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IN THE SUPREME COURT OF JUDICATURE CHANI 97/0995 CMS3

IN THE COURT OF APPEAL (CIVIL DIVISION )

(THE VICE-CHANCELLOR )

Royal Courts of Justice

Strand

London W2A 2LL

Wednesday 22nd April l998

B e f o r e

LORD JUSTICE MILLETT

LORD JUSTICE MORRITT

LORD JUSTICE BROOKE

PORTMAN BUILDING SOCIETY Appellant

v.

HAMLYN TAYLOR NECK (A FIRM ) Respondent

(Computer Aided Transcription of the Stenograph Notes of

Smith Bernal Reporting Limited, l80 Fleet Street

London EC4A 2HD Tel: 0l7l 42l 4040

Official Shorthand Writers to the Court)

MR SIMON BERRY QC and MR MARK WEST (instructed by Messrs Clarke Willmott & Clarke, Yeovil, Somerset) appeared on behalf of the Appellant (Plaintiff).

MR JONATHAN SUMPTION QC and MR DAVID HALPERN (instructed by Messrs Bond Pearce, Exeter) appeared on behalf of the Respondent (Defendant).

J U D G M E N T

(As approved by the court)

©Crown Copyright

LORD JUSTICE MILLETT: This is yet another case in which a mortgagee, having advanced money on mortgage at the height of the property boom in the late l980s and having realised its security during a serious recession in the early l990s, 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 resort to an even less promising claim in restitution.

The appellant is the 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,l00 to the firm, and this was duly paid into the firm's client account. The difference between the sum of £392,l00 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 l989, when in accordance with its instructions the firm paid the sum of £92,l00 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 l996, 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 l989 and the issue of the writ in January l996. 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 and West Building Society v. Mothew [l998] Ch. l. This left only the restitutionary claim for an account.

The Society alleges that, in the events which happened, it paid the sum of £92,l00 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,l00 to the firm in the first place.

Accordingly, the Society contends, it is entitled to maintain an action for the recovery of the £92,l00 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 £92,000 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 "The Law of Restitution" published in l965 states:

"The law of restitution is the law of all claims... which are founded on the principle of unjust enrichment."

That passage echoes section l of the Restatement of the Law of Restitution, published by the American Law Institute in l937, 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? (3) Is his enrichment at the expense of the plaintiff? There are several factors which 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, e.g. 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,l00. 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 which establish that an action lies to recover payments made under a mistake of fact; see for example Barclays Bank v. W.J. Simms [l980] Q.B. 677, 695. 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 which 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.

Secondly, the Society relies on those cases which 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 (l86l) l B & S 424; affd.(l863) 4 B & S l4. That is what the firm did in the present case.

Thirdly, the Society relies on the doctrine described in Article ll3 of Bowstead & Reynolds on Agency (l6th Edition) l996 and Goff & Jones The Law of Restitution (4th Edition) l993 at pages 750-5l. The general rule is that money paid (e.g. 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 which 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 and West Building Society v. Mothew [l998] Ch. l where I said at page 22:

"...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 which 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.

LORD JUSTICE MORRITT: I agree.

LORD JUSTICE BROOKE: I agree. The writ in this action was issued on 25th January l996, 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 l980 by advancing its alternative claim in restitution.

For the reasons given by Lord Justice Millett, 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.l5l "Limitation of Actions" (l998). 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.

Order: Appeal dismissed with costs;

application for leave to appeal

to the House of Lords refused.