Law Report: Bank wins rate swap payment

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Westdeutsche Landesbank Girozentrale v Islington London Borough Council.

Court of Appeal (Lord Justice Dillon, Lord Justice Leggat and Lord Justice Kennedy).

17 December 1993.

A bank which had made a payment to a council under a void rate swap transaction is entitled to recover the balance with compound interest running from the date of the payment to the council since the payment was made for no consideration and the council held the money in a fiduciary position on resulting trust for the bank.

The Court of Appeal dismissed the council's appeal against Mr Justice Hobhouse's decision (the Independent, 25 February 1993) that the council pay the bank pounds 1.5m including compound interest and allowed the bank's appeal as to the date from which interest should run.

Following the House of Lords' decision in Hazell v Hammersmith and Fulham LBC (1992) AC 1 that rate swap transactions between local authorities and banks were outside the powers of local authorities and void, the bank claimed the balance of pounds 2.5m paid to the council on 18 June 1987. The council had made four payments to the bank, so that the balance was pounds 1.1m. The council argued that the money was not recoverable as money had and received or on grounds of unjust enrichment since, by making four payments to the bank, the consideration for the pounds 2.5m had not wholly failed.

Trevor Philipson QC, Brian Doctor and Andrew Burrows (Nabarro Nathanson) for the council; Jonathan Sumption QC, George Leggatt (Travers Smith & Braithwaite) for the bank.

LORD JUSTICE DILLON said that the rate swap transactions were not illegal but were ultra vires the local authority and void. The approach developed in Woolwich Equitable Building Society v Inland Revenue Commissioners (1993) 1 AC 70 was that money paid to a public authority pursuant to an ultra vires demand should be repayable on the ground that there was no consideration for the payment.

At common law the bank was entitled to recover the balance of the pounds 2.5m from the council as money had and received or unjust enrichment at the expense of the owner of the money.

Since contrary to the expectation of the parties, the swap transactions were from the outset ultra vires and void, the purpose for which the pounds 2.5m was paid by the bank to the council had wholly failed and the pounds 2.5m had, from the time the council received it, been held on a resulting trust for the bank. In equity the bank was entitled to the return of the balance of the pounds 2.5m.

Under Woolwich, the bank was also entitled to interest on the money awarded it by a restitutionary remedy. There was no merit in the suggestion that the council should be absolved from paying interest to the bank over the period while the case was being tested in the courts. The date from which interest was to run was 18 June 1987, the date of receipt of the money by the council.

As to whether the interest award should be simple or compound, the council was, on the true view that the swap agreement was ultra vires and void, a person in a fiduciary position from 18 June 1987. The money was spent by the council on its ordinary purposes. The council would have borrowed more, if it had not received the payment from the bank, in order not to have to reduce its expenditure.

It was appropriate that the council should be charged compound interest on the balance outstanding of the money it received from the bank.

LORD JUSTICE LEGGATT, concurring, said that there could have been no consideration under a contract void ab initio.

The parties were not performing the contract even in part: they were making payments that had no legal justification, instead of affording each other mutual consideration for an enforceable contract.

The payments made were recoverable by the bank as money had and received to the use of the bank, by which the council had been unjustly enriched. The bank's claim in equity was also favourable. Where money had been withheld by a person in a fiduciary position the court had power to award compound interest. To accord the bank simple interest would not represent commercial reality.