Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669

Key point

Payments made with the intention to discharge contractual obligations rebuts a presumed resulting trust even if the contract it was paid under was void
Birks’ theory of resulting trusts was rejected

D (Islington LBC) entered into interest rate swaps with the bank C
The interest rate swap contract was void in fact
C argues that the money it paid to D under the contract is held by D for it under resulting trust

C’s claim rejected, the money was not held for C under presumed resulting trust (PRT)

Normative argument against the imposition of PRT

The effect of creation of equitable interest in money received under void contract is that the money is not available for creditors
The proprietary interest is enforceable against any recipient of the property other than bona fide purchaser
Wise judges have warned against the wholesale importation into commercial law of equitable principles inconsistent with certainty and speed
If the bank’s arguments are right businessmen can find that assets which apparently belong to one person in fact belong to another, that there are off balance sheet liabilities he cannot be aware of

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Doctrinal argument against the imposition of PRT

Equity operates on the conscience of the owner of legal interest, a person cannot be a trustee if and so long as he is ignorant of the facts alleged to affect his conscience
Once a trust is established the beneficiary has in equity a proprietary interest in the trust property which will be enforceable against any subsequent holder except a bona fide purchaser
- There are cases where the trustee of a resulting trust is unaware that property has been put in his name; Vinogradoff
- But they became aware by the time action was brought and their conscience was affected
- In the present case by the time the LA knew the contract was void their bank account had went into overdraft and the money was thus untraceable
The argument that W retained equitable interest is fallacious as legal title carries all rights and equitable interest was thus non-existent when W held the legal title

On Automatic Resulting Trusts

Where A transfers property to B on express trusts but the trusts declared do not exhaust the whole BI, the resulting trust is not imposed by law against the intentions of the trustee but gives effect to his presumed intention
Megarry J in Vandervell (No. 2) was wrong
If the settlor has expressly or by necessary implication abandoned any beneficial interest in the trust property there is no resulting trust, and the undisposed or equitable interest goes bona vacantia: pursuant to West Sussex
There was no transfer of money to D on express trust, thus no ART could arise

His Lordship considered and rejected Birks’ theory of resulting trusts
Professor Birks has suggested that based on restitutionary principles the definition of RT should be extended to cover a perceived gap in the law of ‘subtractive unjust enrichment’ so as to give a plaintiff a proprietary remedy when he has transferred under a mistake or under a contract that fails
The search for a perceived need to strengthen the remedies of a plaintiff claiming in restitution involves, to my mind, a distortion of trust principles
1. The argument elides rights in property into rights in ‘the value transferred’, trust can only arise where there is defined trust property
2. The argument assumes that the recipient is a trustee from the date when receiving the property when he could not have known that the contract will be frustrated or void for mistake – this is incompatible with the basic premise of trust law that the conscience of the trustee is affected
3. A arbitrary distinction between frustration and breach. Birks considers that a resulting trust does not arise after breach so as to preserve the rights of creditors in the insolvency of a recipient

The judgment in Chase Manhattan Bank v Israel-British Bank [1981] Ch 105 is based on a concept of retaining an equitable property in money where, prior to the payment to the recipient bank, there was no existing equitable interest
I cannot understand how the recipient’s “conscience” can be affected at a time when he is not aware of any mistake
Although I do not accept the reasoning of Goulding J, Chase Manhattan may well have been rightly decided on the basis that the bank became aware of the mistake within two days of the receipt of money
Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust
In the current case the money was not recoverable via constructive trust because once D had realised that the transaction was void, C’s money had ceased to be identifiable