Kleinwort Benson Ltd v Birmingham City Council [1996]

In Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733, the Court of Appeal dealt with issues related to unjust enrichment and rejected a defence of "passing on" when concerning the extent to which enrichment of the defendant must be at the expense of the claimant.

The facts of the case involved Kleinwort Benson, a bank, making payments to Birmingham City Council under interest rate swap agreements. Later, these agreements were declared to be ultra vires and void by the House of Lords. The council argued that it did not have to repay the money because the bank had allegedly passed on its losses through hedging transactions long before.

The Court of Appeal rejected the passing on defence, stating that there was no analogy to compensating for loss that could be avoided or passed on. The court provided two main reasons for rejecting the passing on defence. First, it noted that the payments received by the bank under the hedge contract were not causally connected to the payments made under the swap contract. Second, the claims in unjust enrichment were not subject to a restriction on the defendant’s gain that it must correspond with the claimant's loss.

Evans LJ, in delivering the leading judgment, outlined the problems associated with a passing on defence. Saville LJ delivered the second judgment, emphasising that the obligation to return the money in unjust enrichment cases is not based on any loss the payer may have sustained but on the simple ground that it is unjust. The phrase "at the expense of" in unjust enrichment describes the need for the payer to show that their money was used to pay the payee, without importing concepts of loss or damage.

Morritt LJ concurred, highlighting that the words "at the expense of" point to the requirement that the immediate source of the unjust enrichment must be the plaintiff. The suggested defence of passing on would involve a different concept, namely a reduction in the net worth of the plaintiff, which was not in line with the principles of unjust enrichment.
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