Cross-border restitution claims stand alone, says House of Lords

Jonathan Tecks is a barrister with Littman Chambers and Tom Coates is a partner with Lewis Silkin. Jonathan Tecks and Tom Coates discuss a case that has, for a while at least, settled the question of where a restitutionary claim should be heard.

A recent case has for the moment decided the issue of domestic and European cross-border claims, which has been troubling practitioners and academics. In Kleinwort Benson v City of Glasgow District Council the House of Lords ruled, on 30 October, that a restitutionary claim has neither a contractual nor a tortious character. It does not therefore fall within either of the relevant exceptions to the general principle that a defendant must be sued in the courts of its domicile.

Kleinwort Benson was the contractual loser in a series of interest rate swap contracts entered into with Glasgow. It brought its claim in restitution after such contracts involving local authority counterparties were held to be void. It sued Glasgow in England.

Glasgow challenged the jurisdiction, claiming the benefit of article 2 of schedule 4 to the Civil Jurisdiction and Judgments Act 1982 (the inter-UK statute corresponding to the Brussels Convention).

Kleinwort Benson resisted the challenge, arguing its claim for restitution was either contractual or tortious within the article 5(1) or 5(3) exceptions to article 2. The House of Lords found in favour of Glasgow. The article 5(3) tort argument, which had not been strongly urged by Kleinwort Benson, was rejected as a misreading of a European case.

The article 5(1) argument that a restitutionary claim was a "matter relating to a contract" and could therefore be brought "in the place of performance of the obligation in question" was rejected by a majority.

It was held that "the obligation in question" referred to a contractual obligation. There was no contractual obligation where the contract had already been declared void. The restitutionary claim was founded on the principle of unjust enrichment, which was distinct from contract.

An interesting aspect is that the majority (Lords Goff, Clyde and Hutton) based their decisions firmly on the established jurisprudence of the European Court. Although deliberating on a domestic statute which in some respects diverges from the Brussels Convention, they emphasised that schedule 4 to the 1982 Act should be construed uniformly with its European model. The majority saw their decision as a straightforward application of the European cases. A dissenting minority (Lords Nicholls and Mustill) thought that approach too simplistic.

They adopted a pragmatic approach and considered it would be convenient for the court dealing with the validity of a contract to also be able to deal with the consequences of nullity, such as a restitutionary claim. As they saw it, all such matters should be regarded as contractual in a broad sense.

It seems clear that there is scope for further debate. The instant case concerned a clear restitutionary claim where the nullity of the contract had already been decided. The claim was raised many years after the last payment had been made and was put solely on the basis of restitution.

But there may well be grey areas. Lord Goff left open, for example, the issue of whether a claim to recover money paid under a valid contract on the ground of failure of consideration might be classified as contractual and so within article 5(1), particularly in cases arising under the Brussels Convention.

A case recently decided by the Court of Appeal went the other way. In Agnew v LansforAkringbolagens AB, claims to avoid contracts of reinsurance on the ground of breaches of the duty of good faith properly characterised as non-contractual were held to be within article 5( l ).

The Court of Appeal said that as long as the proceedings were in a matter related to a contract, the obligation in question need not be contractual. Although that was a decision arising under the Lugano Convention rather than schedule 4, it would seem that it may now fall to be reconsidered. It is also important to remember that the European Court has yet to consider the status of a restitutionary claim. Although the Kleinwort Benson v Glasgow case was referred to it, the European Court declined jurisdiction because the issue arose under domestic, not European law.

The European Court would, of course, be free to come to its own conclusions.