Westdeutsche Landesbank Girozentrale v Islington London Boro...

Facts

• Westdeutsche Landesbank Girozentrale (the bank) entered into interest rate swap agreements with Islington London Borough Council (the council).
• The contracts were later held to be void ab initio (from the beginning).
• The bank made payments to the council based on the mistaken belief that valid contracts existed.
• Upon learning the contracts were void, the bank sought the return of its payments, claiming the council held them on resulting trust.
• The council argued it was not a trustee and had no obligation to return the payments under trust principles.
• The dispute centered on whether a resulting trust could arise when payments were made under contracts subsequently found void.

Issues

1. Whether payments made under a void contract give rise to a resulting trust in favour of the payer.
2. Whether the intention behind payments made to discharge contractual obligations rebuts the presumption of a resulting trust.
3. Whether an automatic resulting trust arises where an express trust was never created due to a void contract.
4. Whether a recipient can be a trustee if they are unaware of the facts giving rise to trust obligations.

Decision

• The House of Lords held that payments made with the intention of fulfilling contractual obligations, even if the contract is later found void, do not give rise to a presumed resulting trust.
• Automatic resulting trusts only arise if there is a failure of an express trust; a void contract does not create such a situation.
• The council did not hold the money on trust for the bank, as there was neither the requisite intention nor a failed express trust.
• A recipient cannot be considered a trustee if ignorant of the facts that would affect their conscience, and thus, equity will not impose a trust in such circumstances.
• The court rejected the extension of trust principles to cover cases of unjust enrichment alone.

Legal Principles

• Payments made to discharge perceived contractual obligations rebut the presumption of an intention to create a resulting trust.
• Automatic resulting trusts arise on the failure of express trusts, not merely when a contract is void.
• Equity operates on the conscience of the legal owner; a trust requires the recipient’s knowledge of the circumstances creating trust obligations.
• Resulting trusts are not founded on unjust enrichment; trust principles should not be extended to all mistaken payments.
• Chase Manhattan Bank v Israel-British Bank should be distinguished; a resulting trust may only arise when the recipient is aware of the mistake.

Conclusion

The House of Lords clarified that mistaken payments made under contracts later held void do not automatically create a resulting trust; instead, the creation of a trust depends on the payer’s intention and the recipient’s knowledge. This decision established critical limits on the operation of resulting trusts and reinforced the necessity of affected conscience and proper trust formation in commercial transactions.