Westdeutsche v Islington BC

Westdeutsche v. Islington BC

[1996] A.C. 669, [1996] 2 All E.R. 961
House of Lords (3-2)
(main majority speech Lord Browne-Wilkinson; main minority speech Lord Goff)

The argument of the bank.

The bank's unsuccessful argument, in essence, was, that the payment of the £2.5 million to the local authority was made on the assumption that the swap agreement was valid. When it was retrospectively declared void in Hazell v Hammersmith and Fulham London BC [1990] 2 QB 697, the effect was that neither legal nor equitable title passed to the local authority on receipt. However, at the latest when the local authority paid the money into a mixed account, thereby mixing the bank's money with the local authority's own, the bank lost its legal title to the local authority. Only the bare legal title passed to the local authority, however. The bank retained its equitable title, however, with which it had never intended to part. From that moment, therefore, the local authority held the money on resulting trust for the bank, and therefore there was a fiduciary relationship (although the bank argued that (as in Sinclair v Brougham) the resulting trust was not of an active character).

The bank’s argument was based on an article by Peter Birks based on a conference organised by the Hebrew University of Jerusalem, "Restitution and Resulting Trusts," in Equity: Contemporary Legal Developments (1992), at p. 335. The essence of Birks’ argument was that the categorisation of presumed resulting trusts in Re Vandervell’s Trusts (No. 2) [1974] Ch 269 (on which see section 2.4) was far too narrow, and that in any case where there was a voluntary transfer of legal title, with neither a presumption of advancement nor any evidence of an intention to give, a resulting trust should be presumed, whereby the settlor retained his equitable title, parting only with legal title. In Westdeutsche itself, the bank (given that the contract was void) did not intend to pass equitable title to the local authority, and since there is clearly no presumption of advancement from a bank to a local authority, the bank should retain the equitable title, with which it had never parted.

There will be a diagrammatic representation produced shortly.

Notice that on this argument, the resulting trust arises simply because the transferor did not intend to transfer equitable title. It is independent of the intention, or even knowledge, of the transferee. In a later article, A New Role for Resulting Trusts (1996) LS 110, William Swadling (whose views were generally approved by Lord Browne-Wilkinson in Westdeutsche) argued that Birks’ view as to when a resulting trust should be presumed were too wide, but his view also depended only on the intention of the transferor, neither the intention nor the knowledge of the transferee being relevant.

It was necessary for the bank to argue further that from the separation of legal and equitable title between local authority and bank, it necessarily followed that the local authority was trustee for the bank; whenever there is a separation of legal and equitable titles there is a trust, and since all trusts give rise to fiduciary relationships, it therefore followed that the local authority must have been trustee for the bank. The bank was therefore entitled to compound interest in equity.

N.B. No knowing receipt or Diplock personal claim was advanced by the bank in Westdeutsche. Knowing receipt would clearly have been hopeless, since the local authority did not know the contract was void; it is not clear why the Diplock claim was not advanced; perhaps there were doubts about whether it could have applied anyway given the doubts about the extent of the application of the doctrine. Perhaps it was doubted whether the doctrine creates a fiduciary relationship (since the case it is clear that it does not).

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Authorities relied on by the bank

The bank relied primarily on three authorities, Sinclair v Brougham [1914] AC 398, Chase Manhattan Bank NA v Israel-British Bank (London) Ltd. [1981] Ch 105, and Re Ames' Settlement [1946] Ch 217.

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