Hazell v Hammersmith and Fulham London Borough Council and Others

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Keith of Kinkel,Lord Brandon of Oakbrook,Lord Templeman,Lord Griffiths,Lord Ackner
Judgment Date24 Jan 1991
Judgment citation (vLex)[1991] UKHL J0124-2

[1991] UKHL J0124-2

House of Lords

Lord Keith of Kinkel

Lord Brandon of Oakbrook

Lord Templeman

Lord Griffiths

Lord Ackner

Hazell
(Appellant)
and
Council of the London Borough of Hammersmith and Fulham and Others
(Respondents)
Hazell and Others
(Respondents)
and
Council of the London Borough of Hammersmith and Fulham
(Appellants)
(Conjoined Appeals)
Lord Keith of Kinkel

My Lords,

1

I have had the advantage of considering in draft the speech to be delivered by my noble and learned friend Lord Templeman. I agree with it, and for the reasons he gives would allow the appeal and restore the orders of the Divisional Court.

Lord Brandon of Oakbrook

My Lords,

2

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Templeman. I agree with it and for the reasons which he gives I would allow the appeal and make the orders proposed by him.

Lord Templeman

My Lords,

3

By the Local Government Act 1972, England was divided into local government areas consisting of counties, districts, London boroughs and parishes. The local authority charged with the administration of local government in a local government area consists of an elected council which "shall have all such functions as are vested in them by this Act or otherwise;" sections 2(1) and (2) and 14(1) and paragraph 1(2) of Schedule 2 of the Act of 1972. A local authority, although democratically elected and representative of the area, is not a sovereign body and can only do such things as are expressly or impliedly authorised by Parliament. The functions of a principal council, defined by section 270 of the Act of 1972 as a county, district, or London borough council, extend under many statutes to public health, housing, planning and highways and other environmental matters and to education, housing and social and welfare services including the care and protection of children, the sick and the elderly. The expenditure incurred by a local authority in the discharge of its functions is funded partly by grants from Parliament, derived from the taxpayer, partly by rates and community charges derived from local residents and partly by income lawfully generated by the council in the due performance of some of its functions, for example, rents from council houses. Authorised expenditure by a local authority may be short-term or long-term. The authority will require revenue to pay its employees periodically and revenue to finance the capital cost of a housing or property development which may cost millions of pounds and produce revenue for a century. The receipt of revenue never coincides with expenditure because grants and rates are received at intervals which do not coincide with outgoings. Moreover the burden of long-term expenditure is in fairness spread over future generations of taxpayers and ratepayers and not imposed entirely on those who pay when the expenditure is incurred. Accordingly Parliament has conferred on a local authority controlled power to borrow short-term and long-term.

4

The borrowing powers of a local authority are defined and controlled by the provisions of Part I of Schedule 13 of the Act of 1972 to which I must hereafter refer in detail. Those provisions limit the purpose and method of borrowing by a local authority and dictate internal accounting for repayment. A local authority which is lawfully borrowing may choose to borrow at a fixed or variable rate of interest. The advantages of a fixed interest rate are certainty and protection against increases in current interest rates from time to time. The disadvantage of a fixed interest is that no benefit can be derived from a fall in interest rates.

5

In exercise of their borrowing powers, the appellant Hammersmith and Fulham Borough Council ("the council") borrowed sums which on 31 March 1989 amounted to £390m. largely representing borrowings incurred to undertake capital projects over many years. Each borrowing had its own terms of repayment. The interest rate differed from one loan to another, some loans were at fixed rates of interest and some at variable rates of interest. The council when taking up a loan must have considered that its resources would be adequate to meet its obligations under the terms of the loan. No doubt has been cast on the legality of any of the council's borrowings. Each outstanding loan remains payable with interest according to its terms which cannot be altered without the consent of the lender.

6

From December 1983 onwards and principally between April 1987 and 23 February 1989 the council entered into numerous interest swap contracts. The council was in each contract anticipating a rise or fall in interest rates generally and if its anticipation was fulfilled would derive from the contract a profit which could then be employed, but was not bound to be employed, by the council in meeting the interest burden of its borrowings. The question is whether the council possessed power to enter into any swap contract.

7

To determine this question it is necessary to consider the statutory powers of local authorities and the nature and effect of the swap transactions which have been carried out by the council. These transactions are alleged by the appellant district auditor ("the auditor") to have been unlawful. Some of the transactions were carried out with the respondent banks ("the banks"). A decision that all the transactions were unlawful could have serious financial repercussions on the banks and other parties to unlawful transactions. The banks have therefore joined in these proceedings. The banks concede that the swap transactions carried out by the council between April 1987 and July 1988 were unlawful but contend that some of the transactions carried out after July 1988 were or may on investigation prove to have been lawful. All the transactions were held by the Divisional Court (Woolf L.J. and French J. [1990] 2 W.L.R. 17) to be unlawful. The Court of Appeal (Sir Stephen Brown P., Nicholls and Bingham L.JJ. [1990] 2 W.L.R. 1038) held that some of the transactions may have been incidental to the statutory functions of the council and therefore lawful.

8

The auditor appeals to this House against the decision of the Court of Appeal that some of the transactions entered into by the council could and may have been lawful. The council feel obliged to support the auditor and to argue that all the swap transactions entered into by the council were unlawful.

9

The evidence discloses that about 1981 there appeared in the world of international finance a new swap market comprising interest rate swaps, currency swaps and, recently, asset swaps. An illuminating article entitled Recent developments in the swap market by Miss G.M.S. Hammond in the Bank of England "Quarterly Review" of February 1987, explains that the swap market assists traders to solve financial problems arising out of variations in interest rates and currency exchange rates, different taxation regimes and rates of inflation and different creditworthiness. In the simplest case a bank which found it easy to raise fixed finance would swap its interest obligations with a company which could only borrow at variable rates but for good commercial reasons needed the certainty and security of fixed rates. In a more complicated case an American company creditworthy in the United States might build a ship in Italy for an English subsidiary claiming capital allowances and would require short-term and long-term borrowings and payments in Italian and British currency. A European trader creditworthy in his country might need to expend and borrow dollars. Through the intermediation of a bank the American company and the European trader could by swap transactions ensure that fluctuations in interest rates and exchange rates did not have disastrous consequences. The swap market enables a borrower to raise funds in the market to which the borrower has best access but to make interest and principal payments in its preferred form of currency. The swap market has provided a valuable method of carrying on international trade and finance. Swaps may involve speculation or may eliminate speculation. In most cases the advantage sought by a user of the swap market is the elimination of speculation and uncertainty.

10

The transactions in the swap market which are now impugned were not carried out in order to enable the council to borrow or to enable the council to choose to borrow at a fixed rate rather than at a variable rate or vice versa. The transactions were undertaken in the hope that the burden of interest payable in respect of borrowings by the council would be mitigated by profits from swap contracts whereby the council successfully forecast movements in interest rates. If the council swapped from a fixed interest to a variable interest the council gained if, after the swap, interest rates went down. The council lost if, after the swap, interest rates rose. Similarly, if the council swapped from variable interest to fixed interest the council gained if, after the swap, interest rates went up and lost if interest rates went down.

11

Swaps employed by the council and said by the banks to be available to all local authorities are lucidly and comprehensively described in the judgment of the Divisional Court and in particular in Appendix A to that judgment: [1990] 2 W.L.R. 17, 52. The simplest form is a swap contract described, at p. 52, as

"an agreement between two parties by which each agrees to pay the other on a specified date or dates an amount calculated by reference to the interest which would have accrued over a given period on the same notional principal sum assuming different rates of interest are payable in each case. For example, one rate may be fixed at 10 per cent. and the other rate may be equivalent to the six month London Interbank Offered Rate ('LIBOR'). If the LIBOR rate over the...

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