Haugesund Kommune & Anor v DEPFA ACS Bank

The court held that the so-called "zero coupon swap" transactions entered into by the two Norwegian municipalities were, as a matter of Norwegian law, loans within the meaning of section 50 of the Local Government Act 1992 and therefore outside the municipalities' substantive powers. The judge concluded that Wikborg Rein & Co.'s unqualified legal advice to Depfa that the municipalities had power to enter the transactions was negligent because it relied improperly on a brief Ministry circular without adequate independent analysis.

As a result, while the municipalities were entitled to declaratory relief that they were not bound by the swap contracts (their contention of lack of capacity), Depfa was entitled to restitution of the sums advanced on the alternative private law bases pleaded (mistake/failure or absence of consideration). The municipalities' change‑of‑position defence failed because they always knew the sums were repayable and assumed the investment risk. The court therefore directed that judgment should be entered for Depfa against the municipalities for the agreed sums or for damages to be assessed, and found Wikborg Rein in breach of duty to Depfa, leaving quantification and causation issues to be addressed subsequently.

Background and parties:

• The claimants were two Norwegian municipalities (Haugesund and Narvik). The defendant was Depfa ACS Bank, an Irish bank. The third party was Norwegian law firm Wikborg Rein & Co, engaged by Depfa to advise on municipal capacity.

Nature of the proceedings and relief sought:

• The municipalities sought an expedited declaratory judgment that they were not liable under ISDA-based “swap” transactions on the ground they lacked capacity under the Norwegian Local Government Act 1992 (section 50). Depfa counterclaimed in restitution (mistake; failure/absence of consideration) and, against Wikborg Rein, sued in contract and negligence for negligent advice.

Issues framed by the court:

1. Whether the swaps were loans within section 50 of the Local Government Act 1992 and therefore beyond municipal power;
2. Whether the municipalities (or their officers) had authority to enter into the transactions or subsequent amendments;
3. Whether Wikborg Rein’s advice to Depfa was negligent and caused Depfa loss;
4. Whether Depfa could recover in restitution (and whether any defence such as change of position or good faith precluded recovery).

Court’s reasoning (concise):

• The judge analysed the contract documents and Norwegian law authorities and expert evidence, concluding plainly that the agreements were loans: the one‑off upfront payments and the municipalities' continuing obligation to repay were characteristic of borrowing. Contextual factors relied on by Wikborg Rein (investment intent, matching maturities, expected repayment from investments) did not alter the character of the agreements.
• Wikborg Rein’s opinion was held to be negligent. The firm had relied on an abbreviated Ministry circular without adequate independent analysis of the basis for the Ministry’s view and had failed to warn Depfa of material doubts. The advice therefore fell below the standard of a reasonably competent Norwegian lawyer.
• On private law remedies, Depfa was entitled to restitution of the sums advanced. The municipalities’ change of position defence failed because they always knew the advances were repayable and undertook the investment risk themselves; therefore it would not be inequitable to require restitution.
• The judge addressed but did not finally determine questions about the role of the Norwegian good faith doctrine and differences between Norwegian public‑law competence and the English concept of capacity. He concluded that lack of substantive power under Norwegian law should be treated as going to capacity for the purposes of the English conflict rule, and that potential private‑law exceptions (good faith) do not rescind that characterisation.

Disposition: The court declared that the municipalities lacked the power to enter the loan agreements but nonetheless awarded Depfa restitution. The court found Wikborg Rein in breach of duty and liable to Depfa; quantification of loss, causation and any contributory negligence were left to be dealt with thereafter.

At first instance the court determined that the ISDA-documented zero‑coupon swap transactions were loans within the meaning of section 50 of the Norwegian Local Government Act 1992 and therefore outside the municipalities’ substantive powers. The municipalities are entitled to declaratory relief that they are not bound by the swap contracts, but Depfa succeeds on its restitutionary counterclaim and is entitled to recover the sums it advanced (judgment for Depfa against each municipality in the agreed sums or for damages to be assessed). Wikborg Rein’s legal advice was negligent and breached the duty of care owed to Depfa; Wikborg Rein is liable to Depfa, with quantification of damages, causation and any contributory negligence reserved for further consideration and directions.