England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBCMF 96/0588/B

IN THE COURT OF APPEAL (CIVIL DIVISION )

(MR JUSTICE PHILLIPS )

Royal Courts of Justice

Strand

London W2A 2LL

Thursday l9th February l998

B e f o r e

LORD JUSTICE MORRITT

LORD JUSTICE WALLER

LORD JUSTICE ROBERT WALKER

GUINNESS MAHON & COMPANY LIMITED Respondent

v.

COUNCIL OF THE ROYAL BOROUGH OF

KENSINGTON AND CHELSEA Appellant

(Handed down transcript of

Smith Bernal Reporting Limited, l80 Fleet Street

London EC4A 2HD Tel: 0l7l 42l 4040

Official Shorthand Writers to the Court)

MR CHARLES BÉAR (instructed by Messrs Director of Legal Services, Royal Borough of Kensington and Chelsea) appeared on behalf of the Appellant (Defendant).

MR GEORGE LEGGATT QC (instructed by Messrs Norton Rose. London EC3A 7AN) appeared on behalf of the Respondent (Plaintiff).

J U D G M E N T

(As approved by the court)

©Crown Copyright

LORD JUSTICE MORRITT: On 23rd September l982 the Royal Borough of Kensington and Chelsea (“the Council”) apparently entered into an agreement with Guinness Mahon & Co.Ltd (“the Bank”) setting out the terms of a transaction of a type known as an interest rate swap. The Council agreed to borrow £5m. from a building society for a period of five years at an interest rate of ll.5/8% per annum. Over the same period of five years it was agreed that at the expiration of each successive period of six months the Bank should pay to the Council sums equal to the interest payments to be made by the Council to the building society for that period and the Council should pay to the Bank interest at a floating rate on a notional loan of £5m for the same period. Thus if the floating rate prescribed was less than ll.5/8% pa the Council would receive from the Bank more than it paid to the Bank and vice versa.

The five year period ended on 22nd September l987. By that date, when all swaps had been effected, the Council had received from the Bank £384,409 more than it had paid. There matters might have rested but for the fact that on lst November l989 the Divisional Court declared, as subsequently upheld in the House of Lords in Hazell v Hammersmith and Fulham London BC [l992] 2 A.C. l, that such an agreement as the Council had apparently concluded with the Bank was ultra vires the Council and so void from the start.

In early l993 two actions selected as test actions for the resolution of the problems arising from the invalidity of such interest rate swaps came before Hobhouse J. They were Westdeutsche Landesbank Girozentrale v Islington Borough Council (“Westdeutsche”) and Kleinwort Benson Ltd v Sandwell Borough Council (“Sandwell”). In the former the period prescribed in the agreements during which such swaps should take place had not expired at the time the proceedings were commenced. In the latter the period specified in one of the agreements sued on had, as in this case, expired, all relevant swaps having been duly paid before the writ was issued. In each case the Bank sought repayment of the net amount it had paid the local authority. Hobhouse J gave judgment in February l993 (reported at [l994] 4 All ER 890) upholding the claims of the banks in all cases. In particular he refused to draw a distinction between what might be described as “open swaps” where the period prescribed in the ultra vires agreement had not expired and “closed swaps” where it had.

These proceedings were commenced by the Bank on 26th July l993. On 9th November l994 judgment in default of notice of intention to defend was entered by the Bank. On 4th March l995 Phillips J made a consent order setting aside the judgment entered in default and, but without prejudice to the Council’s right to appeal therefrom, substituting for it a judgment in favour of the Bank in the sum of £l0l,78l and interest. It is against that judgment that the Council now appeals with the leave of Staughton LJ. Though there were appeals in Westdeutsche on certain points in relation to open swaps there was none in Sandwell, because it was settled, and therefore none in relation to a closed swap. Accordingly this appeal has been argued on the footing that it is in substance an appeal from the order of Hobhouse J in Sandwell in so far as it related to a closed swap.

It is necessary at the outset to consider in some detail the decisions of Hobhouse J in Westdeutsche and Sandwell and of the Court of Appeal and the House of Lords in Westdeutsche for the purpose of ascertaining the basis on which sums paid under an open swap are, as is common ground, recoverable if the agreement was ultra vires one of the parties to it. In Westdeutsche the interest rate swaps were of the conventional kind but the agreement provided for the bank to pay to the local authority a lump sum at the commencement of the period for which the agreement was intended to run. All of them were open swaps. In the case of Sandwell there was no such lump sum payment and, as I have pointed out, one of them was a closed swap. The judgment of Hobhouse J (reported at [l994] 4 All ER 890) after a review of the facts of the case is helpfully divided into sections. In section (l) he dealt with a number of preliminary matters, namely (a) the historical development of claims for restitution, (b) the effect of the ultra vires principle, (c) the passing of property in money, (d) the decision of the House of Lords in Sinclair v Brougham [l9l4] A.C. 398, and (e) the effect of certain annuity cases. For present purposes it is sufficient to note conclusions of Hobhouse J in relation to (d) and (e). With regard to the former he considered (p.92l) that Sinclair v Brougham was direct authority for the proposition that if it were ultra vires the payor to make the payment in question then it had an equitable right against the recipient, in the nature of an equitable charge, to trace the money so paid into its general assets. In the case of the latter he concluded (p.923) that the annuity cases, which he described in some detail, established that the right of restitution existed in respect of payments made under void contracts even though there were payments both ways so that on a contractual analysis there was no total failure of consideration. He also considered and found to be inapplicable in Sandwell the statement of Bayley J in Davis v Bryan (l827) 6 B & C 65l, 655 to the effect that where one party received the whole of that for which he bargained it was against conscience to claim that the contract was void from the start.

In section (2) Hobhouse J analysed the restitutionary claim of money had and received under five headings of which only the second “void contracts and absence of consideration” is directly material. He recorded two arguments for the banks; first that payments made under a void contract do not amount to consideration for the purposes of the law of restitution; second, that the banks did not get the benefit for which they had bargained, sc. payments which would discharge a legal obligation and which, therefore, the banks might lawfully retain, but, by contrast, obtained under a void contract money which the local authority was prima facie entitled to recover. After referring to Rowland v Divall [l923] 2 K.B. 500, Linz v Electric Wire Co. of Palestine Ltd [l948] A.C. 37l and Rover International Ltd v Cannon Film Sales Ltd (No.3) [l989] l W.L.R. 9l2 he said

“In my judgment, the correct analysis is that any payments made under a contract which is void ab initio, in the way that an ultra vires contract is void, are not contractual payments at all. They are payments in which the legal property in the money passes to the recipient, but in equity the property in the money remains with the payer. The recipient holds the money as a fiduciary for the payer and is bound to recognise his equity and repay the money to him. This relationship and the consequent obligation have been recognised both by courts applying the common law and by Chancery courts. The principle is the same in both cases: it is unconscionable that the recipient should retain the money. Neither mistake nor the contractual principle of total failure of consideration are the basis for the right of recovery.”

In the concluding passage of that section he decided that it was irrelevant to the existence of a cause of action in connection with the payments made under the first Sandwell swap that the supposed contract was in fact fully performed and there was no failure of consideration in the contractual sense. In section (3) Hobhouse J considered Equitable Tracing and decided that the banks were entitled to that remedy. Sections (4) to (6) dealt respectively with the Limitation Act, the defence of change of position and interest. His ultimate conclusion (p.955) was

“The plaintiff is entitled to recover that sum either as money had and received by the defendant to the use of the plaintiff or as money which in equity belongs to the plaintiff and which it is entitled to trace in the hands of the defendant and have repaid to it out of the present assets of the defendant. The basis of the plaintiff’s claim, which at common law or in equity, is that the defendant has been unjustly enriched at the expense of the plaintiff and that in conscience the defendant must repay to the plaintiff, save in so far as it has already done so, the sum which it received from the plaintiff. The right to restitution arises from the fact that the payment made by the plaintiff to the defendant was made under a purported contract which, unknown to the plaintiff and the defendant, was ultra vires the defendant and wholly void.”

Counsel for the Council criticises this judgment on three grounds. First, he submits, Hobhouse J was wrong to distinguish Davis v Bryan . Second, Hobhouse J failed properly to apply the principle stated by Kerr LJ in Rover International Ltd v Cannon Film Sales Ltd (No.3 ). Third Hobhouse J was wrong to consider that the equitable interest in money paid under an ultra vires contract remained in the payor.

There is no issue with regard to the third criticism for the House of Lords decided the point in the contrary sense in the subsequent appeal in Westdeutsche. However it is clear from the judgment of Hobhouse J as a whole that he found for the banks on two grounds, money had and received and the equitable right to trace. Though the House of Lords disagreed on the second ground both the Court of Appeal and the House of Lords agreed with Hobhouse J on the first.

The order made by Hobhouse J in Westdeutsche awarded to the Banks the net sum paid by them to the local authority with compound interest from the date of the decision of the Divisional Court in Hazell. The appeal in Sandwell was settled. In W estdeutsche the local authority appealed against the award of compound interest and the bank cross-appealed in respect of the date from which interest should run. The Court of Appeal dismissed the local authority’s appeal, so it remained liable for compound interest, but allowed the appeal of the bank so as to award interest on the balance due to the bank from time to time. Both those apparently limited issues involved the further consideration of the basis of the liability of the local authority.

Dillon LJ considered that the liability of the local authority was established in both restitution and equity. In the case of the former the claim was for money had and received on the basis of a total failure of consideration. Dillon LJ rejected the contention of the local authority that such claim must fail because of the interest payments it had made by way of swap. After referring to Rugg v Minett (l809) ll East 2l0 Dillon LJ said:

“I do not see why a similar process of severance should not be applied where what has happened, in a purely financial matter, is that there has been a payment of money one way and a payment of smaller sums of money the other way. The effect of severance is that there has been a total failure of consideration in respect of the balance of the money which has not come back.

Severance apart, however, to hold that as the interest swap transaction and contract were ultra vires and void there was no consideration for the payment by Westdeutsche of the £2.5m and therefore the balance which has not so far been repaid by Islington can be recovered by Westdeutsche in quasi contract as money had and received or on the ground of unjust enrichment is warranted by early cases decided under the Grants of Life Annuities Act l777.”

He concluded that the bank was entitled to recover the balance from the local authority as money had and received or unjust enrichment at the expense of the owner of the money. He also considered and upheld the decision of Hobhouse J in respect of the liability of the local authority on equitable grounds, but that part of his judgment cannot now stand in view of the subsequent decision of the House of Lords.

The judgment of Leggatt LJ was to the same effect. In rejecting the submission for the local authority that because of the payments it had made there could not have been a total failure of consideration he said

“There can have been no consideration under a contract void ab initio. So it is fallacious to speak of the failure of consideration having been partial. What is meant is that the parties did, in the belief that the contract was enforceable, part of what they would have been required to do if it had been. As it was, they 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. In my judgment, the payments made are in those circumstances recoverable by Westdeutsche, in so far as they exceed the payments made by Islington, as money had and received to the use of Westdeutsche by which Islington have been unjustly enriched.”

There is in that passage an echo of the judgment of Lord Ellenborough CJ in Hicks v Hicks (l802) 3 East l6 where in one of the annuity cases he said:

“This was either an annuity or not an annuity. If not an annuity, the sums paid on either side were money had and received by the one party to the other’s use. If the consideration of the annuity be money had and received, it must be money had and received with all its consequences; and therefore the defendant must be at liberty to set off his payments as such on the same score.”

Leggatt LJ also considered the claims of the bank to be justified on equitable grounds, but for the same reason as in the case of the judgment of Dillon LJ that part of his judgment cannot stand. Kennedy LJ agreed with both judgments. I have referred to these judgments in some detail for it seems to me that, as submitted by counsel for the Bank, the Court of Appeal decided, quite separately from their conclusion on the claim on equitable grounds, that the bank was entitled to succeed in its claim on the grounds of money had and received on the basis of a total failure of consideration notwithstanding that in one sense consideration was given by the local authority in performing its part of the swap.

The local authority appealed to the House of Lords against the order of the Court of Appeal awarding compound interest on the net balance due from time to time. The appeal was allowed in respect of the award of compound rather than simple interest but dismissed in respect of the time from which interest should be payable. The House of Lords disagreed with Hobhouse J and the Court of Appeal in respect of the bank’s claim on equitable grounds. In doing so they re-examined their own decision in Sinclair v Brougham [l9l4] A.C. 398. Though the claim in respect of money had and received was not in issue the decisions of Hobhouse J and the Court of Appeal in that respect were evidently approved. Thus at p.683 Lord Goff of Chieveley said in relation to the annuity cases on which Hobhouse J had relied:

“they were concerned with cases in which payments had been made, so to speak, both ways; and the courts had to decide whether they could, in such circumstances, do justice by restoring the parties to their previous positions. They did not hesitate to do so, by ascertaining the balance of the account between the parties, and ordering the repayment of the balance. Moreover the form of action by which this was achieved was the old action for money had and received - what nowadays we call a personal claim in restitution at common law. With this precedent before him, Hobhouse J. felt free to make a similar order in the present case; and in this he was self-evidently right.”

At p.7l0 Lord Browne-Wilkinson said of the decision in Sinclair v Brougham :

“..in Sinclair v Brougham the depositors should have had a personal claim to recover the moneys at law based on a total failure of consideration. The failure of consideration was not partial: the depositors had paid over their money in consideration of a promise to repay. The promise was ultra vires and void: therefore the consideration for the payment of the money wholly failed. So in the present swaps case (though the point is not one under appeal) I think the Court of Appeal were right to hold that the swap moneys were paid on a consideration that wholly failed. The essence of the swap agreement is that, over the whole term of the agreement, each party thinks he will come out best: 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.”

I have referred at length to the course of the proceedings in Westdeutsche to demonstrate that the true basis for the recovery by the bank of the net amount it paid to the local authority which had no capacity to enter into the swap agreement was for money had and received as on a total failure of consideration. I take this to have been one of the two distinct grounds of decision of Hobhouse J and of the Court of Appeal and that ground was expressly approved by at least two of the members of the Appellate Committee in the House of Lords.

Except for the decision of Hobhouse J in Sandwell all these conclusions were reached in the case of an open swap whereas this case concerns a closed swap. For the Council Mr Béar, in his excellent argument, submitted that this makes all the difference. He pointed out that the only interest the Bank had ever had in the capacity of the Council was to ensure performance of the swap agreement but once it had been completed the Bank was in exactly the same position as it would have been if the Council had had the necessary capacity. He submitted that there were two stages to the consideration of any question of restitution; first did the circumstances give rise to a case of unjust enrichment which should prima facie lead to a recovery; if so did the circumstances give rise to a defence or bar to recovery negativing the prima facie case of unjust enrichment, for example, in the circumstances it was not unjust. He submitted that there is no authority binding on this court on the question whether full performance of a void contract precluded a claim for recovery which would have succeeded in the case of partial performance. He submitted that the decision of Hobhouse J in Sandwell was in conflict with the observation of Bayley J in Davis v Bryan . He suggested that to answer the question in the negative would fail to give effect to Rover International Ltd v Cannon Film Sales Ltd (No3 ) [l989] l W.L.R. 9l2. Quite apart from authority he argued that there was nothing unjust in refusing recovery for the “enrichment” of the Council which would result because it would be exactly that for which the parties had bargained. He sought support for his arguments from the statements in Goff & Jones, The Law of Restitution, 4th Ed. p.6l that:

“No doubt it is right that a party who has received the very thing which he has contracted for should be unable to reopen the transaction to recover his money.”

and in Professor Birks Article “No Consideration: Restitution after Void Contracts” The University of West Australia Law Review Vol.23 l95 at p.206 that:

“If we stand back from authority, there is in fact no compelling reason to allow a plaintiff to recover the value of his performance if he has received in exchange for it all that he expected. His ground for restitution, if it exists must be purely technical.”

He pointed out that acceptance of his argument would align the law of England and Wales with the American Law Institute’s Restatement of the Law of Restitution (l937) in which it is stated in para.47:

"A person who, in order to obtain the performance of a promise given or believed to have been given by another and in exchange therefor, has conferred upon the other a benefit other than the performance of services or the making of improvements to the land or chattels of the other, is entitled to restitution from the other if the transferor, because of a mistake of law,

(a) erroneously believed the promise to be binding upon him and

(b) did not obtain the benefit expected by him in return."

The notes to that paragraph on p. l94 state that:

“If the transferor receives what he expected to receive in exchange for what he gave, his right to restitution is discharged, as where the other party ratifies the act of an unauthorized agent with whom the transferor had dealt or where a married woman, not bound by her promises, gives what she had promised.”

Mr Béar’s concluding submission was to the effect that if the argument for the Bank was right it would amount to giving a right in restitution to repayment of money on the sole ground that its original payment had not been due. This he contended would be contrary to the proposition expressed by Lord Goff of Chieveley in Woolwich BS v IRC [l993] A.C. 70 at p.l72 that English Law did not recognise such a cause of action.

Before considering these submissions in greater detail it is helpful to consider the position of the parties to an open swap and a closed swap. I assume a swap period of 5 years with swap payments between the bank and local authority every six months. The penultimate payments made four and a half years after the date of the agreement have given rise to a net balance in favour of the local authority of £l00,000. Westdeutsche establishes that if the original swap agreement was ultra vires the local authority the bank would have a cause of action for repayment of that balance as money had and received or for restitution at common law. Then I assume that six months later the final swap payments are made by a net payment from the bank to the local authority of a further £50,000. The argument for the Council, if accepted, would deny the bank any right of recovery. But if the restitutionary principle requires the recognition of a cause of action for recovery of £l00,000 when the penultimate payments were made it is difficult to see on what basis it denies any claim at all when on the final payments the balance in favour of the local authority rises to £l50,000.

It was not suggested that the position differed depending on which party was the net winner. Thus I assume the converse case. After four and a half years the balance of £l00,000 is in favour of the bank. That sum is recoverable by the local authority because it had no capacity to enter into the agreement under which the various sums making up the balance were paid. On the last payment the balance in favour of the bank is increased by a further £50,000. That payment was made by the local authority with the same lack of capacity as all the earlier ones. It is hard to see any basis of logic or justice which would justify allowing the claim of the local authority to the balance due after the penultimate swap but denying it in respect of the final balance. The Council seeks to justify the distinction on two theoretical legal bases.

The first theoretical basis on which the case for the Council is put is that because over the whole of the term of the swap agreement the parties paid and received exactly what they had bargained for there can be no failure of consideration in the case of the closed swap. By contrast, in the case of the open swap one or more of the swaps envisaged has not been carried out; therefore, it is said, there is a total failure of consideration for the parties have not received all that for which they bargained. But this argument assumes that in the case of a swap contract the relevant bargain was for the payments which were actually made rather than the legal obligation to make them. It is true that in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [l943] A.C. 32 Viscount Simon at page 48 said

“when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.”

But that case concerned a contract originally valid but subsequently frustrated due to the outbreak of war and not a contract void from the outset. In any event the statement was not intended to be exhaustive as is apparent from the qualification introduced by the words “generally speaking”.

In Rover International Ltd v Cannon Film Sales Ltd (No.3 ) [l989] l W.L.R. 9l2 the relevant agreement was invalid from the start because the party with which it was expressed to be made had not been incorporated at the time it was executed. The consequence was that Rover was not entitled to the benefit of the profit sharing agreement it contained. The judge had rejected the claim of Rover to recover sums it had advanced in the belief that it was a valid and effective agreement on the ground that “the consideration, if it had been a contract, had not failed” because Rover had received some of the benefits for which the contract provided. Kerr LJ considered that the judge had adopted the wrong test. At p.923 he said:

“The question whether there has been a total failure of consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract. The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract.”

Kerr LJ then considered the passage from the speech of Viscount Simon in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [l943] A.C. 32 which I have already quoted, the decision of the Court of Appeal in Rowland v Divall [l923] 2 K.B. 500 and of Finnemore J in Warman v Southern Counties Car Finance Corporation Ltd [l949 2 K.B. 576. Kerr LJ considered that in the latter two cases what was bargained for was lawful possession and a good title to the car and the use of and option to purchase the car. He concluded in relation to the case before him that:

“The relevant bargain, at any rate for present purposes, was the opportunity to earn a substantial share of the gross receipts pursuant to clause 6 of the schedule, with the certainty of at least breaking even by recouping their advance. Due to the invalidity of the agreement Rover got nothing of what they had bargained for, and there was clearly a total failure of consideration.”

Dillon LJ did not find it necessary to consider the claim based on a total failure of consideration. Nicholls LJ agreed with the reasoning of both Kerr LJ and Dillon LJ. I accept, as Mr Béar argued, that this case concerned a contract void from the start. But I do not accept Mr Béar’s further submission that Kerr LJ was considering only the performance of the promise. It seems to me that he was considering whether Rover obtained the legal rights for which it had stipulated as well as the fruits of such rights.

But whether or not my reading of the judgment of Kerr LJ is correct one principle clearly established by the Court of Appeal in Westdeutsche is that in the case of a contract void from the start there must for that reason have been a total failure of consideration. per Dillon LJ [l994] l W.L.R. at p. 945H and Leggatt LJ at p. 953E. To the same effect is the speech of Lord Browne-Wilkinson in the House of Lords [l994] AC at p. 7l0H-7llA. These passages, which I have already quoted, demonstrate that it is the very fact that the contract is ultra vires which constitutes the total failure of consideration justifying the remedy of money had and received or restitution for unjust enrichment. If partial performance of that assumed obligation in the case of an open swap does not preclude a total failure of that consideration then there is no basis on which complete performance of a closed swap could do so.

The second theoretical basis on which the Council tries to justify the distinction between an open and closed swap for which they contend is by reference to the principle of the severability or apportionment of consideration. Such a concept was referred to by Lord Wright in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [l943] AC 32 at p.64. He considered that where the entire consideration was severable there might be a total failure of consideration as to a severed part. The authority relied on was Rugg v Minett (l809) ll East 2l0 which was referred to by Dillon LJ in Westdeutsche. The principle was further explained and applied in Goss v Chilcott [l996] A.C. 788 at pp. 797/8. Counsel for the Council sought to apply that principle by severing each six-monthly swap both from the overall agreement and also from each of the others. In this manner he drew a distinction between the open swap, where it was suggested that there was a total failure of consideration with regard to the outstanding swap, with the closed swap, where there was no such failure because all had been performed. But a distinction cannot in my view be drawn on those lines. On that basis each six monthly swap would be severable. If the relevant consideration for each swap was the performance of the obligation each party thought it was under in respect of that swap then each swap would be fully performed and neither party could recover from the other either during the term of the swap agreement or thereafter the amount by which what he paid exceeded what he received. If on the other hand the consideration for each swap was the benefit of the contractual obligation then there was a total failure of consideration in the case of each swap either before or after the term of the agreement had elapsed, thereby entitling to loser to recover the balance under a closed swap as well as an open one. Thus neither horn of the dilemma justifies a distinction between a closed swap and an open swap. As Mr Leggatt QC submitted for the Bank the proposition either proved too much or too little.

Mr Leggatt QC also relied by way of analogy on the provisions of s.84 Marine Insurance Act l906 and cases decided thereunder. I do not think that it is necessary to deal with them further for I do not think that his argument requires any such support. I should for completeness add that I am not sure that the field of insurance is necessarily analogous with regard to claims paid under a policy made void by the section. In many such cases the insurer’s claim for repayment of the insurance moneys paid would be likely to be met by the defence of change of position. No such defence is suggested in this case.

For these reasons I do not accept either of the theoretical bases on which the Council seeks to justify a distinction between an open and a closed swap agreement. In dealing with the first of them I have covered the criticism of the judgment of Hobhouse J based on the judgment of Kerr LJ in Rover International Ltd v Cannon Film Sales Ltd (No.3 ) [l989] l W.L.R. 9l2. It is necessary then to consider the remaining criticism of the judgment of Hobhouse J, namely that based on the judgment of Bayley J in Davis v Bryan (l827) 6 B & C 65l, one of the annuity cases the application of which was expressly approved by Lord Goff of Chieveley in Westdeutsche [l996] AC 669 at p. 683. The Council contend that the conclusion of Hobhouse J is contrary to that judgment. In Davis v Bryan the defendant had sold to the deceased an annuity for the life of the latter, whose estate was represented by the plaintiff, for a capital sum. The defendant had paid the annuity until the death of the annuitant. But as no memorial of the grant of the annuity had been registered the original grant was void. The plaintiff sought to recover the sum paid for the purchase of the annuity. He failed. Bayley J, at p. 655, said

“This appears to be a clear case on principles both of law and honesty. This is an action for money had and received, and I learned many years ago that such an action could not be maintained, if it were against equity and good conscience that the money should be recovered. Here a bargain was made, and the testator paid a consideration of £300, and the defendant agreed for that to pay a certain annuity. The testator received the whole of that which he bargained for, and now his representative says that the contract was void from the beginning. Is there any thing like good conscience in the claim? Then is the contract void? The Act of Parliament says, that unless a memorial be duly enrolled, the deed of which no memorial is enrolled shall be void; but in many cases such words have been held to make [656] the instrument voidable only at the will of the party, and I think we are at liberty to put that construction upon them in the present case.”

Holroyd J gave as an additional ground the fact that the agreement had been fully executed. Littledale J concurred. Hobhouse J observed that that case appeared to be based on three grounds but had subsequently been regarded as authority for only the second, namely that the grantee who had failed to register the transaction could not unilaterally avoid it. He concluded that it did not establish any proposition of assistance to Sandwell in relation to the closed swap save that in an action for money had and received it is always necessary to have regard to considerations of equity and good conscience. I agree with Hobhouse J. The grant of the annuity had not, according to the decision of the court, been void from the start because the grantor had never sought to avoid it and the grantee could not rely on his own failure to register. Accordingly there had not been a total failure of consideration because not only had the annuity been paid in full but also the grant had never been avoided by the grantor. Thus that case is distinguishable from that of a contract void from the start because it was ultra vires.

It must be borne in mind that the ultra vires doctrine exists for the protection of the public. This was stated in relation to limited companies by Lords Parker of Waddington and Wrenbury in Cotman v Brougham [l9l8] A.C. 5l4, 520 and 522 and in relation to statutory corporations by Lord Templeman in Hazell v Hammersmith and Fulham London BC [l992] 2 A.C. l, 36. It is true, as Hobhouse J observed in Westdeutsche that once the transaction has been held to have been void from the start the effect of the doctrine has been exhausted so far as the corporation is concerned for no illegality is involved, though it may have further implications and effect on the officers of the corporation. But that does not mean that the court should apply the law of restitution so as to minimise the effect of the doctrine. If as the Council contends there is no claim for money had and received in the case of a completed swap then practical effect will be given to a transaction which the doctrine of ultra vires proclaims had no legal existence. The House of Lords declined so to do in Sinclair v Brougham [l9l4] AC 5l4 on the theory, now discredited, that the restitutionary claim was based on an implied promise; if the contractual promise was void because it was ultra vires how could the law imply a promise to the like effect? Though the basis of the implied promise may now have gone in my view the general principle must remain that an ultra vires transaction is of no legal effect. It must follow that the recipient of money thereunder has no right to it. If he keeps it he will be enriched. If he does not then or subsequently obtain a right to keep it such enrichment will be unjust. The claim for money had and received may be defeated by the defence of change of position. But in the absence of such a defence, and none was suggested in this case, it seems to me to be no answer to the claim to say that once the transaction has been fully performed the bank no longer has any interest in the capacity of the corporation or that both parties have received the expected return. Nor does it appear to me to be accurate to describe the party’s ability to recover his net payments as a windfall. If any of those factors, not amounting to the defence of change of position, was an answer to the claim it would attribute some effect to the transaction the law had declared to have none.

The passage in Goff & Jones, The Law of Restitution 4th Ed. p.40l, which I quoted earlier is not specifically related to payments made in purported performance of an ultra vires contract. Nor, with respect to Professor Birks, do I agree that there is no compelling reason to allow the bank to recover the value of its performance. The Bank did not get in exchange for that performance all it expected for it did not get the benefit of the contractual obligation of the local authority. Likewise in reference to paragraph 47 of the American Restatement the Bank did not get the benefit it expected in the form of a contractual obligation.

I agree with Hobhouse J that there is no principle which could justify drawing a distinction between a closed swap and an open swap. I can summarise my reasons for that conclusion in the following propositions:-

(l) A contract which is ultra vires one of the parties to it is and always has been devoid of any legal effect.

(2) Payments made in purported performance thereof are necessarily made for a consideration which has totally failed and are therefore recoverable as money had and received. Thus at the first stage of the enquiry suggested in the submissions of Mr Béar the circumstances do give rise to a case of unjust enrichment which should prima facie lead to a recovery.

(3) A party to an apparent swap contract which is void because ultra vires one party is entitled so to recover the amount by which what he paid exceeds what he received whether or not the apparent contract has been completely performed for there is a total failure of consideration whether it is regarded as entire or severable.

(4) The fact that the swap contract, though ultra vires and void, has been fully performed does not constitute a defence or bar to the recovery of the net payment as money had and received for the recipient had no more right to receive or retain the payment at the conclusion of the contract than he did before. Thus at the second stage of the enquiry suggested by Mr Béar there are no grounds negativing the prima facie case of unjust enrichment

(5) Proposition (l) is not disputed. Propositions (2) and (3) are established by the decision of the Court of Appeal in Westdeutsche and supported by dicta in the House of Lords in the same case. Proposition (4) is inherent in that decision and those dicta and is a necessary corollary of the principle of ultra vires and the purpose for which it exists.

I would dismiss this appeal.

LORD JUSTICE WALLER: I agree that this appeal should be dismissed, essentially for the reasons given by Morritt LJ. I would however like to express shortly certain thoughts of my own.

I need not repeat Morritt LJ’s analyses of the facts or his full history of the litigation relating to “swaps”, and I will gratefully adopted his terminology.

Although I think Morritt LJ is right that the general statements he quotes from the judgments of Dillon and Leggatt LJJ in their judgments in the Court of Appeal in Westdeutsche are decisive of this case, I have at certain stages had some doubt about it. I am furthermore doubtful whether the passages quoted from the speeches of Lord Goff and Lord Browne Wilkinson in the House of Lords in the same case can be taken as supporting fully the basis on which Hobhouse J and the Court of Appeal formulated the grounds for recovery for money had and received in the swaps context. This may not be important in the open swaps situation but could be relevant in the closed swaps case.

The Court of Appeal and the House of Lords were of course dealing only with an “open swap” situation, and it seems to me that Lord Goff was clearly sounding a note of caution as to whether the basis for recovery was correctly analysed in a way that might make a difference in the “closed swaps” context.

Lord Goff refers to Professor Birks article “No consideration: Restitution after void contracts” (l993) 23 W.A.L.R. l95 and other articles at 683D-H. He ends that passage recognising the fact that there was not before the Appellate Committee any appeal as to the correctness or otherwise of the decision relating to the basis of recovery but saying:

“ ... I think it right to record that there appears to me to be considerable force in the criticisms which have been expressed; and I shall, when considering the issues on this appeal, bear in mind the possibility that it may be right to regard the ground of recovery as failure of consideration.”

Because only “open swaps" were under consideration, that statement should not, as it seems to me, be taken as endorsement necessarily that “closed swaps” could be analysed on the basis that there had been a failure of consideration. Reference to Professor Birks’ article and approval of the criticisms should, if anything, be taken as an indication to the contrary.

I was much persuaded by Mr Béar’s arguments expanding on Professor Birks’ article, that there should be a distinction between "open" and "closed swaps". There is in my view great force in the argument that “absence” of consideration as opposed to “failure” of consideration should not by itself be a ground for restitution. If one applies the concept of failure as opposed to absence of consideration, failure of consideration still provides a ground for restitution in relation to an open swap. This much is clearly recognised by Lord Goff, and was accepted by Mr Béar. If however the proper concept is failure, and not absence, the position may well be different in relation to a "closed swap", although (and this seems to me important in the context of this case) Professor Birks would suggest depending on the circumstances that there may be some other basis for restitution.

I follow the force of the “absurdity” argument that Morritt LJ relies on for suggesting that there should be no difference between an “open swap” and a “closed swap”. But prima facie, the right which A has to reclaim money paid flows from the fact that B has been able to refuse to perform the contract, or been released or prevented from performing or obtaining performance of the contract, but if the remedy of restitution is not allowed that will leave B unjustly enriched at the expense of A. I have serious doubts as to whether simply because a party can show that a contract between them duly completed was void for whatever reason, that that should automatically lead to the court being prepared simply to unravel the contract.

I can illustrate the point I wish to make by reference to one of the cases cited to us and referred to in Professor Birks’ article Re Phoenix Life Assurance Co. Burges and Stock’s case reported both at 2 J&H 44l and 3l Courts of Chancery N.S.749 . In that case the court was concerned with an insurance company acting ultra vires by issuing marine policies when its powers were only to issue life policies. Three points had to be dealt with. First, could those insureds under marine policies prove for their claims under those policies; the answer was no. Second, could insureds prove on judgments already obtained and or bills of exchange already issued; one report would suggest yes, (2 J&H 448), but the other report would suggest there was a change of mind by Vice Chancellor Sir W.Page Wood (N.S. 752). Third, could the insureds reclaim the premiums paid; the answer was yes. The case does not deal with whether the insurance company would have been able to reclaim moneys actually paid out on claims under the void marine policies, but the impression one gains from the debate on the judgments and the bills of exchange is that it was not contemplated that they could do so. My instinct would further suggest that even now with the further recognition of restitutionary remedies, and even in the absence of a change of position defence, the court would be reluctant to allow the insurance company to recover, there being nothing unconscionable in the insureds retaining the benefit of the claims which they received not being aware of the ultra vires point and believing the same to be due for the premiums paid. There was little argument before us by reference to those cases demonstrating that payments made to “close a transaction” are regarded as voluntary payments and irrecoverable (see for example Lord Goff’s speech In Woolwich Building Society v I.R.C . [l993] A.C. 70 at l65G). But it may be that would be a basis on which recovery would be refused.

In my view authorities also referred to in Professor Birks’ article, such as Pearce v Brain [l929] 2 K.B. 3l0, (a case relating to a contract at that time absolutely void under which an infant had exchanged his motorcycle for a car, but where despite the nullity of the contract the court did not order restitution and counter restitution); Steinberg v Scala (Leeds) Ltd [l923] 2 Ch. 452 ( a case where an infant under a contract by this time voidable avoided a contract, and then surrendered the shares to avoid further calls, but could not recover the price) also point in the direction of there not being a simple principle that if a contract is void, but completed as expected, there is still a right to restitution and counter restitution so as to unravel the contract. That principle would seem to be contrary to the principles recognised by Lord Goff in Woolwich at l65D and l72D. What is more, if the principle were so simple and straightforward, voidness equals rights on both sides simply to have returned to them that which has been transferred - why has that not been spelled out clearly in some authority prior to Westdeutsche.

But the fact that there is no general principle entitling one party to a void contract, to obtain restitution, and an unravelling of a contract on that basis does not mean that the court should never provide that remedy in a situation in which a contract is held to be void ab initio. Professor Birks indeed does not suggest that there may or should not be restitutionary remedies available where void contracts have been entered into and completed in certain circumstances. He simply argues for the basis of the remedy being accurately recognised and described so that recovery is only allowed in appropriate situations. One difficulty for Mr Béar seems to me to be that Professor Birks would suggest that in the swaps cases, the Banks should be entitled to recover even on a "closed swap". The first basis suggested is that of mistake. It is of course recognised that English law would have to be liberalised to achieve that result since “mistake of law” is still not a recognised basis for recovery despite criticisms (see Lord Goff in Woolwich l64D).

The other alternative suggested by Professor Birks as a basis of recovery would be as he puts it at one stage “some policy transcending both the plaintiff’s intentions and the defendant’s conduct which requires that restitution be granted”.(206).

It is I think of interest that one can recognise in the judgment of, for example Leggatt LJ in the Court of Appeal in Westdeutsche, support for the view he is taking being gained from policy considerations. The passage with which his judgment starts is pure policy.

"The parties believed that they were making an interest swaps contract. They were not, because such a contract was ultra vires the council. So they made no contract at all. The council say that they should receive a windfall, because the purpose of the doctrine of ultra vires is to protect council taxpayers whereas restitution would disrupt the council's finances. They also contend that it would countenance 'unconsidered dealings with local authorities.' If that is the best that can be said for refusing restitution, the sooner it is enforced the better. Protection of council taxpayers from loss is to be distinguished from securing a windfall for them. The disruption of the council's finances is the result of ill-considered financial dispositions by the council and its officers. It is not the policy of the law to require others to deal at their peril with local authorities, nor to require others to undertake their own inquiries about whether a local authority has power to make particular contracts or types of contract. Any system of law, and indeed any system of fair dealing, must be expected to ensure that the council do not profit by the fortuity that when it became known that the contract was ineffective the balance stood in their favour. In other words, in circumstances such as these they should not be unjustly enriched."

There is also, dare I say it, a hint in the above passage, and indeed in a later passage, of Leggatt LJ (953E) being influenced by the fact that the Banks were under a mistaken belief that the contract was valid. It follows that thus for long periods while the contracts were being worked out the Banks were exposed to the possibility that if payments came in their direction they might have to repay them.

I wholeheartedly agree with the passage in Leggatt LJ’s judgment quoted above and would suggest that there is no injustice in the council being bound to repay. Indeed in one sense it can be said that the council were “unjustly” enriched, though the sense seems to me slightly different from the unjust enrichment usually relied on.

We may in one sense be at a crossroads. Hobhouse J has held that the Bank should succeed on a "closed swap" possibly stretching the lack (to use a neutral word) of consideration basis in order to do so. That basis has in fact been approved by the court of appeal and we are bound by it. I have no compunction in dismissing the appeal not only because of the binding nature of that decision but because although I feel (if the matter were considered at a higher level) there may well be further elaboration of the appropriate basis, the result will be the same.

LORD JUSTICE ROBERT WALKER: I have had the advantage of reading in draft the judgment of Morritt LJ. I agree that this appeal should be dismissed, very largely for the reasons set out in the judgment of Morritt LJ, but I add some comments in my own words.

I gratefully adopt Morritt LJ’s summary of the facts and of the course of the proceedings in Westdeutsche and Sandwell. As Morritt LJ says, this appeal is in substance (though not in form) an appeal from the decision of Hobhouse J. on the first, closed swap in Sandwell. Hobhouse J. dealt with that point quite shortly [l994] 4 All ER at pp 923-4, and in summaries at pp 936 and 954). He said of the fully-performed annuity case, Davis v Bryan (l827) 6 B&C 65l, l68 ER 59l that it:

“does not establish any proposition of assistance to Sandwell in relation to the first Sandwell swap save that in any action for money had and received it is always necessary to have regard to considerations of equity and good conscience”.

The Court of Appeal upheld Hobhouse J’s conclusions in Westdeutsche both as to the personal restitutionary remedy (money had and received) and as to the proprietary restitutionary remedy (no passing of property in equity). Had that case not proceeded to the House of Lords on the narrow issue of compound interest, the resolution of the present appeal would, I think, have presented little difficulty. This court would have been bound by its previous decision (which in turn rested on the decision of the House of Lords in Sinclair v Brougham [l9l4] A.C. 398) that the recipient of a net payment under a swaps transaction received money which belonged in equity to the payer. On that basis retention of the payer’s money would on the face of it be unconscionable, subject to any defence of change of position, whether or not the swaps transaction had run its course. It is understandable that Hobhouse J, having concluded that he was not bound by any contrary principle in Davis v Bryan , dealt with the point so shortly. (It is however noteworthy that the learned article by Professor Birks relied on the appellant - (l993) 23 UWALR l95- was published before Westdeutsche had proceeded to either higher court).

The House of Lords, although concerned only with the issue of compound interest, departed from Sinclair v Brougham as to the passing of property in equity, and so upset the symmetry between the claims at law and in equity which is a salient feature of the judgment of Hobhouse J. (especially at [l994] 4 All ER 929 and again at 955 : “the plaintiff is entitled to recover that sum either as money had and received by the defendant to the use of the plaintiff or as money which belongs in equity to the plaintiff” ; see also, in this court, Dillon LJ at pp 962-3 and Leggatt LJ at pp 967-8). In the House of Lords it was the opinion of Lord Browne-Wilkinson ([l996] A.C. at pp 7ll-4) that Sinclair v Brougham should be departed from on the equitable proprietary claim, and Lord Slynn, Lord Woolf and Lord Lloyd agreed on that point (pp 7l8, 720 and 738). Lord Goff would not have departed from Sinclair v Brougham although he contemplated that it might “fade into history” or be reinterpreted (pp 688-9). Lord Goff had already referred (at p.683) to Professor Birks’ article and thought it right to record that he saw considerable force in its criticisms of Hobhouse J’s approach on “absence of consideration”. The other members of their Lordships’ House did not refer to this point, except for a short passage in the speech of Lord Browne-Wilkinson at p.7l0-l.

Since the Westdeutsche litigation evolved in that way, and the appeal to this court in Sandwell was compromised, the resolution of this appeal is not a short or simple matter, despite the excellent submissions from counsel on both sides. Three different lines of approach can be discerned in both sides’ submissions: first impression, legal principle, and authority.

(l) As a matter of first impression, the appellant’s best point is that the swap transaction was carried through to completion, just as the parties intended. One party ended up better off than the other (subject to any “passing on”) but that was always predictable. The appellant was enriched, but it was not unjustly enriched. The respondent’s best point, as a matter of first impression, is the apparent absurdity pointed out in the judgment of Morritt LJ : after four and a half years one party might be £l00,000 down and able to recover; what justice is there is denying it recovery if it is £l50,000 down after five years?

(2) As a matter of legal principle, it is debatable whether the “injustice” of the defendant’s enrichment depend on the fact that (what was supposed to be) an entire contract has been interrupted before it has run its course, or simply on the invalidity of the supposed contract. The appellant argues for the former, calling in aid Professor Birks’ article (at p.206: “his ground for restitution, if it exists, is purely technical”). The respondent argues for the latter, calling in aid Professor Birks’ textbook, An Introduction to the Law of Restitution (l989 revision at p.223: “failure of the consideration for a payment ... means that the state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed to sustain itself”).

(3) As a matter of authority, the appellant submits that the case is concluded in this court by its decision in Rover International Ltd v Cannon Film Sales Ltd [l989] l W.L.R. 9l2; the respondent submits that the case is concluded in this court by its decision in Westdeutsche , untouched (so far as the claim for money had and received is concerned) by the House of Lord’s departure from Sinclair v Brougham . The appellant also relies on Davis v Bryan but the respondent says that Hobhouse J. was right to treat it as largely irrelevant.

Although I have referred to these as different lines of approach they cannot easily be kept distinct. The tracks soon begin crossing and recrossing. I make two brief preliminary points, one on severance and the other on absurdity.

I do not find the notion of severance helpful to the resolution of this appeal. A swaps contract must, it seems to me, be regarded as an entire contract. That is obviously correct for a transaction (such as the Islington transaction described in Westdeutsche at pp 900-5) which provides for an “up-front” payment by the bank. It is also correct, it seems to me, for a series of matched payments, since the transaction as a whole involves the parties taking a view as to the trend of short-term or medium-term interest rates over the whole period of the transaction. It is no more capable of dissection into separate obligations than a term policy, at annual premiums, on human life.

Moreover it is in the stark financial nature of a swaps transaction that one party or the other will be seen, with the benefit of hindsight, to have got the better of the transaction; and if the other party is doing badly six months before the end of the transaction it is quite likely (but not, of course, certain) that it will be found to have done even worse when the transaction period comes to an end. That diminishes (but does not entirely remove) the force of the argument based on absurdity.

In Rover this court held, in relation to a void contract, that one party’s claim to recover advance payments as money had and received was not barred by the defendant’s plea that there had been no total failure of consideration. In Westdeutsche this court preferred Hobhouse J’s formulation, in relation to a void contract, of “absence of consideration”. This difference of approach calls for examination, although it may not in the end provide a clear answer to the issue raised in this appeal.

In English law the expression “consideration” has at least three possible meanings. Its primary meaning is the “advantage conferred or detriment suffered” ( Midland Bank Trust Co v Green [l98l] A.C. 5l3, 53l) which is necessary to turn a promise (not under seal) into a binding contract. In the context of failure of consideration, however, it is (in the very well-known words of Viscount Simon in Fibrosa Spolka v Fairbair Lawson Combe Barbour [l943] A.C. 32, 48):

“generally speaking not the promise that is referred to as the consideration, but the performance of the promise”.

Then there is the older and looser (and potentially very confusing) usage of “consideration” as equivalent to the Roman law “causa”, reflected in the traditional conveyancing expression “in consideration of natural love and affection” (see Professor Birks’ textbook at p.223; Professor Birks appears, at least superficially, to have moved his position in the last part of his more recent article : (l993) 23 UWALR l95, 233-4).

Where a contract is void ab initio there is in the eyes of the law no contract at all, and so speaking of failure of consideration (in the sense of failure of contractually promised performance) may be confusing. That is why Hobhouse J. preferred (as he explained at p.924) to speak of “absence of consideration” in the case of a purported contract which was void because ultra vires. If on the other hand a plaintiff (of full age and capacity) has got all that he bargained for that is at first blush the opposite of failure of consideration. The proposition that such a plaintiff cannot complain, because he has got all that he bargained for, has a simple and direct appeal. It is a proposition which has been stated, more or less in those terms, in a number of otherwise disparate cases, several of which were cited in argument.

Davis v Bryan (l827) 6 B&C 65l, l08 ER 59l was one of the cases of annuities void for non-registration under the Annuity Act l8l3 (re enacting the Grants of Life Annuities Act l777). The claim (for repayment of the purchase price) was made after the annuitant’s death by his executrix. It failed. Bayley J. said:

“The testator received the whole of that which he bargained for, and now his representative says that the contract was void from the beginning. Is there anything like good conscience in the claim?”

In that case there had been a bargain, and its statutory avoidance for non-registration within 20 days (the obligation being treated as one which fell on the grantee) seems to have been treated as making the annuity voidable ( ab initio ) by the grantor. That is one of the grounds of decision discernible in Davis v Bryan , and in the view of Hobhouse J. that has emerged as the main ground of decision.

In Steinberg v Scala (Leeds ) [l923] 2 Ch. 452 the plaintiff, a minor, had paid for shares allotted to her, and sought to recover the payment on the ground of total failure of consideration. The shares had been registered in her name and she could have sold them. Lord Sterndale MR said at p.459,

“If the plaintiff were a person of full age suing to recover the money back on the ground, and the sole ground, that there had been a failure of consideration it seems to me it would have been impossible for her to succeed , because she would have got the very thing for which the money was paid and would have got a thing of tangible value”.

This is the case referred to in a footnote in Goff & Jones, Law of Restitution (4th ed p.6l) to a sentence on which the appellant strongly relies,

“No doubt it is right that a party who has received the very thing which he has contracted to receive should be unable to reopen the transaction to recover his money”.

(That is not in a section of the work dealing with void contracts.)

In Rowland v Divall [l923] 2 K.B. 500 a car dealer had bought a car to which the seller had no title. The dealer succeeded in his claim to recover the purchase price on the ground of total failure of consideration. Atkin LJ said at p.506,

“In this case there has been a total failure of consideration, that is to say that the buyer has not got any part of that for which he paid the purchase money. He paid the money in order that he might get the property, and he has not got it. It is true that the seller delivered to him the de facto possession, but the seller had not got the right to possession and consequently could not give it to the buyer”.

The vendor had gone through the motions of performance of his contract by handing over a car, but in the eyes of the law that was no performance because the car was stolen.

Then there is the decision, referred to by Goff and Jones (p.402) as anomalous, of the Privy Council in Linz v Electric Wire Company of Palestine [l948] A.C. 37l. The appellant had been allotted what purported to be preference shares in the defendant company. Unlike the plaintiff in Scala, she was of full age; but her case (which the Privy Council assumed to be correct) was that the company had no power under its memorandum and articles to issue the preference shares. After four years she sold her preference shares at a loss, still apparently unaware of the defect in title. Then another shareholder raised the issue in proceedings which were compromised, and the company made an offer to all its registered preference shareholders (including, presumably, the plaintiff’s successor in title) to repay the amounts paid up on the shares. That offer was not made to the plaintiff herself, and she sued for repayment on the ground of total failure of consideration. The Privy Council rejected the claim. Lord Simonds said at p.377, echoing language which is becoming familiar,

“Having been duly registered as a shareholder and having parted for value with her shares by a sale which the company recognised ...she got exactly what she bargained to get”.

He rejected (also at p.377), the plaintiff’s counsel’s reliance on Rowland v Divall :

“That case might have assisted him, if the fact was that the appellant still held the shares ....But it does not avail him in a case where the shareholder has sold his shares”.

In fact, the car dealer in Rowland v Divall had resold the stolen car to a customer, and had very properly returned the purchase money to the customer. In Westdeutsche Hobhouse J. (at p.928) treated Linz and Rowland v Divall as depending on an analysis of whether the defendant’s breach was “fundamental to the particular contractual transaction”. That was, he said:

“very different from the present case where there was in truth no bargain at all and problems of deciding what was the essential part of the bargain do not arise”.

In Rover International v Cannon Film Sales [l989] l W.L.R. 9l2 a complicated commercial contract was void because one of the parties, Rover, had not been incorporated at the date of the purported contract. Non-existence is the most extreme form of incapacity. Rover had made a series of payments to Cannon in the expectation of a share of substantial profits from the distribution of cinema films in Italy. The parties fell out, and the invalidity of the supposed contract was discovered, before Rover had received any share of profits. It was conceded that Rover was entitled to a quantum meruit . But it was argued that the Rover could not recover its payments because it had obtained possession of films, and would get a quantum meruit payment. Kerr LJ said at p.923:

“The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract”.

Then at pp 924-5 he applied that test to the facts:

“And delivery and possession were not what Rover had bargained for. The relevant bargain, at any rate for present purposes was the opportunity to earn a substantial share of the gross receipts pursuant to clause 6 of the schedule, with the certainty of at least breaking even by recouping their advance. Due to the invalidity of the agreement Rover got nothing of what they had bargained for, and there was clearly a total failure of consideration.

This equally disposes of [Cannon’s counsel’s] ingenious attempt to convert his concession of a quantum meruit, in particular the element of reasonable remuneration, into consideration in any relevant sense. Rover did not bargain for a quantum meruit, but for the benefits which might flow from clause 6 of the schedule. This is the short answer to this point”.

Dillon LJ (at p.933) saw the case as a classic case of money paid under a mistake of fact. He expressed no view on the issue of total failure of consideration (p.935). Nicholls LJ agreed with both judgments.

In Westdeutsche Hobhouse J. discussed Rover in some detail and differed from Kerr LJ’s “essentially contractual” analysis. He said at p.929:

“In my judgment the correct analysis is that any payments made under a contract which is void ab initio, in the way that an ultra vires contract is void, are not contractual payments at all. They are payments in which the legal property in the money passes to the recipient, but in equity the property in the money remains with the payer”.

In the Court of Appeal Dillon LJ made no reference to Rover; Leggatt LJ did (at pp 968-9) and agreed with Hobhouse J’s approach, although he also agreed with Kerr LJ’s statement of the test as being whether the plaintiff had in fact received any “benefit bargained for under the contract or purported contract ” (emphasis supplied).

It may be important to note that Rover was an appeal to this court after a three-week trial which appears from the report (l987 BCLC 540) to have concentrated on issues of fact and (so far as the law was concerned) on estoppel by convention. The Judge dealt very shortly indeed (pp 545g-546b) with the issues which occupied this court’s attention. In this court Kerr LJ referred to Viscount Simon’s well-known statement in Fibrosa Spolka and to Rowland v Divall (both cases where there had initially been a valid contract). He was concerned to point out that Rover’s position was clearer and stronger. His earlier reference to “the contract or purported contract” [l989] l W.L.R. at p.923) cannot have been intended, in the context, to make any general equation of valid and void contracts in relation to failure of consideration.

I am not therefore persuaded that there is any serious difference in principle between the decisions of this court in Rover and Westdeutsche (and the fact that Dillon LJ was a member of both constitutions, but did not advert to a difference, tends to confirm that there is none). The point was more fully considered in Westdeutsche, especially by Leggatt LJ in the passages ([l994] 4 All ER at pp 968-9) to which I have already referred. Leggatt LJ concluded (after referring to the part of Hobhouse J’s judgment reported at p.925e-g):

“There can have been no consideration under a contract void ab initio. So it is fallacious to speak of the failure of consideration being partial”.

I respectfully agree with that. Either there was total failure of consideration, in that neither side to the supposed contract undertook any valid obligation, or there was (in Hobhouse J’s preferred expression) absence of consideration. The choice between the two expressions may be no more than a matter of which is the apter terminology (when Westdeutsche was in the House of Lords Lord Goff pointed out that “the concept of failure of consideration need not be so narrowly confined”: l996 AC at p.683). It becomes more than a matter of terminology only if the expression “absence of consideration” is supposed to take the case right out of any contractual context and into a claim to recover a payment simply because it was not due, a broader ground of recovery than has so far been recognized by English law (see Woolwich Building Society v IRC l993 AC 70 especially at pp l66-72).

Where there is initially a valid contract, total failure of consideration connotes a failure by one contracting party to perform any part of his essential obligation under the contract, as the vendor failed in Rowland v Divall , even though he had delivered a car to the purchaser. Where a supposed contract is void ab initio , or an expected contract is never concluded (as in Chillingworth v Esche [l924] l Ch. 97), no enforceable obligation is ever created, but the context of a supposed or expected contract is still relevant as explaining what the parties are about. An advance payment made in such circumstances is not a gift, and is not to be treated as a gift. A net payment under an ultra vires swaps transaction has this much at least in common with the purchase of a stolen car, that the recipient thinks he is getting a clean title, but he is wrong. That conclusion is not affected by the House of Lords’ decision that property in the net payment passes in equity as well as at law. The recipient’s title is still overshadowed by the payer’s personal restitutionary claim, and if that shadow is there throughout the period of the transaction, it would be paradoxical if it vanished at the moment when (and simply because) the contract, had it been a valid contract, would then have been fully performed. With a valid contract total failure of consideration and full performance are at the opposite ends of the spectrum. The same is not true of a void contract. That is to my mind the real force of the argument based on absurdity. The injustice of the appellant’s enrichment does not vanish because the term of the void contract ran its course.

I am in full agreement with Morritt LJ’s observations on Davis v Bryan . On the facts of that case it would have been remarkable (and unconscionable) if the executrix had been able to recover. The reasoning in Linz is difficult to understand and the case is probably best regarded (as is suggested by Goff and Jones) as anomalous.

For those reasons, and for the reasons given in the judgment of Morritt LJ, I agree that this appeal should be dismissed.

Order: Appeal dismissed with costs.