Haugesund Kommune & Another v DEPFA ACS Bank & Another  EWCA Civ 579 3103 (Comm)
Norwegian municipalities, Haugesund and Narvik Kommunes, had no change of position defence to restitution claims by a bank, DEPFA ACS Bank, with whom they had entered swap contracts with that were later found to be ultra vires and void. Read the judgment here.
Two Norwegian municipalities, Haugesund and Narvik (“the Kommunes”), were advanced NOK 231,300,000 and NOK 190,000,000 respectively under contracts, with English law and jurisdiction clauses, with DEPFA ACS Bank (“Depfa”), a German-Irish bank. Under the “swaps” contracts the Kommunes had to repay in fixed quarterly payments, as well as a final repayment, over a period of eight or twelve years. The other party to the appeal are Wikborg Rein & Co. (“WR”); advisories to Depfa on the swap contracts before they were concluded, ultimately advising that the Kommunes had the capacity and authority to enter into zero coupon “swap” contracts as they were not “loans” under section 50 of the Norwegian Local Government Act 1992 (“the 1992 Act”). The “swap” contracts were concluded in June 2004 and September 2005 for Haugesund and Narvik respectively.
Each Kommune then invested the sums in financial instruments, upon the advice of now liquidated Terra Securities ASA (“Terra”), which proved calamitous. Haugesund lost NOK 125,000,000 and Narvik lost NOK 142,000,000, combining to ~£26.7 million at the time of hearing. It was at this point the Norwegian Ministry of Justice published its opinions that “swaps” were loans under section 50 of the 1992 Act. Although Depfa still stated that the contracts were valid and enforceable in their counterclaim, they also stated that if they were not, they should be able to seek restitution for the return of the sums advanced to the Kommunes: a counterclaim governed by English law.
The Kommunes appealed against the decisions made by Tomlinson J in a previous hearing ( EWHC 2227 (Comm),  Lloyd’s Rep. P.N. 210, stating that they were liable to make restitution of sums advanced to them by Depfa under the swap contracts that were deemed void, and – in a cross-appeal – the decision that the Kommunes lacked capacity to agree to the swap contracts in the first place was also challenged; the Kommunes could not rely on a defence of “change of position”, and were legally obliged to pay restitution in full of the sums that they had received, minus what had been repaid. Depfa also claimed damages against WR for their negligent advice.
The main issues on this appeal were:
First Issue: whether the Kommunes lacked capacity to enter the “swaps” contracts, and as a result were void.
Second Issue: what the scope of restitution available was to the legal entities, depending on the outcome of the appeal.
Third Issue: whether the Kommunes’ “change of position” defence could be relied on, being that the judge may have misapplied relevant laws, and misunderstood or misapplied aspects of public policy or protection of the public under Norwegian law.
First Issue: WR’s appeal on the ‘validity’ issue was dismissed, as Tomlinson J was previously correct in ruling that after the lack of capacity was established, the contracts were indeed invalid and void. Pursuant to Rule 162 in Dicey, Morris and Collins on The Conflict of Laws (14th ed) (“Dicey”), Tomlinson J was right to conclude that they lacked capacity “in English legal terminology”. The swaps were loans within Norwegian law and the Kommunes did indeed lack substantive power to enter into them, with this meaning that they were then void under English law. As they did not have capacity, the issue on whether they had authority to enter into the contracts no longer required more discussion.
Second Issue: Pursuant to the decision in Westdeutsche Landesbank Girozentrale v Islington LBC  UKHL 12, in which the decision made in Sinclair v Brougham was departed from, Aikens LJ stated that the lenders did have a claim for restitutionary recovery of the sums advanced to the Kommunes. However, Depfa’s claim to this was hoped to be defeated by issue three.
Third Issue: The judge stated that whilst the change of position argument had been stipulated as a solitary issue, they believed it should be separated into the public policy and then separately, the change of position argument. In English courts, a restitutionary claim can be defeated on the grounds of public policy; an issue that was unclear in respect to foreign public policy. The Kommunes were understanding that Depfa had a claim to some restitution for the money, however they stated that they were only entitled to recover as much as the policy in section 50 of the 1992 Act allowed, and that a purpose of the act was to protect “citizens from the consequences of the municipality borrowing for other than a permitted purpose”. The court held that a foreign public policy could refuse allowing a restitutionary claim, but that in this instance, it did not. Furthermore, pursuant to the decision made in the previous hearing, the judges held that the change of position defence could not be used, and that Depfa were entitled to recover the sum that they were owed.
Ultimately, both the appeal and the cross-appeal were dismissed; the Kommunes had lacked substantive power under Norwegian law to enter into the loans, and were therefore void under English law. WR’s advice was found to be negligent and they were liable to Depfa for damages, the total of which was to be calculated after.
This case was integral in providing a basis upon which foreign public policy could be applied in scenarios involving restitution.Contact Us