O
''Hazell v Hammersmith and Fulham LBC''
992
Year 992 ( CMXCII) was a leap year starting on Friday (link will display the full calendar) of the Julian calendar.
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Worldwide
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2 AC 1 is an
English administrative law
United Kingdom administrative law is part of UK constitutional law that is designed through judicial review to hold executive power and public bodies accountable under the law. A person can apply to the High Court to challenge a public body's dec ...
case, which declared that
local authorities
Local government is a generic term for the lowest tiers of public administration within a particular sovereign state. This particular usage of the word government refers specifically to a level of administration that is both geographically-loca ...
had no power to engage in
interest rate swap agreements because they were beyond the council's borrowing powers, and that all the contracts were
void
Void may refer to:
Science, engineering, and technology
* Void (astronomy), the spaces between galaxy filaments that contain no galaxies
* Void (composites), a pore that remains unoccupied in a composite material
* Void, synonym for vacuum, a ...
. Their actions were held to contravene the
Local Government Act 1972.
Prior to the judgment, a large number of local authorities had entered into such swap transactions. Accordingly, the decision of the
House of Lords
The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminste ...
declaring such practices to be unlawful set off a
torrent of collateral litigation unwinding such swaps.
[In his judgment, in ]
Re Interest Rate Swap Litigation
' (unreported, 28 November 1991), Hirst J recorded that "As at 30th October, 1991 there were 203 extant swap actions, 18 had been settled after the issue of proceedings, 2 had been discontinued and 4 are in progress in the Chancery Division. Although in the vast majority of cases the banks are plaintiffs, there are 10 actions involving 8 local authorities in which a local authority is plaintiff because they are net losers under their swap transactions. The number of plaintiff banks in these actions totals in all 42 and the number of local authority defendants 62. These figures may need up-dating, but give a substantially accurate picture." Although this clearly caused difficulties for the banks and local authorities engaged in such swap transactions, it has been noted that the "swap litigation" was instrumental in developing the modern law of
restitution
The law of restitution is the law of gains-based recovery, in which a court orders the defendant to ''give up'' their gains to the claimant. It should be contrasted with the law of compensation, the law of loss-based recovery, in which a court ...
under English law.
Facts
Up until the early 1990s, a number of local authorities had been engaged in interest rate swap transactions as part of managing their debt portfolios. Under the
Local Government Act 1972, the local authorities had power to borrow in order to amortise their costs of capital projects over a longer period of time. In connection with that borrowing, certain local authorities sought to enter into swap transactions to hedge their exposure to fluctuations in interest rates. There were some doubts as to the ability of local authorities to enter into such transactions, but the local authorities sought the opinion of Anthony Scrivener QC, a leading commercial silk, who had advised that if a "rate swap is undertaken as part of the proper management of the council's fund then ... the swap will be ''
intra vires
('beyond the powers') is a Latin phrase used in law to describe an act which requires legal authority but is done without it. Its opposite, an act done under proper authority, is ('within the powers'). Acts that are may equivalently be termed ...
''"
.e. within the powers of the council
Whilst most local authorities engaged in swap transactions on a prudent scale to manage their debt portfolios, the position of
Hammersmith and Fulham LBC was different. Writing about the swaps litigation, Professor
Ewan McKendrick described it thus:
In his 2008 book, ''Follow The Money'',
Duncan Campbell Smith paints a dramatic picture of the moments before the litigation commenced, with the slowly dawning realisation developing amongst the principals that somehow a very left-wing London borough council has managed to accumulate an extraordinarily large swaps exposure to the various banks simply to be able to collect and spend the premiums for entering into the trades. He describes a call from Howard Davies at the Audit Commission to Goldman Sachs:
When Mr Scrivener QC was asked to give a further opinion in relation to the matter, having been made better aware of the scale of the activities of Hammersmith, he advised that if one looked at all of the transactions in their totality, one could not say "these transactions were part and parcel of debt management so as to be lawful".
In his judgment, Lord Templeman noted that although the total borrowings of Hammersmith were in the order of £390 million, it had entered into swap transactions with a total aggregate notional principal of £6,052 million.
[''Hazell v Hammersmith and Fulham LBC'' 9912 AC 1, at 26F.]
When the district auditor (Tony Hazell) became aware of the scale of Hammersmith and Fulham's activities in the swap market he brought proceedings to determine whether or not those activities were lawful. Although the case is reported as Hazell against Hammersmith and Fulham, in practice the various banks were joined as third parties, and Hammersmith and Fulham joined with Hazell in arguing that the swaps were unlawful and should not be binding upon them.
The banks were understandably upset that Hammersmith and Fulham were selected to be the
test case
In software engineering, a test case is a specification of the inputs, execution conditions, testing procedure, and expected results that define a single test to be executed to achieve a particular software testing objective, such as to exercise ...
, given that its activities were at the extreme end of the spectrum. In addition to being upset at the choice of Hammersmith (rather than a council which had made more responsible use of interest rate swaps), the various banks were also reported to have been upset by the decision for the case to be brought in a
divisional court
A divisional court, in relation to the High Court of Justice of England and Wales, means a court sitting with at least two judges.Section 66, Senior Courts Act 1981. Matters heard by a divisional court include some criminal cases in the High Court ...
rather than in the Commercial Division of the Chancery Court, where a judge might have been expected to have greater familiarity with transactions of this nature.
Judgment
Divisional court and Court of Appeal
Recognising the importance of the point, the case was heard by two judges at first instance in a
divisional court
A divisional court, in relation to the High Court of Justice of England and Wales, means a court sitting with at least two judges.Section 66, Senior Courts Act 1981. Matters heard by a divisional court include some criminal cases in the High Court ...
,
Woolf LJ and
French J. They delivered a judgment on 1 November 1989, and they held that the swap transactions were ''ultra vires'' and beyond the powers of the local authorities. It was noted, with no small sense of irony, that "the decision had the bizarre effect of 'benefiting the chief culprit' (Hammersmith), while hurting the more prudent local authorities."
The case was appealed and came before
Sir Stephen Brown P,
Nicholls LJ and
Bingham LJ who handed down their decision on 22 February 1990. The
Court of Appeal broadly divided the swap entered into by the local authorities into three different types:
# Purely speculative swaps, which it held were void;
# Swaps which were part of managing the local authorities' interest rate exposure under their borrowing, which it held were valid; and
# Swaps which were entered into by local authorities once it became apparent that earlier swaps might be void to mitigate the damage caused by those void swaps (called the "interim strategy"), which it held were also valid.
Both at first instance and in the Court of Appeal, the judgments were deliberately handed down at a time when the markets were closed.
The case was then appealed to the House of Lords.
House of Lords
The main judgment was given by
Lord Templeman
Sydney William Templeman, Baron Templeman, MBE, PC (3 March 1920 – 4 June 2014) was a British judge. He served as a Lord of Appeal in Ordinary from 1982 to 1995.
Early life and career
Templeman was born on 3 March 1920, the son of Herbert ...
, with whom all judges agreed.
Lord Ackner
Lord is an appellation for a person or deity who has authority, control, or power over others, acting as a master, chief, or ruler. The appellation can also denote certain persons who hold a title of the peerage in the United Kingdom, or are ...
gave a short concurring judgment. After recounting the facts and describing in brief terms what an interest rate swap contract is, Lord Templeman then expanded upon the facts, noting that the various swaps fell into three categories.
# The first category was where swaps were entered simply to speculate. In relation to those swaps the banks conceded that they were unlawful.
# The second category was where swaps were entered into with respect to an existing loan to try and capitalise upon a change in interests. Accordingly, whilst they were also speculative in nature, they did directly relate to an existing loan exposure of the local authority. In the judgment these were referred to as "parallel contracts" or "replacing" interest rates. Lord Templeman noted quickly that "a parallel contract does not in fact replace the interest under the original borrowing and the swap transaction is a speculation no different in quality although different in magnitude from a swap contract which is not entered into by reference to any existing borrowing."
# The third category related to swaps also entered into in connection with an existing loan, where the local authority sought to use swaps to alter the proportion of the interest which was paid on either a fixed or variable basis through swap contracts. In the judgment these were referred to as "re-profiling". Similarly, Lord Templeman determined fairly immediately in his judgment that these were in his view largely indistinguishable from parallel contracts.
Powers of local authorities
Having almost immediately stated that all swaps were, in his view, conceptually the same as the types of swap which the banks had admitted were unlawful, Lord Templeman then explored the limits of the powers of local authorities under the
Local Government Act 1972. He sought to explore whether the "replace" and "re-profile" swaps could be said to be "calculated to facilitate" or were "conducive to" the power of the local authorities to borrow under section 111 of the statute.
He referred to the judgments of
Lord Blackburn and
Lord Selborne LC in ''Attorney-General v Great Eastern Railway Co'' (1880) 5 App Cas 473 where the House of Lords had held unequivocally that where powers are conferred upon a statutory corporation "what it does not expressly or impliedly authorise is to be taken to be prohibited". He referred further to the decision of Lord Selborne LC in ''Small v Smith'' (1884) 10 App Cas 119 where the House of Lords held that granting powers to deal generally in a certain type of business did not mean that there is a potential necessity for entering into all manner of related transactions. Lord Templeman thought that reasoning directly analogous to the case in hand. Finally, Lord Templeman referred to the decision of
Lord Loreburn LC in ''Attorney-General v Mersey Railway Co''
907 AC 415where he said "The rule of law has been laid down in this House to the effect that it must be shown that the business can fairly be regarded as incidental to or consequential upon the use of the statutory powers." Lord Templeman held that "The same considerations apply in the present case."
Having considered the weight of authority, Lord Templeman noted that, despite its title, debt management is not in itself a function. He also noted that in the case of
building societies
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially savings and mortgage lending. Building societies exist in the United Kingdo ...
Parliament has expressly conferred upon them a power to enter into swap transactions. He finally concluded:
The "arcane point"
Lord Templeman finally addressed what he referred to as the banks' "arcane" argument. Broadly, that stated that the incorporated Hammersmith and Fulham Borough (representing the concept of inhabitants as a whole group) could only act through the unincorporated Hammersmith and Fulham Borough Council (made up of the mayor and councillors), and though the powers of the council are limited by the Local Government Act 1972, it claimed the borough itself had all the powers of a natural person. The argument conceded that this would not save transactions entered into out of the general rate fund (which would presumably be most of them), but might save transactions funded from other sources. Lord Templeman stated "This argument strikes me as being not so much arcane as absurd." The argument drew on ''
Sutton's Hospital Case'' (1612) 10 Co Rep 1 that the use of a common seal allowed a corporate to do anything that a natural person might do. This only applies to a corporation created by exercise of the
royal prerogative
The royal prerogative is a body of customary authority, privilege and immunity, recognized in common law and, sometimes, in civil law jurisdictions possessing a monarchy, as belonging to the sovereign and which have become widely vested in th ...
(''
Riche v Ashbury Railway Carriage and Iron Co'' (1874) LR 9 Ex 224 at 263). But in the present case, Hammersmith, as a London borough, was a hybrid corporation created by royal charter under the
London Government Act 1963
The London Government Act 1963 (c. 33) is an Act of the Parliament of the United Kingdom, which created Greater London and a new local government structure within it. The Act significantly reduced the number of local government districts in the ...
.
Reaction
The reaction of banks and financial institutions to the judgment has been described as "furious". Having entered into transactions with local authorities in good faith, the banks now found themselves embroiled in costly litigation to unwind hundreds of financial contracts at great expense. Various suggestions were made that the decision might imperil London's reputation as a financial centre. The reaction of the local authorities is reported to have been mixed; whilst many councils were relieved of potentially large liabilities, their officials had nonetheless effectively been found to have engaged in unlawful conduct. Furthermore, the local authorities also had to face the unpleasant prospect of litigation to unwind the swaps.
Although Hammersmith and its ratepayers were saved from a potentially massive and crippling financial exposure, the picture that the case painted was not at all a pretty one. And, as has been pointed out, for all the criticisms that are made of the chaos that the decision caused, ultimately, the doctrine of ''ultra vires'' functioned as it was supposed to - protecting persons (the ratepayers) from the effects of persons wielding executive power in doing things that they were not supposed to do.
The banks made some attempts to have retrospective legislation passed to legalise the swaps, but were not successful in doing so.
Aftermath
The decision led to a torrent of litigation unwinding swap transactions entered into with local authorities. In his judgment Lord Templeman referred to there being "about 400" open swaps between banks and local authorities.
Many councils had multiple open positions. In a subsequent case management hearing, Hirst J indicated that over 200 separate sets legal proceedings were ongoing.
These are often collectively referred to as
the "swaps cases".
Many of these cases settled before trial, but the cases that did not included:
* ''
Westdeutsche Landesbank Girozentrale v Islington LBC
is a leading English trusts law case concerning the circumstances under which a resulting trust arises. It held that such a trust must be intended, or must be able to be presumed to have been intended. In the view of the majority of the House o ...
''
996AC 669, HL
* ''Kleinwort Benson v Sandwell BC''
994
Year 994 ( CMXCIV) was a common year starting on Monday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* September 15 – Battle of the Orontes: Fatimid forces, under Turkish gener ...
4 All ER 890,
Hobhouse J
* ''
Kleinwort Benson Ltd v Birmingham City Council''
9964 All ER 733, CA
* ''Kleinwort Benson v South Tyneside MBC''
994
Year 994 ( CMXCIV) was a common year starting on Monday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* September 15 – Battle of the Orontes: Fatimid forces, under Turkish gener ...
4 All ER 972, Hobhouse J
* ''
Morgan Grenfell & Co Ltd v Welwyn Hatfield DC''
995
Year 995 ( CMXCV) was a common year starting on Tuesday (link will display the full calendar) of the Julian calendar.
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Japan
* 17 May - Fujiwara no Michitaka (imperial regent) dies.
* 3 June: Fujiwara no Michikane gain ...
1 All ER 1, Hobhouse J
* ''Credit Suisse v Allerdale BC''
997
Year 997 (Roman numerals, CMXCVII) was a common year starting on Friday (link will display the full calendar) of the Julian calendar.
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By place
Japan
* 1 February: Empress Teishi gives birth to Princess Shushi - she is the first ...
QB 306
* ''Kleinwort Benson v Glasgow CC''
997
Year 997 (Roman numerals, CMXCVII) was a common year starting on Friday (link will display the full calendar) of the Julian calendar.
Events
By place
Japan
* 1 February: Empress Teishi gives birth to Princess Shushi - she is the first ...
4 All ER 641
See also
*
United Kingdom constitutional law
The United Kingdom constitutional law concerns the governance of the United Kingdom of Great Britain and Northern Ireland. With the oldest continuous political system on Earth, the British constitution is not contained in a single code but princ ...
*
English administrative law
United Kingdom administrative law is part of UK constitutional law that is designed through judicial review to hold executive power and public bodies accountable under the law. A person can apply to the High Court to challenge a public body's dec ...
*
Local authorities swaps litigation
The local authorities swaps litigation (sometimes called simply the swaps cases) refers to a series of cases during the 1990s under English law relating to interest rate swap transactions entered into between banks and local authorities. The ...
Notes
References
Bibliography
*
* {{cite book , url=http://www.duncancampbellsmith.com/pdf/ftm_chapter_6.pdf , archive-url=https://web.archive.org/web/20120823234647/http://www.duncancampbellsmith.com/pdf/ftm_chapter_6.pdf , archive-date=23 August 2012 , chapter=Closing the Swap Shop, 1988–91 , title=Follow The Money , publisher=Allen Lane , first=Duncan , last=Campbell-Smith , year=2008 , pages=188–205 , isbn=978-1-84614-068-6
English trusts case law
English derivatives case law
House of Lords cases
1992 in case law
1992 in British law
20th century in the London Borough of Hammersmith and Fulham
United Kingdom constitutional case law