Haugesund Kommune v Depfa ACS Bank

The Court of Appeal dismissed the appeals and cross-appeals. The court applied the English conflict of laws rule as stated in Dicey, Morris & Collins (Rule 162) and held that the question whether a Norwegian municipality had the substantive power to enter a particular transaction was governed by Norwegian law; if Norwegian law showed a lack of substantive power that lack could properly be characterised, for the purposes of English conflict rules, as a lack of capacity. Because the judge was entitled to find that section 50 of the Norwegian Local Government Act 1992 restricted the Kommunes' powers such that the zero-coupon swaps were loans outside their substantive power, the swaps were void under their putative applicable law (English law). The court held that Depfa was entitled to restitution of the sums advanced, subject to ordinary restitutionary defences, and rejected the Kommunes' defences based on public policy and change of position.

Key legal principles: (1) Dicey Rule 162 requires examination of the corporate constitution under the law of the place of the corporation and that analysis may treat a foreign statute restricting powers as going to capacity for conflict purposes; (2) Westdeutsche (WLG) departed from Sinclair v Brougham in permitting personal restitutionary claims for money advanced under void borrowing contracts; (3) the defence of change of position is available but will fail where the recipient received the money knowing it would have to be repaid and voluntarily assumed the investment risk.

Background and parties. Two Norwegian municipalities (Haugesund and Narvik) entered into so-called zero coupon swaps with Depfa ACS Bank, an Irish bank, advised by Terra and with legal advice to Depfa from Wikborg Rein & Co (WR). The swaps involved Depfa advancing large capital sums which the Kommunes invested; the investments later lost substantial value. The contracts contained English law and jurisdiction clauses and the Kommunes sued in England for declarations they were not liable because the transactions were ultra vires under section 50 of the Norwegian Local Government Act 1992.

Procedural posture. The trial on liability was before Tomlinson J in the Commercial Court (judgment 4 September 2009; order 1 October 2009). Depfa counterclaimed in restitution. Tomlinson J held the swaps were loans within section 50, that the Kommunes lacked substantive power (characterised as lack of capacity), declared the swaps void and ordered restitution to Depfa; he also held WR negligent and liable to Depfa (damages to be assessed). Both appeal and cross-appeal followed to the Court of Appeal.

Nature of the proceedings and issues. (i) Validity issue (capacity/power/authority): whether the Kommunes lacked capacity under Dicey Rule 162 because Norwegian law (section 50) limited their powers, and if so whether the English-law swaps were void; (ii) restitution in borrowing/loan contracts: whether Sinclair v Brougham prevented a personal claim in restitution for money advanced under a void loan; (iii) defences to restitution: whether public policy or the defence of change of position limited Depfa’s recovery. The court also considered WR's contention about the analysis of capacity and whether officials had authority (actual or ostensible).

Court’s reasoning. The Court of Appeal (Aikens LJ, Etherton LJ and Pill LJ) agreed that the Dicey rule required examination of the Kommunes' "constitution" under Norwegian law; Aikens LJ concluded that for conflict-of-law purposes a foreign statutory restriction on substantive power could properly be characterised as lack of capacity and that Tomlinson J was entitled to find the Kommunes lacked substantive power under section 50 so the English-law swaps were void. The court held that Westdeutsche had effectively overruled Sinclair v Brougham on the point that a lender could not recover at law for money advanced under an ultra vires borrowing contract, so Depfa’s restitution claim was not barred by Sinclair. The court rejected the Kommunes’ public policy and change of position defences: the Kommunes had received the money on terms that they would have to repay and voluntarily invested it, thereby assuming the investment risk; the change of position defence therefore failed. The court declined to disturb the judge’s relevant factual findings. Etherton LJ would have adopted a narrower interpretation of "capacity" in Rule 162 and remitted the ostensible authority question for further findings if pursued, but agreed the restitution and defence conclusions meant the appeals should be dismissed.

Appeal and cross-appeal dismissed. The court held that Dicey Rule 162 requires the court to examine the corporation's constitution under the law of its place (Norwegian law) and that Tomlinson J was entitled to find that section 50 of the Norwegian Local Government Act 1992 deprived the Kommunes of substantive power to enter the swaps, a matter which could properly be characterised as lack of capacity for conflict-of-law purposes; consequently the English-law swaps were void. The court further held that Depfa could pursue a restitutionary claim (Westdeutsche having superseded Sinclair on the issue) and that the Kommunes could not rely on public policy or change of position to avoid full restitution because they had acted in good faith but assumed the investment risk.

Appeal from Queen's Bench Division, Commercial Court (Tomlinson J). Liability trial 11 days April–May 2009; reserved judgment 4 September 2009; further judgment 1 October 2009 (order declaring swaps void, restitution and WR liable); damages trial as to WR 12 February 2010. The Court of Appeal heard the appeals 15–17 February 2010 and handed down judgment 27 May 2010. (No separate neutral citation for the first-instance judgment supplied in this text; Tomlinson J case no 2008, Folio 1320.)