Hazell v Hammersmith and Fulham London Borough Council and Others
| Jurisdiction | England & Wales |
| Judge | THE PRESIDENT |
| Judgment Date | 22 February 1990 |
| Judgment citation (vLex) | [1990] EWCA Civ J0222-3 |
| Docket Number | 90/0148 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 February 1990 |
[1990] EWCA Civ J0222-3
The President (Sir Stephen Brown)
Lord Justice Nicholls and
Lord Justice Bingham
90/0148
No. 1464/89
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(DIVISIONAL COURT)
CROWN OFFICE LIST
Royal Courts of Justice
MR GORDON POLLOCK, Q.C., MR RHODRI DAVIES and MR ALAN GRIFFITHS, instructed by Messrs Clifford Chance, appeared for the First, Second, Third and Fourth Appellants (Respondents).
MR NICHOLAS CHAMBERS, Q.C. and MISS CATHERINE OTTON GOULDER, instructed by Messrs Linklaters & Paines, appeared for the Fifth Appellant (Respondent).
MR JOHN HOWELL, instructed by A.A. Child Esq., Solicitor to the Audit Commission, appeared for the First Respondent (Applicant).
MR ANTHONY SCRIVENER, Q.C. and MISS CATHERINE NEWMAN, instructed by Messrs Herbert Smith, appeared for the Second Respondent (First Respondent).
This is the judgment of the Court. It is given on an appeal against a decision of the Queen's Bench Divisional Court (Woolf L.J. and French J.) given on 1st November 1989: [1990] 2 W.L.R. 17. On the application of Mr Hazell ("the Auditor") under section 19(1) of the Local Government Finance Act 1982, the Divisional Court made a declaration "that the items of account appearing within the Capital Markets Fund Account of the Council of the London Borough of Hammersmith and Fulham for the financial years beginning on 1st April 1987 and 1st April 1988 are contrary to law" and ordered that the accounts of that Council for those years be rectified. That order is not challenged on appeal, and was not opposed below, by the Council of the London Borough of Hammersmith and Fulham ("the Hammersmith Council"), which was (as Order 98 rule 2(2) of the Rules of the Supreme Court requires) the respondent to the Auditor's notice of originating motion. The resistance to the Auditor's application, below and on appeal, has been mounted by the other respondents, all of them banks which (among others) entered into transactions with the Hammersmith Council (or, it may be, the Corporation of the London Borough of Hammersmith and Fulham). Before this court Barclays Bank PLC ("Barclays") have been represented by Mr Nicholas Chambers Q.C., the other appellant banks ("the Banks") by Mr Gordon Pollock Q.C. Save on one point the Banks and Barclays have substantially made common cause.
The joinder of the Banks and Barclays as respondents to the Auditor's application against the Hammersmith Council was on their own application. They feared that if the items in the accounts of the Hammersmith Council to which the Auditor objected were declared to be contrary to law, this would or might prejudice their right to enforce a number of outstanding contracts. They accordingly applied to be joined in order to defend their commercial interests, and the application was granted.
Before the hearing of the Auditor's application by the Divisional Court an interlocutory order was made on 21st September 1989 that certain issues only be heard in the first instance and that the remaining issues be deferred. The issues ordered to be heard were:
"(1A) Whether transactions within the eight categories referred to in paragraph 4 of the affidavit sworn by the [Auditor] herein on 30th May 1989 are capable of being within the powers conferred on local authorities by Parliament:
(IB) If so, whether transactions within all or any of those categories were in fact entered into by the [Hammersmith Council] in a proper exercise of those powers;
(2) Whether the transactions were not such that a reasonable authority could have engaged in organised as the [Hammersmith Council] was [sic];
(3) Whether the transactions were authorised properly or at all by the [Hammersmith Council];
(4) Whether the Capital Markets Fund was validly established or maintained by the [Hammersmith Council]."
The issues ordered to be deferred related (a) to the enforceability of contracts by the Banks or Barclays if the Auditor was wrong on issue (1A) but right on any other issue and (b) if the Auditor was right on any issue, to the restitutionary rights of the respective contracting parties.
The Divisional Court answered issue (1A) in the Auditor's favour. All parties before us accepted that this answer, if correct, renders unenforceable any outstanding claim by the Banks and Barclays against the Hammersmith Council and must, since issue (1A) raises an issue of pure principle, preclude successful claims on similar facts by any other bank against the Hammersmith Council or by any bank against any other local authority. It seems clear on the evidence before us that this result would cause the banks losses running into many millions of pounds.
Having decided issue (1A) in the Auditor's favour, it was strictly unnecessary for the Divisional Court to decide the other issues, but they helpfully expressed their views on these issues in case they were wrong on issue (1A). Making the assumption (contrary to their decision) that transactions of the kind in question might in principle be lawfully entered into by a local authority, the Divisional Court were broadly of opinion that issues (IB) to (4) inclusive should also be decided in the Auditor's favour, although they qualified that opinion in respect of the period up to March 1987 and after August 1988. Even on the assumption stated the Divisional Court were of opinion that the Hammersmith Council's capital market activities between those dates could not be justified.
The items of account which the Auditor challenges relate to what have for convenience been generically described as interest rate swaps, but the genus comprises financial transactions more specifically called interest rate swaps, interest rate swap options, interest rate caps, interest rate floors, interest rate collars, forward rate agreements, gilt options and cash options. In Appendix A to their judgment the Divisional Court have given a clear and succinct explanation of these transactions which has not been criticised and which therefore we gratefully adopt and need not repeat. But it is important to see these transactions in context.
The contract for the loan of money is one of the oldest known to the law and it is in essence very simple. A makes money available to B for a period in consideration of B's covenant to repay the money during or at the end of the period and to pay interest on the sum outstanding until repayment. Like all commercial transactions this is not free of risk, the most obvious being that B will be unwilling or unable to repay. But even if B's financial integrity and credit are unimpeachable, risk of a less obvious kind remains. If the rate of interest is fixed and market rates rise over the period of the loan, the contract, although advantageous to B, leaves A out of his money and earning a reward less than it would command in the market. Conversely, if rates fall the contract benefits A, but results in B paying more for the use of A's money than he would if he contracted afresh. If the contractual rate of interest is expressed to be variable it may be assumed that the rate payable will follow the market, perhaps subject to some time lag, but risk is not thereby eliminated. If interest rates fall over the period of the loan, A will earn less than he expected and may have relied upon. If interest rates rise, B may find the burden of repayment greater than he expected or budgeted for, and may in an extreme case find that the project for which he borrowed the money is turned from profit into loss by the increased cost of borrowing. In a genuinely commercial context, where the lessening of risk and uncertainty will almost always be desirable, it is understandable that both A and B will seek for their own differing reasons to protect themselves against changes in the market rate of interest which might prove prejudicial to their respective interests.
If B has borrowed at a fixed rate for a term and market rates have fallen below that fixed rate, his most obvious remedy is of course to borrow at the lower market rate and use the proceeds of the loan to repay A. But the fall in the market which makes it advantageous for B to repay A makes it correspondingly disadvantageous for A at that time to receive premature repayment. So, subject always to the terms of the contract, A will attempt to ensure that the price payable by B on premature redemption so far as possible compensates A for the loss he will necessarily suffer on re-lending in the market at a less favourable rate. Once the fall has occurred, therefore, it may not be open to B simply to replace his existing borrowing with a new loan at a lower rate of interest without significant expense. The desirability from B's point of view of protecting himself in advance is obvious.
To meet the legitimate concerns of parties such as A and B a new market has grown up over the last decade, trading in interest rate swaps and the other related transactions we have mentioned. The volume of trade has been enormous and the range of institutions participating in the market diverse. We do not think it useful or necessary to retail examples of situations in which these transactions may for legitimate commercial reasons be entered into, although many notional examples have been elaborated for our consideration. It suffices to say, without at this stage differentiating between the different types of transaction or different classes of participant, that these...
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