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Yesterday, the House of Lords decided Westdeutsche Landesbank Girozentrale v Islington LBC yesterday and by a majority of 3:2 allowed the appeal and awarded simple interest from 18 June 1987, the date the Council received the payment from the bank. Lords Goff and Woolf dissented. The speeches run to 69 pages.

In briefest outline: All were agreed that there should be no proprietary remedy. The majority would and the minority would not overrule Sinclair v Brougham, Lord Goff regarding it as irrelevant to the decision of the appeal. Professor Birks' tentative advocacy of the resulting trust as a mechanism of restitution found no supporters; William Swadling's recent piece on the subject was enthusiastically adopted. The minority would and the majority would not extend the equitable jurisdiction (and the equitable auxiliary jurisdiction in aid of common law rights of restitution) to award compound interest to cases where it was necessary in order to effect full restitution of the benefits of having the principal sum derived by a payee. The minority regarded the legislature's intervention into the field of interest as making it inappropriate for the courts to extend the jurisdiction. Much ink was spilt in discussing just what President of India v La Pintada [1985] AC 104 decided.

The case is full of interesting suggestions and raises a host of issues. No doubt it will keep the readers of this list occupied for some time.

Particularly interesting are the observations of Lord Browne-Wilkinson on the possibility of the remedial constructive trust making its way into English law:

"Although the resulting trust is an unsuitable basis for developing proprietary restitutionary remedies, the remedial constructive trust, if introduced into English law, may provide a more satisfactory road forward. The court by way of remedy might impose a constructive trust on a defendant who knowingly retains property of which the plaintiff has been unjustly deprived. Since the remedy can be tailored to the circumstances of the particular case, innocent third parties would not be prejudiced and restitutionary defences are capable of being given effect."

Lord Goff saw the case as particularly simple:

"Once the character of an interest swap transaction has been identified and understood, and it is appreciated that, because the transaction was beyond the powers of the Council, it was void ab initio, the basic question is whether the law can restore the parties to the position they were in before they entered into the transaction. That is, of course, the function of the law of restitution. I feel bound to say that, in the present case, there ought to be no difficulty about that at all. This is because the case is concerned solely with money. All that has to be done is to order that each party should pay back the money it has received - or, more sensibly, to strike a balance, and order that the party who has received most should repay the balance; and then to make an appropriate order for interest in respect of the balance. It should be as simple as that.

...

The question has arisen whether the Bank should also have the benefit of an equitable proprietary claim in the form of a resulting trust. The immediate reaction must be - why should it? Take the present case. The parties have entered into a commercial transaction. The transaction has ... , for technical reasons, been held to be void from the beginning. Each party is entitled to recover its money ... . But why should the plaintiff Bank be given the additional benefits which flow from a proprietary claim ... ? After all, it has entered into a commercial transaction, and so taken the risk of the defendant's insolvency just like the defendants other creditors who have contracted with it, not to mention other creditors to whom the defendant may be liable to pay damages in tort."

Nonetheless he was detained for some 21 pages on Sinclair v Brougham, resulting trusts and President of India v La Pintada.

Hopefully someone will make the full text of the speeches available on the list. For the moment, I have included at the end of this posting my brief notes taken on reading the decision today in the hope that some may find them interesting.

+----------------------------+
Simon Evans
Gonville and Caius College
Cambridge CB2 1TA
+----------------------------+

Lord Goff saw no reason for awarding a proprietary remedy in such a commercial transaction; the Bank had taken the risk of the Council's insolvency; it was not for the House to attempt to formulate general principles of the law of proprietary remedies; were Sinclair v Brougham to arise today, a personal claim in restitution would not be regarded as enforcing the ultra vires contract; Sinclair v Brougham would therefore fade into history; it should not be overruled on this occasion because any such determination would be obiter; it should stand for the proposition that those who are caught in the trap of advancing money under ultra vires borrowing contracts will not be denied appropriate relief; Professor Birks' argument, written to test the temperature of the water, for a wider role for the resulting trust in the field of restitution has found the water to be decidedly cold; no resulting trust arises; it is unnecessary to consider Chase Manhattan.

The question reduced to the jurisdiction to award compound interest in equity in the absence of a proprietary claim; plainly Hobhouse J was correct to regard compound interest as appropriate; the jurisdiction of the court is designed to do justice in the cases that come before it; it is startling that it should be argued that the jurisdiction is limited in a manner that prevents that from being done; where jurisdiction is founded on principles of justice it should not be defined but illustrated by particular categories of case; compound interest is be available where the defendant has wrongfully profited or may be presumed to have profited from having the use of another person's money; it is available in equitable personal claims as well as proprietary claims; without this power the common law remedy would be inadequate so compound interest is available in equity's auxiliary jurisdiction. The appeal should be dismissed.

Lord Browne-Wilkinson said that it was common ground that in the absence of agreement or custom there was no jurisdiction to award compound interest at law or under s 35A of the Supreme Court Act 1981; in the absence of fraud equity only awarded compound interest against fiduciaries, by way of recouping improper profits.

There could not be a constructive trust imposed because once the Council acquired relevant knowledge there was no possible trust fund.

There should be held to be no resulting trust: William Swadling's argument (16 LS 133) was persuasive; such a trust with its tracing and priority implications was inappropriate in relation to a commercial contract that all parties believed was valid and in a context where no-one was aware of the existence of the trust; "a new unmanageable risk [would] be introduced into commercial dealings"; there was never a time at which both (a) there was defined trust property and (b) the conscience of the local authority in relation to such defined trust property was affected - the basic requirements of a trust were never satisfied. It could not be argued that something in the transaction caused the Bank to retain its equitable title to the money it paid over because prior to payment it was the absolute owner of the money - there was no divided equitable title.

The Bank must demonstrate circumstances which raised a trust when the Council received the money or paid it into the mixed account. A resulting trust gives effect to presumed intention: the existence of automatic resulting trusts doubted. There was no need to raise a resulting trust to fill a gap in beneficial ownership; and any presumption of a resulting trust was rebutted by the fact that the Bank paid and the Council received the money with the intention that the money so paid should become the absolute property of the Council. An actual intention to pass property - and not just an intention to make a gift - rebut the presumption. The misapprehension as to the existence of a binding contract did not alter the actual intentions of the parties at the date the payment was made or at the date the money was mixed in the bank account.

Professor Birks' argument elides (a) rights in the property transferred with (b) rights to the value transferred. A trust cannot exist without defined trust property. Secondly, the idea that a recipient becomes trustee of property under a contract which is subsequently found to be void or the consideration for which subsequently fails is inconsistent with the basic premise that a trust does not arise unless the conscience of the trustee is affected: in the two cases posited there are no circumstances at the date of receipt that impinge on the conscience of the recipient, rendering him or her a trustee. Thirdly, an arbitrary and unprincipled modification would be required to ensure that a resulting trust does not arise when there has only been a failure to perform a contract.

As a matter of authority the assertion that there should be a trust fails also.

(i) The reasoning of Sinclair v Brougham was no longer sound.

(a) Sinclair v Brougham should be overruled in so far as it held that the claim for moneys had and received is based on implied contract. In that case there had been a total failure of consideration. The Court of Appeal in this case was correct to hold that the swap monies were paid on a consideration that wholly failed. The consideration for one party making a payment is an obligation on the other party to make counter-payments over the whole term of the agreement.

(b) The decision in Sinclair v Brougham as to rights in rem ought to be overruled: no single ratio may be detected; all the reasoning is open to serious objection; it was only intended to deal with cases where there were no trade creditors in competition. No doubt should be cast by this overruling on the principles of tracing as established in Re Diplock.

(ii) Goulding J's reasoning in Chase Manhattan could not be accepted: it is based on a concept of retaining property in money where prior to the payment there was no existing equitable interest; the recipient's conscience cannot be affected at a time when he or she is not aware of any mistake. (Moreover, New York law accepts the existence of the remedial constructive trust; English law "for the most part" has only recognised an institutional constructive trust.) Nonetheless, Chase Manhattan may have been correctly decided: retention of the money once the recipient became aware of the payor's mistake may provide the foundation for a constructive trust.

(iii) In re Ames Settlement cast no light on the present question whether in the absence of an express trust monies paid on a consideration which wholly fails are held on a resulting trust.

Stolen monies are traceable in equity.

The law of resulting trusts if developed along the lines suggested by "those concerned with developing the law of restitution" would confer on the plaintiff a right to recover property from, or at the expense of, those who have not been unjustly enriched at his or her expense at all (for example, the lender whose debt is secured by a floating charge and all other third parties how have purchased an equitable interest only, albeit in all innocence and for value).

"Although the resulting trust is an unsuitable basis for developing proprietary restitutionary remedies, the remedial constructive trust, if introduced into English law, may provide a more satisfactory road forward. The court by way of remedy might impose a constructive trust on a defendant who knowingly retains property of which the plaintiff has been unjustly deprived. Since the remedy can be tailored to the circumstances of the particular case, innocent third parties would not be prejudiced and restitutionary defences are capable of being given effect."

Interest should start to run from the date of payment.

Compound interest should not be available in equity's auxiliary jurisdiction (as suggested by Lords Goff and Woolf) because Parliament has twice since 1934 considered the issue and failed to enact that compound interest was available at common law; and at trial the bank advanced no such argument as that put by Lords Goff and Woolf.

The appeal should be allowed and simple interest awarded from the date of payment.

Lord Slynn agreed with Lord Browne-Wilkinson that Sinclair v Brougham should be departed from; compound interest was only available in equity in cases of fraud and cases involving fiduciaries; but for the existence of legislation, it would have been open to hold that courts could award compound interest either at common law or in the auxiliary jurisdiction of equity; but Parliament having acted further developments were for Parliament. The appeal should be allowed and simple interest awarded from the date of payment.

Lord Woolf said that any decision other than one to award compound interest would be inconsistent with the court's ability to grant full restitution. The reasoning of Lords Goff and Browne-Wilkinson convinced Lord Woolf that the Bank had no proprietary claim and the Council did not owe fiduciary duties to the Bank. A wholesale importation of equitable principles is not necessarily the consequence of a finding that the courts have the equitable jurisdiction to make an order for the payment of compound interest in connection with a the grant of a remedy of restitution. The issue was not primarily one of equitable principles but of equitable remedies. Compound interest would be awarded because it would be unconscionable to allow the Council to make a profit out of a contract which was void because it had exceeded its own powers.

Where there is a duty to make restitution equity can achieve full restitution by granting simple or compound interest. It will be appropriate to do so when the defendant has made an actual or presumed profit from being the recipient of a principal sum which he or she has not repaid. If the case is one where there is jurisdiction to award equitable interest then whether compound or simple interest is recoverable depends on the facts of the particular case, depending on what the defendant would have earned.

Equity in the case of both compound and simple interest looks to the benefit which the payee has derived from the payment. The common law is concerned with the loss suffered by the payer.

In President of India v La Pintada counsel did not address the House on the limits of the equitable jurisdiction to award compound interest. Lord Brandon's remarks were obiter. Nothing in them makes it inappropriate to extend the right in equity so that it extends to the recovery of compound interest ancillary to a restitutionary order. (If there had been a contract in this case and a nonpayment of sums due under the contract, the bank could have recovered compound interest.)

Lord Lloyd agreed with Lord Browne-Wilkinson that Sinclair v Brougham should be overruled. The jurisdiction to award compound interest should not be extended in this case: (i) the point was scarcely argued; Hungerfords v Walker was not considered; (ii) the invocation of the auxiliary jurisdiction was difficult to reconcile with the ratio of President of India v La Pintada, and Parliament having acted the further extension of the power to award compound interest can only be achieved by Parliament; (iii) a discretionary power to award compound interest would (as Lord Goff had also observed) be of the greatest use in commercial cases where compound interest reflected the true loss of the claimant, but in commercial cases certainty was paramount and disputes would be fought (rather than settled for simple interest).