Westdeutsche Landesbank Girozentrale v Islington LBC

Facts

The Westdeutsche Landesbank Girozentrale sued Islington LBC for the return of £1,145,525, which included compound interest, as money that it had paid under an interest rate swap agreement with the council. Interest rate swap agreements had been declared by the House of Lords, a few years earlier in Hazell v Hammersmith and Fulham LBC, to be ultra vires and void because they exceeded councils' borrowing powers under the Local Government Act 1972. The council accepted that it should repay the money it had received under the void contract, but that it should only repay simple interest. Previously, the courts had only allowed awards of compound interest if the claimant could establish a property right (though this was later reversed in Sempra Metals Ltd v IRC).

Accordingly, Westdeutsche argued that when it paid over the money a resulting trust arose immediately, because the bank plainly did not intend to make a gift. Among the arguments, counsel for the bank submitted that a resulting trust arose on all unjust enrichment claims, which this was, given that the basis for the initial contract had failed. The council contended that on traditional trust law principles there could be no resulting trust (and therefore no property right, and compound interest) because the council's conscience could not be affected when it could not know (before the judgment in Hazell) that the contract was void. A resulting trust needed to be linked to a deemed intention of the parties that money be held on trust, but there was none because the bank had intended the money to pass under a valid swap agreement (even though it did not turn out that way). It followed that compound interest could only begin accruing from the later date of the council's conscience being affected.

On the 18 February 1993, Hobhouse J held at first instance the bank could recover the money because the council had been unjustly enriched at the bank’s expense, and could recover compound interest. Hazell v Hammersmith and Fulham LBC was considered and Sinclair v Brougham was applied. On the 17 December 1993, the Court of Appeal, with Dillon LJ, Leggatt LJ and Kennedy LJ, upheld the High Court, with Andrew Burrows acting for Islington LBC, and Jonathan Sumption QC for Westdeutsche. The council appealed.

Judgment

The House of Lords by a majority (Lord Browne-Wilkinson, Lord Slynn and Lord Lloyd) held that Westdeutsche bank could only recover its money with simple interest because it only had a personal claim for recovery in a common law action of money had and received. But the bank had no proprietary equitable claim under a resulting trust. There was no resulting trust because it was necessary that the council's conscience had been affected when it received the money, by knowledge that the transaction had been ultra vires and void. Consequently, it was necessary that there would be an "intention" that the money be held on trust, but this was not possible because nobody knew that the transaction would turn out to be void until the House of Lords' decision in Hazell v Hammersmith and Fulham LBC in 1991. In his Lordship's view all resulting trusts (even those described by Megarry J as "automatic" in Re Vandervell's Trusts (No 2)) depended on intention and were not connected with the law of unjust enrichment. It followed that no trust arose, and there was only a personal claim for the money back. This meant, said the majority, that only simple interest, and not compound interest was payable (a controversial decision that was overturned in Sempra Metals Ltd v IRC).

The two dissenting judges, Lord Goff and Lord Woolf, also thought that there should be no resulting trust of the money because if a proprietary claim were available, in other cases like this it would have an unfair impact on other creditors of an insolvent debtor, and similarly because it could potentially be unfair if assets could be traced. However, they would have held that compound interest should be available on personal claims. Lord Goff, however, expressly did not enter into a discussion of the points about unjust enrichment that went beyond the scope of the present case. Lord Woolf quoted De Havilland v Bowerbank where Lord Mansfield CJ stated, "that though by the common law, book debts do not of course carry interest, it may be payable in consequence of the usage of particular branches of trade; or of a special agreement". There was no reason why compound interest should not be awarded if it was ordinary commercial practice.

Lord Goff gave his judgment first, agreeing that there was no resulting trust for different reasons, but in dissent arguing that compound interest should be awarded on personal claims.

Lord Browne-Wilkinson's judgment, agreed with by the majority, followed.

Lord Slynn gave a short opinion concurring with Lord Browne-Wilkinson. Lord Woolf concurred with Lord Goff. Lord Lloyd concurred with Lord-Browne-Wilkinson.

Significance

Westdeutsche has on its facts been superseded by Sempra Metals Ltd v Inland Revenue Commissioners, where the House of Lords held that the courts could award compound interest in a restitutionary claim at common law. In Westdeutsche it was conceded that compound interest could not be awarded at common law, and the case was argued to fall within resulting trust principles. However, the bank's claim could now have succeeded without recourse to establishing a resulting trust. In this respect, on what circumstances give rise to a resulting trust, however, Westdeutsche is still the leading case.

However, while remaining the leading case on the circumstances under which a resulting trust will arise, and thus a proprietary remedy is available, Westdeutsche has been subjected to wide ranging criticism, particularly from academic circles focused on unjust enrichment. This view, represented by Peter Birks and Robert Chambers, suggests that Lord-Browne Wilkinson was wrong to regard resulting trusts as responding to conscience, rather than the absence of any intention to benefit another person. Birks argued that a proprietary remedy need not necessarily follow, although Chambers regards it as possible.