(A) REJECTION OF A DEFENCE OF INSTITUTIONAL INCAPACITY
The general attitude of the common law has been that the fact that the defendant institution lacks capacity to enter into a transaction does not operate as a bar to a restitutionary claim. This is justifiable on policy grounds. The prime purpose of the ultra vires doctrine is to ensure that shareholders, taxpayers and creditors are protected from the consequences of the institution entering into speculative transactions. But this policy of protection is not furthered in any way by the defendant institution being able to retain benefits which would otherwise have had to be returned had the defendant not been acting ultra vires. This approach is reflected in Re Phoenix Life Assurance Co,21 where a company issued marine insurance policies to the claimant which it lacked capacity to do. When the company was wound up, the claimant sought to enforce claims on these policies. Although the claims on the policies themselves were barred, because they were void as a result of the company’s lack of capacity to issue them, the claimant was still able to recover the premiums in an action for money had and received, the ground of restitution being total failure of basis. The claim was not affected in any way by the defendant’s incapacity. Similarly, in National Bank of Egypt International Ltd v Oman Housing Bank SAOC,22 the claimant was able to recover money it had lent to a bank which lacked the capacity to borrow the money; the defendant’s incapacity did not bar the restitutionary claim.
That institutional capacity should not be a defence to restitutionary claims at all is reflected in the litigation arising from public authorities entering into interest rate swap transactions. These transactions were null and void because the local authorities lacked capacity to enter into them.[1] Consequently, where a financial institution sought restitution from the local authorities a defence ofinstitutional incapacity would have defeated the claim. But restitution was not denied in any of the swaps cases on the ground of incapacity. Indeed, restitutionary relief was awarded in many of them despite the defendant’s incapacity.[2] [3] [4] [5]
- [1] Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1.
- [2] See, in particular, Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 1 WLR 938 (CA).
- [3] [1914] AC 398.
- [4] [1996] AC 669, 710 (Lord Browne-Wilkinson), 718 (Lord Slynn), and 738 (Lord Lloyd). Cf Lord Goff,ibid, 688.
- [5] [2010] EWCA Civ 579, [2012] QB 549. 28 See Chapter 13.
