The Historical Theory of Judicial Decision Was Fiction

Kleinwort Benson Ltd. v Lincoln City Council [1999] 2 A.C. 349 Lord Goff of Chieveley pp 378-379

Explain and discuss the passage.

Ensure you consider in your decision why the retrospective effects of judicial decisions have been contentious in the law of payments made under a mistake of law.

The passage contains a portion of Lord Goff’s description of the theory of judicial decision in the case of Kleinwort Benson Ltd. v Lincoln City Council. He felt the historical description of the theory of judicial decision- that when judges make a ruling they are not changing law, instead they are discovering and then declaring what they discover, though it may have been effective in the past, is not a realistic description. The one thing that has remained constant is the fact that the judicial theory is retrospective in nature. Lord Goff goes on to describe that the common law is a seamless web, in constant adaptation and repair in order to maintain its relevance. According to him the only alternative to judicial decision, is prospective overruling. Prospective overruling would uphold the precedent in the current case but declare it overruled for future cases, and this would be completely contradictory to the current system. It has been adopted in some other countries, producing some very controversial results. Regardless of all this, he feels it is in no way an option for the English Legal System. Lord Goff felt that some theory to the effect of the theory of judicial decision making will apply in common law as well as civil law systems alike, because it’s a feature that has to be a part of any legal system that is evolving with the changing times. He uses Germany, a civil law country as example.

Although the case of Kleinwort Benson was concerned with the law of restitution, unjust enrichment and money paid under a mistake of law, the central issue was the retrospetivity of judicial decisions.

Facts of the case: [1]

Kleinwort Benson was a bank that entered into swap agreements/transactions with four local authorities. They entered into these agreements on various dates between 1982 and 1985. Swap agreements are concerned with swap transactions which are transactions between two parties. One party, A, will be known as the fixed rate payer and the other party, B, will be known as the floating rate payer. The party paying the fixed rate will pay a fixed rate of interest on a notional capital sum over a certain period of time and the party paying the floating rate will pay interest on the market rate for the same period on the same capital sum. On relevant dates, the amounts paid are balanced, and the party that owes a greater sum pays the outstanding amount to the opposite party. All the swap transactions were completed according to the terms that had been set for the duration of the period. In 1991 the House of Lords in Hazel v Hammersmith ruled that interest rate swap contracts were void. The bank had paid a net sum of £811, 208.90. A portion of the sum had been paid within the six year limitation period that had expired when the writs were issued. But the bigger potion amounting to £423, 094.18 had been paid outside the limitation period. It was the larger sum that was the issue, and the reason for the appeal.

Kleinwort Benson’s argument:

What had happened would constitute a mistake of law.

And the mistake of law should be brought within the ambit of S 32(1)(c) of the Limitation Act [2] :Postponement of limitation period in case of fraud, concealment or mistake.

(1) Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either ……

(c) the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it. References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent. [3]

The problem was that it was a mistake of law, and mistakes of law don’t come within S 32 (1) (c).

At the time when it made the payments it had done so under terms of legally binding agreements, and therefore could not recover by action of unjust enrichment. [4]

The issues before the court were:

There was no recovery of money, for money that was paid under a mistake of law. The recovery of money was only available for payments made under a mistake of fact. So the question was whether the court should retain this long standing rule of law which had been around for more than two centuries or depart from it?

And if the answer was to depart from it, should they also provide some defenses for this new rule? (The municipalities argued for the following defenses- ‘settled law’ and ‘honest receipt’)

Did it make a difference that the transactions between the bank and the local authorities had already been fully performed before the mistake was discovered?

Could mistake of law be construed to fall within the ambit of S 32(1)(c) of the Limitation Act?

If it could be construed to fall within S32, would it now open flood gates of litigation?

Held: [5]

The mistake of law bar was removed. One can now seek recovery of money paid under a mistake of law

The mistake of law rule was subject to the defenses available in the law of restitution.

The fact that the payments agreed upon were completed by performance did not matter because in Hazel it was held that swap agreements were ultra vires the authorities and void whether performed or not.

The mistake of law rule fell within the ambit of S32(1)(c)of the Limitation Act 1980 because S32 (1)(c) applied to mistakes of both fact and law.

Having looked at the case in entirety, we shall now examine the central and the most controversial issues in the case, by discussing the development of the law in that area over the last two centuries. Next we will look at how the judges reached their decision. Finally, we will look at advantages and disadvantages of their decisions.

Declaratory Theory of judicial decision and the mistake of law bar:

The definition of judicial decision in its simplest form would be to say it is a decision made by a judge that acts both prospectively and retrospectively. The controversial question that arises when a judge rules on a case – is he making the law? This would be against the English legal system and it’s doctrine of separation of powers as it is the legislature that is the law making body. The declaratory theory on the other hand, justifies judicial decision making by holding that judges do not make the law; they just discover it and then declare it- The law never changes, it remains the same throughout. According to Lord Reid [6] this theoretical position is nothing more than a fairy tale. Judges do in fact make law, and it is inevitable. If these weren’t the case the law would be stale and outdated. There is no other way to keep the law relevant in these changing times. Regardless of this, it still does not change the fact that the law judges make/declare are retrospective in nature. On a first impression it may look like judges simply lay down the law, but the reality of the situation is that they work within their means and limitations to look at the facts of the case before them and try to rule on the case based on interpretation and understanding of legislation, precedents, law reports and other academic material. After all, their primary role is none other than to interpret the law and in doing so sometimes they need to be a little creative, this is where the cannons of interpretation come in. The law is a skeleton, to which the judges give life. Judges help develop the law, they mould it and shape it so it works smoothly in society. [7] There are times when a judicial decision will be a move away from a long established rule, and at times like this, the new principle will be applicable to all comparable cases and not only the case that is on trial. [8] This is exactly what happened in Kleinwort Benson. Mistake of law is a legal principle referring to something done wrongly by someone because he or she has misinterpreted the law or how the law should have been applied. Before Kleinwort Benson, the rule was that money paid under a mistake of law cannot ground for recovery. Kleinwort Benson departed from a settled understanding of the law that had been around for about 200 years, and changed the law making recovery of money paid under a mistake of law possible.

The rule has been very problematic in nature. So much so that even in Section 94A Judicature Act 1908 (NZ), as inserted by section 2 Judicature

Amendment Act 1958, New Zealand removed the mistake of law bar. [9] Initially there was a lot of confusion as which was a mistake of law and which was a mistake of fact. There was ambiguity as to what would, could and should constitute a defense(s) to the rule. . After a strig of cases the Law Commission had taken step towards reforming the law in this area on the basis of unjust enrichment.

The rule that says mistake of law cannot ground recovery was said to have originated from the case of Bilbie V Lumley(1802). In Bilbie v Lumley, the claimant had paid an insurance claim that he wasn’t supposed to pay out because the defendant had failed to disclose certain information to him. However he managed to get the information that was not disclosed to him before he paid the claim out. The mistake he claimed was that he did not know that non disclosure by the defendant meant he could rescind. Lord Ellenbourough C.J had actually been inspired by the maxim used by Buller.J in Lowrey v Bourdieu(1780) – ignorantia juris non exusat.. In his judgment, Lord Ellenborough C.J. said money should not be recoverable if the mistake of law was made as a result of someone’s ignorance of the law..

At the turn of the 19th century, the position on weather one could recover under a mistake of law or not, was contradictory in nature. One distinct flaw found in the theories behind the rule of law was that there was partiality shown between mistake of law and mistake of fact. The former did not allow for recovery and the latter did. Reasons for restitution were not very developed at that time and restitution may have been possible in cases where there was no reason for the defendant to retain the assets. [10] There was a lot of confusion as the line between the two types of mistakes was never drawn properly. The confusion was a direct result of the lack of development in this area of law. There was no real definition and nothing concrete or solid to lean on. So much so that judges sometimes categorised mistakes of law as mistakes of fact in order to do justice. For example in the case of Bize v Dickason [11] , where the claimanu was an insurance broker, he had signed the defendant who was bankrupt as an underwriter.On his bankruptcy the defendant owed the broker a sum of £662, as a result of losses. The claimant in turn owed the defendant a sum greater then £662 in underwriting premiums. The claimant mistakenly paid over the entire amount he owed without deduction the £662 that was owed to him. He was under the mistaken belief that he was not entitled to do so. Later he discovered he was entitled to do so and sought to recover his sum.It was clearly a mistake of law but Lord Mansfield allowed the recovery on the basis that in equity it would unjust to allow the defendant to retain the sum he owed.In contrast, the case of National Parimutual Association Ltd v R [12] , by virtue of S15 of The Finance Act 1926 [13] had required the plaintiff to pay the crown a certain amount of money. Subsequently the House of Lords in a similar case ruled that such payments were not within the meaning of act. The plaintiff was unable to recover as it was a mistake of law. These decisions are somewhat easily distinguishable but this is not always the case. For instance it has been held that payments that have been made as a result of erroneous interpretation of a deed or will are mistakes of law. It has also been held that error as to a right to property is a mistake in fact, even though the error was a result of misinterpretation of the law. Similarly in the case of Solle v Butcher [14] the defendant entered into a lease with the mistaken understanding that it was no longer subject to statutory rent, because it had undergone renovation. Lord Justice Buckhill and Denning held that it was a mistake of fact and thus the lease could be set aside. However Lord Justice Jenkins dissented. He felt it was a mistake of law. He felt even though the parties were well aware of the existence of the statute they had misinterpreted its provisions. In George (Parky) Jacobs Enterprises Ltd v City of Regina it was held that since the plaintiff was mistaken as to the existence of a certain law, it was a mistake of fact. Hence recovery was not barred.

A clear indication of the extent to which the mistake of law rules were strected making it possible for the defendants to deny having knowledge of the statute. Which made it evedient that the lacuna in the law needed to be filled. Law should be certain, not ambiguous. The English Law Commission’s main argument for reform was that the recipient of the money would be allowed to keep the money, though it was unjust for him to do so. The payee is unjustly enriched because he is entitled to keep that the money that the payer had no intention of paying him but for the mistake., the payer would not have paid the payee. It was this that ultimately justified the mistake of law bar and the adoption of the unjust enrichment theory that replaced it. This is to has the same effect to what was said by Park B in Kelly v Solari [15] The House of Lords, in Kleinwort Benson by a majority, were bold enough to make the move towards changing the law.

Discussion of the decision. (how they reached this decision and why)

Five judgments were delivered by the House of Lords. Lord Goff, Lord Hope and Lord Hoffman, were the majority, who allowed the appeal by the bank to recover payments made under a mistake of law. The minority consisting of Lord Browne Wilkinson and Lord Lloyd would have dismissed the appeal. Despite the difference in opinion here, all five did agree on certain matters- the bar of mistake of law should be removed. They agreed that some of the defenses suggested by the defendant lacked merit and they also agreed as to the application on S 32(1)(c) of the limitation act 1980. However they did not agree on as to whether payments that had been made according to ‘apparently settled law’ at the time they were made could be said to have been mistaken; since when the bank made the payment, it made it in accordance to the law at the time. Secondly they disagreed as to whether recovery of money should be allowed when a new law comes about and changes the law that was in place at the time of payment/transaction [16] Lord Browne Wilkinson felt that the bank was not mistaken at the time it had made the payment. It had made the payment according to settled law at the time. He felt the bank would have been mistaken if it made the payments at a time when there was no settled understanding of the law. Lord Browne Wilkinson would have allowed the appeal to determine whether there was settled law about swap contracts at the time the bank entered into swaps agreements with the local authority. After having assessed the situation while also taking into account what the majority’s view on what constituted a mistake, he felt it was best left to parliament to reform the law of mistaken payments. He felt that without statutory safeguards it would open flood gates to claims.

Lord Lloyd in his minority judgment had expressed opinions similar to those of Lord Bowne Wilkinson. He too felt that payments made under a settled law, which was later departed from, should not be recoverable. He did however share with the majority the opinion that the House of Lords should be allowed to depart from the law of mistaken payments as it then stood. He had his own idea of how the law should have been formulated, but unfortunately no one else agreed with his formulation.Since no one else agreed he felt the next best course would be to leave it to parliament to reform. He therefore had the same opinion as Lord Browne Wilkinson as to who should reform the law, but they were founded on different reasons. [17]

Both Lord Hope and Lord Geoff wrote a comprehensive majority judgment but Lord Goff’s judgment was the main majority sided judgment, as his judgment framed all the issues for debate and also because of his repute as a scholar of the law of restitution. Lord Hope also wrote a majority sided judgment but his judgment was narrow, focusing only on the controversial issues.

The House of Lords was not burdened by trying to defend the mistake of law rule. Even the defendant municipalities wanted the law to be changed.

Lord Goff in his judgments addressed the issue of how the difference between the mistake of law and mistake of fact rule was untenable. He felt it shouldn’t be allowed to live on as a part of English law. [18] Next he addressed the issue of formulating appropriate defenses.

The municipalities argued by analogy that when ‘settled law’ is changed by legislation it does not apply retroactively, so there is no way the law can be mistaken. They then said when judges change settled law it should not apply retroactively. This argument had been borrowed from the English Law Commission [19] Lord Goff acknowledged that this argument was complicated by what the declaratory theory was said to mean and how it behaved in reality. Lord Goff dealt with this argument by explaining how the historical definition was a fairy tale, and how judges sometimes have no choice but to make radical decisions. Lord Geoff believed the retroactivity of judicial decision. Furthermore he said the ‘settled understanding of the law’ defense was not a defense but actually was a badly formed argument. He went on to say that ‘settled understanding of the law’ did not have a concrete definition. It was too wide. [20] Next, Lord Goff rejected the honest receipt defense. Lord Goff felt that this defense, that was borrowed from a suggestion by Brennan.J in the Australian case David Securities Pty Ltd v Commonwealth Bank of Australia, was too wide and no longer served the purpose they intended it for. It would limit recovery of payments made under a mistake of law by more then what was necessary. Plus Furthermore, no one else found the defense to be of any good either. Finally the municipalities argued that S 32(1)(c) of the Limitation Act 1980 only covered mistake of fact and not mistake of law. but However, Lord Goff said it covered mistakes in general, which would mean it covered both types of mistake. [21]

As for Lord Browne Wilkinson, he agrees that judges make and change law. On the point that the payments made by the bank were by a mistake of law, he didn’t agree with the majority opinion. He felt whether the payments were a mistake or not would depend upon what the law was at the time the payments were made. Was there settled law that the swaps were legal? He felt there was no reason for the municipalities to not keep the money they have received at a time when all skilled lawyers felt they were entitled to receive them. Hazel v Hammersmith had made swaps illegal but was not illegal at the time the bank entered into agreement with the municipalities. [22] Along that line of reasoning he goes on to categorise three different classes for claims [23]

If a payer looking to make a payment was wrongly advised (by lawyers skilled in the field) then he would be able to recover under mistake of law.

If a payer seeking legal advice had been advised that the current law was uncertain, although currently there was no mistake but a risk should be assumed, this person would not be entitled to claim.

If the payer had been correctly advised and the current law supported the payment, then there would be no recovery under the mistake of law.

In his opinion the appeal should have been allowed to determine which category the claim fell under. He concluded by criticizing the majority approach to reform. In his criticisms he agreed that money paid under a mistake of law should be irrecoverable (but not in this case) and he agreed to the application of the Limitation Act, but argued that reform best be left to parliament, because if not there would be a hurricane of old cases resurfacing. [24] This is clear reflection how the restrospectivity of judicial decision has been contentious in the law of payments made under a mistake of law.

Lord Hoffman on the issue of whether there was a mistake at the time of payment, on the outset he was going to side with the minority, but he later changed his mind as to what constituted of a mistake. He looked at it from the unjust enrichment point of view and felt it would be unjust to allow the municipalities to keep the money. Because Since the bank paid the money because it thought it had to, then but later as it turned out that he it did not have had to didn’t have to. He did not agree with the settled understanding of the defense either. He felt it was inappropriate judicial activism. In agreement with Lord Goff, he also expressesd that it was not founded upon any principle. While he felt there was a strong argument leaning towards why parliament should being the one to reform the law,but at the same time he felt allowing that would not do justice in the case before them. For this reason he allowed the appeal. He also agreed that the banks claim under mistake came within S32(1)(c) of the Limitation Act 1980.

Advantages and Disadvantages

The House of Lords in Kleinwort Benson decided to remove the bar in mistake of law. The advantage of doing this was that, they were able to serve justice to in the case before them. They also finally put an end to the uncertainty and confusion in that area of the law. The disadvantage was that by making that change to the law, it now then applied retrospectively, meaning, they were subjected themselves to an opening of flood gates of litigation for past cases dealing with issues on of the same level. Seeing that how settled law is being departed from in this case, leaves behind a sense of insecurity over, never being truly certain what your legal rights are because they can change at any time.

In conclusion, I agree that there should be recovery for money paid under a mistake of law. The best explaination for what constitutes a mistake was provided by Lord Browne Wilkinson, where he says that a mistake in law can only arise when you are misinformed as to its actual meaning and how it applies, for example when you are misinformed by an attorney. To say that today one can invalidate an action correctly performed ten years ago is absurd, but that is just how the declaratory theory of judicial decision operates. In fact even in civil law jurisdictions they ‘interpret the law’ to the same extent as in common law jurisdictions, but in theory they are slow to admit it that they in fact make law [25] like in the Australian case of David Securities Pty Ltd v Commonwealth Bank of Australia [26] , the mistake of law bar was removed. It is clear that it is inevitable that the declaratory theory operates in some form or another in both civil law and common law jurisdictions. It keeps the law current.