If a payment is made in accordance with the law at the time, where is the "mistake" ?

This, I think, is at the heart of _Kleinwort Benson_. The decision came just in time to destroy my carefully planned Restitution course, as I was just about to come on to mistakes of law in last Monday's class. My notes on _Kleinwort Benson_ for that class ended up taking the form of a very rough case-note, which I might publish somewhere if I get around to polishing it up. But that draft turned out to be much more about whether the banks could be described as having been mistaken than it was about mistake of law. I found the following examples helpful.

Pattern 1.
Assume a contract by which Kevin and Katherine Bell (KB) agree to pay £10,000 to Birmingham Climbers' Club (BCC) if the latter "successfully climb the highest mountain in the world". Assume further that, at the time the contract is made, everyone "knows" that Mount Everest is the highest mountain in the world. BCC duly climb Mount Everest, and KB duly pay the £10,000. Assume finally that, after the successful climb, scientific advances allow scientists to determine that K2 is actually higher than Mount Everest. Our experience of these things suggests that K2 has therefore always been higher than Mount Everest, and was so both when the contract was made and when Everest was climbed.

Were KB mistaken in their payment? I think they were. They paid in the belief that BCC had "successfully climb[ed] the highest mountain in the world"; since what they had climbed transpired to be only the second highest mountain in the world, KB's belief was mistaken. But this works because the fact - of K2 being higher than Everest - established subsequently was one which must always have existed.

Pattern 2.
Again, assume a contract by which Kevin and Katherine Bell (KB) agree to pay £10,000 to Birmingham Climbers' Club (BCC) if the latter "successfully climb the highest mountain in the world". Assume further that, at the time the contract is made, scientific tests have established that Mount Everest is the highest mountain in the world (and is higher than K2). BCC duly climb Mount Everest, and KB duly pay the £10,000. Assume finally that, after the successful climb, a seismological event occurs the result of which is that K2 becomes higher than Mount Everest.

Were KB mistaken in their payment? I think they were not. They paid in the belief that BCC had "successfully climb[ed] the highest mountain in the world"; and at the time of BCC's climb, it was "the highest mountain in the world". KB's belief was not mistaken. The subsequent change did not alter this. The change in the facts, by which K2 subsequently becoming higher than Everest, is not something which must always have existed: it is a new fact.

So, the obvious question arises: is the real _KB v BCC_ more like the first pattern or the second. There, KB paid in the belief that they had a duty to pay pursuant to a contract which they believed to be valid. With their Lordships, let us assume a Court of Appeal decision, (call it _Llezah_) to the effect that local authorities (and thus BCC) had capacity to make such contracts; on this view the contracts would be valid. Let us assume further a later House of Lords decision, (call it _Hazell_) to the effect that local authorities (and thus BCC) had no such contractual capacity (thus overruling _Llezah_); on this view the contracts would be void. Whether example 1 or example 2 applies might be thought to depend upon whether that story is viewed from the perspective of the capacity of the local authorities or the validity of the contracts.

Take first the perspective of the validity of the contracts, and apply both patterns above. Applying the first pattern, the effect of the decision in _Hazell_ would be that the local authorities never had capacity and the contracts were therefore always void. On this view the prior contrary holding in _Llezah_ was irrelevant. The fact of the invalidity of the contracts, though established subsequently, is one which must always have existed. If so, then payment in the belief in the validity of the contractual duty which did not exist is a mistaken payment. Applying the second pattern, the effect of the decision in _Llezah_ would be that the local authorities had capacity, of that in _Hazell_ would be that the local authorities lacked such capacity and the contracts were thus void but only from the date of the decision in _Hazell_. Payments before that date on foot of the belief in the validity of the contract were not mistaken. The subsequent change in the law did not alter this: it created a new fact. From the perspective of the validity of the contracts, the application of the first pattern makes sense, that of the second does not. This is so because of how we understand the consequences of voidness of contracts. If a contract is void, it has always been void. A valid contract might be voidable and avoided, or subsequently discharged for breach or frustration. But a void contract is always void. Voidness is in this sense indivisible. If the plaintiff's belief is as to the validity of the contract, and if that contract has always been void, then the plaintiff has made a mistake. It is exactly like the first pattern There, the plaintiff paid on foot of a belief that Mount Everest was the highest mountain in the world, whereas the highest mountain in the world was always K2: that plaintiff paid on foot of a mistake. Here, the plaintiff paid on foot of a belief that the contract was valid, where the contract was always void: this plaintiff too paid on foot of a mistake.

Take now the perspective of the capacity of the local authorities, and apply both examples above. Applying the first pattern, the effect of the decision in _Hazell_ would be that the local authorities never had capacity and the contracts were therefore always void. On this view the prior contrary holding in _Llezah_ was irrelevant. The fact of the incapacity of the local authorities, though established subsequently, is one which must always have existed. If so, then payment in the belief in the capacity of the payee is a mistaken payment. Applying the second pattern, the effect of the decision in _Llezah_ would be that the local authorities had capacity, of that in _Hazell_ would be that the local authorities lacked such capacity but only from the date of the decision in _Hazell_. Payments before that date on foot of the belief in the capacity of the local authorities were not mistaken. The subsequent change in the law did not alter this: it created a new fact. From the perspective of the capacity of the local authorities, if capacity is indivisible, then the application of the first pattern makes sense, while that of the second pattern does not. If a finding of incapacity carries with it the necessary implication that a party could never have had that capacity, the the party has always been an incapax. If the plaintiff's belief is as to the defendant's capacity, and if that defendant has always been an incapax, then the plaintiff has made a mistake, just as much as he would if his belief had been as to the validity of an always void contract or as to the height of an always shorter mountain. On the other hand, if it is possible to conceive of a situation in which a party can initially be regarded as having capacity and subsequently be regarded as not without consequences for the earlier view, then the application of the second pattern can make sense. The plaintiff would then be correct in his belief in the defendant's capacity before the incapacity de futuro was declared just as much as he would be in the height of Mount Everest before the seismological event raised the height of K2. However, for so long as the law conceives of incapacity as indivisible, the application of the second pattern does not make sense. Thus, even from the perspective of capacity, it is exactly like the first pattern: the defendant has always been an incapax, and the plaintiff has made a mistake.

There is however a third perspective from which the facts in KB might be viewed. It is that the plaintiffs might be understood to have made their payment in accordance with the law at the time; that is, that the law required their payment. A good example of this kind of thing is provided by facts analogous to _Brisbane v Dacres_, where the commander of a ship paid an admiral because he (the commander) believed that the law required him so to pay. But a later decision established that there was no such duty to pay as a matter of law. Let us assume that the commander's duty to pay was confirmed in our fictional Court of Appeal decision _Llezah_; let us further assume that the subsequent decision establishing that there was no such duty as a matter of law is our fictional House of Lords decision in _Hazell_. If _Hazell_ establishes the law as it has always been, notwithstanding _Llezah_, then the circumstances fall within the first pattern: there, the plaintiff paid on foot of a belief that Mount Everest was the highest mountain in the world, whereas the highest mountain in the world was always K2: that plaintiff paid on foot of a mistake. Here, the commander paid on foot of a belief that there was a duty to pay, whereas there never was such a duty: the commander too paid on foot of a mistake. On the other hand, if _Llezah_ was right, and _Hazell_ simply establishes the law for the future, then the circumstances fall within the second pattern: there, the plaintiff paid on foot of a belief that Mount Everest was the highest mountain in the world, and at the time it was, though it subsequently became K2: that plaintiff was not mistaken when he made the payment. Here, the commander paid on foot of a belief that there was a duty to pay, and at the time there was, though it was subsequently removed: the commander was not mistaken when he made the payment.

On this third perspective, which effect _Hazell_ is to have depends upon the declaratory theory of judicial decision-making. By that theory, judges state what the law has always been. Applying it in _Kleinwort Benson_, the decision in _Hazell_ would have established a fact which must have always existed, which would bring the case within example 1 above. On the other hand, if the decision in _Hazell_ is understood to have changed the law, it would have established a new fact, which would bring the case within example 2 above. In the event, the majority sustained enough of the declaratory theory to come to the first conclusion: _Hazell_ did not change the law; it established a fact which must have always existed. On the other hand, the minority were prepared to abandon the declaratory theory as a fairy tale, and conclude that _Hazell_ did in fact change the law, establish a new fact, thereby bringing the case within the example 2 above.

This is exalted territory; but I am not sure that it was necessary that the Law Lords traverse it in _Kleinwort Benson_, since I do not think that it was a case of this kind at all. In that case, their Lordships were concerned with the effects of the decision in _Hazell_ on the incapacity of the local authorities and thus the invalidity of the contracts. In principle, there were three effects which could have been considered (corresponding to the three perspectives developed here): first, whether the effects of a decision must in principle be retrospective (with which the House of Lords concerned themselves); second, assuming that the decision found that the local authorities did not have capacity (and whether or not the decision itself might be understood to be retrospective), whether that finding of incapacity is one of an always existing fact; and third; whether that finding of incapacity renders the contracts void. As the analysis above has demonstrated, considered from either of the latter two perspectives, because of the nature of incapacity and voidness, I think that it can properly be said that the plaintiffs had made a mistake. I also think that it is not sensible to consider _Kleinwort Benson_ from the first perspective, because it is not really a case analogous to the _Brisbane v Dacres_ scenario at all. It is not a case of payment pursuant to a supposed obligation imposed by law. It is, instead, a case of payment pursuant to a supposed obligation imposed by a void contract. In the former case, the House of Lords could discard the declaratory theory of judicial decision making, and sensibly hold that the law actually did impose the obligation at the time of the payment but was subsequently changed. In the latter case, however, if the House of Lords holds the contract void on the grounds of incapacity, the indivisible nature both of voidness and of incapacity are such that a court could not sensibly hold that the contract actually did impose the obligation at the time of the payment but was subsequently void.

In the case of analysis from the perspective of voidness and incapacity, the decision in _Hazell_ is retrospective in the sense that it establishes facts which must have always existed. In that sense it does not falsify history; it establishes what the facts were, and to the extent that the parties' assumptions were at variance with those facts, it does falsify assumptions.

Whether or not I develop this argument into a casenote, I'd still welcome comments. The consequence is that we do not have to come to a conclusion on the declaratory theory to conclude that the plaintiffs can properly be understood to be mistaken.

Eoin

EOIN O'DELL
Barrister, Lecturer in Law

Trinity College
Dublin 2
Ireland

ph (+ 353 - 1) 608 1178
fax (+ 353 - 1) 677 0449

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(All opinions are personal; no legal responsibility whatsoever is accepted.)