Morgan Guaranty Trust Company v Lothian Regional Council
| Jurisdiction | Scotland |
| Judgment Date | 28 October 1993 |
| Date | 28 October 1993 |
| Court | Court of Session (Outer House) |
Outer House of the Court of Session
Before Lord Penrose
Scots law - local authority - swap agreements ultra vires - payments made on an error of law not recoverable
"Swap" agreements were ultra vires a Scottish local authority and sums which would have been owed to financiers by the authority had the contract been valid were not recoverable, because payment had been made on an error of law.
Lord Penrose, sitting in the Outer House of the Court of Session, so held, dismissing as irrelevant an action of payment brought by the Morgan Guaranty Trust Company of New York against Lothian Regional Council.
Mr William Nimmo-Smith, QC, for the pursuers; Mr Neil Davidson, QC, for the defenders.
LORD PENROSE said that the dispute raised for the first time in Scotland the question of the legality of "swap" agreements made between financial institutions and local authorities. The pursuers averred that the transactions were ultra vires the council and were void. There had been a net excess of payments to the council, and they claimed repayment of that sum.
The council maintained that the arrangements were valid, and, alternatively, that if the contracts were void, repetition was not a remedy available to the pursuers.
The particular form of transaction in issue was that described in Hazell v Hammersmith & Fulham London Borough CouncilELR ([1990] 2 QB 697, 739-741). InHazellELR, it had been held by the House of Lords ([1992] AC 1) that such agreements were ultra vires.
However, the defenders sought to distinguish the two bodies of English and Scottish legislation. Subsections 69(1) and (2) of the Local Government (Scotland) Act 1975 were in identical terms to subsections 111(1) and (2) of the Local Government Act 1972, which had been considered in Hazell.
The parallel was such that of necessity the same decision fell to be arrived at on an analysis of the Scottish Act as had been arrived at in England. However, the defenders founded upon differences in the detailed schedules of the supporting legislation, and in particular section 16 and Schedule 3 of the Local Government (Scotland) Act 1975.
Swap arrangements used the language of borrowing but did not in fact involve borrowing to any extent except in so far as it was instantly set off to an equivalent extent by cross-lending.
In his Lordship's opinion, none of the provisions of Schedule 3 could support their regularity. Paragraph 1 of the Schedule either identified...
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