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(B) IMPLICIT RECOGNITION OF A DEFENCE OF INSTITUTIONAL INCAPACITY

There are, however, certain cases where the defendant’s incapacity has effectively operated as a defence to a restitutionary claim. The most important of these is the decision of the House of Lords in Sinclair v Brougham25 where the claimants sought to recover money which they had lent to a building society which was carrying on a banking business even though it lacked capacity to do so. The House of Lords held that the claimants’ personal claim for restitution failed, because the award of restitutionary relief would have indirectly contradicted the ultra vires bar, by enabling the claimants to recover their loan when the transaction was null and void. This did not, however, prevent the proprietary claim in Equity from succeeding, presumably because the award of a proprietary restitutionary remedy did not involve effective enforcement of the loan, since the claimants could only recover what the defendant had retained rather than what the defendant had received.

Although Sinclair v Brougham seems to deny personal restitutionary relief to the claimant, at least where he or she seeks restitution of money lent to the defendant, as a result of the defendant’s incapacity making the transaction null and void, such a conclusion is no longer defensible. This was the conclusion of a majority of the House of Lords in Westdeutsche Landesbank Girozentrale v Islington LBC,26 where it was recognized that, since the obligation to make restitution is imposed by law, the award of a restitutionary remedy does not effectively enforce the loan transaction. It follows that, where the claimant has lent money to the defendant in a transaction which is void because of the defendant’s incapacity, that incapacity cannot bar the claim. This was subsequently confirmed in Haugesund Kommune v Depfa ACS Bank,27 where a bank had lent money to Norwegian public authorities which lacked the capacity to borrow the money. It followed that the bank was unable to sue on the contract of loan, which was void, but it was recognized that the bank had a claim in unjust enrichment grounded on failure of basis.[1] The Court of Appeal did, however, recognize a specific defence grounded on public policy, whereby a claim for restitution will be defeated where the award of restitution is considered to be contrary to public policy, such as the objective of a statute which had rendered a contract void.[2] Although this claim was recognized in principle, the court went on to consider whether there was any policy which should defeat a claim for restitution involving money lent, either because restitution would have the effect of enforcing a void contract or because, in claims against public authorities, awarding a restitutionary remedy might undermine the policy of the ultra vires doctrine in protecting the public. Public policy was considered to be a distinct defence to restitutionary claims[3] and required consideration as to whether allowing restitution would be contrary to the policy underpinning the Norwegian statute which rendered the transaction void, even though English law was the applicable law, for reasons of comity. The relevance of Norwegian law is, however, dubious. It legitimately determined the capacity of the Kommunes to borrow money, but it was for English law, as the applicable law of the restitutionary claim, to determine whether restitution should be barred by English public policy. In the end it was held that the award of restitution would not infringe Norwegian public policy and so restitution was awarded.

SHOULD A DEFENCE OF INCAPACITY BE RECOGNIZED?

This analysis has shown that there is no justification for the law of restitution to recognize a distinct defence of incapacity. The failure even to consider such a defence in the swaps cases illustrates its unimportance. It is to be hoped that the modern developments in the law of restitution will mean that in future the question of incapacity as a defence can be stated simply: there is no such defence. Rather, restitution may sometimes be denied for reasons of public policy, where the award of restitution is considered to undermine the policy which renders a transaction void for lack of capacity.

  • [1] 29 See Boissevain v Weil [1950] AC 327; Dimond v Lovell [2002] 1 AC 384; Wilson v First County Trust (No 2)
  • [2] [2003] UKHL 40, [2004] 1 AC 816.
  • [3] Although Etherton LJ in Haugesund Komune [2010] EWCA Civ 579, [2012] QB 549, [151], indicatedthat it would often form part of the change of position defence. See p 695, above.
 
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