Facts
Mr Haddon was a director of a company called Central Acceptance Limited. Mr Haddon wished to borrow money from the company, but under New Zealand law companies were barred from lending money to their directors. Accordingly, Mr Haddon formulated a plan whereby the company would lend $30,000 to Mr and Mrs Goss (Mrs Goss was Mr Haddon's sister), and then Mr and Mrs Goss would on-lend those sums to Mr Haddon. [2]
Mr Haddon proposed the loan to Mr and Mrs Goss to his fellow directors on 6 May 1987, although it does not appear that he made them aware that the funds were to be immediately on-loaned to him. The loan was approved for a short term (3 months), repayable in three monthly instalments, at an extremely high interest rate (33% per annum), and was to be secured by a mortgage over a nursery property owned by Mr and Mrs Goss. [2]
A law firm drew up the necessary documentation and Mr and Mrs Goss signed it. They directed that the $30,000 be paid directly to Mr Haddon in accordance with the private arrangement that they had made. What happened next was slightly unclear, but in the event only two small interest payments were made: one by Mr Goss and a second by Mr Haddon directly. But at some point after the mortgage documentation was signed and prior to it being registered, the documents were altered to change the term of the loan from 3 months to 12 months. Mr and Mrs Goss did not know or approve of the change. Mr Haddon told the company that registration of the mortgage had been delayed, but that they had agreed to extend the loan to a 12-month term. Mr Goss also gave evidence to the effect that Mr Haddon had separately told him that the loan had been paid off. [2]
In the event, no further loan payments were made and the company ended up going into liquidation. Mr Chilcott was appointed as the company liquidator, and he sought to enforce repayment of the loan made by the company to Mr and Mrs Goss. [2]
At trial it was held that the amendments to the mortgage instrument rendered it void under the rule in Pigot's Case (1614) 11 Co Rep 26b, and there was no appeal against that. The court also considered whether Mr and Mrs Goss must repay the loan (without the punitive interest) as money had and received, but held that there had been no total failure of consideration. The New Zealand Court of Appeal overturned the judgement in part, accepting that the loan was void, but ordering that Mr and Mrs Goss must repay the capital sums as money had and received. Mr and Mrs Goss then appealed to the Privy Council. [2] The New Zealand Court of Appeal also rejected an argument that Mr and Mrs Goss were acting under the undue influence of the company. [3]
Judgement
The only judgement was given by Lord Goff. In his characteristic style, Lord Goff addressed each of the legal issues sequentially. There was no appeal against the holding of the judge that the arrangement was not a sham, nor against his finding that the loan contract was void under the rule in Pigot's Case. Accordingly, he turned first to the availability of the claim in restitution.
Claim in restitution
At first instance Neazor J had held that the company could not make a claim in restitution as there had been no total failure of consideration. The Privy Council disagreed, but took a different approach from the New Zealand Court of Appeal. Lord Goff referred to the "much-quoted" speech of Viscount Simon LC in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32:
... when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise ... If this were not so, there could never be any recovery of money, for failure of consideration, by the payer of the money in return for a promise of future performance, yet there are endless examples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled. [4]
Lord Goff noted that normally a failure to repay a loan results in a claim in contract, but on the facts of this case that remedy was not available because of the fraudulent changes to the documentation. Accordingly, he turned to the problem of whether there had been a total failure of consideration. He noted that "although no part of the principal sum had been repaid by the appellants, two instalments of interest had been paid; and the question arises whether these two payments of interest precluded recovery on the basis that in such circumstances the failure of consideration for the advance was not total." [5] He then answered that the view of the Court was that it did not. Payments of interest were different from payments of capital sums. However the court noted that it was possible that the documents were altered prior to one of the payments, in which case the payments would be treated as repayment of capital. However Lord Goff was unequivocal: "even if part of the capital sum had been repaid, the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which apportionment can be carried out without difficulty, the law will allow partial recovery on this ground (see David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 383)." [5]
Receipt of the advance
Lord Goff then addressed briefly the suggestion that Mr and Mrs Goss had never received the advance (because it had been paid over directly to Mr Haddon). Lord Goff unceremoniously rejected this. [6] When the sums were paid, at their direction, to Mr Haddon, that was effectively payment to them (or, more accurately, to their order).
Change of position
Lastly, Lord Goff turned to whether Mr and Mrs Goss had a defence of change of position. In his judgement he noted that in New Zealand the defence of change of position was codified in the New Zealand Judicature Act 1908, section 94B. [7] However, in his view the position in New Zealand was the same as that under the common law.
The Board felt unable to accept that, on the facts of the case, there was a change of position on the part of the appellants such as to render it inequitable to require them to make restitution. Even before the fraudulent amendment to the instrument, Mr and Mrs Goss were required to repay the money which had been advanced to them by the company. That obligation was not affected by the fact they had on-loaned it to another person. By lending that money on to Mr Haddon they were necessarily taking the risk that he might not be able to repay them, "in which event they themselves would have to repay it without recourse to him." [8] The court stated that any action by Mr and Mrs Goss against Mr Haddon would now be fruitless, [9] and that by claiming change of position they were essentially seeking to shift that loss onto the company. Lord Goff was clear: "This, in their Lordships' opinion, they cannot do. The fact that they cannot now obtain reimbursement from Mr. Haddon does not, in the circumstances of the present case, render it inequitable for them to be required to make restitution to the company in respect of the enrichment which they have received at the company's expense." [8]
Ministerial receipt
Lord Goff also summarily dismissed the argument that this was a case of "ministerial receipt" where Mr and Mrs Goss received the money as agents for an undisclosed principal (Mr Haddon). [10] The trial judge had found as a fact that there were two loans; one from the company to Mr and Mrs Goss, and a second loan from them to Mr Haddon.
Failure of consideration is a technical legal term referring to situations in which one person confers a benefit upon another upon some condition or basis ("consideration") which fails to materialise or subsist. It is also referred to as "failure of basis". It is an 'unjust factor' for the purposes of the law of unjust enrichment. Where there is a "total failure of consideration" the claimant can seek restitution of the benefit by bringing an action in unjust enrichment against the defendant. Historically speaking, this was as a quasi-contractual claim known as an action for money had and received to the plaintiff's use for a consideration that wholly failed. The orthodox view is that it is necessary for any relevant contract to be ineffective, for example because it is discharged for breach, void ab initio or frustrated. However, it will be available on a subsisting contract where it does not undermine the contractual allocation of risk.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd[1942] UKHL 4 is a leading House of Lords decision on the doctrine of frustration in English contract law.
Barclays Bank Ltd v Quistclose Investments Ltd[1968] UKHL 4 is a leading property, unjust enrichment and trusts case, which invented a new species of proprietary interest in English law. A "Quistclose trust" arises when an asset is given to somebody for a specific purpose and if, for whatever reason, the purpose for the transfer fails, the transferor may take back the asset.
Dextra Bank & Trust Company Limited v Bank of Jamaica[2001] UKPC 50 is an important case in unjust enrichment in the Privy Council.
The English law of unjust enrichment is part of the English law of obligations, along with the law of contract, tort, and trusts. The law of unjust enrichment deals with circumstances in which one person is required to make restitution of a benefit acquired at the expense of another in circumstances which are unjust.
Baltic Shipping Company v Dillon, the Mikhail Lermontov case, is a leading Australian contract law case, on the incorporation of exclusion clauses and damages for breach of contract or restitution for unjust enrichment.
Philip Collins Ltd v Davis [2000] 3 All ER 808 is an English unjust enrichment case, an example of a restitution claim and the change of position defence.
Hussey v Palmer [1972] EWCA Civ 1 is an English trusts law case of the Court of Appeal. It concerned the equitable remedy of constructive trusts. It invokes the equitable maxim, "equity regards the substance and not the form."
Westdeutsche Landesbank Girozentrale v Islington LBC[1996] UKHL 12 is a leading English trusts law case concerning the circumstances under which a resulting trust arises. It held that such a trust must be intended, or must be able to be presumed to have been intended. In the view of the majority of the House of Lords, presumed intention to reflect what is conscionable underlies all resulting and constructive trusts.
Frazer v Walker (1967) 1 AC 569, is a landmark New Zealand court case that went to the Privy Council on appeal. The case upheld the concept that an owner of interest in land which was originally obtained from the rightful owner through fraud, still obtains an indefeasible interest in that title if they were unaware of the fraud.
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd[2011] EWCA Civ 347 is an English trusts law case, concerning constructive trusts. Sinclair was partially overruled in July 2014 by the UK Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC.
Sinclair v Brougham [1914] AC 398 is an English trusts law case, concerning the right of depositors to recover sums which were deposited to a building society under contracts of deposit which were beyond the powers of the building society.
Relfo Ltd v Varsani [2014] EWCA Civ 360 is an English unjust enrichment law case, concerning to what extent enrichment of the defendant must be at the expense of the claimant.
FHR European Ventures LLP v Cedar Capital Partners LLC[2014] UKSC 45 is a landmark decision of the United Kingdom Supreme Court which holds that a bribe or secret commission accepted by an agent is held on trust for his principal. In so ruling, the Court partially overruled Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd in favour of The Attorney General for Hong Kong v Reid (UKPC), a ruling from the Judicial Committee of the Privy Council on appeal from New Zealand.
Nilon Limited v Royal Westminster Investments S.A.[2015] UKPC 2, P.C. is a leading case of the Judicial Committee of the Privy Council on the right of a party to seek rectification of a company's share register, and the use of "anchor defendants". The case also included various obiter comments about the doctrine of forum non conveniens.
Penalties in English law are contractual terms which are not enforceable in the courts because of their penal character. Since at least 1720 it has been accepted as a matter of English contract law that if a provision in a contract constitutes a penalty, then that provision is unenforceable by the parties. However, the test for what constitutes a penalty has evolved over time. The Supreme Court most recently restated the law in relation to contractual penalties in the co-joined appeals of Cavendish Square Holding BV v Talal El Makdessi, and ParkingEye Ltd v Beavis.
The local authorities swaps litigation refers to a series of cases during the 1990s under English law relating to interest rate swap transactions entered into between banks and local authorities. The House of Lords ruled that such transactions were unlawful. As a result of the decision over 200 separate actions were filed as hundreds of interest rate swap contracts had to be unwound by the courts at great expense.
Haugesund Kommune v DEPFA ACS Bank[2010] EWCA Civ 579 and the subsequent decision in Haugesund Kommune v DEPFA ACS Bank [2011] EWCA Civ 33 were decisions of the English Court of Appeal relating to the consequences of certain swap transactions which had been entered into between the Irish bank and the Norwegian kommune, but were held to be beyond the powers of the kommune.
Barclays Bank Ltd v W J Simms, Son and Cooke (Southern) Ltd [1980] 1 QB 677, [1979] 3 All ER 522 was a decision of the High Court of Justice relating to the recovery of a payment mistakenly made by a bank after the customer had countermanded the cheque.
Lloyds Bank plc v Independent Insurance Co Ltd[1998] EWCA Civ 1853 was a decision of the Court of Appeal relating to the recovery of a payment made by a bank on the mistaken belief that the customer had sufficient cleared funds in the account.
