Haugesund Kommune v Depfa ACS Bank
| Jurisdiction | England & Wales |
| Judge | THE HON. MR JUSTICE TOMLINSON,The Hon. Mr Justice Tomlinson,MR JUSTICE TOMLINSON,Mr Justice Tomlinson |
| Judgment Date | 12 February 2010 |
| Neutral Citation | [2009] EWHC 2227 (Comm),[2010] EWHC 227 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 12 February 2010 |
| Docket Number | Case No: 2008 Folio 1320 |
[2009] EWHC 2227 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Before: The Hon. Mr Justice Tomlinson
Case No: 2008 Folio 1320
Iain Milligan QC and Sean Snook (instructed by Messrs Macfarlanes) for the Claimants
David Railton QC and Andrew Fulton (instructed by Messrs Denton Wilde Sapte) for the Defendant
Gregory Mitchell QC and Richard Brent (instructed by Messrs Reynolds Porter Chamberlain) for the Third Party
Hearing dates: 22, 23, 24, 27, 28, 29 and 30 April, 1, 5, 7 and 8 May 2009
Approved Judgment
The Hon. Mr Justice Tomlinson:
Introduction
The Claimants in this action are Norwegian municipalities. The municipalities are at the bottom of the three-tier system of government in Norway, beneath the central government and the nineteen county authorities. There are 430 municipalities. They are autonomous bodies although their powers are limited by legislation. They are led by directly elected assemblies and have their own administrative officers. I shall refer to the Claimants as “Haugesund” and “Narvik” respectively.
The Defendant is an Irish bank, a subsidiary of Depfa Bank plc, which is owned by a German company. It specialises in public sector lending outside Germany. I shall refer to it as “Depfa”.
To English eyes the litigation has some familiar features. Haugesund and Narvik were advanced money by Depfa pursuant to contracts which were called “swaps”. Having invested imprudently the money advanced, sustaining massive losses, the municipalities deny their liability to the bank to repay the advances, relying upon their alleged lack of capacity ever to have entered into the transactions with Depfa in the first place. They rely upon a provision in the Norwegian Local Government Act 1992 which restricts their borrowing powers.
The transactions were the brainchild of Norwegian financial advisers Terra Fonds AS, subsequently Terra Securities ASA. I shall refer to this company as “Terra”. Haugesund and Narvik acted on the advice of Terra, both as to the advances from or “swaps” with Depfa and as to the disastrous investments made with the proceeds thereof. In November 2007 the financial supervisory authority of Norway, Kredittilsynet, warned Terra that the revocation of its licence to provide financial services was under consideration on the grounds of its systematic violation of its duties. Terra's response was to petition for bankruptcy the following day. It is now in insolvent liquidation.
The Third Party in this litigation is Wikborg Rein & Co. Wikborg Rein is a well-known and highly respected firm of lawyers in Norway. Before entering into the “swap” agreements with Haugesund and Narvik Depfa sought the advice of Wikborg Rein on the question whether the municipalities had the power and authority to enter into them, which transactions Depfa pointed out were in fact loans. Wikborg Rein advised in unequivocal and unqualified terms that for the purposes of the Norwegian legislation the “swaps” were not in fact to be regarded as loans and that the municipalities had full power and authority to enter into and perform the agreements. In the event that it cannot recover, or recover in full, from the municipalities Depfa claims damages against Wikborg Rein for breach of contract and negligence.
Haugesund and Narvik are not the only Norwegian municipalities to have entered into transactions such as I have described in reliance upon advice from Terra. I am told that the episode is in Norway regarded as something of a national scandal. Litigation is apparently pending in Norway. Although the “swap” agreements are governed by English law, the approach of English law is to regard the question whether the municipalities had capacity to enter into the contracts as governed by the law of Norway, the law pursuant to which the municipalities are constituted. The liability of Wikborg Rein to Depfa is also governed by Norwegian law, although it is no longer suggested that in the relevant respects the law of Norway is any different from the law of England. The duties owed by Wikborg Rein to Depfa are the same as the duties which English law would in such circumstances regard as undertaken. However the impugned advice of Wikborg Rein relates to the capacity of the municipalities, or more immediately to the application of the Norwegian Local Government Act, both questions of Norwegian law. In these circumstances it is I think unfortunate that the English court should have to resolve this litigation before there is available from the Norwegian courts guidance on the central issue of Norwegian law, underlying as it does the Terra scheme which has resulted in widespread losses for municipalities in Norway. However the “swaps” are, as I have already mentioned, by express choice of the parties governed by English law and provide for the jurisdiction of the English court. Haugesund and Narvik have invoked the jurisdiction of the court, seeking on an expedited basis declaratory relief as to their non-liability to Depfa. Depfa for its part counterclaims in restitution in the event that the “swaps” are unenforceable against the municipalities. That counterclaim is governed by English law and Depfa is entitled to ask the English court to decide it, just as the municipalities are entitled to ask the English court for a declaration of non-liability. Wikborg Rein has not contested the jurisdiction of the English court and indeed could not successfully have attempted so to do. All parties invite the English court to resolve the disputes of which it is seised. It was only very shortly before the trial began that I became aware that Narvik is a defendant in Norway to a claim brought by a Norwegian bank arising out of a similar “swap” transaction. It is the contention of Mr Iain Milligan QC, for the municipalities, that the English court lacks the power to defer determination of the dispute until after the central issue has been considered by a Norwegian court. I do not need to decide whether that is so. However much I regret the lack of guidance from the Norwegian court, it quite quickly became plain to me that this court must now proceed to resolve the disputes of which it is properly seised and for the determination of which the parties had made expensive preparation.
Background
Many of the Norwegian municipalities have available to them in addition to locally raised taxes a source of revenue derived from the presence of power generating plants within the municipality. In some cases this is simply an entitlement to purchase electricity at a concessionary price and then to resell it at market price. In the case of Haugesund it is, relevantly, dividend and interest revenue which it derives from its shareholding in the local generating company Haugaland Kraft AS. In the case of Narvik it is, relevantly, a property tax imposed on power stations within the municipality. The basis for property taxation of power stations is the market value of the station, calculated according to a formula which has regard to a rolling average of the last five years' sales revenue minus operating costs. Norwegian municipalities enjoy a good credit rating.
It would seem that in 2001 Terra proposed to the municipality of Vik that it could increase its income by borrowing, at low cost, reflecting its good credit risk, the present value of its expected revenue from the resale of concessionary electricity and investing the proceeds in financial markets at a higher rate of return. The repayment schedule would reflect the expected revenues from the resale of electricity. No details are available of this transaction, except that it resulted in a “swap” agreement between DnB Markets, a Norwegian bank, and Vik and the consequent investment of funds by Vik in the financial markets. However it seems that the “interest rate swap” must have been a “zero coupon swap” whereunder the sole obligation of the bank was to pay to Vik the discounted present value of Vik's expected revenue from the resale of electricity over the next ten years, with the liability of the bank to pay interest reduced to zero.
In Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669 Lord Goff explained how an interest rate swap works and how it can become a form of borrowing. At page 680 he said this:
“Under such a transaction, one party (the fixed rate payer) agrees to pay the other over a certain period interest at a fixed rate on a notional capital sum; and the other party (the floating rate payer) agrees to pay the former over the same period interest on the same notional sum at a market rate determined in accordance with a certain formula. Interest rate swaps can fulfil many purposes, ranging from pure speculation to more useful purposes such as the hedging of liabilities. They are in law wagers, but they are not void as such because they are excluded from the regime of the Gaming Acts by section 63 of the Financial Services Act 1986.
One form of interest rate swap involves what is called an upfront payment, i.e. a capital sum paid by one party to the other, which will be balanced by an adjustment of the parties' respective liabilities. Thus, as in the present case, the fixed rate payer may make an upfront payment to the floating rate payer, and in consequence the rate of interest payment by the fixed rate payer is reduced to a rate lower than the rate which would otherwise have been payable by him. The practical effect is to achieve a form...
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