#5212 - Haugesund Kommune V. Depfa Bank - Conflict of Laws BCL

Haugesund Kommune v. Depfa Bank

Facts

In the early years of this century a number of Norwegian local authorities entered into so-called “swaps” transactions, on the advice of a Norwegian financial adviser, with the aim of making money from investments in order to provide better local services or reduce taxes. These contracts went disastrously wrong and the episode has been regarded as somewhat of a scandal in Norway. The English courts have become involved in the aftermath.

This appeal from the judgment of Tomlinson J [2010] Lloyd's Rep PN 21 dated 4 September 2009 and his order of 1 October 2009 concerns so-called “zero coupon swaps agreements” between two particular Norwegian municipalities and an Irish bank, which is an indirect subsidiary of a German bank. I will refer to the two individual municipalities, who are the claimant appellants, as “Haugesund” and “Narvik”, and to them collectively as “the kommunes”. I will refer to the defendant respondent bank as “Depfa”.

The other party to the appeal is a firm of Norwegian lawyers, called Wikborg Rein & Co. It is both well known and highly respected. I will refer to it as “Wikborg”. It advised Depfa on various aspects of the “swaps contracts” before they were concluded. For present purposes the key issue on which Wikborg advised was whether the kommunes had the legal power and authority to enter into the swaps contracts in the light of the terms of section 50 of the Norwegian Local Government Act 1992, which deals with the purposes for which Norwegian local authorities can raise loans. (The text of section 50 is set out in the appendix to this judgment.) Wikborg advised Depfa that the proposed zero coupon swaps contracts were not “loans” within section 50 of the 1992 Act and that the kommunes had the power and authority to enter into the agreements, which would therefore create valid and binding obligations on them.

Eventually, in January 2008, the resolutions of the kommunes to make the investments were annulled by superior Norwegian administrative authorities and, effectively, the kommunes were ordered to sell off the investments, which they did at a considerable loss. Haugesund's loss on its sale was about NOK125m; Narvik's loss was about NOK142m. At current exchange rates the combined losses of the kommunes on their investments total about 26·7m. Shortly after the kommunes were directed to sell the investments, the Norwegian Ministry of Justice published its opinion that “swaps” such as the contracts the kommunes had concluded did constitute loans within section 50 of the 1992 Act.

But the terms of the swaps contracts concluded between the kommunes and Depfa contained English law and English jurisdiction clauses. The kommunes invoked the jurisdiction clause in the agreements and brought proceedings in the Commercial Court for declarations of non-liability to Depfa on the swaps contracts, alleging that they had been concluded ultra vires the powers of the kommunes by reason of the terms of section 50 of the 1992 Act, with the consequence that the contracts were void.

Decision at first instance: Tomlinson J held, following the long-standing rule in Dicey, Morris & Collins, The Conflict of Laws 14th ed (2006), vol 2, rule 162(1) that the capacity of a corporation to enter into any legal transaction is governed by both the constitution of the corporation and by the law of the country which governs the transaction in question. He held that, as the corporations are Norwegian kommunes, the interpretation of their constitutions and the issue of their “capacity” or “powers” to conclude the swaps contracts are therefore governed by Norwegian law: see para 6. But the consequences of any conclusions on the scope of the kommunes' capacity or powers, in terms of the validity or not of the swaps contracts must depend on English law, because that is the applicable law of the contracts.

Argument of the defendant – distinction between “power” and “capacity”: Therefore, Gordon Pollock QC, for Wikborg, took the lead in arguing this first point. He challenges principally Tomlinson J's analysis and conclusion at the first stage of this issue. He submits that, for the purposes of the English conflict of laws rule, the kommunes had the capacity to conclude the swaps contracts, but that, on the proper analysis of the effect of the Norwegian 1992 Act, the kommunes had either had their powers limited or they were prohibited from entering the swaps contracts by that Act. If that analysis is correct, then, Mr Pollock argues, under English conflict of laws rules the Norwegian legislation that limits their powers or prohibits these contracts does not affect their validity as English law contracts. This is because, as Mr Pollock stated, the kommunes did not argue that Norway was the place of performance of the swaps contracts, so that any prohibition under Norwegian law is irrelevant to the substance and enforceability of these English law contracts.

Holding

Dicey, Morris & Collins, The Conflict of Laws, rule 162(1)(2):

(1) The capacity of a corporation to enter into any legal transaction is governed both by the constitution of the corporation and by the law of the country which governs the transaction in question.

(2) All matters concerning the constitution of a corporation are governed by the law of the place of incorporation.

Does the word “capacity”, when used to mean the legal ability to exercise specific rights, equate to the word “power” to exercise specific rights, for the purposes of Dicey's conflict of laws rule? It seems to me that so long as “power” is used only in the sense of a legal ability to exercise specific rights, the two words will have the same meaning and effect.

So, I return to the question: in what sense must we interpret the word “capacity” in Dicey's rule? Counsel have found no authorities in which there is any discussion of the meaning of the word for the purposes of the rule. None of the cases cited in the footnotes to Dicey assist on this point. It appears to be a novel issue. How the word “capacity” is interpreted for the purposes of the rule is, as Etherton LJ has stated in his judgment, ultimately a matter of policy. In my view it is important to remember the purpose of the rule, which is to determine which systems of laws will be used, under English conflicts rules, to decide whether a “corporation” has the ability to exercise the legal right to enter into a binding contract with a third party. If that accurately summarises the rule's purpose, then I think, following the approach of Auld LJ in the Macmillan case [1996] 1 WLR 387, 407 that the concept of “capacity” has to be given a broader, “internationalist”, meaning and...