Restitution — Solicitors — Mortgage advance — Advance made under mistake of fact — Whether solicitors liable to account and payment of sum advanced as loan
The plaintiff
building society loaned £93,000 to B upon the security of a property which it
alleged B had stated he would use for exclusively residential purposes. The
building society made it a strict condition of its offer that the property
should be used solely for B’s own private occupation. B defaulted and, having
discovered that B had used the property as a guest house, the building society
recovered possession and sold it at a loss. The defendant firm of solicitors
acted for B and the building society in connection with the purchase and
mortgaging of the property. In the course of that work the defendant completed
a standard form of report on title and confirmed that the building society’s
conditions of advance had been complied with. The defendant did not tell the
building society that it had apportioned the purchase as to £87,250 to the
property itself and the residue to the goodwill of the business. The building
society sought to recover its losses from the defendant by claiming, inter
alia, in quasi-contract for money had and received for which the remedy was
an account and payment; if the society had known that the occupancy condition
was not going to be complied with, it would not have made the loan and would
not have advanced it to the defendant in the first place. The money was paid to
the defendant under a mistake of fact. The building society appealed against
the decision of the Vice-Chancellor striking out the claim.
a payment may have been made by mistake is not by itself sufficient to justify
a restitutionary remedy. A restitutionary remedy requires, inter alia,
that a person has been unjustly enriched at the expense of the plaintiff. A
person cannot be unjustly enriched if he has not been enriched at all. The
defendant was not enriched by the receipt of the advance. The money was trust
money which belonged to the building society. The defendant was liable to
account for the money. The defendant paid the money away and dealt with it in
accordance with the building society’s instructions; its authority to do so was
never revoked. Although the defendant was liable to account, there was nothing
due to the building society if an account were taken. The court does not order
an account where nothing is due.
The following
cases are referred to in this report.
ex parte
Edwards (1884) 13 QBD 747
Barclays
Bank Ltd v WJ Simms Son & Cooke (Southern)
Ltd [1980] QB 677; [1980] 2 WLR 218; [1979] 3 All ER 522; ([1980] 1 Lloyd’s
Rep 225
Bristol
& West Building Society v Mothew [1998]
Ch 1; [1997] 2 WLR 436; [1996] 4 All ER 698, CA
Holland
v Russell (1861) 1 B&S 424; affirmed
(1863) 4 B&S 14
This was an
appeal by the plaintiff, Portman Building Society, against the decision of Sir
Richard Scott V-C, who had dismissed the plaintiff’s appeal against the
decision of the master striking out claims by the plaintiff against the
defendant firm, Hamlyn Taylor Neck.
Simon Berry QC
and Mark West (instructed by Clarke Willmott & Clarke, of Yeovil) appeared
for the appellant; Jonathan Sumption QC and David Halpern (instructed by Bond
Pearce, of Exeter) represented the respondent.
Giving the
first judgment, MILLETT LJ said: This is yet another case in which a
mortgagee, having advanced money on mortgage at the height of the property boom
in the late 1980s and having realised its security during a serious recession
in the early 1990s, has sought to recover its loss from the solicitor who acted
for it in the transaction. Unwilling to plead fraud and unable to recover
damages for breach of contract or tort, or equitable compensation for breach of
fiduciary duty, it has had to resort to an even less promising claim in
restitution.
The appellant
is Portman Building Society (the society). The respondent is a firm of
solicitors, Hamlyn Taylor Neck (the firm). The case concerns a property in
Torquay, which was bought by a Mr Biggins with the assistance of a mortgage
advance of £93,000 by the society. In his mortgage application Mr Biggins
stated that it was his intention to use the property exclusively for
residential purposes. He repeated this in a letter which he later wrote to the
society. The society made it an express condition of its offer of a mortgage
advance that the property should be used solely for Mr Biggins’ own private
occupation.
In accordance
with the usual practice, the firm acted for both Mr Biggins and the society in
the transaction. In the proceedings, the society alleges that in fact the
property was an established guest house with some eight bedrooms, and that to
the firm’s knowledge it was Mr Biggins’ fixed intention throughout to continue
to use it as a guest house and not solely as a private residence for himself
and his family. Before completion the firm negotiated with the vendor an
apportionment of the purchase price of £98,000 between the property itself, the
fixtures and fittings and the goodwill of the guest house business.
In due course
the firm completed and returned the society’s standard form of report on title.
This stated that the society’s conditions of advance had been complied with and
that there were no other matters affecting the property about which the society
ought to be advised. The firm did not tell the society that part of the
purchase price had been apportioned to the goodwill of the business or that
only £87,250 of the purchase price had been apportioned to the property itself.
In consequence, the society alleges it believed that the special condition
regarding the residential use of the property had been complied with and that
the full amount of the purchase price of £98,000 was attributable to the
property which was to be the subject of the proposed mortgage. Although the
society pleads an actual representation of facts known to the representor to be
untrue, it does not allege fraud or dishonesty and has disclaimed any intention
of making such a claim.
Shortly before
completion, the society paid the sum of £92,100 to the firm, and this was duly
paid into the firm’s client account. The difference between the sum of £92,100
received by the firm and the amount of the agreed mortgage advance of £93,000
is accounted for by the fact that £900 was applied by the society in effecting
a mortgage guarantee policy.
The
transaction was completed in March 1989 when, in accordance with its
instructions, the firm paid the sum of £92,100 to the vendor’s solicitor and
obtained a conveyance and mortgage of the property in favour of the society in
exchange.
Mr Biggins
afterwards defaulted in making payments due under the mortgage. The society
became aware that Mr Biggins was using the property as a guest house. It
brought proceedings against Mr Biggins for possession, recovered possession and
sold the property, realising a substantial loss. It has not pursued Mr Biggins
on his personal covenant for repayment, presumably on the ground that such an
action would not be cost effective. Instead, in January 1996, it brought the
present action against the firm.
By its writ
the society maintains a number of alternative causes of action. It claims
damages for breach of contract, the tort of negligence or breach of trust;
compensation for breach of fiduciary duty; or repayment of moneys had or
received to the use of the society. It is to be observed that, with the
exception of the last, all are claims to recover monetary compensation for loss
in consequence of a wrong alleged to have been committed by the firm. The last
claim, however, is a straightforward claim in quasi-contract for money had and
received or, as we would now call it, restitution. As counsel for the society
acknowledged, the remedy for such a claim is not damages but an account and
payment.
On the firm’s
application the master struck out the entire action. He held that the claims
for breach of contract, tort and breach of trust were statute-barred, more than
six years having elapsed between the completion of the transaction in March
1989 and the issue of the writ in January 1996. He struck out the remaining
claims for breach of fiduciary duty and restitution on the ground that they
disclosed no reasonable cause of action.
The society
appealed to Sir Richard Scott V-C. It did not pursue its appeal against the
order striking out the claims for breach of contract, tort, breach of trust or
fiduciary duty. It accepted that the claims for breach of contract, tort and
breach of trust were statute-barred and that the claim for breach of fiduciary
duty was precluded by the decision of this court in Bristol & West Building
Society v Mothew [1998] Ch l. This left only the restitutionary
claim for an account.
The society
alleges that, in the events that happened, it paid the sum of £92,100 to the
firm in the mistaken belief induced by the firm: (i) that the special conditions
contained in its offer of a mortgage advance, that the property would be used
solely as a private residence, had been complied with; and (ii) that the whole
of the purchase price of £98,000 was attributable to the property itself. The
society alleges that, if it had not been for those mistakes, it would not have
been prepared to make the mortgage advance to Mr Biggins and would, therefore,
not have paid the £92,100 to the firm in the first place.
Accordingly,
the society contends it is entitled to maintain an action for the recovery of
the £92,100 as money paid to the firm under a mistake of fact. It is conceded
on behalf of the firm that if such an action is maintainable at all it is
arguably not statute-barred, on the ground that time will not have begun to run
until the mistake which led to the payment being made was, or should with
reasonable diligence have been, discovered. For its part, the society concedes
that the firm duly applied the money in accordance with its mandate. It is
implicit in that concession, and was confirmed by counsel in argument before
us, that the firm’s authority to make the payment had not been determined; and
it is not alleged in the statement of claim that it was. It is to be observed
that the society has not sought to set the transaction aside whether for
mistake, misrepresentation or otherwise; nor of course could it do so, at least
against Mr Biggins, since, with knowledge of the facts, it has affirmed the
transaction by enforcing the mortgage. In paying the £92,100 to the vendor’s
solicitor on completion and in exchange for an executed instrument of mortgage
in favour of the society, therefore, the firm must be taken to have been acting
in accordance with the society’s unrevoked instructions.
The
Vice-Chancellor struck out what remained of the action, and the society appeals
to this court. In my judgment, the Vice-Chancellor was plainly right. The
society’s claim for restitution is entirely misconceived. Whether the claim is
for restitution for wrong or restitution for unjust enrichment by subtraction
(as in the present case), such a claim is designed to reverse unjust
enrichment. The first sentence of the first edition of Goff & Jones on
The Law of Restitution published in 1966 states:
The law of
restitution is the law of all claims … which are founded on the principle of
unjust enrichment.
That passage
echoes section 1 of the Restatement of the Law of Restitution, published
by the American Law Institute in 1937, in which the authors, Professors Warren
Seavey and Austin Scott, made the epoch-making assertion:
A person who
has been unjustly enriched at the expense of another is required to make
restitution to that other.
This
formulation explains why any claim to restitution raises the questions: (l) has
the defendant been enriched?; (2) if so, is his enrichment unjust?; and (3) is
his enrichment at the expense of the plaintiff? There are several factors that
make it unjust for a defendant to retain the benefit of his enrichment; mistake
is one of them. But a person cannot be unjustly enriched if he has not been
enriched at all. That is why it is necessary to ask all three questions and why
the fact that a payment may have been made, eg by mistake, is not by itself
sufficient to justify a restitutionary remedy.
In the present
case the firm was not enriched by the receipt of the £92,100. The money was
trust money, which belonged in equity to the society and was properly paid by
the firm into its client account. The firm never made any claim to the money.
It acknowledged that it was the society’s money, held to the order of the
society, and it was applied in accordance with the society’s instructions in
exchange for a mortgage in favour of the society. The firm did not receive the
money for its own use and benefit, but to the society’s use. Given that the
money was held to the order of the society, the only question is whether the
firm obtained a good discharge for the money. It is conceded that it did.
In its
argument before us the society relies on three lines of authority. The first is
the line of cases that establish that an action lies to recover payments made
under a mistake of fact; see for example Barclays Bank Ltd v WJ Simms
Son & Cooke (Southern) Ltd [1980] QB 677. So it does. In such cases the
money is (mistakenly) paid to the defendant for his own use and benefit, or at
least for the use and benefit of a third party, and not for the use and benefit
of the plaintiff himself. But for the mistake, there would be no injustice in
the defendant or the third party retaining the benefit of the payment, for that
is the common intention of the parties. The effect of the plaintiff’s mistake,
however, is to make it unjust for the defendant or the third party to retain
the benefit of the payment. The action for restitution reverses the unjust
enrichment.
But in the
present case the society paid the money to the firm to hold to the society’s
order, that is to say for the society’s own use and benefit. The society was
entitled to give the firm directions as to the application of the money, and to
revoke those directions and demand the repayment of the money if not previously
applied in accordance with its unrevoked directions. The society did not need
to plead mistake or any other ground of restitution. The firm received the
money on terms that made it an accounting party and has never denied its
liability to account. The society’s difficulty is not in establishing the
firm’s liability to account, but in showing that anything is due from the firm
after it applied the money in accordance with the society’s instructions.
Second, the
society relies on those cases that show that the cause of action for money had
and received is complete when the plaintiff’s money is received by the
defendant. It does not depend on the continued retention of the money by the
defendant. Save in strictly limited circumstances, it is no defence that the
defendant has parted with the money. All that is true. But it is, of course, a
defence that he has parted with it by paying it to the plaintiff or to the
plaintiff’s order; see Holland v Russell (1861) 1 B&S
424; affirmed (1863) 4 B&S 14. That is what the firm did in the present
case.
Third, the
society relies on the doctrine described in Article 113 of Bowstead &
Reynolds on Agency (16th ed) 1996 and Goff & Jones on
that money paid (eg by mistake) to an agent, who has accounted to his principal
without notice of the claim, cannot be recovered from the agent, but only from
the principal. The society submits that the agent’s defence in such a case is a
particular species of the change of position defence and does not avail the
agent who has notice, actual or constructive, of the mistake that founds the
plaintiff’s claim.
I myself do
not regard the agent’s defence in such a case as a particular instance of the
change of position defence, nor is it generally so regarded. At common law the
agent recipient is regarded as a mere conduit for the money, which is treated
as paid to the principal, not to the agent. The doctrine is therefore not so
much a defence as a means of identifying the proper party to be sued. It does
not, for example, avail the agent of an undisclosed principal; though today
such an agent would be able to rely on a change of position defence.
The true rule
is that where the plaintiff has paid money under (for example) a mistake to the
agent of a third party, he may sue the principal, whether or not the agent has
accounted to him, for in contemplation of law the payment is made to the principal
and not to his agent. If the agent still retains the money, however, the
plaintiff may elect to sue either the principal or the agent, and the agent
remains liable if he pays the money over to his principal after notice of the
claim. If he wishes to protect himself, he should interplead. But once the
agent has paid the money to his principal or to his order without notice of the
claim, the plaintiff must sue the principal.
But all this
is by the way, because the doctrine is concerned with the receipt of money by
an agent from a third party and his subsequent payment of the money to his own
principal without the authority of the third party. Where the agent remains
liable, it is not because a change of position defence is not available. It is
because neither he nor his own principal was entitled to retain the money as
against the third party who made the payment. The agent is liable to make
restitution to the third party, because he knew that his principal was no more
entitled to the money than he was himself: see ex parte Edwards (1884)
13 QBD 747.
But in the
present case, while the society’s mandate remained unrevoked, the firm was
entitled and bound to deal with the money in accordance with the mandate. In
the present case there is no third party plaintiff. The firm was the agent of
the society. It received the payment from its principal, held it to the order
of its principal and applied it in accordance with its principal’s
instructions. The firm’s defence is not that it has paid the money away to a third
party, but that it has dealt with it in accordance with the society’s
instructions and thereby obtained a good discharge.
In the course
of argument, counsel submitted that the society’s mistake, induced by the firm,
rendered the money repayable and the mandate revocable. In fact, of course, the
mandate was revocable in any case. The problem is that it was never revoked.
The continuing validity of the transaction under which the money was paid to
the firm is, in my judgment, fatal to the society’s claim. The obligation to
make restitution must flow from the ineffectiveness of the transaction under
which the money was paid and not from a mistake or misrepresentation which
induced it. It is fundamental that, where money is paid under a legally
effective transaction, neither misrepresentation nor mistake vitiates consent
or gives rise by itself to an obligation to make restitution. The recipient
obtains a defensible right to the money, which is divested if the payer
rescinds or otherwise withdraws from the transaction. If the payer exercises
his right of recission in time, and before the recipient deals with the money
in accordance with his instructions, the obligation to make restitution may
follow.
This court
explained the effect of a defensible payment in the recent case of Bristol
& West Building Society v Mothew [1998] Ch 1 where I said, at
p22F:
it would
appear that the judge was of opinion that the defendant’s authority to deal
with the money was automatically vitiated by the fact that it (and the cheque itself)
was obtained by misrepresentation. But that is contrary to principle.
Misrepresentation makes a transaction voidable not void. It gives the
representee the right to elect whether to rescind or affirm the transaction.
The representor cannot anticipate his decision. Unless and until the
representee elects to rescind the representor remains fully bound. The
defendant’s misrepresentations merely gave the society the right to elect to
withdraw from the transaction on discovering the truth. Since its instructions
to the defendant were revocable in any case, this did not materially alter the
position so far as he was concerned, though it may have strengthened the
society’s position in relation to the purchasers.
That, in my
judgment, is the position in the present case.
The society
brings a claim for money had and received. The firm does not deny that it is an
accounting party. It is an accounting party irrespective of the existence of
any mistake on the part of the society. But it has dealt with the whole of the
money that it received from the society in accordance with the society’s
instructions, which have never been revoked. Accordingly, although the firm is
accountable for the money it received, it is plain that there is nothing due to
the society on the taking of the account. The whole of the money has been
expended on the society’s behalf. The court does not order an account to be
taken where it is plain that there is nothing due.
In my
judgment, the action is entirely misconceived and the appeal must be dismissed.
Agreeing, BROOKE
LJ said: The writ in this action was issued on January 25 1996, nearly
seven years after the completion of the relevant transaction. The only reason
why this expensive litigation has taken up so much time in the courts through
three different levels is that the law of limitation has grown up piecemeal
over the last 450 years before the modern remedy of restitution was properly
developed. As a result, the plaintiff sought to take adventitious advantage of
section 32(l)(c) of the Limitation Act 1980 by advancing its alternative
claim in restitution.
For the
reasons given by Millett LJ, with which I agree, this claim is hopeless. The
time and cost devoted to this appeal illustrates, in my judgment, the need for
parliament to bring appropriate limitation rules relating to restitutionary
remedies within a coherent, principled limitation statute as suggested by the
Law Commission’s recent Consultation Paper No 151 Limitation of Actions
(1998). Everybody would then be able to understand clearly where they stand and
what the relevant rules are, and this sort of litigation could be avoided.
MORRITT LJ agreed and did not add anything.
Appeal
dismissed.
