Hazell v Hammersmith & Fulham (1992) – Landmark case that found local authority swaps to be ultra vires
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Hazell v Hammersmith & Fulham London Borough Council [1992] 2 A.C. 1
Summary
A local council – Hammersmith and Fulham LBC – carried out substantial speculative transactions over a number of years, under the guise of “debt management”. When interest rates were set to rise and the local council were going to lose a lot of money, the auditor working on behalf of Hammersmith and Fulham LBC tried to argue that the transactions were not legal. An appeal by John Hazell on behalf of the banks that the local council had entered into swap agreements with stated that the swaps were still deemed legal. At a later Appeal by the auditor on behalf of the local council, it was confirmed that local authorities do not have the power to enter into “interest rate” swaps. Appeal was allowed on all three issues that were appealed, with the swaps deemed ultra vires and unlawful, as they were not ancillary to a local council’s functions.
Introduction
Hammersmith and Fulham LBC – a local authority – had been incorporated into the Royal Charter, pursuant to section 1(2) of the London Government Act 1963, and entered into many swap agreements in the fiscal years of 1987-1988 and 1988-1989, acting as “debt management”. By 31st July 1989, the council had entered into multiple swaps, under which if the interest rates fell they would benefit, and suffer if they rose. The auditor who was appointed by the Audit Commission of Local Authorities in England and Wales began to question the legality, and so the council’s director of finance closed all transactions that would not incur a loss if he did so. The remaining were continued to be carried out under an “interim strategy”; aiming to limit damages from the rising interest rates. The legality (specifically of those left) fell into question when interest rates rose and Hammersmith and Fulham LBC stood to lose a lot of money due to increasing interest rates. The auditor then applied for a declaration of illegality for the transactions, so that the heavy losses could not be incurred. In retaliation, a number of banks were granted leave to oppose the application, the declaration of which was granted by the Divisional Court. On behalf of the banks – including that which covered the Hammersmith and Fulham LBC swaps – John Hazell (the Appellant) appealed to the Court of Appeal, which allowed the appeal in part. It was held that (i) the declaration should remain in place for the agreements that were operating during the “interim strategy” stage and (ii) that there should be no order for rectification.
The auditor then appealed on three issues:
Issue One: local governments do not have the power to enter into financial transactions, outside of those described in section 111 of the Local Government Act 1972 (which includes borrowing), and so the swaps were ultra vires and unlawful.
Issue Two: the ability to act out the “interim strategy”.
Issue Three: the council had no power to enter into transactions under the name of the borough, even though they had been incorporated by the Royal Charter.
Judgement
Whilst Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation [1986] Ch. 246 was referenced, the court heard that even if it was correct as a matter of private law, it was not applicable to the public law case at hand.
Issue One: the Court of Appeal found that section 111 applied but section 101(6) did not as swap transactions were incidental to the function of debt management, rather than borrowing, with debt management also not being an operative function. Lord Templeman held that the word “functions” in this specific case “embraces all the duties and powers of a local authority; the sum total of the activities Parliament has entrusted to it.” ‘Debt management’ was merely a coined term, rather than an applicable function, and implied lawful activities conducted by the local council – of which entering into swap agreements for profit is not. In attempt to raise capital, this was not a subsidiary function to section 111 of the Local Government Act 1972.
Issue Two: it was expressly stated that as though the local council had no power to enter into swap transactions, the swap transaction during the interim strategies were also unlawful. This is irrespective of their function in attempting to aid in the reduction of the impact of losses due to the change in interest rates. The swap transactions that took place during the interim strategy were found not to be different from swap transactions that were entered into at any earlier period, seeing as the power to enter into such activities originated from section 111 of the Local Government Act 1972.
Issue Three: the court heard that the Royal Charter given in 1964, pursuant to the Local Government Act 1963, extended no powers beyond that which the metropolitan borough councils had previously held. Despite the claim that whilst the council was constrained in their powers, it was argued that the borough itself had the powers of natural person, Lord Templeman refuted this – claiming it was “not so much arcane as absurd”. The argument stemmed from the Sutton’s Hospital Case (1612) 10 Co Rep 1, in which a corporation with a common seal had the ability to do anything a natural person might, but this was only handed to those created by the royal prerogative. Hammersmith and Fulham LBC was instead a hybrid corporation created by Royal Charter under the Act of 1963. Thus, the council had extended the powers that the statute allowed them and did not hold the powers of natural person, and could not lawfully enter into swap agreements.
The appeals were ultimately allowed.
Application
This case is rudimentary to an understanding in English administrative law, having been the first case to declare that English local authorities had no power to enter into interest rate swap agreements. Whilst many financial institutions were enraged by the judgement, the ultra vires doctrine was shown to have functioned as it was supposed to, by protecting ratepayers from the effect of entities willing to enter into unauthorised agreements.
Photo: Alex.muller, CC BY-SA 3.0 https://creativecommons.org/licenses/by-sa/3.0, via Wikimedia Commons
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