Haugesund Kommune v DEPFA ACS Bank

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".[6] 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) [1996] 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.[7] Accordingly the transactions were void.

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 [1914] AC 398 and Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12, but also the decision of the Privy Council in Goss v Chilcott [1996] UKPC 17.

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.[8]

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."[9] The Court then dealt with those separately.

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.[10] 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".[11] 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.[12]

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?[13]

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

First, the defence of change of position is a general defence to all restitution claims (for money or other property) based on unjust enrichment. Secondly, the question is always whether it is unjust to allow the claimant to have restitution in whole or in part. Thirdly, that itself depends on whether the defendant has so changed his position that the injustice of requiring him to repay outweighs the injustice of denying the claimant restitution (in whole or part). That can only be decided on the facts of each individual case. Fourthly, a defendant cannot rely on this defence if he has acted in bad faith or has failed to show good faith, which is not the same thing as having acted dishonestly.[14]

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."[15] In that respect he felt that the judge had correctly applied the principles to the facts at trial.

There was surprising little comment (critical or otherwise) in relation to the first decision. One commentator wrote that "this case will provide some comfort to lenders who find themselves in such situations".[1] This may be a reflection of the perceived orthodoxy of the decisions on the relevant points. The case is cited with approval (in a footnote) in Dicey Morris & Collins.[25]

Commentary on the second decision was generally favourable. One commentator focused on the key distinction between what the court called category 1 (general advice) and category 2 (specific advice), noting that "[t]he decision is helpful because it reaffirms that a solicitor advising on specific aspects of a complex transaction does not usually advise and owe a category 1 (advice) duty. The solicitor's duty is usually limited to the category 2 provision of accurate information and he will be liable only for the consequences of that information being wrong."[26]

Another expressed the view that "[t]he decision in this case can be viewed as merely the application of the Saamco principles to complex factual circumstances. The complexity of those circumstances is demonstrated by the fact that Tomlinson J and Rix LJ (with whom Gross LJ implicitly sided) disagreed as to whether Wikborg Rein had taken on specific or general duties in relation to the transactions (and therefore whether the case was of category 1 or category 2 under the Saamco principle)", before adding "[a]pplications of the Saamco principle will always be heavily fact sensitive, and it is for that reason that solicitors should consider carefully (and seek to strictly define, if possible) the nature of their duties to their client when providing advice on complex transactions. Although it will not be determinative, the wording of engagement letters will be highly relevant to any subsequent consideration of the duties assumed by the solicitor."[27]