Kleinwort Benson Ltd v Lincoln City Council, 1998 UKHL 38
Citation:Kleinwort Benson Ltd v Lincoln City Council, 1998 UKHL 38
Rule of thumb:Where someone enters a contract and later discovers that they were not actually allowed to do so as a matter of law, can they get out of this contract? Yes, this contract can be set aside as a general rule.
Background facts:
The facts were that Lincoln City Council had entered swap agreements with the investment bank Kleiwort Benson. The bank sought to have the contract reduced once they became aware that they were not allowed to do this type of contract with a public body as a matter of civil law.
Parties argued:
LCC argued that this was an uninduced unilateral error that did not create grounds for essential error. The bank argued that a mistake of law entering into an agreement constituted an essential error.
Judgment:
The Court held that money paid in error of law constitutes an essential error about the nature of the contract and does not constitute a mistake made in ignorance. The Court held that the contract was void and that Kleinwort Benson should return the investment they received from LCC in full with no requirement to pay any potential increases that the fund may have generated.
Ratio-decidendi:
'Private agreements made under a mistake of law may be set aside', Lord Hope
‘This is that a payment made on a settled view of the law is more likely to be excusable, and thus to be one where restitution would more obviously be justified, than a payment made as a result of one man's mistake or ignorance. Yet a mistake of law which only the payer himself had made would not be caught by the defence. As Mr. Southwell said, the worse the legal advice the more likely the payer could show that the defence was not applicable. But I do not need to elaborate on this point. The valuable work done by the Scottish Law Commission has shown a need for caution which I consider to be entirely justified. I would not favour the introduction of such a defence judicially... But the distinction between mistake of fact and mistake of law as a ground for recovery is not absolute. Relief is available where the mistake of law relates to private rights: Earl Beauchamp v. Winn(1873) L.R. 6 H.L. 223. Private agreements made under a mistake of law may be set aside, and relief will be given in respectof payments made under such agreements. Other examples may be given where a cause of action for relief will be available although the mistake was one of law. In Regina v. Tower Hamlets London Borough Council, Ex parte Chetnik Developments Ltd. [1988] A.C. 858, 874H-877C Lord Bridge referred to a substantial line of authority showing circumstances in which the court would not permit the mistake of law rule to be invoked. These include payments made under an error of law to or by a trustee in bankruptcy as an officer of the court: Ex parte James (1874) L.R. 9 Ch. App. 609. It is hard to see why in those cases the equitable rule which allows for the postponement of the limitation period should not apply, to the effect that time will not run until the claimant knew of the mistake or ought with reasonable diligence to have known of it. If the postponement can apply in these examples of mistake of law, I think that it ought to apply…’, Lod Hope.
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.