Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669

Westdeutsche Bank and Islington London Borough Council entered an interest-rate swap agreement under which the bank paid the council £2.5 million. After such local-authority swaps were held to be beyond councils' statutory powers, the agreement was void from the outset. The council repaid the principal with simple interest. The bank claimed compound interest, arguing that the council had held the payment on a resulting trust because the transaction lacked a valid legal basis. If a trust existed, equitable jurisdiction could support compound interest. The dispute focused on whether a recipient becomes a trustee immediately upon receiving money under a void contract, even before knowing the facts that make the transaction void.

Did the void swap automatically give rise to a resulting trust of the payment, entitling the bank to equitable compound interest, despite the council's initial lack of knowledge?

The House of Lords rejected the bank's proprietary claim and awarded only simple interest. Lord Browne-Wilkinson stated that a trust ordinarily depends on the conscience of the legal owner. When the council received the money, neither party knew that the swap was void, so its conscience was not then affected and it could not be a trustee. A resulting trust arises where an apparent gift is not intended, including a transfer made on trusts that fail, but the bank had intended the council to receive full beneficial ownership under the swap. Failure of the contractual purpose did not retrospectively create a trust from receipt. The decision left personal restitutionary recovery intact while denying proprietary priority.

A recipient does not ordinarily hold property on trust before becoming aware of the circumstances alleged to affect its conscience. The traditional resulting-trust categories turn on an absence of intended beneficial transfer, not simply on a payment being made under a contract later found void.

Westdeutsche is fundamental to debates about institutional and remedial resulting trusts. It limits proprietary restitution by refusing to impose an automatic trust merely because the legal basis for payment failed. The case also contains Lord Browne-Wilkinson's influential account of resulting trusts, later discussed in Air Jamaica Ltd v Charlton. English law has since developed the court's power to award compound interest as a personal remedy, so the interest aspect must be read with later authority. The trust reasoning remains essential when distinguishing personal restitution from proprietary relief.