act was repealed by the Gambling Act 2005.
• [31] Morgan v Ashcroft [1938] 1 KB 49.