BRIDGING THE GREAT DIVIDE BETWEEN MISTAKES OF LAW AND FACT IN RESTITUTION: IS THE BRIDGE SAFE TO CROSS?

• Date: 01 December 1999
• Citation: (1999) 11 SAcLJ 321
• Author: LOW FATT KIN, KELVIN LOI CHIT FAI, KELRY
• Published date: 01 December 1999

On 29 October 1998, the House of Lords in Kleinwort Benson Ltd v Lincoln City Council, and other appeals1 (‘Kleinwort Benson’s case’) finally abrogated the rule barring recovery of payments made under a mistake of law in restitution in England. This article seeks to examine whether the Singapore courts should follow the English approach or whether the difficulties which were articulated by the minority in the House of Lords should stand in the way of such a development locally.

I. INTRODUCTION

In Kleinwort Benson’s case, Kleinwort Benson (‘the bank’) entered into several swaps contracts with several local authorities and pursuant to those contracts paid out a total of £811,208.90 to the latter. Subsequent to those payments, the House of Lords in Hazell v Hammersmith and Fulham London Borough Council and Ors2 held that the relevant statute3 did not confer upon the local authorities the requisite capacity to enter into such swaps contracts. As a result of that decision, the bank brought actions against the various local authorities claiming the sums paid. Of the £811,208.90, some £388,114.72 of the payments were made within the six-year limitation period and had already been recovered by the bank on the ground of failure of consideration. The present claim concerned only the balance of £423,094.18 representing earlier payments and recovery under this head was prima facie time-barred. In order to overcome this time-bar, the bank sought to recover this balance on the alternative ground of mistake of law.

II. THE GREAT DIVIDE

Historically, the great divide in the law of restitution at common law was to be found between a mistake of law and a mistake of fact. According to the UK Law Commission Report in 1994: ‘It is generally accepted that in English law the fact that a payment is made under a mistake of law is not of itself a ground for recovery of the payment. By contrast, a payment made under a mistake of fact is prima facie recoverable.’4

In the earliest annals of English law, there was no such divide between a mistake of fact and one of law.5 The first suggestion that such a divide existed emerged from the obiter dictum of Buller J in Lowrie v Bourdieu6 where his Lordship based the rule of non-recovery on the maxim ignorantia juris non excusat. The origin of the rule, however, as part of the ratio decidendi of a case, is well-known to be born of the decision of Lord Ellenborough CJ in Bilbie v Lumley. 7 His Lordship in that case opined that ‘[e]very man must be taken to be cognisant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case.’8 In that case, an underwriter had paid a claim under a policy which he was entitled in law to repudiate for non-disclosure. His claim to recover the money so paid was thus barred by the ‘mistake of law’ rule that Lord Ellenborough CJ established.

Many academics have suggested that Bilbie v Lumley can be restricted to its facts and that the proposition by Lord Ellenborough CJ in that case should be narrowed. In particular, Gareth Jones is convinced that the ‘principle in Bilbie v Lumley should [only] preclude recovery of money which was paid in settlement of an honest claim … Any other payment made under a mistake of law should be recoverable if it would have been had the mistake been one of fact. [Emphasis added.]’9 However, history has proven otherwise. In Wilson and M’Lellan v Sinclair, 10 Lord Brougham LC took the view that a restitutionary claim under the rubric of mistake could only succeed if the said mistake was ‘in the fact.’ By

1841, Parke B in Kelly v Solari11 accepted that ‘money paid with full knowledge of all the facts cannot be recovered back by reason of its having been paid in ignorance of the law.’ By 1943, Groom-Johnson J considered it to be ‘beyond argument’ in all the courts below the House of Lords that a payment made as a result of a mistake of law is generally irrecoverable.12

III. ABROGATION OF THE ‘MISTAKE OF LAW’ RULE

A. Critique of the great divide

This great divide has been the subject of severe criticism by academics and judges alike. As Lord Goff of Chieveley in his leading judgment in Kleinwort Benson pointed out, the criticisms are mainly threefold:13

First, the rule allows the payee to retain a payment which would not have been made to him but for the payer’s mistake, whereas justice appears to demand that money so paid should be repaid unless there are special circumstances justifying its retention. Second, the distinction drawn between mistakes of fact (which can ground recovery) and mistakes of law (which cannot) produces results which appear to be capricious.14… Third, as a result of the difficulty in

some cases of drawing the distinction between mistakes of law and fact, and the temptation for judges to manipulate that distinction to achieve practical justice in particular cases, the rule became uncertain and unpredictable in its application.15

B. Bridging the great divide

The first judicial signs within the Commonwealth that the great divide would be bridged can be traced to the dissenting judgment of Dickson J in Hydro Electric Commission of the Township of Nepean v Ontario Hydro who noted that ‘[o]nce a doctrine of restitution or unjust enrichment is recognised, the distinction as to mistake of law and mistake of fact becomes simply meaningless’.16 His Honour, though in the minority, was subsequently followed by the majority of the Supreme Court of Canada in Air Canada and Pacific Western Airlines v The Queen in Right of the Province of British Columbia and the Attorney General of British Columbia, in which La Forest J (with whom Lamer and L’Heureux-Dube JJ agreed) declared that ‘the distinction between mistake of fact and law should play no part in the law of restitution. Both species of mistake, if one can be distinguished from the other, should, in an appropriate case, be considered as factors which can make an enrichment at the plaintiff’s expense “unjust”, or “unjustified”. [Emphasis added.]’17

The rout was soon followed by the High Court of Australia in David Securities Pty Ltd and Ors v Commonwealth Bank of Australia, 18 where the majority (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ)19 decided that ‘the rule precluding recovery of moneys paid under a mistake of law should be held not to form part of the law in Australia’ and that it ‘would be logical to treat mistakes of law in the same way as mistakes of fact, so that there would be a prima facie entitlement to recover moneys paid when a mistake of law or fact has caused the payment’.20

The first signs that this trend would be followed in England was seen in the Woolwich case which led the Law Commission to opine that the mistake of law rule would not survive reconsideration by the House of Lords.21 The rule was indeed laid to rest by the House of Lords on 29 October 1998 when it arose for consideration in Kleinwort Benson’s case. The House of Lords were unanimous in the opinion that the mistake of law rule should be abolished,22 being of the view that the recognition that the law of restitution rests upon the foundation of unjust enrichment demands that the rule be abrogated. However, the minority dissented over concerns as to the effects that such an abrogation by the majority would have.

IV. SPECIAL DEFENCES FOR CLAIMS UNDER MISTAKE OF LAW?

So far as Kleinwort Benson’s case was concerned with the abrogation of the mistake of law rule, it was the subject of little controversy, the House of Lords being unanimous that the abolition of the rule was long overdue. However, aside from bridging the great divide between mistakes of law and mistakes of fact, the majority of the House of Lords also took the opportunity to reject several defences to an action for recovery of payments made under a mistake of law.

A. Honest receipt

The defence of honest receipt was first proposed by Brennan J (as he then was) in David Securities Pty Ltd and Ors v Commonwealth Bank of Australia, where his Honour opined that ‘[i]t is a defence to a claim for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to receive and retain the money or property.’23 The rationale of this defence, which was not endorsed by the majority in David Securities, was to achieve a degree of certainty in past transactions.24

As pointed out by Lord Goff of Chieveley, the defence sought to address the concern of judges ‘about what is sometimes called the finality of transactions … [which had] formed a significant part of the amalgam of concerns which led to the rule that money paid under a mistake of law was irrecoverable on that ground.’25 According to Lord Goff of Chieveley, this defence suffers from a chronic lack of support because it is ‘generally regarded as being wider than is necessary to meet the perceived mischief.’26 In particular, the defence of honest receipt in the case of a claim for recovery of payment under a mistake of law would eclipse accepted defences to restitution such as that of change of position27 and

the settlement of a bona fide claim.28 As such, Lord Goff of Chieveley thought that ‘it would be most unwise for the common law, having recognised the right to recover money paid under a mistake of law on the ground of unjust enrichment, immediately to proceed to the recognition of so wide a defence as [that proposed by Brennan J] which would exclude the right of recovery in a very large proportion of cases. The proper course is surely to identify particular sets of circumstances which, as a matter of principle or policy, may lead to the conclusion that recovery should not be allowed; and in so doing to draw on the experience of the past, looking in particular from the analogous case of money paid under a mistake of fact’.29

B. Completed transactions

...