Haugesund Kommune v Depfa ACS Bank
| Jurisdiction | England & Wales |
| Judge | Lord Justice Aikens,Lord Justice Etherton,Lord Justice Pill |
| Judgment Date | 27 May 2010 |
| Neutral Citation | [2010] EWCA Civ 579 |
| Docket Number | Case No: A3/2009/2307 & A3/2009/2146 |
| Court | Court of Appeal (Civil Division) |
| Date | 27 May 2010 |
[2010] EWCA Civ 579
Lord Justice Pill
Lord Justice Etherton
and
Lord Justice Aikens
Case No: A3/2009/2307 & A3/2009/2146
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION,
COMMERCIAL COURT
MR JUSTICE TOMLINSON
Case no 2008, Folio 1320
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Iain Milligan QC and Mr Julian Kenny (instructed by Macfarlanes LLP) for the Claimant
Mr David Railton QC, Mr Andrew Fulton and Mr Richard Power (instructed by Denton Wilde Sapte LLP) for the Defendant
Mr Gordon Pollock QC, Mr Gregory Mitchell QC and Mr Richard Brent (instructed by Reynolds Porter Chamberlain LLP) for the Part 20 Defendant
Hearing dates: 15 th, 16 th and 17 th February 2010
Synopsis of the case so far
History repeats itself, at least with variations. In the 1990s there was much litigation in the English courts arising from English local government authorities concluding "interest-rate swaps" contracts with banks. The contracts were disastrous for the local authorities and eventually district auditors questioned whether the local authorities had the power to conclude such transactions. The House of Lords held they did not in Hazell v Hammersmith LBC. 1 The fact that local authorities had entered into speculative transactions to make money caused a stir in some circles at the time. The resulting litigation also led to great developments in the English law of restitution, particularly at the hands of Lord Goff of Chieveley.
In the early years of this century a number of Norwegian local authorities entered into so-called "swaps" transactions, on the advice of a Norwegian financial adviser, with the aim of making money from investments in order to provide better local services or reduce taxes. These contracts went disastrously wrong and the episode has been regarded as somewhat of a scandal in Norway. The English courts have become involved in the aftermath. The present case gives rise to interesting and novel questions on the conflict of laws and the law of restitution.
This appeal from the judgment of Tomlinson J dated 4 September 2009 and his order of 1 October 2009 concerns so—called "zero coupon swaps agreements" between two particular Norwegian municipalities and an Irish bank, which is an indirect subsidiary of a German bank. I will refer to the two individual municipalities, who are the appellants, as "Haugesund" and "Narvik", and to them collectively as "the Kommunes". I will refer to the respondent bank as "Depfa".
The other party to the appeal is a firm of Norwegian lawyers, called Wikborg Rein & Co. It is both well-known and highly respected. I will refer to it as "WR". It advised Depfa on various aspects of the "swaps" contracts before they were concluded. For present purposes the key issue on which WR advised was whether the Kommunes had the legal power and authority to enter into the "swaps" contracts in the light of the terms of section 50 of the Norwegian Local Government Act 1992 ("the 1992 Act"), which deals with the purposes for which Norwegian local authorities can raise loans. (The text of section 50 is set out in the Appendix to this judgment.) WR advised Depfa that the proposed zero coupon "swaps" contracts were not "loans" within section 50 of the 1992 Act and that the Kommunes had the power and authority to enter into the agreements, which would therefore create valid and binding obligations on them.
The "swaps" contracts were arranged through a Norwegian financial adviser called Terra Fonds AS, later named Terra Securities ASA ("Terra"), which has since gone into insolvent liquidation. The contracts were concluded in June 2004 (with Haugesund) and September 2005 (with Narvik). Essentially, Depfa agreed to advance to the Kommunes a capital sum, which was equivalent to the net present value of income that each of the Kommunes expected to receive from certain sources 2 over an eight or twelve year period. Under the contracts Depfa advanced NOK 231,300,000 to Haugesund and NOK 190,000,000 to Narvik. Payment of those "Fixed Amounts" was the full extent of Depfa's liability in each case. Under each of the "swaps" contracts the Kommunes were obliged to make fixed quarterly payments over the period of the agreement. The payments consisted mainly of interest but included a small amount of amortisation. Then at the end of the fixed period of the agreement, the Kommunes had to make a "bullet" repayment, which comprised the outstanding interest and principal. Depfa's payment and the Kommunes' quarterly and "bullet" repayments were respectively described in the contracts as the "first" and "second" "Fixed Amount". The agreements were called "zero coupon swaps agreements" because Depfa paid no interest, so its "coupon" was zero.
The Kommunes, upon the advice of Terra, invested the sums advanced by Depfa in financial instruments. The investments proved disastrous. Eventually, in January 2008, the resolutions of the Kommunes to make the investments were annulled by superior Norwegian administrative authorities and, effectively, the Kommunes were ordered to sell off the investments, which they did at a considerable loss. Haugesund's loss on its sale was about NOK 125 million; Narvik's loss was about NOK 142 million. At current exchange rates the combined losses of the Kommunes on their investments total about £26.7 million. Shortly after the Kommunes were directed to sell the investments, the Norwegian Ministry of Justice published its opinion that "swaps" such as the contracts the Kommunes had concluded did constitute loans within section 50 of the 1992 Act.
It will be immediately obvious that none of the parties involved in this débacle has anything to do with England and Wales. But the terms of the "swaps" contracts concluded between the Kommunes and Depfa contained English law and English jurisdiction clauses. The Kommunes invoked the jurisdiction clause in the agreements and brought proceedings in the Commercial Court for declarations of non-liability to Depfa on the "swaps" contracts, alleging that they had been concluded ultra vires the powers of the Kommunes by reason of the terms of section 50 of the 1992 Act, with the consequence that the contracts were void. Before the judge, it was common ground that the issue of the "capacity" or "power" of the Kommunes to conclude the "swaps" contracts in the light of the provisions of the1992 Act, especially section 50, involved questions of Norwegian law, as well as English law. It was (and is) agreed that all questions of the actual authority 3 of officers of the Kommunes to conclude the contracts are governed by Norwegian law.
Depfa counterclaimed, alleging that the "swaps" contracts were valid and enforceable. But if they were not, then Depfa claimed in restitution for the return of the sums advanced to the Kommunes. It is common ground that the restitution counterclaims are governed by English law.
Depfa joined WR as a Third Party to the litigation. WR did not contest the jurisdiction of the English court. Depfa claimed damages against WR for any losses it suffered as a result of what it claimed was WR's negligent advice in relation to the capacity or power of the Kommunes to enter the "swaps" contracts. Although that claim is governed by Norwegian law, it was agreed before the judge that the relevant Norwegian law is no different from that of England and Wales, save that Depfa could only bring a claim for breach of a contractual duty to give careful advice. There is no Norwegian equivalent to a parallel tortious duty to take care, at least not on the facts of this case.
The trial on liability was expedited and took place before Tomlinson J over 11 days in April and May 2009. The judge heard evidence from witnesses of fact and also three experts on Norwegian law. He handed down his reserved judgment on 4 September 2009.
The relevant conclusions of Tomlinson J in his judgment of 4 September 2009 are: (1) the "swaps" contracts constituted loans within the meaning of section 50 of the 1992 Act. 4 (2) The effect of section 50 of the 1992 Act was that the Kommunes lacked the substantive power under Norwegian law to enter into the "swaps" contracts. That lack of substantive power was to be characterised, in English legal terminology, as a lack of capacity to conclude the "swaps" contracts. 5 (3) Accordingly, the "swaps" contracts were void according to their putative applicable law, viz. English law. 6 (4) The "swaps" contracts were also void for want of authority on the part of the individuals of the Kommunes who entered into the contracts. 7 (5) Depfa had not taken the risk that the "swap" contracts might be void; instead Depfa had relied on the advice of WR. 8 (6) Therefore, the Kommunes were entitled to declarations that the "swaps" contracts were void. 9 (7) However, this was, as the judge put it, a Pyrrhic victory, because Depfa was entitled to recover, in restitution, the full amount of the principal sums that had been advanced by Depfa under the "swaps" contracts, plus interest. 10 (8) The Kommunes could not rely on a defence of "change of position", based on their bona fide investment of the sums advanced under the "swaps" contracts and the losses suffered on those investments by the adverse turn in the markets. 11 (9) The Kommunes were therefore legally obliged to make restitution in full of the sums that they had received from Depfa, although they...
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