Haugesund Kommune & Anor v Depfa ACS Bank & Anor

For the English conflict-of-laws rule governing a foreign corporation’s contractual capacity, capacity has an internationalist meaning. It includes the legal ability, under the corporation’s constitution as determined by its local law, to enter into the particular contract. The constitution may include relevant statutes and rules of law, not merely constitutive documents.

Money paid under a borrowing contract void for the borrower’s incapacity is recoverable at common law in restitution for total failure of consideration. A recipient cannot establish change of position merely by investing money which it understood it would have to repay, and then suffering the investment loss at its own risk.

Two Norwegian municipalities entered English-law zero-coupon swap agreements with Depfa ACS Bank. The agreements were loans for the purposes of section 50 of the Norwegian Local Government Act 1992. The municipalities invested the advances and suffered substantial losses.

Tomlinson J held that the municipalities lacked capacity to make the agreements, which were therefore void. He nevertheless awarded Depfa restitution of the advances with interest, and rejected defences based on public policy and change of position. He also held Wikborg Rein & Co liable to Depfa for negligent advice.

The municipalities appealed the restitution ruling. Wikborg Rein cross-appealed on validity. The central questions were whether Norwegian restrictions on municipal borrowing constituted incapacity for English conflict-of-laws purposes, and whether restitution should be reduced or defeated.

1. The appeal and cross-appeal were dismissed. Aikens LJ, with whom Pill LJ agreed, held that Dicey’s conflict rule required an internationalist understanding of a foreign corporation’s capacity. A corporation’s constitution includes the bundle of powers, duties and legal abilities conferred or limited by the law of its creation, including relevant legislation. The municipalities’ lack of substantive power under section 50 of the Norwegian Local Government Act 1992 was therefore incapacity for the rule’s purposes. Under the English law governing the swaps, that incapacity made the agreements void.

2. The Norwegian private-law rule by which a good-faith counterparty might enforce a contract following an invalid municipal resolution did not alter that characterisation. Once capacity was determined by Norwegian law, the contractual consequence of its absence fell to the putative applicable law, English law.

3. The court held that Sinclair v Brougham [1914] AC 398 no longer barred a personal restitutionary claim for money lent under an ultra vires borrowing contract. The majority in Westdeutsche Landesbank Girozentrale v Islington London BC [1996] AC 669 had departed from that rule. Depfa could therefore recover the advances as money paid for a consideration which had wholly failed.

4. A restitutionary claim may be excluded where recovery would circumvent the express provisions or clear statutory intention of relevant legislation. The municipalities, however, had established neither that section 50 intended to bar restitution nor any other basis for limiting recovery on public-policy grounds.

5. The change-of-position defence failed. Although the municipalities invested in good faith and would not have invested but for Depfa’s advances, they received the money knowing that it was to be repaid. They alone chose the investments and accepted their risk. The loss therefore did not make full restitution inequitable.

Etherton LJ would have allowed the cross-appeal on the capacity issue and remitted ostensible authority, but agreed that the municipalities had no defence to Depfa’s restitutionary claim.

• Court of Appeal (Civil Division): The municipalities’ appeal and Wikborg Rein’s cross-appeal were dismissed. The majority upheld the conclusion that the swaps were void and that Depfa was entitled to full restitution.
• Commercial Court: Tomlinson J, on 4 September 2009, held the swaps void for lack of capacity, awarded Depfa restitution of the advances with interest, and rejected change of position. By a further judgment of 1 October 2009, he rejected contributory negligence by Depfa and made consequential orders.