and the subsequent decision in were decisions of the English Court of Appeal relating to the consequences of certain swap transactions which had been entered into between the Irish bank and the Norwegian kommune, but were held to be beyond the powers of ("ultra vires") the kommune.

In his judgment Lord Justice Aikens noted the striking similarity between the case before him, and the long series of decisions in the local authorities swaps litigation relating to similar transactions entered into by English local authorities.Haugesund Kommune v DEPFA (No 1), at paragraphs 1-2. "History repeats itself, at least with variations. In the 1990s there was much litigation in the English courts arising from English local government authorities concluding "interest-rate swaps" contracts with banks. The contracts were disastrous for the local authorities and eventually district auditors questioned whether the local authorities had the power to conclude such transactions. The House of Lords held they did not in Hazell v Hammersmith LBC. ... 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. The present case gives rise to interesting and novel questions on the conflict of laws and the law of restitution." Nonetheless, the appeals raised a number of novel points of English law relating to restitution.

Background

DEPFA Bank was an Irish bank. Haugesund Kommune and Narvik Kommune were local municipalities in Norway. The Kommunes had entered into interest rate swap transactions with the banks. Although the transactions were documented as swaps, the rate payable by the bank under the swaps was zero (and they were called "zero coupon swaps") and initial payments by the bank were repaid in small quarterly amortisation payments with a single bullet repayment at the end. Commercially the effect was similar to a term loan with a backloaded repayment schedule than a true interest rate swap. The Kommunes then invested those payments in a number of financial investments. The investments went disastrously wrong, and the whole episode was described by the Court of Appeal as having been "regarded as somewhat of a scandal in Norway".

After things had gone wrong, the Kommunes challenged the validity of the transactions, alleging that under Norwegian law the Kommunes did not have legal capacity to enter into such transactions. Under the ISDA Master Agreements that documented the transactions, the contracts were governed by English law and were subject to an English jurisdiction clause.

The bank counterclaimed for repayment of the sums, and joined Wikborg Rein & Co (a Norwegian law firm) as a Part 20 defendant on the counterclaim. The law firm had advised the bank that the Kommunes were able to enter into the transactions, and so on their counterclaim the bank asserted that if transactions were invalid, then Wikborg Rein & Co should be liable to the bank for professional negligence.

The matter came before Tomlinson J at first instance. He ruled that the swaps were beyond the powers of the Kommunes, and therefore the transactions were void. However, he also ruled that the Kommunes had to repay the money which had been advanced to them as money had and received on the basis of a failure of consideration. He also held that Wikborg Rein & Co had been negligent, with damages to be assessed on a later date.Haugesund Kommune v DEPFA (No 1), at paragraph 13.

Haugesund Kommune v DEPFA ACS Bank (No 1)

The matter was appealed to the Court of Appeal, where Lord Justice Aiken gave the main judgment. He held that there were three issues which arose for consideration on the appeal (although the last issue had two limbs):Haugesund Kommune v DEPFA (No 1), at paragraphs 16, 19, 24 and 25. Whether the judge was correct to conclude that the Kommunes had no capacity to enter into the transactions; If the transactions are void, what is the scope of the restitutionary remedy available to the bank; Could the Kommunes rely upon a defence of "change of position", in respect of which the Kommunes argued: the judge misapplied the relevant law; and the judge had misunderstood or misapplied the relevant aspect of public policy for protection of the public under Norwegian law.

Issue #1 - Capacity

The Court of Appeal agreed with the trial judge that under the Rome Convention, which was given the force of law in the United Kingdom by the Contracts (Applicable Law) Act 1990, the capacity of parties was excluded from the Convention regime. Accordingly such issues are therefore governed by English common law conflict of laws rules. Dicey Morris & Collins indicated, at Rule 162 that: "(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".Haugesund Kommune v DEPFA (No 1), at paragraph 27. The Kommunes argued that under Norwegian law they lacked capacity to enter into the transactions. The Court of Appeal extensively reviewed the expert evidence of Norwegian law given at trial.

The Court approved statements in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) WLR 387 that "...to strive for comity between competing legal systems, [classification] should not be constrained by particular notions or distinctions of the domestic law of the lex fori, or that of the competing system of law, which may have no counterpart in the other's system. Nor should the issue be defined too narrowly so that it attracts a particular domestic rule under the lex fori which may not be applicable under the other system..." In other words, the Court would take a broad view as to whether the Kommune's had the necessary capacity, rather than getting tied up in the detail of English legal distinctions between capacity and powers. Under section 50 of the Norwegian Local Government Act 1992 local authorities were restricted in their ability to borrow loans; the Court was satisfied that under Norwegian law the swaps would have been treated as loans, and that the Kommunes lacked substantive power to enter into those transactions.Haugesund Kommune v DEPFA (No 1), at paragraph 58. Accordingly the transactions were void.

Issue #2 - Restitutionary remedy

Under English conflict of laws rules, even though the capacity of the Kommune to enter into the transactions was governed by Norwegian law, the consequences of the contracts being held to be void still fell to be determined by English law as the putative proper law of the contracts. The Court of Appeal then embarked upon an exhaustive analysis of the authorities, and in particular to the two House of Lords' decisions in Sinclair v Brougham AC 398 and , but also the decision of the Privy Council in .

After considering all the authorities the Court was satisfied that the bank could enforce a valid claim for money had and received under the law of restitution, and could claim the return of the sums advanced under the void contract (plus interest) on the basis of failure of consideration.Haugesund Kommune v DEPFA (No 1), at paragraph 87-88.

Issue #3 - Change of position

The Court separated the question of whether the Kommune's had the benefit of a change of position defence into two parts. The appeal was made on the basis of a single defence, but the Court held: "I think this is the wrong analysis. In my view the English cases show that these are two distinct defences to a restitutionary claim."Haugesund Kommune v DEPFA (No 1), at paragraph 90. The Court then dealt with those separately.

"Public policy" argument

The Court held that there "is no doubt that in English law a restitutionary claim for the return of money may be defeated on grounds of public policy where, on the correct construction of a statute or regulation, recovery in restitution would be contrary to the objective of the statute", and cited various authorities in support.Haugesund Kommune v DEPFA (No 1), at paragraph 92. What was not clear was the extent to which a foreign public policy could be utilised in the same way. The judge at first instance had found as a fact that "one of the purposes of section 50 is to protect the citizens from the consequences of the municipality borrowing for other than a permitted purpose".Haugesund Kommune v DEPFA (No 1), at paragraph 89. The Court held that in principle a foreign public policy could provide a basis for refusing to permit a restitutionary claim, but on the facts of this case it did not do so.Haugesund Kommune v DEPFA (No 1), at paragraph 105.

"Change of position" argument

The Kommunes argued that because they had received the sums from the bank, invested those sums, and lost money on the investments, it would be inequitable to ask them to repay money which they no longer have. Conversely the bank argued that the Kommune's took the decision, and the risk, of investing the loaned monies. Accordingly, the bank should not be penalised for the Kommune's subsequent decisions. The Court of Appeal approach the issue in three stages: First, what are the general principles of the defence of "change of position" in the law of restitution? Secondly, how are those applicable to the facts of this case? Thirdly, has Tomlinson J erred in his analysis or conclusions on this issue?Haugesund Kommune v DEPFA (No 1), at paragraph 108.

After reviewing the extensive case law, Aiken LJ summarised it thus:

Balancing those considerations on the fact, he felt that "[t]he scales fall heavily in favour of Depfa recovering the full amount that it paid over to the Kommunes."Haugesund Kommune v DEPFA (No 1), at paragraph 126. In that respect he felt that the judge had correctly applied the principles to the facts at trial.

Haugesund Kommune v DEPFA ACS Bank (No 2)

After the first judgment of the Court of Appeal handed down, the Kommunes withdrew from the proceedings, and refused to pay the sums ordered by the court. Accordingly, the bank then sought to pursue it claims against the Part 20 defendants, Wikborg Rein. That was also made subject to an appeal to the Court of Appeal, which for the second appeal was constituted by Rix LJ, Gross LJ and Peter Smith J.

The issue was summed up by Lord Justice Rix:

Rix LJ also gave the lead judgment. He described Wikborg Rein as "a well-known and highly respected firm of lawyers",Haugesund Kommune v DEPFA (No 2), at paragraph 1. and noted. and indicated that they had "advised in unqualified terms that the swap contracts were not loans for the purposes of [relevant provisions of Norwegian law] and that the Kommunes had full capacity to enter into them." That advice had turned out to be incorrect. He further noted that "[i]t was common ground that Depfa knew, and was willing to take the risk, that it was not possible to obtain execution against the Kommunes, should there be any need to do so. Wikborg Rein had advised Depfa that – 'A claim against a Norwegian municipality cannot be enforced, no distress or seizure may be obtained of any of its assets and no bankruptcy or debt settlement proceedings may be initiated against it.'" The law firm largely defended the claim against it on two ground: first, that Depfa had suffered no loss (because it had a valid claim against the Kommunes as recognised by an English judgment); and secondly, that any loss suffered was outside, or was not on the evidence shown to be within, the scope of Wikborg Rein's duty.Haugesund Kommune v DEPFA (No 2), at paragraph 97.