[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)
Lord Goff's view (on the flexibility of equitable jurisdiction) was applied in Brennan v Brighton Borough Council - the majority view in Westdeutsche is not necessarily inconsistent with this, but Lord Browne-Wilkinson took the view that judicial legislation was not permissible where Parliament had twice considered the matter and not extended the jurisdiction.
The case was considered in a Quistclose context in Anglo Corporation v. Peacock AG. It was followed by the Court of Appeal in Guinness Mahon & Co. Ltd v Kensington and Chelsea Royal LBC [1998] 2 All ER 272. In that case, a swap agreement between a local authority and a bank had already run its five year term before the decision of the Divisional Court in Hazell v Hammersmith; the agreement had been a poor one from the bank’s viewpoint, and it had paid nearly £400,000 to the local authority over the five year period. The Court of Appeal held that, the agreement having been void ab initio, the bank was entitled to recover all the money paid as money had and received. No distinction was drawn between open swaps, such as that in Westdeutsche, and closed swaps, which had been fully performed, the full period of the swap having expired. The decision does not appear particularly just, since the bank had received all it had bargained for, and was simply enabled to avoid the consequences of a bad bargain. Guinness Mahon proceeded entirely on the basis of common law money had and received, and no trust was argued, but the bank does not appear to have claimed compound interest in Guinness Mahon.
Top of case, table of cases, trusts page, creation of trusts, resulting trusts
These notes were last updated on 07 May 98.
Mail Paul Todd: toddpn2@cf.ac.uk
Westdeutsche has been fairly heavily criticised in the academic journals, and it is in some respects clearly a regrettable decision. If the local authority had borrowed the money in the marketplace it would have had to pay compound interest. If the bank had been able to lend the money commercially it would have been able to obtain compound interest. The local authority had therefore arguably been unjustly enriched at the bank’s expense by an amount of money that included the compound interest on the capital paid. By refusing to grant the bank compound interest the House of Lords was thereby not granting full restitution to the bank.
In Westdeutsche, Lord Browne-Wilkinson refused to cast "any doubt on the principles of tracing as established in Re Diplock." This implies that he accepted the requirement for a fiduciary relationship before tracing could occur in equity. While as Millett LJ has observed, this will not normally cause any problems, because in cases such as Agip Africa and Banque Belge the theft is by an employee, who is in a fiduciary position, it will cause problems where the theft is by a stranger. It has long been argued that the requirement for a fiduciary relationship cannot be justified in principle, and indeed most justifications seem to be essentially historical, but in Westdeutsche Lord Browne-Wilkinson appears to have entrenched the requirement. Indeed, given his views on the bank’s argument that it had retained equitable title, it is difficult to see how an equitable interest can arise at all in the absence of a trust, because it is not meaningful to talk in terms of equitable title at all where one person owns property absolutely.
It is however worth considering the mischief, and I would suggest that the resulting trust is an inappropriate device for granting restitution, because the fiduciary relationship to which it gives rise is a wholly undesirable side effect, unless the conscience of the recipient is affected. Full restitution could easily have been achieved by extending the jurisdiction to award compound interest to money had and received claims. Even Lord Browne-Wilkinson may have been prepared to do this, had he not felt constrained by the legislative history. This is perhaps a matter therefore which needs to be reconsidered by the legislature.
With a money had and received claim, the basis of the action is receipt by the defendant of money belonging to the plaintiff in such a way that the defendant is unjustly enriched. The defendant comes under no obligation, apart from the return of the money received. The liability is personal, and property in the money received passes to the defendant, who can use it as he or she wishes. Because property passes to the defendant, third parties are unaffected by the plaintiff’s claim. If the money had and received claim carried with it the right to compound interest, full restitution would be made to the plaintiff without any additional undesirable consequences.
Suppose on the other hand the money does not pass to the defendant as currency, and the defendant does not mix it with his or her own, as in F.C. Jones, or Banque Belge. The plaintiff will now have a proprietary claim at common law, and if the money increases in value, the plaintiff will also be able to claim the increase, as in F.C. Jones. However, the defendant is under no obligation to invest the money, merely to return the plaintiff’s property to the plaintiff. If the defendant mixes some of the money with his or her own, then the proprietary claim for that money disappears, but the defendant will be liable for money had and received. If the defendant spends some of the money, the proprietary claim against him or her will also disappear, but there may be a claim against the recipient.
In any event, the maximum liability of the defendant will not exceed the value of the money remaining in his or hands, plus whatever has been mixed or spent. There are no positive duties to invest the money, and at the latest once the money is mixed, property passes to the mixer, so that the proprietary consequences of he common law claims are relatively limited. If compound interest could be awarded on a money had and received claim, the plaintiff could be granted full restitution without the undesirable proprietary consequences of the resulting trust route.
If, however, the resulting trust is used, and the defendant becomes a fiduciary for the plaintiff, he is liable not merely to return the money received, but also to invest it. If he invests the money wisely, the plaintiff will be able to claim title to the investments, as in A-G for Hong Kong v Reid. It is by no means clear that this is a just result if the conscience of the defendant is unaffected. Moreover, the plaintiff remains owner of the money in equity, and can trace into property purchased with it, leading to all the undesirable consequences of proprietary overkill identified by Lord Browne-Wilkinson in Westdeutsche.
It may, however, quite reasonably be argued that the requirement for a fiduciary relationship to trace in equity is undesirable, but again the question is what is the mischief. The reason that arguments are advanced for the extension of equitable tracing is because of the supposed inadequacies in the common law approach. For example, there is no obvious justification for restricting the ability of the common law to trace money that has not been mixed, but transferred electronically, as in Agip Africa, but I would suggest that the common law position on requiring a physical asset to follow is not yet entrenched. Arguably also the plaintiff should be able to trace in a case such as El Ajou, where the only money reaching the defendant appeared to have been derived from the fraud of which the plaintiff was principal victim, but clearly tracing was not possible in that case at common law. In both Agip Africa and El Ajou, however, the money could be traced in equity, both case involving a theft by a fiduciary, and as Millett has pointed out in Tracing the Proceeds of Fraud (1991) LQR 71, the fiduciary requirement will rarely be a problem. We have seen above that it is not a problem even where money is stolen by a stranger, if the thief mixes the money with his or her own, because the thief becomes a constructive trustee. There is, it is true, a difficulty where the thief does not mix the money but gives it to an innocent donee who does, but even there the donee is in principle liable for money had and received. There the trail will stop, but it this will only be unfair if money that can be regarded as derived from the theft later ends up in the hands of someone who is connected in some way with the fraud.
In conclusion, while nobody could defend all aspects of the present law, and particularly the rules of common law tracing, it does not necessarily follow that to use the resulting trust as a device for granting restitution is the answer.
Top of case, table of cases, trusts page, creation of trusts, resulting trusts
These notes were last updated on 07 May 98.
Mail Paul Todd: toddpn2@cf.ac.uk