(ii) Rejection of the Defence

The passing-on defence has been expressly rejected in Australia12 and Canada.13 Whether the defence is recognized at common law in England has been a controversial matter. Although the point was left open by Lord Goff in Woolwich Equitable Building Society v IRC,14 the defence was expressly rejected by the Court of Appeal in Kleinwort Benson Ltd v Birmingham CC.[1] This was one of the interest rate swap cases, where the defendant local authority argued that the claimant, a bank which was seeking restitution of money paid under a void interest rate swaps transaction to the defendant, had passed on the financial loss arising from the swap transaction by entering into hedging transactions to protect the claimant against the risks which are inherent in a swaps transaction. The Court of Appeal rejected this argument for two reasons.

First, if restitutionary remedies were concerned with what the claimant has lost, the passing-on defence would be highly relevant, because the fact that the claimant has passed on his or her loss would mean that he or she would require less compensation from the defendant. But, because the law of restitution is concerned with recovery of what the defendant has gained, it follows that the fact that the claimant has passed on his or her loss is an irrelevant defence to a restitutionary claim. This was well expressed by Saville LJ who said:

[The defendant] does not cease to be unjustly enriched because the payer for one reason or another is not out of pocket. His obligation to return the money is not based on any loss the payer may have sustained, but on the simple ground that it is unjust that he should keep something to which he has no right.[2]

Secondly, Morritt LJ[3] relied on the question of what was just and equitable as a reason for rejecting the passing-on defence. He acknowledged that a consequence of rejecting the defence is that the claimant may be left with a windfall where he or she had been able to pass the loss on to a third party, but, crucially, he asserted that the claimant ‘has a better title than the defendant to any “windfall” available, not least so as to be in a position to satisfy any claim made against him by those from whom the “windfall” was ultimately derived’.18 Consequently, as between the claimant and the defendant it is the claimant who should benefit from the fact that a loss has been passed on to a third party.

Although the defence of passing on was rejected on the facts of the case, its availability was left open generally and particularly as regards claims for the recovery of tax and other duties.19 Evans LJ did not consider these cases to be relevant to the swaps cases because they involved public law claims, but most of the swaps cases also involved a public law element since the restitutionary claim was brought against public authorities, albeit in respect of a private law claim. Indeed, Kleinwort Benson itself involved a claim brought against a public authority.

  • [1] [1997] QB 380. See also Kleinwort Benson v South Tyneside MBC [1994] 4 All ER 972 (Hobhouse J).
  • [2] Kleinwort Benson Ltd v Birmingham CC [1997] QB 380, 394. Evans LJ recognized, ibid, 393, that, even ifthe restitutionary claim was concerned with compensating the claimant for the loss it had suffered, the hedgingtransaction which the claimant had entered into was too remote and so need not be considered.
  • [3] Ibid, 401. 18 Ibid. 19 Ibid, 389 (Evans LJ). 20 See p 116, above.
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