Haugesund Kommune & Anor v DEPFA ACS Bank

A transaction is a loan where one party receives money and assumes an obligation to repay it, even if the transaction is documented as a swap and the amount advanced is calculated by reference to future revenue. The intended use of the money, the expected source of repayment, matching maturities and the perceived risk of an investment do not alter that characterisation where the borrower remains unconditionally liable to repay. A municipality’s lack of substantive power to borrow may amount to lack of capacity, although private-law rules may preserve enforceability against a third party. Restitution is available for money paid under invalid loan agreements, and change of position will not assist recipients who knowingly assumed the investment risk and always understood that the money had to be repaid.

Two Norwegian municipalities entered into English-law zero-coupon swap agreements with an Irish bank. The bank advanced substantial sums, calculated by reference to expected municipal revenues. The municipalities invested the proceeds in financial products which suffered heavy losses and later contended that the transactions were prohibited loans under section 50 of the Local Government Act 1992.

The bank counterclaimed in restitution and claimed damages from its Norwegian legal advisers, who had advised that the municipalities had power and authority to enter into the transactions. The principal issues were whether the swaps were loans, whether the municipalities had capacity to contract, whether the advisers were negligent, and whether the municipalities had a change-of-position defence.

1. Characterisation. The swaps were loans within section 50 of the Local Government Act 1992. The municipalities received money and undertook an unconditional obligation to repay it with interest. The agreements contained no restriction on the use of the money, no requirement that repayment come from any particular revenue stream, and no security or assignment of future revenues. The economic description of the arrangements as a sale or restructuring of future income could not alter their legal character.
2. The intended investment, its maturity, its expected return, and the municipalities’ expectation that it would fund repayment were irrelevant to the bank’s contractual rights. The municipalities had simply borrowed money for investment in financial markets, a purpose not permitted by section 50.
3. Capacity and enforceability. The municipalities lacked substantive power to enter into the prohibited loans. In English legal terminology that amounted to lack of capacity. Norwegian private law might, in some circumstances, make a contract enforceable against a third party acting in good faith, but that was an issue of enforceability governed by the English proper law of the agreements, not an issue of capacity governed by Norwegian law.
4. Negligence. Wikborg Rein’s advice was negligent. Its lawyer relied on a Ministry circular without independently addressing whether the transactions were loans and reached a conclusion which no reasonably competent Norwegian lawyer exercising proper care could have reached. Depfa relied materially on the advice and would not have proceeded had a material risk been identified.
5. Restitution. Depfa was entitled in principle to restitution for its advances. The municipalities’ investment losses were not a change of position. They always knew that the advances had to be repaid and deliberately assumed the risk that their investments would be insufficient. The reasoning in Goss v Chilcott was applicable.
6. The municipalities were entitled to declarations that they were not bound by the swaps, but this was a Pyrrhic victory. There would be judgment for Depfa against each municipality for the agreed amount, or damages to be assessed if agreement could not be reached. The form of order concerning Wikborg Rein, and questions of causation, contributory negligence and quantum, were reserved.

First-instance judgment in the Commercial Court. No appellate history was stated in the judgment.